In this post, we will learn when and how we should trade using options.
What are Options?
These are financial instruments which gives us advantage to buy or sell a stock without even buying or selling a particular stock. These are basically used by traders for speculation or by investors for hedging against losses.
Basic Advantage of Option as a Buyer
- Your risk is always limited to amount you pay as option premium.
- You can hedge your position easily by paying the option premium.
When to Buy Options
- When you are expecting volatility to increase.
- When VIX is below 18-20 normal circumstances.
- Buy and hold option only when there is no trading holiday otherwise premium erosion will increase.
But during high Vix environment your option value can erode like due to dump in Vix.
Below is one example where AshokLey went down by 7% but 35 & 30 PE (both were liquid) decreased instead of appreciating. This all happened because vix decreased by 8% on the same day.
