SP#02: BASIC UNDERSTANDING OF OPTIONS TRADING:
Let’s discuss some of the psychological facts of traders while selecting Options Buying over Option Selling.
1. Higher Capital but Limited Profit
a. Options Writers (Options Sellers) required relatively higher margins to cover the worst-case scenario that is theoretically unlimited loss potential (If the position is not hedged). As significant capital is blocked, doing anything exciting in the market on a daily basis becomes restrictive.
b. The Maximum profit an Option Seller can get is limited to the premium collected, which is unattractive in most scenarios.
2. Waiting Game
a. Options Writing is not as exciting and fascinating as Opting Buying. It’s a waiting game. With the time decay, the Options Writer’s position becomes stronger.
b. Trader’s temperament has been tested. Being patient is sometimes difficult initially.
3. Do Something Bias
c. Options writing requires lesser skills. And we humans perceive ourselves as more competent thus, writing options and doing nothing sometimes gives the impression that we are incompetent and losing out on more significant bets.
Rahul Dravid is not as fascinating as Virender Sehwag, but you know who was more reliable.
Bonus Tip: Traders may consider using different Time-tested Options strategies (based on the market scenarios) to achieve wishful returns with lesser and limited risk. Investors may consider using the same to hedge there long term positions against the market risks.