There has been a renewed interest among traders going in for intraday options trading, which has witnessed a consistent rise. An 83% surge in trading volumes has been recorded, as per the National Stock Exchange (NSE) data.
Fast gains and the ability to keep a tab on risk have been the prime reasons traders are eyeing the options trading market. It is to be noted that options trading is a relatively complicated affair, and a trader should have a complete understanding of a few crucial factors before taking the plunge.
In this regard, the three factors that every intraday option traders need to be well-versed in are: volatility, liquidity, and time decay.
Volatility is a crucial aspect of options trading, highlighting risks and returns. A trader can take stock of changes in the price of an underlying asset, and volatility as a factor has a tremendous impact on options premiums.
Significant volatility frequently results in a rise in option pricing, thus providing traders with a higher opportunity to gain profit. The Volatility Index (VIX) is a prime measure that market entrants use to fathom future volatility in anticipation.
For instance, releasing an economic report builds up an atmosphere of excitement or fear, resulting in a rise in VIX. This spike in volatility results in greater price swings for options, thus building an opportunity for traders to profit from large price moves. On the other hand, phases of stability are known to lead to reduced option premiums due to lower volatility.
Liquidity: It is another important factor in stocks, which means that such stocks are liquid enough for a trader to buy and sell them in the short run with quite ease. For such stocks, there is no need to hold onto them in long positions.
For example, a trader discovers a profitable options trade but releases that the option of choosing has relatively low liquidity. In its effort to exit the position, a lack of interested buyers or sellers may prove difficult for the trader to execute the trade at a preferred price.
To address such a scenario, traders should go in for options with high trading volumes; this will result in smooth execution, especially during moments of fast-paced intraday trading.
Time decay: This is also referred to as theta, is another of the core concepts in options trading that holds significance for intraday traders. As per this factor, an option reaches its expiration date; its value tends to dip due to the decreasing amount of time available for considerable price moves.
In intraday trading, a trader needs to be well-versed in the consequences of time decay as positions are frequently held for short periods relatively.
Take, for instance, a trader who purchases a call option with a week until expiration. With every passing day, the option moves closer to expiry, and its value might experience a dip, despite the underlying asset’s price remaining relatively stable. The rapid time decay highlights the significance of precise timing and strategic execution as far as intraday options trading is concerned.
In the end, incorporating these three factors of volatility, liquidity, and time decay into the trading strategy will help any intraday trader to register success while surpassing risks more effectively.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.