FUTURES & OPTIONS

CONCEPTS
AND
APPLICATIONS

WEBINAR SERIES PART SEVEN

PRESENTED BY CHERUKURI KUTUMBA RAO

06-09-2020 1
There is intelligent speculation as there is intelligent investing. But there are many
ways in which speculation may be unintelligent. Of these the foremost are: speculating
when you think you are investing; speculating seriously when you lack proper
knowledge and skill for it; risking more money in speculation than you can afford to
lose………Benjamin Graham

The speculator is not an investor. His object is not to secure a steady return on his money at a good
rate of interest, but to profit by either a rise or a fall in the price of whatever he may be speculating
in. To anticipate the market is to gamble. To be patient and react only when the market
gives the signal is to speculate……….Jesse Livermore
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 Introduction to Derivatives
Derivatives are financial contracts that derive their value from an underlying asset. These could
be stocks, indices, commodities, currencies, exchange rates, or the rate of interest. These
financial instruments help you make profits by betting on the future value of the underlying
asset. So, their value is derived from that of the underlying asset. This is why they are
called ‘Derivatives’.

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  USE OF DERIVATIVES
Earn money on shares that are lying idle:
So you don’t want to sell the shares that you bought for long term, but want to take advantage of price
fluctuations in the short term. You can use derivative instruments to do so. Derivatives market allows you to
conduct transactions without actually selling your shares – also called as physical settlement.

Benefit from arbitrage:

When you buy low in one market and sell high in the other market, it called arbitrage trading. Simply put, you
are taking advantage of differences in prices in the two markets.

Protect your securities against

fluctuations in prices The derivative market offers products that allow you to hedge yourself against a fall in
the price of shares that you possess. It also offers products that protect you from a rise in the price of shares
that you plan to purchase. This is called hedging.

Transfer of risk:
By far, the most important use of these derivatives is the transfer of market risk from risk-averse investors to
those with an appetite for risk. Risk-averse investors use derivatives to enhance safety, while risk-loving
investors like speculators conduct risky, contrarian trades to improve profits. This way, the risk is transferred.
There are a wide variety of products available and strategies that can be constructed, which allow you to pass
on your risk.
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 PARTICIPANTS IN DERIVATIVES MARKETS

Hedgers: Traders, who wish to protect themselves from the risk involved in price movements, participate
in the derivatives market. They are called hedgers.

Speculators: As a hedger, you passed on your risk to someone who will willingly take on risks from you.
Speculators, unlike hedgers, look for opportunities to take on risk in the hope of making returns.

Margin traders: Many speculators trade using of the payment mechanism unique to the derivative
markets. This is called margin trading. When you trade in derivative products, you are not required to pay
the total value of your position up front. Instead, you are only required to deposit only a fraction of the total
sum called margin. This is why margin trading results in a high leverage factor in derivative trades.

Arbitrageurs: Derivative instruments are valued on the basis of the underlying asset’s value in the spot
market. However, there are times when the price of a stock in the cash market is lower or higher than it
should be, in comparison to its price in the derivatives market. Arbitrageurs exploit these imperfections and
inefficiencies to their advantage as it is a low-risk trade.

Day traders and Position traders:

•A day trader tries to take advantage of intra-day fluctuations in prices. All their trades are settled by by
undertaking an opposite trade by the end of the day. They do not have any overnight exposure to the
markets.
•On the other hand, position traders greatly rely on news, tips and technical analysis – the science of
predicting trends and prices, and take a longer view, say a few weeks or a month in order to realize better
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profits. They take and carry position for overnight or a long term.
 THE DIFFERENT TYPES OF DERIVATIVE CONTRACTS

There are four types of derivative contracts – forwards, futures, options and swaps. However, for the
time being, let us concentrate on the futures and options only. Swaps are complex instruments that are not
available for trade in the stock markets.
Futures: Futures are contracts that represent an agreement to buy or sell a set of assets at a specified
time in the future for a specified amount. Forwards are futures, which are not standardized. They are not
traded on a stock exchange. For example, in the derivatives market, you cannot buy a contract for a single
share. It is always for a lot of specified shares and expiry date. This does not hold true for forward
contracts. They can be tailored to suit your needs.
Options: These contracts are quite similar to futures and forwards. However, there is one key difference.
Once you buy an options contract, you are not obligated to hold the terms of the agreement.
This means, even if you hold a contract to buy 100 shares by the expiry date, you are not required to.
Options contracts are traded on the stock exchange.

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 Futures Contracts

A futures contract is an agreement between two parties – a buyer and a seller – wherein the
former agrees to purchase from the latter, a fixed number of shares or an index at a specific time
in the future for a pre-determined price. These details are agreed upon when the transaction
takes place. As futures contracts are standardized in terms of expiry dates and contract sizes,
they can be freely traded on exchanges. A buyer may not know the identity of the seller and vice
versa. Further, every contract is guaranteed and honored by the stock exchange, or more
precisely, the clearing house or the clearing corporation of the stock exchange, which is an
agency designated to settle trades of investors on the stock exchanges.

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 STOCK FUTURES
Stock futures are derivative contracts that give you the power to buy or sell a set of stocks at a fixed price by a certain
date. Once you buy the contract, you are obligated to uphold the terms of the agreement. Here are some more
characteristics of futures contracts:
•Lot/Contract size: In the derivatives market, contracts cannot be traded for a single share. Instead, every stock futures
contract consists of a fixed lot of the underlying share. The size of this lot is determined by the exchange on which it is
traded on. It differs from stock to stock. For instance, a Reliance Industries Ltd. (RIL) futures contract has a lot of 505 RIL
shares, i.e., when you buy one futures contract of RIL, you are actually futures trading 505 shares of RIL. Similarly, the lot
size for Infosys is 1200 shares.

•Expiry: All three maturities are traded simultaneously on the exchange and expire on the last Thursday of their respective
contract months. If the last Thursday of the month is a holiday, they expire on the previous business day. In this system, as
near-month contracts expire, the middle-month (2 month) contracts become near-month (1 month) contracts and the far-
month (3 month) contracts become middle-month contracts.

•Duration: Contract is an agreement for a transaction in the future. How far in the future is decided by the contract
duration. Futures contracts are available in durations of 1 month, 2 months and 3 months. These are called near month,
middle month and far month, respectively. Once the contracts expire, another contract is introduced for each of the three
durations
The month in which it expires is called the contract month. New contracts are issued on the day after expiry.

•Example: If you want to purchase a single July futures contract of ABC Ltd., you would have to do so at the price at
which the July futures contracts are currently available in the derivatives market. Let's say that ABC Ltd July futures
trading are at Rs 1,000 per share. This means, you are agreeing to buy/sell at a fixed price of Rs 1,000 per share on the
last Thursday in July. However, it is not necessary that the price of the stock in the cash market on Thursday has to be Rs 8
1,000. It could be Rs 992 or Rs 1,005 or anything else, depending on the prevailing market conditions. This difference in
prices can be taken advantage of to make profits.
 INDEX FUTURES
A stock index is used to measure changes in the prices of a group stocks over a period of time. It is constructed by
selecting stocks of similar companies in terms of an industry or size. Some indices represent a certain segment or the
overall market, thus helping track price movements. For instance, the NSE Nifty is comprised of 50 liquid and
fundamentally strong companies. Since these stocks are market leaders, any change in the fundamentals of the
economy or industries will be reflected in this index through movements in the prices of these stocks on the NSE. Here
are some features of index futures:

•Contract size: Just like stock futures, these contracts are also dealt in lots. But how is that possible when the index is
simply a non-physical number. No, you do not purchase futures of the stocks belonging to the index. Instead, stock
indices points – the value of the index – are converted into rupees.
•For example, suppose the CNX Nifty value was 11500 points. The exchange stipulates that each point is equivalent to
Rs 1 , then you have to pay 75 times the index value – Rs 8,62,500 i.e. 1x11500x75. This also means each contract has
a lot size of 75.

•Expiry: Since indices are abstract market concepts, the transaction cannot be settled by actually buying or selling the
underlying asset. Physical settlement is only possible in case of stock futures. Hence, an open position in index futures
can be settled by conducting an opposing transaction on or before the day of expiry.

•Duration: As in the case of stock futures, index futures too have three contract series open for futures trading at any
point in time – the near-month (1 month), middle-month (2 months) and far-month (3 months) index futures contracts.

•Illustration of an index futures contract: If the index stands at 11500 points in the cash market today and you decide
to purchase one Nifty 50 October future, you would have to purchase it at the price prevailing in the futures market.
•This price of one October futures contract could be anywhere above, below or at Rs 8.625 lakh (i.e., 11500*75),
depending on the prevailing market conditions. Investors and traders try to profit from the opportunity arising from this
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difference in prices
 Options
Understanding the Basics

There are two basic types of options: calls and puts. The purchase of a call option provides the buyer
with the right—but not the obligation—to purchase the underlying item at a specified price, called the
strike or exercise price, at any time up to and including the expiration date. A put option provides the buyer
with the right—but not the obligation—to sell the underlying item at the strike price at any time prior to
expiration. (Note, therefore, that buying a put is a bearish trade, while selling a put is a bullish trade.)
The price of an option is called a premium.

As an example of an option, an Reliance September 2300 call gives the purchaser the right to buy 505
shares of Reliance at Rs77 per share at any time during the life of the option (for Sept series-24-09-2020).
The buyer of a call seeks to profit from an anticipated price rise by locking in a specified purchase price. The
call buyer’s maximum possible loss will be equal to the rupee amount of the premium paid for the option.
This maximum loss would occur on an option held until expiration if the strike price was above the prevailing
market price.
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For example, if Reliance was trading at Rs2300 or below that price when the 2300 option expired, the
option would expire worthless. If at expiration, the price of the underlying market was above the strike
price, the option would have some value and would hence be exercised. However, if the difference
between the market price and the strike price was less than the premium paid for the option, the net result
of the trade would still be a loss. In order for a call buyer to realize a net profit, the difference between the
market price and the strike price would have to exceed the premium paid when the call was purchased
(after adjusting for commission cost). The higher the market price, the greater the resulting profit. The
buyer of a put seeks to profit from an anticipated price decline by locking in a sales price. Like the call
buyer, the maximum possible loss is limited to the rupee amount of the premium paid for the option. In the
case of a put held until expiration, the trade would show a net profit if the strike price exceeded the market
price by an amount greater than the premium of the put at purchase (after adjusting for commission cost).
Whereas the buyer of a call or put has limited risk and unlimited potential gain, the reverse is true for the
seller. The option seller (often called the writer) receives the dollar value of the premium in return for
undertaking the obligation to assume an opposite position at the strike price if an option is exercised.

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For example, if a call is exercised, the seller must assume a short position in the underlying market at the
strike price (since by exercising the call, the buyer assumes a long position at that price). The seller of a call
seeks to profit from an anticipated sideways to modestly declining market. In such a situation, the premium
earned by selling a call provides the most attractive trading opportunity. However, if the trader expected a
large price decline, he would usually be better off going short the underlying market or buying a put—trades
with open-ended profit potential. In a similar fashion, the seller of a put seeks to profit from an anticipated
sideways to modestly rising market. Some novices have trouble understanding why a trader would not
always prefer the buy side of the option (call or put, depending on market opinion), since such a trade has
unlimited potential and limited risk. Such confusion reflects the failure to take probability into account.
Although the option seller’s theoretical risk is unlimited, the price levels that have the greatest probability of
occurrence (i.e., prices in the vicinity of the market price when the option trade occurs) would result in a net
gain to the option seller. Roughly speaking, the option buyer accepts a large probability of a small loss in
return for a small probability of a large gain, whereas the option seller accepts a small probability of a large
loss in exchange for a large probability of a small gain. In an efficient market, neither the consistent option
buyer nor the consistent option seller should have any significant advantage over the long run.
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The option premium consists of two components: intrinsic value plus time value.
The intrinsic value of a call option is the amount by which the current market price is above the strike
price. (The intrinsic value of a put option is the amount by which the current market price is below the strike
price.) In effect, the intrinsic value is that part of the premium that could be realized if the option were
exercised at the current market price. The intrinsic value serves as a floor price for an option. Why?
Because if the premium were less than the intrinsic value, a trader could buy and exercise the option and
immediately offset the resulting market position, thereby realizing a net gain (assuming that the trader
covers at least transaction costs). Options that have intrinsic value (i.e., calls with strike prices below the
market price and puts with strike prices above the market price) are said to be in-the-money. Options that
have no intrinsic value are called out-of-the-money options. Options with a strike price closest to the market
price are called at-the-money options. An out-of-the-money option, which by definition has an intrinsic value
equal to zero, will still have some value because of the possibility that the market price will move beyond
the strike price prior to the expiration date. An in-the-money option will have a value greater than the
intrinsic value because a position in the option will be preferred to a position in the underlying market. Why?
Because both the option and the market position will gain equally in the event of a favourable price
movement, but the option’s maximum loss is limited. The portion of the premium that exceeds the 13
intrinsic value is called the time value.
The three most important factors that influence an option’s time value are:

1. Relationship between the strike and market price—Deeply out-of-the-money options will have little time value since it
is unlikely that the market price will move to the strike price—or beyond—prior to expiration. Deeply in-the-money
options have little time value, because these options offer positions very similar to the underlying market—both will
gain and lose equivalent amounts for all but an extremely adverse price move. In other words, for a deeply in-the-
money option, the fact that risk is limited is not worth very much, because the strike price is so far from the prevailing
market price.

2. Time remaining until expiration—The more time remaining until expiration, the greater the value of the option. This is
true because a longer life span increases the probability of the intrinsic value increasing by any specified amount
prior to expiration.

3. Volatility—Time value will vary directly with the estimated volatility [a measure of the degree of price variability] of the
underlying market for the remaining life span of the option. This relationship is a result of the fact that greater volatility
raises the probability of the intrinsic value increasing by any specified amount prior to expiration. In other words, the
greater the volatility, the greater the probable price range of the market. Although volatility is an extremely important
factor in the determination of option premium values, it should be stressed that the future volatility of a market is
never precisely known until after the fact. (In contrast, the time remaining until expiration and the relationship
between the current market price and the strike price can be exactly specified at any juncture.) Thus, volatility must
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always be estimated on the basis of historical volatility data. The future volatility estimate implied by market prices
(i.e., option premiums), which may be higher or lower than the historical volatility, is called the implied volatility.
 OPTION RELATED TERMS
• Premium: The upfront payment made by the buyer to the seller to enjoy the privileges of an option contract.
• Strike Price / Exercise Price: The pre-decided price at which the asset can be bought or sold.
• Strike Price Intervals: These are the different strike prices at which an options contract can be traded. These are
determined by the exchange on which the assets are traded.
• Strike Price / Exercise Price: The pre-decided price at which the asset can be bought or sold.
• Strike Price Intervals: These are the different strike prices at which an options contract can be traded. These are
determined by the exchange on which the assets are traded.
• EXPIRATION DATE: A future date on or before which the options contract can be executed. Options contracts have
three different durations you can pick from: Near month (1 month); Middle Month (2 months); Far Month (3 months).
Please note that long terms options are available for Nifty index. 
• Futures & Options contracts typically expire on the last Thursday of the respective months, post which they are
considered void.
• AMERICAN AND EUROPEAN OPTIONS: The terms ‘American’ and ‘European’ refer to the type of underlying asset in
an options contract and when it can be executed. American options’ are Options that can be executed at any time on or
before their expiration date. ‘European options’ are Options that can only be executed on the expiration date.
• PLEASE NOTE THAT IN INDIAN MARKET ONLY EUROPEAN TYPE OF OPTIONS ARE AVAILABLE FOR
TRADING.
• LOT SIZE: Lot size refers to a fixed number of units of the underlying asset that form part of a single F&O contract.
The standard lot size is different for each stock and is decided by the exchange on which the stock is traded. E.g.
options contracts for Reliance Industries have a lot size of 250 shares per contract.
• OPEN INTEREST: Open Interest refers to the total number of outstanding positions on a particular options contract
across all participants in the market at any given point of time. Open Interest becomes nil past the expiration date for a
particular contract. Example: If trader A buys 100 Nifty options from trader B where, both traders A and B are entering
the market for the first time, the open interest would be 100 futures or two contract. The next day, Trader A sells her
contract to Trader C. This does not change the open interest, as a reduction in A’s open position is offset by an
increase in C’s open position for this particular asset. Now, if trader A buys 100 more Nifty Futures from another trader
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D, the open interest in the Nifty Futures contract would become 200 futures or 4contracts.
Top 6 Options Trading Strategies

1. Long Call Options Trading Strategy

2. Short Call Options Trading Strategy

3. Long Put Options Trading Strategy

4. Short Put Options Trading Strategy

5. Long Straddle Options Trading Strategy

6. Short Straddle Options Trading Strategy

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 1. Long Call Options Trading Strategy
 This is one of the option trading strategies for aggressive investors who are very bullish about a stock
or an index.

 Buying calls can be an excellent way to capture the upside potential with limited downside risk.

 It is the most basic of all options trading strategies. It is comparatively an easy strategy to understand.

 When you buy it means you are bullish on a stock or an index and you expect to rise in future.

Current Nifty Index 11500

Strike Price 12000

Premium (Rs) 12

Break Even Point (Rs) = Strike Price + Premium 12012

It limits the downside risk to the extent of the premium that you pay.
But if there is a rise in Nifty then the potential return is unlimited.
This is one of the option trading strategies that will offer you the simplest way to benefit.
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 2. Short Call Options Trading Strategy
In the previous strategy that we discussed above, we were hoping that the index would rise in the future
and hence we adopted a strategy of long call there. But the strategy of a short call is the opposite of that.
When you expect the index to fall you adopt this strategy. An investor can sell Call options when he is very
bearish about a stock/index and expects the prices to fall. This is a position that offers limited profit
potential. An Investor can incur large losses if the underlying price starts increasing instead of decreasing.
Though this strategy is easy to execute, it can be quite risky since the seller of the Call is exposed to
unlimited risk.
Example:
You are bearish about Nifty and expect it to fall.
You sell a Call option with a strike price of 11400 at a premium of Rs. 193.
If the Nifty stays at 11400 or below, the Call option will not be exercised by the buyer of the Call and you
can retain the entire premium of Rs.193. 
Use this strategy when you have a strong expectation that the price will certainly fall in the future.
This is a risky strategy, as the stock prices rise, the short call loses money more quickly.
This strategy is also called Short Naked Call since the investor does not own the underlying stock that he is
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shorting.
 3. Long Put Options Trading Strategy
Long Put is different from Long Call. Here you must understand that buying a Put is the opposite of buying
a Call. When you are bullish about the stock/index, you buy a Call. But when you are bearish, you may buy
a Put option. A Put Option gives the buyer a right to sell the stock (to the Put seller) at a pre-specified price.
He thereby limits his risk. Thus, the Long Put there becomes a Bearish strategy. You as an investor can buy
Put options to take advantage of a falling market.
Example:
You are bearish on Nifty on 11th September, when the Nifty is at 11450.
You buy a Put option with a strike price Rs. 11400 at a premium of Rs. 127, expiring on 24th September. If
Nifty goes below 11273 (11400-127), you will make a profit on exercising the option.
In case the Nifty rises above 11400, you can give up the option (it will expire worthlessly) with a maximum
loss of the premium.
If you are bearish you can profit from the declining stock prices by buying Puts.
You will be able to limit your risk to the amount of premium paid, but your profit potential remains unlimited.

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 4. Short Put Options Trading Strategy
In the long Put option trading strategy, we saw when the investor is bearish on a stock he buys Put. But
selling a Put is the opposite of buying a Put. Investor will generally sell the Put when he is Bullish about
the stock. In this case, the investor expects the stock price to rise. When an investor sells a put, he earns
a Premium (from the buyer of the Put). Here the investor has sold someone the right to sell him the stock
at the strike price. If the stock price increases above the strike price, this strategy will make a profit for the
seller since the buyer will not exercise the Put. But, if the stock price decreases below the strike price,
more than the amount of the premium, the Put seller will start losing money. The potential loss is unlimited
here.
Example:
You are bullish on Nifty when it is at 11400. You sell a Put option with a strike price of 11400 at a premium
of Rs. 127, expiring on 24th September. If the Nifty index stays above 11400, you will gain the amount of
premium as the Put buyer won’t exercise his option. In case the Nifty falls below 11400, Put buyer will
exercise the option and you will start losing money. If the Nifty falls below 11273, which is the break-even
point, you will lose the premium and more depending on the extent of the fall in Nifty. Selling Puts can lead
to regular income, but it should be done carefully since the potential losses can be significant. This 20
strategy is an income-generating strategy.
 
 5. Long Straddle Options Trading Strategy
The long straddle strategy is also known as buy straddle or simply “straddle”. It is one of the neutral options
trading strategies that involve simultaneously buying a put and a call of the same underlying stock. The
strike price and expiration date are the same. By having long positions in both calls and put options, this
strategy can achieve large profits if there is big directional move. This strategy is used ahead of big events
like Union Budget, RBI Policy meeting, Results etc.
Say for strike price of 11450; Call Premium paid is Rs 165, Put premium paid is 145.
Total premium paid is 165+145 which equals 310.
Upper Breakeven point is calculated as 11450+310 which comes to 11760
Lower Breakeven point is calculated as 11450-310 which comes to 11140
We will assume on expiry Nifty Closes as on expiry Nifty Closes at 11400, 11500, 11700, 11900 and so on.
If the price of the stock/index increases, the call is exercised while the put expires worthless and if the price
of the stock/index decreases, the put is exercised, the call expires worthless.
Either way, if the stock/index show volatility to cover the cost of the trade, profits are to be made.
If the stock /index lies between your upper and lower break-even point you suffer losses to that extent. With
Straddles, the investor is direction neutral. All that you are looking out for is the stock/index to break out 21
exponentially in either direction.
 6. Short Straddle Options Trading Strategy
A Short Straddle is exactly the opposite of Long Straddle.
An investor can adopt this strategy when he feels that the market will not show much movement. Thereby
he sells a Call and a Put on the same stock/index for the same maturity and strike price.
It creates a net income for the investor. If the stock/index does not move much in either direction, the
investor retains the Premium as neither the Call nor the Put will be exercised. 
At the strike price of Nifty say 11500; Call Premium paid is RS 137. Put premium paid is 168. In this
strategy also,
Upper Breakeven point is calculated as 11500+305 which comes to 11805
Lower Breakeven point is calculated as 11500-305 which comes to 11195
If the stock moves up or down significantly, the investor’s losses can be significant.
This is a risky strategy. It should be carefully adopted only when the expected volatility in the market is
limited.

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 Other Popular Option Strategies
1. Covered Call
With calls, one strategy is simply to buy a naked call option. You can also structure a basic covered call or buy-write. This is
a very popular strategy because it generates income and reduces some risk of being long on the stock alone.
 2. Married Put
In a married put strategy, an investor purchases an asset–such as shares of stock–and simultaneously purchases put
options for an equivalent number of shares.
3. Bull Call Spread
In a bull call spread strategy, an investor simultaneously buys calls at a specific strike price while also selling the same
number of calls at a higher strike price. Both call options will have the same expiration date and underlying asset.
4. Bear Put Spread
The bear put spread strategy is another form of vertical spread. In this strategy, the investor simultaneously purchases put
options at a specific strike price and also sells the same number of puts at a lower strike price. Both options are purchased
for the same underlying asset and have the same expiration date.
5. Protective Collar
A protective collar strategy is performed by purchasing an out-of-the-money put option and simultaneously writing an out-
of-the-money call option. The underlying asset and the expiration date must be the same. This strategy is often used by
investors after a long position in a stock has experienced substantial gains.
6. Long Call Butterfly Spread
The previous strategies have required a combination of two different positions or contracts. In a long butterfly spread using
call options, an investor will combine both a bull spread strategy and a bear spread strategy. They will also use three
different strike prices. All options are for the same underlying asset and expiration date.
7. Iron Condor
In the iron condor strategy, the investor simultaneously holds a bull put spread and a bear call spread. The iron condor is
constructed by selling one out-of-the-money put and buying one out-of-the-money put of a lower strike–a bull put spread–
and selling one out-of-the-money call and buying one out-of-the-money call of a higher strike–a bear call spread. All options
have the same expiration date and are on the same underlying asset. 
8. Iron Butterfly
In the iron butterfly strategy, an investor will sell an at-the-money put and buy an out-of-the-money put. At the same time,
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they will also sell an at-the-money call and buy an out-of-the-money call. All options have the same expiration date and are
on the same underlying asset.
 Conclusion
There are innumerable Options Trading Strategies available, but what will help you, in the long
run, is “Being systematic and probability-minded”. No matter what strategy you use, it is
essential that you have a good knowledge of the Market and your Goal. The key here is to
understand which of the options trading strategies suit you more.

My trading method is— KISS Method (Keep It Simple, Stupid.)

How Do I Keep It Simple? :
In simple words, an option on a stock or index will go up or down in price when:
The underlying price moves in that direction. ( Up for Calls and Down for Puts )
This movement happens before expiry of contract. ( Loss in value called Time Decay )
There should be a sudden spike favouring your trade within the expiry period. (Volatility )
Look out for news/event based activity
I base my trades on these simple assumptions and apply normal trading wisdom to
Option Trading.
And it works.
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 10 Habits of a Successful Options Trader
1. Be Able to Manage Risk
Options are high-risk instruments, and it is important for traders to recognize how much risk they
have at any point in time. What is the maximum downside of the trade? What is the implicit or
explicit position with respect to volatility? How much of my capital is allocated to the trade? These
are some of the questions traders always have to keep in their minds.
2. Be Good With Numbers
While trading in options, you are always dealing with numbers. What's the implied volatility? Is the
option in the money or out of the money? What's the break-even of the trade? Options traders are
always answering these questions.
3. Have Discipline
To become successful, options traders must practice discipline. Doing extensive research,
identifying opportunities, setting up the right trade, forming and sticking to a strategy, setting up
goals, and forming an exit strategy are all part of the discipline. A simple example of deviating from
the discipline is following the herd. Never trust an opinion without doing your own research. You
can't skip your homework and blame the herd for your losses. Instead, you must devise an
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independent trading strategy that works in order for it to be a successful options strategy.
 4. Be Patient
Patience is one quality all options traders have. Patient investors are willing to wait for the market
to provide the right opportunity, rather than trying to make a big win on every market movement.
You will often see traders sitting idle and watching the market, waiting for the perfect time to enter
or exit a trade. The same is not the case with amateur traders. They are impatient, unable to control
their emotions, and they will be quick to enter and exit trades.
5. Develop a Trading Style
Each trader has a different personality and should adopt a trading style that suits his or her traits.
Some traders may be good at day trading, where they buy and sell options several times during the
day to make small profits. Some may be more comfortable with position trading, where they form
trading strategies to take advantage of unique opportunities, such as time decay and volatility. And
others may be more comfortable with swing trading, where traders make bets on price movement
over periods lasting five to 30 days.
6. Be Flexible
You cannot stake a claim on the market but must go with the market or leave it when it is not the
type that suits you. You must accept losses occur and that it is inevitable that you will
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lose. Acceptance rather than fighting the market is paramount to understanding, clarity and finally
winning.
 7. Be an Active Learner
Remember that 90% of options traders will realize losses. What separates successful traders from
average ones is successful traders are able to learn from their losses and implement what they
learn in their trading strategies. Elite traders practice…and practice some more until they learn the
lessons behind the trade, understand the economics behind the market and see the market
behaviour as it is happening.
The financial markets are constantly changing and evolving; you need to have a clear
understanding of what's happening and how it all works. By becoming an active learner, you will
not only become good at your current trading strategies, but you will also be able to identify
new opportunities others might not see or may pass over.
8. Interpret the News
It is crucial for traders to be able to interpret the news, separate hype from reality and make
appropriate decisions based on this knowledge. You will find many traders eager to put their capital
in an option with promising news, and the next day they will move on to the next big news. This
distracts them from identifying bigger trends in the market. Most successful traders will be honest
with themselves and make sound personal decisions, rather than just going by the top stories in
the news.
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 9. Plan Your Trades
An options trader who plans is more likely to succeed than one who operates on instinct and feel.
If you don't have a plan, you will place random trades, and consequently, you'll be directionless.
On the other hand, if you have a plan, you are more likely to stick to it. You will be clear about
what your goals are and how you plan to achieve them. You will also know how to cover your
losses or when to book profits. You can see how the plan has worked (or not worked) for you. All
these steps are essential to developing a strong trading strategy.
10. Maintain Records
Most successful options traders keep diligent records of their trades. Maintaining proper trade
records is an essential habit to help you avoid making costly decisions. The history of your trade
records also provides a wealth of information to help you improve your odds of success.

Bottom Line
Top options traders get a thrill from scouting and watching their trades. Sure, it's great to see a
pick come out on top, but much like sports fans, options traders enjoy watching the whole game
unfold, not just finding out the final score. These characteristics will not guarantee your success
in the options trading world, but they will definitely increase your chances at it. 28
 Six Books
for becoming a
Futures & Options Trader
A great trader is like a great athlete. You have
to have natural skills, but you have to train
yourself how to use them.

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 Seven Awesome Trading Movies You Need To See
1. The Corporation (2003)
A brilliant motion picture demonstrating the ascent to the top of a major corporation. The movie is an in-depth psychological investigation of the legal
concept of a corporation. The corporation can buy property, and it has legal ownership and rights. This movies makes you start to ask yourself the
important questions, such as: If the corporation is like a person, what is the mental status of that individual? Is that individual useful for society? This is an
absolute must see trading movie.
2. Wall Street (1987)
Another great thriller by Oliver Stone, who coincidentally made the film as a tribute to his stockbroker father, Lou Stone. It's interesting to know that even
before the movie was filmed, Stone travelled to stock floors and dwelled on the subtle elements of broker language, and the innovation used by them.
Wall street is a trader's cult classic, which revolves around a father-child relationship, and provides the viewer with an accurate representation of the
major ups and downs that can occur in the financial markets.
3. Trading Places (1983)
This may be the funniest Wall Street movie ever made. The storyline hilariously weaves from a drunken, deranged Santa Claus to a Cameroon exchange
student, and then an unfortunate case of mistaken identity involving a gorilla outfit. Trading Places is a farce of the social commentary it's trying to make.
This film has definitely withstood the comedic test of time - so if you're looking for laughs, you won't be disappointed.
4. Floored (2009)
This is a brilliantly executed documentary that revolves around Chicago's futures trading pits. It scores high on the education factor for several reasons.
Firstly, it provides insight into futures markets and trading. You will hear a lot of shocking anecdotes and honest commentary from those interviewed.
Secondly, the movie highlights the real world issue of gambling vs. real trading. This is a must-watch movie for anyone interested in futures or general
trading.
5. Margin Call (2011)
What happens when you go over your leverage? This movie explains what can happen on a much wider stock-market scale. In short, your account can
go from ahead to dead in a few short seconds, when investment firms over the leverage and get a margin call. This film is almost a horror because it
exposes how delicate our financial system really is. It does not shy away from exposing greed and its moral downfall either. Kevin Spacey brilliantly plays
the role of a Head Trader. No matter how deep you are in trading, you need to watch this one .
6. Trader (1987)
This film was made in 1987 during the raging bull market. The movie portrays legendary hedge fund manager Paul Tudor Jones and his Tudor
Investments firm. Filmed before the 1987 Wall Street crash, Trader looks at futures trading and the frantic pace of the marketplace during this time. It
also highlights the wealth that traders like Jones accumulated ahead of the epic crash. The movie is a rarity, but if you can find it, do not hesitate to watch
it!
7. The Wolf of Wall Street (2013)
This movie is based on the true story of a brilliant yet depraved financial expert, Jordan Belfort, who served 22 months for fraud and money laundering.
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The storytelling is direct, and engaging from the very first moments. An epic movie maxed out to grand proportions. This was undoubtedly one of
DiCaprio's best screen performances of his career. Also, Oscar nominee Jonah Hill, whose performance could arguably go toe-to-toe with DiCaprio's, put
in a tremendous effort. Pay attention to a climactic sushi-eating scene -which is one of the best scenes in the movie.
Thank You

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