They have become an essential part of many people’s investment portfolios worldwide. While some retail traders sell options often, others hold on to them for more extended periods. However, holding on to options for long periods is impossible in all international markets. For example, option trading Germany.
So what are some strategies that can help avoid overtrading? Here are seven options trading tips you should know before investing in Germany:
Do Not Roll Forward Or Out If Your Option Expires “In-The-Money.”
When an investor exercises his right to buy call options at strike price K1 and decides to hold it until expiry, he earns unlimited profit potential when the stock price rises above strike price K1. However, some investors may choose to sell call options earlier to receive income or avoid the exercise of the option.
Sell weekly’s options instead of monthlies
Though one can earn more from long term options, selling weekly’s options is an excellent way to decrease risk exposure. There have been cases where companies announce terrible news just before quarterly reports. In such cases, the stock price may fall by over 15% in a day as against 5-6% for the monthly expiry option. Selling shorter-term options means you have lesser time to forget about the market volatility and makes you monitor your investment closely
Buy Both Calls & Puts At The Same Strike Price
Most retail investors who buy call options tend to go for strike prices far away from stock prices. It turns out to be a double-edged sword as it increases the probability of all things going wrong or even positively surprising markets! For example, if you buy calls with K1= 60 when the stock price is 45, the only way the option would be profitable is if the price goes above 61. Selling call options at or near-stock price reduces the risk of having negative gamma, i.e. significant losses when the market fluctuates and helps investors to earn decent returns
Never Sell Naked Puts
There is always a chance that share price falls below strike price resulting in the assignment of the put option and margin call (when bank account balance goes below required maintenance margin). It leads to forced selling for an investor, which may cost him dearly. Investors of retail or mum and pop funds should avoid selling or buying naked puts as it can lead to huge losses.
Buy Long-Term Options Instead Of Short Term Ones
The greater the period between buying a Call option and expiration, the higher are chances that your investment would not go wrong. So if you genuinely believe in stock for the next two years, it makes sense to buy long term options of, say, one year or more than just three months expiry ones. It is one of the essential tips Germans should consider
Never Buy Out-Of-Money Call Options
It can seem like an easy money-making strategy, but with limited risk exposure, it is not. Say you buy a call option at strike price K1 when St is trading at K2 (K1 > K2). If this trade works out well, you make significant profits only if the stock price moves above strike price K1 before expiration. Unfortunately, your forecast must be accurate for this trade to work out. If the stock price does not touch K1 before expiration, you are stuck with a worthless option
Look For Catalysts In The Company’s Future To Buy Call Options
Catalyst can be a product launch, a contract win, deal closure etc. It is the only way to factor in future positive events and buy call options. Most of your trades will work out if they have a significant probability of going up or down but buying calls based upon catalysts makes it significantly higher.