How do Options Traders get ideas for their trades? :

I like this quote.

It is the profitability that matters irrespective of how the idea originated.

I have always maintained that trading in the stock market is a simple and straightforward BUY and SELL deal.

Market players including the experts have made it into something so complicated as if it is rocket science.

Today we have access to computers and software to analyze the data and base our trading strategies on that.

But what is the data based on?

Data is based on the actions of millions of trader’s knowledge, foolishness, greed, fear, information, ignorance, rumors and so many other such factors. To confine such data into certain programming parameters is possible and if same behavior pattern continue, the results will be alright.

But they do go wrong because ultimately markets are about mass behavior which is seldom rational.

People had been trading for over a century without the computers to help them.

Looks like I have also written something which is not simple.

Let us correct the situation.

I will try to keep it simple.

Option Traders:

Let us first talk of the larger group.

The big institutional traders.

They are generally into Option Writing and like insurance companies making their profits from the premium they earn through writing.

For them, the writing the options itself is an idea. They do it every day to get the premium. Their action is based on the data that more than 80% of the Options expire worthless.

Nobody waits for an Option to expire. As soon as a significant part of premium is eroded, trade is exited.

These trades do not need ideas for their trades and they generally trade in Index Options which in Indian Market context means NIFTY and NIFTY BANK.

Individual Traders copying Institutional Traders.

There is another bunch of traders.

As it is common belief that the Institutional Traders are making money in their trades, it would be prudent to follow them.

These traders either directly do trading in a similar way or their Portfolio Management Services (PMS) do it on their behalf.

Individual Traders:

Now these are the most vulnerable people.

With few exceptions they are short of funds, want to make it big in the market and believe that Option Trading is the way.

The promise of UNLIMITED GAINS for the Option Buyer is a great incentive to trade Options.

These Individual Traders have to work harder and smarter to earn their profits as they are competing against the money power of the Option Writers.

They need some luck also favoring them from time to time.

They need ideas for getting into a trade also.

Ideas for getting into a trade:

Well,let me state the idea about IDEA. ( Pun intentional)

One of my friends asked me about some short selling suggestions. It was on September 04, 2017.

There was a news in the market about TRAI reducing the IUC charges for the mobile networks. This would certainly impact the balance sheet of telecom operators who are already smarting under JIO onslaught.

I told him to short IDEA.

I did not buy PUT options, but this is how a trade is initiated.

I sold IDEA CELLULAR futures on September 05 for Rs. 87.35 and closed the trade on September 28 Expiry day at Rs. 75.65.

Buying PUT 85 would have done the job as effectively with a defined risk.Surely a case of “What an idea, Sirji.”

Other ways to get trading ideas:

The idea about IDEA was a one off case.

But that is how you have to do it. First think of a likely scenario.

Have a list of stocks which are doing well and which are doing badly.

Identify the ones in which significant numbers of Options contracts are traded.

Make a short list of few of these stocks whose price movement you have observed or analyzed.

Have a look into their 30 day low and high price.

This gives the general idea about the likely price movement in case of similar volatility in the market.

This list will indicate which PUTS or CALLS to buy.

Strike Price would depend upon the volatility of the stock and the risk capability of the buyer.

This method mostly works.

When it does not, the loss is already fixed.

When it works, one should try to squeeze out the maximum profit.

Remember the promised UNLIMITED profit. At least something significant out of the UNLIMITED should be taken.

Tips from TV Experts:

Individual traders are a harried lot.

In their quest for the right traders they would do anything.

Another source of getting the ideas for their option trades is the Business Channels.

There are tips about Options Trading on almost every channel. Many traders initiate their trades based on these tips.

Like any other method, either it works or fails.

To Summarize:

Option trading is similar to any other trading.

Ideas for a trade originate in the same manner as they would for cash market or futures.

Institutional traders are a different class. They work like insurance companies. Their profit depends on averages. They are not looking for ideas.

Added thought:

While on the topic of IDEA, let us see where the stock has gone since September 2017.

It made a high of Rs. 118.90 on January 05, 2018.

And then the fall started.

On May 14, 2018, it made a low of Rs. 50.10.

Current price is Rs. 62.80 ( on 14 June 2018 ).

Things do not look good for this stock as well as the sector. And when the future ( immediate future ) looks not so good this gives us an idea to buy PUTS.

IDEA PUT 60 for June Expiry is an idea.

Thanks for reading.

Disclaimer: This post and examples are for teaching purpose only and are not meant as advice/suggestion to trade in these stocks. Trading in Futures and Options can lead to big losses and should be done with appropriate knowledge and advice only. Mentioning the stocks here does not imply that I have a trading position or likely to take a trade in these stocks.

Link to the original answer:

https://www.quora.com/How-do-options-traders-get-ideas-for-their-trades/answer/Pramod-Kumar-983