Welcome to the world of Options Trading.

A trader should strive for the best trades. Options are a wonderful tool to maximize the potential of your trades.

But Option Trading needs some skill. Following questions need to be answered:

(1) How can we choose stocks for Options Trading.

(2) How can we know that price of the scrip will increase or decrease.

(3) How to set a strike price.

Let us get to the answers of all these questions one by one.

But there is a caveat. Even after knowing all the answers and entering a right trade, one may not be profitable.

How to trade options profitably should be the fourth question.

How can we select stocks for Options Trading ? :

An option writer will like to select stocks with low volatility whereas an option buyer would go for high volatility stocks.

As the time decay will be causing price erosion everyday, I would like my stock price to move in my favor and move pretty fast.

I have written an answer to a similar question on Quora.

It can be read here:

Pramod Kumar’s answer to How do you choose a script for option trading?

How can we know that price of the scrip will increase and decrease ? :

A million dollar question.

But the answer here is free.

We have to identify the strength and weakness. It is quite easy to spot. This method may not have the sanction of technical experts in the market but it works as well or better than any technical analysis.

I have already posted the answer to this question and it can be read here:

https://optionsnext.com/blog/picking-stocks-for-trading-everyone-can-do-it-right/

With any method of selection, we can go wrong. The key is to keep your losses to the minimum while trying to maximize your gains.

How to set a strike price ? :

We have selected a stock and we have assessed whether it goes north or south.

Now we have to set a strike price for the Option to buy.

Too near the current price then the premium is very high.

Too far away , then there is every chance that it will expire worthless.

The art is in finding a balance.

Here again, the answer lies in the volatility.

For extremely volatile stocks, I will go for a strike as far away as 10% from the current stock price.

For mildly volatile stocks, it would be about 5% away.

For non volatile stock, I would not buy the Option.

The selection of the strike is a delicate art and is learnt through practice. I have indicated general guidelines above.

Now we have answered the three questions. Are we on road to profitability?

Probably not.

We shall have good trades and bad trades.

We shall have options which expire worthless.

We shall also be lucky to get the right trades, but it is important to milk them for the full profit.

We are taking a loss of 100% in expired options, we have to get more than 100% in right trades.

There is a possibility of getting 200%-1000% and even more in a right trade; one has to stay in the trade long enough.

We have seen such results in September Expiry series and in current month also. Most notable examples are L&TFH, IBULHSGFIN, RELCAPITAL and PNB in September. In addition we had a wonderful trade in HINDPETRO in the current October series.

A word of caution here. Every method can go wrong. For us, it went wrong in august series and ended up in a loss of Rs. 99000. In September series, few good trades resulted in a profit of Rs. 430000. Such a turn around was possible with a belief in our methods and commitment to our trades with benevolence of the markets playing  a leading role.

Some readers had requested for stock selection process. I believe this will meet their requirements.

P.S. : This post is a modified version of my answer on Quora some six months ago. You can read it here:

https://www.quora.com/How-can-we-choose-stocks-for-option-trading-and-how-can-we-know-that-the-price-of-that-script-will-increase-or-decrease-and-how-to-set-a-strike-price/answer/Pramod-Kumar-983