Buying the Short Term (ST) Call Options
Most of the people who start trading options know that Options are great financial instruments for making quick money. The leverage is great and the returns can be multifold compared to stock. They are lured by lots of articles showing people making mullions, multi baggers in Options that is not possible in Stocks. I admit that this is possible but if you make this in your first few trades, I will say you were fortunate. It takes lot of experience to make those types of predictions and getting in and out at the right time.
The new Options trader wants to small investment so they can make small investments and expect big return.
What you don’t know?
The time is a very important factor or I will say most important factor in the world of Options. You are buying the out of money which is around 8% out of money. For you to breakeven, the stock has to rise 8% in 2 weeks which is like 200% per annum growth. How many stocks in the world grow that fast without any expected news. Yes, if you are lucky and events like new breakthrough in technology, great quarterly results or acquisition takes place, your trade can give amazing results.
Also, the value of out of the money calls falls rapidly in the last 1 month of expiration period. Even if the stock remains at the current price for 3-4 days, your options will lose 60-80% of its value.
What to do to avoid this?
Since you are a new trader and don’t know how the market will behave, its better that you buy calls that has at least 2 months to expiration. You may end up paying more premiums but you will have more time to recover it. Also you will be able to analyze how the Option moves and will have time to exit if you have exit strategy in place. In case of short term options, before you can think or act, the Options may lose 80-90% of their values.
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