Why Option Strategies Make More Sense than Naked Options Trading

By Amit Jain

Options trading is inherently risky. Both buying and selling options carry higher risks than those prevalent in the stock market. This increased risk stems from several factors. Firstly, options trading involves substantial leverage. This allows traders to take significant positions with minimal capital. While this leverage can amplify gains, it also magnifies losses significantly. Additionally, options contracts have limited lifespans and become worthless after expiration, leading to time decay, which causes their value to decrease over time. In contrast, fundamentally strong stocks can appreciate over the long term.

Moreover, the limited upside, volatility, and complexity of options trading make it riskier than trading underlying assets. However, traders can still profit from options price fluctuations by employing winning options strategies.

Recognizing the need for a comprehensive guide to options strategies, Samco Securities, a leading technology-driven stock broker in India, has introduced Options B.R.O within the Samco trading app.

Options B.R.O and the Need for Options Trading Strategies

Options strategies involve buying and/or selling one or more options contracts to create a hedge. Traders use these strategies to hedge their positions by selecting options with different types, strike prices, or expiry dates. If the market moves as expected, one leg of the strategy may be profitable, offsetting losses from the other. Conversely, if the market moves unfavorably, profits from the hedge may reduce or offset losses from the main trade.

However, identifying the right strategy for each market scenario and implementing it promptly can be challenging. Nilesh Sharma, ED & President of Samco Securities, explained, "There are strategies for bullish, bearish, volatile, and non-volatile markets, as well as neutral market conditions. For both beginners and seasoned traders, identifying and executing the appropriate strategy in a timely manner is difficult. The options market is complex, influenced by various factors like asset price changes, time decay, and market sentiment shifts."

He said that to capitalize on market conditions, traders must assess the market, filter and analyze strategies, identify the best technique, and implement it within seconds or minutes. Personal financial circumstances and risk tolerance levels must also be considered. Manually handling all this within a short timeframe is nearly impossible without errors. Options B.R.O from Samco Securities offers a viable alternative.”

"Options B.R.O is an industry-first strategy builder that narrows down trading strategies to the top three techniques within seconds. Available for free on the Samco trading app, it evaluates over 2,000 options contracts and analyzes over 1,000 strategies in one second, serving as both a comprehensive guide and an effective tool to avoid the pitfalls of naked options trading," he said.

The Problem with Naked Options Trading

Naked options trading involves buying or selling options contracts without owning the underlying asset or having a corresponding position to offset the risk, making it inherently risky.

Naked Options Buying: This involves purchasing a call or put option without owning the underlying asset, offering leverage but also substantial risks. The primary issue is the risk of losing the entire premium if the asset price does not move favorably, resulting in worthless options and lost premiums.

Naked Options Selling: Writing options contracts without holding the underlying asset or a covering position can generate income from premiums but exposes traders to unlimited losses if the asset price rises steeply.

How Options B.R.O Facilitates Options Strategies

Options strategies help avoid the uncontrolled risks of naked options trading. According to Nilesh Sharma, structured strategies like spreads or covered calls manage risks by limiting downsides and hedging trades, crucial for portfolio stability in volatile markets. They allow traders to exploit various market conditions, from sideways markets to steep rallies or downturns.

Samco Securities' Options B.R.O simplifies deploying options strategies. Integrated into the Samco trading app, traders enter basic details, and the tool suggests the top three strategies for different risk profiles. Traders can browse through other strategies, evaluate them using filters like maximum profit, loss, probability of profit, and risk-reward ratio, and execute the strategy directly from the app, ensuring timely execution of winning options strategies.

(The writer is stock market expert. Views expressed here are his personal)