Why Buying 'out of Money' Calls and Puts are not recommended
Lot of people keep asking me why we always go for Nifty Futures and recommend only writing ( selling) options and never recommend buying them. Well there are plenty of reasons, let me try and put few here for every ones benefit
Main cause of Leveraging and overtrade: Buying 'out of money call/put does create a leveraged position. If some has 1 lakh capital and he is trading in 'out of money option he would go and buy 10 lots of 100 Rs. If he is buying just 1 lot then its fine as only 10% of his capital is at stake. However people trade big and buy multiple lots and put 100% capital at risk. If you write call/put( i.e. sell first) then you can buy/sell only one lot with around 1 lakh capital so you are automatically restricted by exchanges to leverage. General rule of mkt is 1 lakh for one lot ( if you want to trade in 5 lots you should have 5 lakh capital) but how many people do you think do that? Every one want to trade 10-20 lot with 50K
Premium loss: When you buy a out of money call/put you pay a premium. Lets say nifty is at 10800 and 10800 put is available at 200 Rs. Now nifty has to fall below 10600 in order for you to make any realistic profit. There is no guarantee that Nifty will start moving down the moment you buy puts. When you sell Nifty future you lose only when Nifty moves up (so chances of losing are 50-50). Now if you buy puts you lose when a) when nifty goes up and you lose b) when nifty does nothing and stay at same place so chances of you losing increases to 66%.. Now see what happens when you sell puts. You gain when nifty moves up and you gain when Nifty does nothing. you only lose when Nifty falls ( so chances of losing drastically reduces to just 33%)
Math and odds are not on your side: like mentioned above, please remember that markets don't move or dont do anything 80% of times they move in big trends only 20% of time. So 80% of the times your put and call will become zero. If you buy call/puts then 4 out 5 times you will end up incurring losses its simple math. You might make money occasionally buying puts and calls ( if you are intraday trader) but if you are a positional trader and trading in out of money call/put then I am afraid you are going to lose most of the times. Premium you pay keep deteriorating every hour every day If the movement of market is not as per your expectations.
In nutshell you need 2 things to be in your favour if you want to make money by buying Calls and Puts a) Overall trend and b) speed of rise/fall and if neither of this happens then you are done.
Out of money call/puts have no intrinsic value, its just a premium you pay to gamble on the underlying price and that premium keep on reducing everyday. If you really want to trade call/puts then go for 'in the money' options like for example nifty is trading at 10700 and 11200 put is available for 500rs (11200-10700= 500) so you pay NIL premium. Always see how much premium you are paying for calls and puts(premium is nothing but pure gamble).
Just see around yourself and ask any trader if hes made money consistently by buying and holding call and puts (its just not difficult its bloody impossible with odds and maths totally stacked against you). Why do you think people lose at casinos? its only because math is always tilted in the favour of casino owner and not in the favour of gambler. Same is here. For you to succeed bare minimum odds you need are 50:50 if its less than that then sorry you should not be interested. That's the reason big players always sell put/calls ( and collect premium)and retail investors buy them and lose it all.
I have seen lots of people wiping out their millions by buying calls and puts. if you are in stock markets purely for thrills and gamble then by all means go for call/puts. But if you mean business and serious about your trade then put your money where its worth.
