Options Trading is a risky business and options traders have to look at various parameters before taking a trade. Choosing a time frame is one of the factors in options traders. Both option Buyer and Sellers use different time frames to trade. Let's see which time frame is most useful for options buying as well as selling.
Options are a type of Derivatives instrument where the Buyer and Seller of an Options Contract come into a mutual agreement. Both the parties agree to exchange the underlying asset on a particular date and at a particular price. Both of them have a legal obligation to exchange the underlying on the date of expiry.
Options trading is a common practice by traders and investors. Options are used by traders to speculate, and investors use Options to hedge their portfolios. Options trading can be done in various different ways, and time frames. Let's discuss the best time frame for Options trading.
Before discussing the best time frame for options trading, let's divide it into two parts.
As Options buying and selling are very different from one another, they require different time frames. let's look at them one by one.
Options buying is one of the two aspects of Options trading. Options buying is comparatively a more difficult place to earn money. This is due to the fact that Options Buyers fight against more than one odds. Which include Theta decay or Time Decay and the risk of their view going wrong. Due to this, the chances of making money for an option buyer is merely 33%. For this Option buyers trade in shorter time frames and scalp the short movements of the underlying. This prevents them from facing some major losses due to the time decay in options.
For scalping, the best time frame for Options Buying is 5 minutes to all the way up to 15 minutes. The 15-minute time frame is ideal to confirm the short-term trend and a lower time frame such as a 5-min time frame is ideal for an entry and exit. In shorter trades, exit is more important than entry. As option premiums tend to increase and decrease very quickly as the expiry approaches. The option buyer can pair their trading with technical analysis to calculate the profit booking points on the basis of support and resistance.
Options selling is comparatively more profitable but all is not good in Options selling. An options seller faces the risk of an unlimited risk if their view goes terribly wrong. On the other hand, the overall profit of an Options seller is capped at the total premium collected by selling a particular option.
Both Option buying and selling come with their own Pros and cons. An option buyer has limited risks and unlimited profit potential. Whereas an Options seller faces the risk of an unlimited loss. On the upside, the chances for an option seller to make money is more than 66%. This makes Option Selling more attractive to people who want to make a decent return on their investments.
An option seller looks to gain as much as possible from the trade. Hence an Option Seller usually carries forward their position overnight till the expiry day to gain as much as they can from the premium decay. For this Option, Sellers can choose to trade in the Hourly and Daily time frame to make strategies and implement them. After execution, a strategy, you can monitor your trades on the 15 minutes time frame so that, you can get a clear picture of the underlying trend. A time frame shorter than 15 minutes will have too many trend reversals, which can confuse you as an Options seller.
Although no strategy is foolproof. Hence option sellers need to monitor their positions periodically to make sure their view of the underlying is intact. If there is any short-term volatility against the position. You can make certain adjustments to the position to limit the losses.
To sum it up, it can be said that Options Buying is like driving a two-wheeler in busy traffic. Option Buyers need to dodge vehicles and zoom in and out of traffic. Due to this, an Options buyer focuses on the short-term trend in order to make profits. For this, a shorter time frame of 5 to 15 minutes suitable for options trading.
On the other hand, Option sellers are like Cars who wait for the traffic to subside to get to their destination. Option sellers focus on the bigger picture and do not focus on short-term volatility. Due to this, a larger time frame of 15 to 60 minutes is suitable for Options Selling.
I believe that 15, 30 minutes and 1 hour plus the daily timeframe are the ideal timeframe for option trading. Since, the daily time frame lets the trader see the big picture along with the hourly time frame showing the major movements. The 15 and 30 minutes time frame act as indicators for short term movements.
A 15-minute time frame is one of the most popular interval used by day traders who focus on multiple stocks.