Which is the best time frame for Options Trading?
Short Answer
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.
Detailed Answer
What is Options Trading?
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.
- Options Buying
- Options Selling
As Options buying and selling are very different from one another, they require different time frames. let's look at them one by one.
Best Time Frame for Options Buying:
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.
Best Time Frame for Options Selling:
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.
Conclusion:
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.
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Discussion (2)
A 15-minute time frame is one of the most popular interval used by day traders who focus on multiple stocks.
With the increasing exposure of the stock markets, more and more people are trying a hand in options trading. Options trading have become a lucrative place for individuals to earn money. The reality is certainly different. More than 95% of individuals lose money in Options trading, There are various reasons behind this. Find out the reasons for losses and the steps by which you can be a profitable options trader here.
Options Premiums are primarily made up of two values. Intrinsic Value and Time Value. Whereas the change in the price of the Option premiums is dependent on five factors called Option Greeks. These are Delta, Gamma, Theta, Vega, and Rho. Know more about options greeks and which Greeks should a trader keep an eye on while trading Options.
Options trading involves two aspects. One is options buying and the other is options selling. To buy an ATM option you will require around Rs 10,000 to Rs 25,000 per lot for an Index or stock option. On the other hand, you will require close to Rs 95,000 to Rs 1,50,000 for selling 1 lot of index option. These amounts change with respect to the time remaining to expiry and other market conditions.
Option Greeks are the financial indicators. Delta, Gamma, Theta, Vega are the option Greeks and deals with different variables such as price, maturity, volatility.
Discount brokers have gained a lot of popularity in the past couple of years. Zerodha is currently India's largest and most trusted discount broker which is also the best option for beginners. It has all the necessary qualities required for a good broker like low commissions, low-maintenance charges, high-quality trading terminal, etc.
If you're looking for a straightforward and comprehensive take on options trading, then Sensibull should do the job perfectly. However, if you're and expert and want more complex trading tools, then Opstra is the one to choose.
Options are a form of conditional derivatives policy that allows the holder to buy or sell the key asset at a fixed price before or after the agreement expires. The two most impactful options are Call Options and Put Options.
Options trading offers many options to traders, investors as well as hedgers. There are some common mistakes that option traders commit. Five of the most common mistakes are, taking too much leverage, not having a pre-defined stop loss and target, acting on tips on social media, adhering to buying options, and taking unhedged trades.
GTT or Good Till Triggered, is a feature of Zerodha that lets users execute trades based on a specific price point. It's quite helpful for those that want to trade in the stock market but have no time to keep track of their investments.
Option Selling can be considered as a full-time business for traders. Similar to a business, you cannot expect extraordinary returns in options selling. You, as an options seller have an edge over option buyers and the chances of making money are higher. Know how much money can be made by selling Options.
Akshat Pareek
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.