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It is ludicrous to think of doing the same with long/buy options when time is constantly ticking against you, he says. Every extra day and weekend that you hold buy option positions significantly erodes the premium," he says.Īveraging down buy option positions is a bad ideaĪveraging down can work sometimes when you buy stocks and the markets are in a long-term bull market because you have time in your favour or the ability to hold on to the position forever. When you buy options, there is a constant depreciation of time value, and along with it, the premium. When you buy options, this decision to hold losing intraday positions overnight only exaggerates the loss. Short term or intraday trades turn into long term positions just because of the loss. Many retail traders get stuck in this vicious cycle of hope when there is a loss that is too big to accept. "If trading options with larger than say even 1% of your capital, having a stop loss in place is important.
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Losses are easiest to accept when they are small but as they get bigger, it only gets tougher to exit. So, Zerodha CEO suggests, "if you are taking a directional view buying options, always trade monthly expiry, you will have much more time value and hence higher odds of profiting as compared to trading weekly." If you buy weekly expiries as compared to monthly expiries, time value reduces much faster. The above effect of time value gets exaggerated because most actively traded options contracts are ATM (At The Money) or OTM (Out of The Money) which have no intrinsic value." This is unlike trading stocks or futures, where you can potentially hold the stock forever or continue rolling the futures contracts, albeit at a small rollover cost. This is the main reason why option buyers lose money – they are constantly fighting time. "The one certain thing is the constantly reducing time value. This means that the trader has to be right on market direction in a big way and within a short period, he says. Option premium is the intrinsic value of the contract and time value.
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