Options Trading is a new buzz among Millenials. People are in a FOMO state about options as it offers a shortcut to monthly passive income.
However lucrative it sounds, Options Trading requires discipline. And even before that, you need to find out what trading style suits you the best.
Broadly there are 3 types of Options Traders. Every type is different, and they have unique methods for entry/exit. Let’s understand in detail about these 3 types:
Directional Option Traders
Directional options traders make directional bets on whether an underlying asset will rise or fall in price over a predetermined span of time.
And based on their speculation they buy/sell naked options. For example: If a person feels that the stock is bullish then he/she will either buy calls or sell puts.
Conservative directional traders can also take hedged positions like covered calls or puts.
Option Greeks they primarily use: Delta & Gamma
Delta Neutral (Non-Directional) Option Traders
Delta neutral option traders are traders who do not take directional positions on a stock or index. They simply adopt a strategy that allows them to make profit on the fluctuations of the price of an underlying security, without having to decide whether it will be bullish or bearish in nature.
Selling straddles or strangles is an example delta neutral strategy. Traders using such strategies bank on the “theta” decay.
Option Greeks they primarily use: Theta
One who Trades Options based on Volatility
Volatility based options trading is different than traditional options trading in that it does not require the trader to worry about the direction or time-decay.
Rather they trade based on the volatility of a security or economic indicator. The rule is simple; buy options when volatility is low and sell when volatility is high.
It is relatively a very complex and difficult strategy to execute.
Option Greeks they primarily use: Vega
None of these 3 types of options traders are better or worse, in fact, all of them can be profitable in the long term if they stick to their system and follow proper risk management
For starting Options Trading, it is imperative to find out which style suits you the best. We prefer delta-neutral strategies. What about you?