How to increase profit while doing Intraday option trading?

Questions to discuss in this blog:

Q1. How to increase profit while doing Intraday option trading?

Q2. How to analyse up and down movement of graph while option trading?

Q3. What's if prices crosses the upper and lower Bollinger Bands?

Q4. How to find call and put point?

Q5. What is OTM, ITM and ATM?

Q6. Explain Open Interest 

Q7. What are contracts?

Q8. Right but not the obligation means

Q1. How to increase profit while doing Intraday option trading?

Increasing profit in intraday options trading requires a combination of strategies, risk management, and disciplined execution. Here are some tips to help maximize profits:

1. Use Technical Analysis

Identify Trends: Use tools like moving averages, RSI (Relative Strength Index), MACD, Bollinger Bands, and support/resistance levels to identify potential market movements.

Candlestick Patterns: Learn how to read candlestick patterns for better entry and exit points.

Volume Indicators: Monitor trading volumes to understand market strength and the potential for price moves.

2. Have a Clear Strategy

Trend Following: Buy call options in an uptrend and put options in a downtrend.

Breakout Trading: Enter trades when the price breaks through key support/resistance levels with high volumes.

Mean Reversion: If an option's price moves significantly away from the average, bet on a reversal back toward the mean.

3. Set Realistic Targets

Set profit targets based on technical analysis or percentage gains. Exiting a trade too late can erode profits.

Use Stop-Loss Orders: This minimizes losses and prevents emotions from driving decisions. A common stop-loss level is 1-2% of your total capital per trade.

4. Keep an Eye on Premium Decay

Option premiums decay rapidly (especially on expiry day). Be mindful of Theta decay and avoid holding positions too close to expiration unless the movement strongly favors your position.

5. Control Position Sizing

Don’t bet all your capital on one trade. Limit the amount of capital you expose to a single trade (e.g., 2-5% of your total capital).

6. Stay Updated on Market News

Intraday trading can be impacted by news and events. Keep an eye on economic reports, corporate earnings, and global news that could drive market volatility.

7. Follow a Risk-Reward Ratio

Maintain a risk-reward ratio of 1:2 or higher. For every 1 rupee you risk, aim to make at least 2 rupees.

8. Limit Overtrading

Overtrading can lead to losses due to higher brokerage fees and increased exposure to market risk. Only enter trades when high-probability setups emerge.

9. Use Option Greeks

Delta: Helps you gauge how much an option price will change with the underlying asset’s movement.

Theta: Understand time decay to prevent holding losing positions too long.

Vega: Measures the impact of volatility on option prices, which is crucial in intraday trading.

10. Track and Review Trades

Keep a trading journal. Review successful and unsuccessful trades to learn from past mistakes and successes.

By combining these strategies with strict discipline and risk management, you can enhance your chances of increasing profits in intraday options trading.

Q2. How to analyse up and down movement of graph while option trading?

Analyzing the up and down movements of a graph during options trading is essential for making informed decisions. Here’s how you can assess price movements effectively:

1. Understand Basic Chart Patterns

Uptrends (Higher Highs and Higher Lows): This indicates a bullish market, where prices are generally increasing. Look for confirmation with strong volume.

Downtrends (Lower Highs and Lower Lows): A bearish market suggests prices are falling. Enter put options when such patterns are visible.

Consolidation/Sideways Movement: This occurs when the price is stuck within a range. Avoid trading during this period or prepare for a breakout.

2. Use Moving Averages

Simple Moving Average (SMA): A commonly used indicator to smooth price data. When short-term averages (e.g., 9-day) cross above long-term averages (e.g., 50-day), it signals an upward move (buy signal). A cross below indicates a downtrend (sell signal).

Exponential Moving Average (EMA): More sensitive to recent prices. A rising EMA indicates bullish sentiment, while a falling EMA suggests bearish sentiment.

3. Relative Strength Index (RSI)

Overbought/Oversold: RSI measures the speed and change of price movements, ranging from 0 to 100.

Above 70 indicates the asset may be overbought (potential for a downward move).

Below 30 suggests it may be oversold (potential for an upward move).

RSI can help you identify reversals in trends.

4. Use Bollinger Bands

Bollinger Bands measure volatility. When the price touches the upper band, the asset might be overbought (possible down movement). When the price touches the lower band, it may be oversold (potential up movement).

A narrowing of the bands often precedes a sharp price movement or breakout.

5. Support and Resistance Levels

Support Level: This is where the price has a tendency to stop falling and bounce back up. A break below support indicates a possible downtrend.

Resistance Level: The price tends to stop rising and pull back. A break above resistance suggests an upward move.

Analyze past price data to identify strong support and resistance levels.

6. Volume Analysis

Increasing Volume with Price Movement: If the price moves up or down with increasing volume, it suggests strength in that direction. A price rise with high volume is bullish; a price drop with high volume is bearish.

Decreasing Volume: A price rise or fall with low volume indicates a weak movement, which may not be sustained.

7. Candlestick Patterns

Bullish Patterns: Patterns like the Hammer (small body, long lower wick), Engulfing Bullish (a larger green candle covering the previous red candle), or Morning Star often signal reversals to the upside.

Bearish Patterns: Patterns like Shooting Star (small body, long upper wick), Engulfing Bearish (a larger red candle covering the previous green candle), or Evening Star indicate potential downward reversals.

Candlestick patterns give clues on short-term direction based on price behavior.

8. MACD (Moving Average Convergence Divergence)

MACD helps identify trend reversals and strength.

MACD Line Crosses Above Signal Line: Buy signal.

MACD Line Crosses Below Signal Line: Sell signal.

MACD divergence (when price makes new highs or lows but the MACD doesn’t) can signal trend reversals.

9. Trendlines

Draw trendlines by connecting the highs in a downtrend and the lows in an uptrend. When the price breaks a trendline, it can signal a potential reversal or continuation of the trend.

10. Price Action

Higher Highs and Higher Lows: Bullish price action.

Lower Highs and Lower Lows: Bearish price action.

Watch how the price behaves at key levels, and pay attention to rejection candles or consolidation at support/resistance areas for clues on market direction.

11. Implied Volatility (IV)

High IV suggests that the market expects large price swings. If IV is low, smaller movements are expected.

Option prices are impacted by volatility, and sharp moves (up or down) often follow periods of low volatility.

By combining these tools, you can better analyze the up and down movements of a graph, allowing you to make more informed decisions in your options trading strategy.

Q3. What's if prices crosses the upper and lower Bollinger Bands?

When prices cross the upper or lower Bollinger Bands, it typically indicates strong price movements, but how you interpret these movements depends on several factors. Here's what it can mean in different scenarios:

1. Price Crosses the Upper Bollinger Band

Overbought Condition: When the price crosses above the upper Bollinger Band, it may indicate that the asset is overbought. This suggests that the price has risen too quickly, and a pullback or consolidation might occur soon. It doesn't always mean an immediate reversal but signals that the asset is in a strong uptrend, possibly due for a correction.

Potential Action: Some traders might sell or take profits, expecting the price to pull back.

Continuation of Strong Uptrend: If the price continues to rise above the upper band with strong volume, it could indicate a very bullish trend where the price will keep rising. In such cases, it's better to avoid selling too early and wait for a clearer reversal signal.

Potential Action: Trend-followers might buy or hold, anticipating more upside.

2. Price Crosses the Lower Bollinger Band

Oversold Condition: When the price crosses below the lower Bollinger Band, it indicates that the asset may be oversold. This often signals that the price has dropped too sharply, and a bounce or reversal could be imminent.

Potential Action: Some traders may look for buying opportunities, anticipating a reversal or bounce.

Continuation of Strong Downtrend: If the price continues to decline sharply after crossing the lower band, especially with increased volume, it may indicate a strong bearish trend that could continue for a while.

Potential Action: Trend-followers may sell or hold put options, expecting the downtrend to continue.

3. Price "Walking the Bands"

Upper Band: When the price crosses and "rides" the upper Bollinger Band, it can signal a strong and sustained uptrend. This indicates bullish momentum, but traders should look for signs of weakening momentum or volume divergence as potential reversal indicators.

Potential Action: Hold the position as long as the price continues walking the band but watch for exhaustion signals like a bearish reversal candlestick or weakening RSI.

Lower Band: Similarly, when the price stays along the lower Bollinger Band, it shows strong bearish momentum. However, this doesn’t always mean an immediate buying opportunity, as the price can continue falling for a while.

Potential Action: Continue holding a bearish position or consider selling on rebounds unless signs of reversal appear.

4. Squeeze and Breakout

Bollinger Band Squeeze: When the Bollinger Bands contract, it indicates low volatility, which is often followed by a sharp price movement. If the price crosses the upper band after a squeeze, it may indicate a strong bullish breakout. If it crosses the lower band after a squeeze, it signals a bearish breakout.

Potential Action: Traders often enter trades in the direction of the breakout once the price breaks above or below the bands.

Summary of Actions:

Cross Above Upper Band: Consider taking profits or holding if the trend is strong.

Cross Below Lower Band: Look for buying opportunities or stay bearish if the trend continues.

Walking the Bands: Stick with the trend but watch for signals of exhaustion or reversal.

After a Squeeze: Prepare for strong directional moves, entering trades in the breakout direction.

Bollinger Bands help traders understand whether the market is overbought or oversold, but it's always best to confirm moves with other indicators like RSI, volume, or candlestick patterns.

Q4. How to find call and put point?

Finding the right call and put points in options trading involves analyzing various technical indicators and price patterns to identify potential market directions. Here are some strategies and tools that can help you determine when to enter a call (buy) or put (sell) option:

1. Support and Resistance Levels

Call Point: When the price is approaching a key support level, and it shows signs of bouncing back (e.g., bullish reversal patterns like hammer or engulfing patterns), it may be a good opportunity to buy a call option.

Put Point: When the price nears a resistance level and starts showing signs of reversal (e.g., bearish candlestick patterns or failure to break the resistance), it can be a good signal to buy a put option.

2. Moving Averages (MA) and Crossovers

Call Point: Look for short-term moving averages (e.g., 9-day EMA) crossing above long-term moving averages (e.g., 50-day EMA), often known as the "Golden Cross." This signals bullish momentum and can indicate a good entry for a call option.

Put Point: If the short-term moving average crosses below the long-term moving average (called a "Death Cross"), it suggests bearish momentum and a good time to buy a put option.

3. Relative Strength Index (RSI)

Call Point: When RSI drops below 30 (oversold territory) and then starts rising, it may indicate that the price is ready to bounce back, which is a good signal for a call option.

Put Point: When RSI is above 70 (overbought territory) and starts dropping, it suggests the price may decline, signaling a good entry for a put option.

4. MACD (Moving Average Convergence Divergence)

Call Point: When the MACD line crosses above the signal line, especially from below zero, it indicates upward momentum, making it a good time to buy a call option.

Put Point: If the MACD line crosses below the signal line, especially from above zero, it signals bearish momentum and could be a good time for a put option.

5. Bollinger Bands

Call Point: When the price touches or crosses below the lower Bollinger Band and shows signs of reversing with high volume, this could be an opportunity to buy a call option, expecting a bounce.

Put Point: When the price touches or crosses above the upper Bollinger Band and begins to reverse, it may signal a good point to buy a put option.

6. Trendlines

Call Point: If the price touches and bounces off an upward trendline with bullish confirmation, it can signal a good time to buy a call option.

Put Point: When the price touches and reverses downward from a downward trendline, it may be a signal to buy a put option.

7. Breakout Trading (Support/Resistance Break)

Call Point: If the price breaks above a strong resistance level with high volume, this suggests bullish momentum, making it a good time to buy a call option.

Put Point: When the price breaks below a strong support level, it often leads to a bearish trend, signaling an opportunity to buy a put option.

8. Implied Volatility (IV)

Call Point: If implied volatility (IV) is relatively low and you expect a significant price movement upwards, this could be a good time to buy a call option.

Put Point: If IV is low and you expect a strong downward move, buying a put option may be a profitable strategy.

9. Candlestick Patterns

Call Point: Look for bullish reversal candlestick patterns like a Hammer, Morning Star, or Bullish Engulfing near support or after a downtrend. These patterns can signal a potential rise in the price, ideal for call options.

Put Point: Bearish candlestick patterns like the Shooting Star, Evening Star, or Bearish Engulfing at resistance or after an uptrend can indicate a price drop, making them good signals for a put option.

10. Volume Analysis

Call Point: When prices are rising, and the trading volume is also increasing, it indicates strong buying pressure. This can be a good signal for buying a call option.

Put Point: When prices are falling, and the volume is increasing, it suggests strong selling pressure. This is a good signal to buy a put option.

11. Economic News and Events

Call Point: Positive news, strong earnings reports, or favorable macroeconomic indicators can drive stock prices higher, making it a good time to buy call options.

Put Point: Negative news or weak economic data may trigger a downward price move, signaling a good opportunity to buy put options.

Combining Indicators for Confirmation

It’s always a good idea to combine multiple indicators to confirm your entry point for call or put options. For example:

Look for a bullish candlestick pattern near a support level, combined with an RSI below 30 and a MACD bullish crossover, to confirm a call point.

Similarly, if the price hits resistance, the RSI is above 70, and the MACD gives a bearish crossover, it’s a strong signal to buy a put option.

Key Points to Remember:

Trend is your friend: Always trade with the trend unless you’re specifically looking for reversals.

Risk management: Set stop losses and manage risk appropriately to prevent large losses.

Volume: Confirm price movement with volume; strong volume means stronger price movements.

By using these methods, you can better identify call and put points, enhancing your chances of success in options trading.

Q5. What is OTM, ITM and ATM?

In options trading, OTM (Out of The Money), ITM (In The Money), and ATM (At The Money) refer to the relationship between the option’s strike price and the current price of the underlying asset. These terms are crucial for understanding the likelihood of an option being profitable and how its price is affected by market movements.

1. OTM (Out of The Money)

Call Option: A call option is considered Out of The Money (OTM) when the current price of the underlying asset is below the strike price.

Example: If the strike price of a call option is $100 and the underlying asset’s current price is $95, the option is OTM.

Put Option: A put option is Out of The Money (OTM) when the current price of the underlying asset is above the strike price.

Example: If the strike price of a put option is $100 and the underlying asset’s price is $105, the option is OTM.

Significance: OTM options have no intrinsic value (only time value) and are cheaper. However, they are less likely to be profitable at expiration unless the underlying asset’s price moves favorably before the option expires.

2. ITM (In The Money)

Call Option: A call option is considered In The Money (ITM) when the current price of the underlying asset is above the strike price.

Example: If the strike price of a call option is $100 and the underlying asset’s price is $105, the option is ITM.

Put Option: A put option is In The Money (ITM) when the current price of the underlying asset is below the strike price.

Example: If the strike price of a put option is $100 and the underlying asset’s price is $95, the option is ITM.

Significance: ITM options have intrinsic value and are more expensive because they are more likely to be exercised for a profit at expiration. These options have both intrinsic and time value.

3. ATM (At The Money)

Call and Put Options: An option is considered At The Money (ATM) when the strike price of the option is very close to or equal to the current price of the underlying asset.

Example: If the strike price is $100 and the underlying asset’s price is $100, the option is ATM.

Significance: ATM options have no intrinsic value, only time value, but they are the most sensitive to price changes in the underlying asset. These options are typically more expensive than OTM options but cheaper than ITM options.

Summary:

OTM: The option has no intrinsic value, and the price of the underlying asset needs to move favorably for the option to become profitable.

ITM: The option has intrinsic value, and it is more likely to be profitable because the underlying asset is already in a favorable position relative to the strike price.

ATM: The option’s strike price is equal (or nearly equal) to the current market price of the underlying asset. It is at the point where even small movements in the asset can significantly affect the option's price.

Understanding these terms helps you determine the risk and reward potential of an option and aids in making informed trading decisions.

Q6. Explain Open Interest 

Open Interest (OI) is a key metric in options and futures trading that represents the total number of outstanding (or "open") contracts—whether calls or puts—that have not yet been settled (either by being exercised, closed, or expired). It is a reflection of the liquidity and activity in a particular option or futures contract.

Key Points to Understand About Open Interest:

1. Open Interest vs. Volume:

Volume refers to the number of contracts traded during a specific period (usually a day), regardless of whether they are new or closing positions.

Open Interest counts only the open contracts still in the market at the end of the trading day. It increases when new positions are opened and decreases when positions are closed.

2. How Open Interest Changes:

Increase in Open Interest: When a buyer and seller create a new contract, open interest increases. This signals new capital entering the market, suggesting more interest or liquidity in that option or futures contract.

Decrease in Open Interest: When a trader closes their position by selling the contract or when contracts are settled or expire, open interest decreases. This shows that money is leaving the market, which might indicate reduced market activity or confidence.

3. Importance of Open Interest:

Liquidity Indicator: Higher open interest means more liquidity, making it easier to enter and exit positions. It also suggests that there’s significant interest in that particular contract, making it a good sign for active traders.

Market Sentiment: Increasing open interest along with rising prices can suggest a bullish market sentiment (more buyers entering). If open interest increases with falling prices, it may indicate bearish sentiment (more sellers entering).

Potential for Reversals: A decrease in open interest could indicate that a trend is losing momentum, as fewer traders are holding positions. A decrease in open interest along with falling prices can signal that the market may be nearing a bottom.

Example:

Let’s say you’re looking at an option contract with an open interest of 1,000 contracts. This means there are 1,000 contracts that remain open and have not been exercised or closed.

If on the next trading day, 100 more contracts are opened and 50 are closed, the new open interest will be 1,050 (1,000 + 100 - 50).

Interpretation in Different Market Conditions:

Bullish Market:

Rising prices + rising open interest: Indicates strong bullish sentiment, with new money coming into the market.

Rising prices + falling open interest: This could mean short-covering, where traders are closing their bearish positions, and the uptrend might not be sustained for long.

Bearish Market:

Falling prices + rising open interest: Indicates strong bearish sentiment, with more sellers entering the market.

Falling prices + falling open interest: Suggests traders are closing their positions, potentially signaling the end of a downtrend or a market bottom.

How Traders Use Open Interest:

Identifying Trends: Open interest can confirm a trend’s strength or signal a potential reversal. High open interest with an increasing trend indicates strong momentum, while a drop in open interest could mean a weakening trend.

Liquidity Consideration: Traders prefer high open interest contracts for better liquidity, as it’s easier to trade in and out of those positions.

Support and Resistance: Areas with significant open interest (such as strike prices with high open interest for options) can act as support or resistance levels.

Conclusion:

Open interest helps traders gauge market activity and liquidity, offering insight into whether a trend is likely to continue or reverse. While it’s not a standalone indicator, combining open interest with other technical analysis tools can improve trading strategies and decision-making.

Q7. What are contracts?

In the context of derivatives trading, such as options and futures, contracts refer to standardized agreements between two parties (a buyer and a seller) that outline the terms for buying or selling an underlying asset at a predetermined price, date, and quantity. These contracts are essential for trading assets like stocks, commodities, and currencies without the need to directly own them.

Types of Contracts in Trading:

1. Options Contracts:

Call Option: A call option gives the buyer the right, but not the obligation, to buy an underlying asset (like a stock) at a specified price (called the strike price) on or before a specified expiration date. The seller (or writer) of the call option is obligated to sell the asset if the buyer exercises the option.

Put Option: A put option gives the buyer the right, but not the obligation, to sell an underlying asset at the strike price on or before a specified expiration date. The seller of the put option must buy the asset if the buyer exercises the option.

Example of an Options Contract:

You buy a call option with a strike price of $100 for a stock that is currently trading at $90. If the stock price goes up to $110, you can exercise the option to buy the stock at $100, thus profiting from the price difference. If the stock price stays below $100, you can choose not to exercise the option, and your loss is limited to the premium you paid for the contract.

2. Futures Contracts:

A futures contract is an agreement to buy or sell an underlying asset (such as oil, gold, or a financial instrument) at a predetermined price on a specific future date. Unlike options, both parties are obligated to fulfill the contract at expiration.

Futures contracts are often used for hedging (risk management) or speculation. For example, a farmer may sell a futures contract for corn to lock in a price and hedge against falling prices before harvest.

Example of a Futures Contract:

A company enters into a crude oil futures contract to buy 1,000 barrels of oil at $70 per barrel three months from now. At the contract’s expiration, the company must either take delivery of the oil or close the contract (by taking an opposite position) if they don’t want the physical oil. If the price of oil rises to $80, the company benefits from locking in the lower price.

Components of a Contract:

Each contract has standardized elements to ensure transparency and liquidity:

Underlying Asset: The financial instrument or commodity being traded (e.g., stocks, currencies, commodities).

Quantity: The amount of the underlying asset covered by the contract (e.g., 100 shares for stock options, or 1,000 barrels of oil for futures).

Strike Price (for Options): The price at which the buyer can exercise the option (buy or sell the underlying asset).

Expiration Date: The date on which the contract expires, after which it can no longer be exercised.

Premium (for Options): The price paid by the buyer to the seller for holding the rights in the option contract.

Benefits of Contracts:

Leverage: Contracts allow traders to control a large position with relatively small upfront capital. This increases potential profits but also potential losses.

Hedging: Futures and options contracts are often used to hedge against unfavorable price movements in the underlying asset. For example, a company expecting to purchase a commodity in the future can lock in today’s price to avoid price fluctuations.

Speculation: Traders use contracts to speculate on the future price movement of an asset, aiming to profit from price fluctuations without owning the underlying asset.

Key Differences Between Futures and Options Contracts:

Features	Option	Future
Obligation	Buyers have no obligation to exercise, seller has obligation	Both the parties are obligated to fulfill the contract
Risk	Buyer's risk limited to the oremium paid	Risk is unlimited, unless the position is closed before expiration
Laverage	Lower initial cost (Premium)	Full value of the contract must be margined (initial margine required)
Use	Often used for hedging and speculation	Commonly used for hedging and speculation

Conclusion:

Contracts in options and futures trading are standardized agreements used by traders to speculate on or hedge against price movements in various assets. These contracts provide flexibility, leverage, and risk management tools, but they also carry risks, particularly if the market moves unfavorably. Understanding how contracts work is essential for making informed trading decisions.

Q8. Right but not the obligation means?

In options trading, "right but not the obligation" means that the buyer of an option has the choice to exercise the option if it is profitable but is not required to do so. This provides flexibility to the buyer, as they can decide not to exercise the option if it would result in a loss.

Here’s how it works in both types of options:

1. Call Option (Right to Buy):

The buyer of a call option has the right to buy the underlying asset at the strike price but is not obligated to do so if the market price is lower than the strike price.

Example:

You buy a call option to buy a stock at $100 (strike price), but if the market price of the stock is $90 at expiration, you wouldn’t exercise the option because it would be cheaper to buy the stock in the open market.

You have the right to buy at $100, but you are not obligated, so you simply let the option expire, losing only the premium you paid.

2. Put Option (Right to Sell):

The buyer of a put option has the right to sell the underlying asset at the strike price but is not obligated to sell if the market price is higher than the strike price.

Example:

You buy a put option to sell a stock at $100, but if the stock is trading at $110 at expiration, you wouldn’t exercise the option because you can sell the stock at a higher price in the market.

You have the right to sell at $100, but you are not obligated to do so, so you let the option expire.

Why It's Important:

The key benefit of "right but not the obligation" is that it limits the risk for the buyer to just the premium paid for the option, while still offering the potential for profit. The seller, on the other hand, has the obligation to fulfill the contract if the buyer exercises their option.

This flexibility is a key advantage of options trading, allowing traders to take calculated risks with limited downside.