Completed 3 mnths in options trading.. everything learnt from experts sharing freely & generously on twitter.. let me use this long weekend to share my learning "for beginners only" basically ppl like myself who cud nvr convince self to trade in F&O bcoz of several misconceptions

Most of this thread is from option writing perspective and not option buying .. i will mention specifically when referring to option buying 1/n

1st return expectations .. initially when i started looking at options .. i started with stk options instead of idx opt .. from option writing perspective u wud want to write options that hav high chances of being worthless .. 2/n

So if RIL is gng up u will want to write put options in RIL lower than CMP .. to be safe u wud write put options 200-300 points below CMP so that u make money even if RIL corrects a little after run up .. such options will give u 1k-2K premium .. 3/n

More aggressive traders will write close ATM put options say 100 points lower and fetch much higher premium say 4K-5K .. but carry the risk of losing money if RIL corrects more than 100 points 4/n

now let's do some calculations .. typical option contracts are of 5L to 11L range for underlying .. stk options have monthly expiry .. RIL contract is ~11L underlying .. so for 11L you get 2K(safe) 5K(risky) in a month .. 5/n

using margin ur broker will block 20% of contract value .. so 2K (safe) 5K(risky) in 1 month on 2L blocked margin .. so 1-2% in one month .. fairly decent .. i used to calculate it on underlying value instead of blocked margin thinking it is too low .. which was wrong 6/n

Now let's look at the other side of the coin i.e risk .. if caught on the wrong side .. options tend to give very harsh penalties .. 2 reasons ..
1. Min contract size is 5L-10L so quantities involved r huge
2. Options can give infinite moves .. there is no 10-20% ckts..etc 7/n

i have seen option prices going up by 300%-1000%-6000%-10000% within seconds & minutes .. so if you have written a 4 Rs option of 500 lot size = 2000 premium .. caught on the wrong side it could become 40 rs in the blink of an eye leading to a loss of (40-4)*500=18K 8/n

biggest part of option writing is to save yourself from such incidents that can easily take away profits from 10-20 trades in one shot .. although such situations are rare but 1 in 10 is enuf to bring you back to 0 profit .. and it does happen 1/10 times so risk mgmt is imp! 9/n

2nd risky aspect is position sizing.. since option trading is by default based on 20% margin amount.. if u don't keep track ..very easy for u get carried away and fully leveraged i.e end up with positions 5x ur account size.. any accident in such positions will be a disaster 10/n

So inherently in option writing u can see that return is fixed and low and risk is high .. So the best way to succeed is first learn to manage risk and then start focusing on scaling up your returns .. we will discuss both in detail in this thread 11/n