Options in the financial market offer traders a great deal of flexibility when it comes to managing profits and losses. With options, investors have the ability to limit potential losses while leaving the potential for profits unrestricted. This characteristic of options becomes particularly useful in times when the market is uncertain and indecisive.
Currently, with the Nifty struggling around 19,500, there is much debate about the sustainability of the trend. However, past rallies following brief pauses cannot be ignored. This is where the concept of Out of the Money (OTM) options comes into play. OTM options allow traders to avoid significant losses if they are wrong in their predictions, while offering the opportunity for substantial gains if there is a breakout or reversal.
OTM options are options with strike prices below the current market price for Put options (option to sell) and above the Call options (option to buy). These options are considered OTM because, if exercised, they would result in selling lower or buying higher than the current market price. Typically, OTM options are cheaper due to the lower likelihood of making a profit.
There are several benefits to using OTM options. Firstly, it reduces the initial investment required for a trade. Since OTM options are dependent on a favorable market move, they are less attractive to buy and therefore cheaper. This allows for smaller investments and provides more opportunities for trading.
Another advantage of OTM options is the potential for higher return on investment (ROI) compared to other options. While the absolute profits from OTM options may be lower than other options, if a significant market move occurs, the ROI can be much higher. This is especially relevant in scenarios where a make or break situation could result in a big move.
In conclusion, OTM options can be a valuable tool for traders when faced with directional uncertainty in the F&O market. They offer the advantages of lower investment requirements and the potential for higher ROI in case of significant market moves. However, it is important to seek advice from certified experts before making any investment decisions.
Source: The information presented in this article is based on the source article by Shubham Agarwal from Moneycontrol.com.