The Multi Commodity Exchange of India recently launched Gold Mini Options Contract with Gold Mini (100 grams) Futures as the underlying. It was welcomed by all – namely, investors, jewellers, traders as well as other key stakeholders.
That said, trading in options need some amount of discipline, dedication and a bit of knowledge.
Here are the key things to watch out for in a options trading including gold mini options trading:
1. Zero Sum Game: In option trading, no wealth is being created. The exact amount of profit that an option buyer gets is the exact amount of money that the option seller loses. So, option investing is more like a trading instrument, and not an investment instrument.
“Option trading is a short-term investment, since it is a zero-sum game. If an option buyer is right in his prediction, he stands to gain money, otherwise his option will expire worthless, and he will lose the premium he has paid. My advice to new retail traders is to not write (sell) options; rather they may buy options for trading purposes. That’s because if you sell options, then the loss will become unlimited, and the profit will become limited, since you will only gain when the strike price goes below your option written price,” adds Tosniwal.
2. Time Decay: This is a phenomenon unique to options, wherein the price premium is factored in taking into account the time value of money. Hence, the premium becomes lesser as the option comes close to expiry.
“The closer the option comes close to its expiry, the lesser premium it will command, since the probability of the said option strike price getting matched with the spot cash price gets lowered,” says SP Tosniwal, founder and CEO, ProStocks, a stock broking and financial services company.
3. No Circuit Lock: In a normal equity share or commodity cash spot or future, there exists a circuit lock, but in options, no such circuit lock exists. Hence, the price can freely move up or down as much as possible.
“There exists a theoretical circuit of 10 per cent on options, meaning the price will stop for a few seconds in that limit, and then move forward or down, and then the next band of price will be open,” adds Tosniwal.