The market is not easy to predict in Options Trading, especially if you are a beginner, and in 90% of cases, beginners in Options Trading lose the initial capital. This is why many experts believe that you are fortunate if you don’t have enough capital to start with. The whole point is that when you have low capital, you will lose less money, and on the contrary, when you enter the market with big capital in the initial stage, you will tend to lose big money.
If you are wondering, “Can I start Options Trading with just ₹5000?” The answer is yes. However, there are some dos and don’ts that you have to bear in mind when you are just getting started with Options Trading, and this post is going to be all about How to Do Options Trading with 5000 rupees.
You can only be an Options Buyer with ₹5000
If you have a capital as low as ₹5000, you can only be an Options buyer since Options selling requires a big capital. While this is an advantage in Options buying, time decay is the worst enemy of Options buyers, unlike Options sellers, who benefit largely from time decay. As a buyer, you can trade in Nifty50, Bank Nifty, and Equity Options. The size of 1 Nifty50 lot is 50 shares, while that of Bank Nifty is 15. The size per lot in Equity Options differs from Equity to Equity.
Find your trading style
|1m & 3m
|5m & 15m
|4h & 1D
|Daily, Weekly, Monthly
If you are just getting started with Options Trading, you must determine your Trading style. Some trading styles for Options are Intraday, Scalping, BTST, or Swing. Intraday is buying and squaring off a position on the same day. Scalping is a fast form of trading, which involves buying and squaring off options in 1 minute to 5 minutes. BTST is buying today and squaring off position the next day. Swing trading is holding your position for more than two days or until expiry.
Work on Your Money Management
Determine your Stop Loss per trade
Before you place your first order in the Options Segment, you must work on your Money Management. It starts with answering the most basic question: how much money are you okay with losing every day? It may seem a little discouraging, but preparing for the worst-case scenario is essential. If you don’t work on this, it will affect your trading psychology, and you may incur heavy losses due to over-trading. It’s essential to understand that trading without a Stop Loss is like being in the sea without a life jacket, and you may get drowned at any time.
Hence, you must first decide how much Stop Loss per order you are most comfortable with. While many Options traders prefer keeping a wider Stop Loss of 40 to 50 points, it’s wise to keep the Stop Loss small in the beginning and concentrate on taking better trades. You can experiment with 5 to 10 points of Stop Loss initially. Next, you will need to determine the number of trades you are comfortable with daily. You have to understand that simply increasing the number of trades per day doesn’t increase your chance of winning. Instead, it increases your chance of losing more.
Determine the number of trades per day
There is a thin line between trading and gambling. As long as you analyze the technical charts and place orders with a good technical setup, you are a trader. Here is what you need to understand – analyzing the charts isn’t child’s play, and it takes great focus and understanding of market trends. Hence, if you take too many trades per day, chances are that you will not do justice to all the trades since by the time you place the last order of the day, you may be exhausted to the core, and let alone focus. 2 to 3 trades per day is considered wise and manageable.
Determine the risk: reward per trade
Once you decide the number of trades per day, you must work on your risk: reward per trade, which means your StopLoss: Target. In Options Trading, you can have a risk: reward of 1:1 to 1:3. As an Options buyer, you must always try to capitalize on the momentum and need to spot the level from which the price may gain momentum. If you succeed in capturing the right level, it’s not hard to achieve 1:3. It’s essential to stick to your risk: reward religiously.
Trail Stop Loss when you are at a profit
Sometimes, the price turns back and hits your StopLoss after getting close to the target. It’s not hard to visualize how frustrating it can get to experience such a situation. All traders have experienced it at one point or the other. This is where Trailing Stop Loss comes into play. A Trailing Stop Loss can be very effective in locking your profits. For example, you have set a target of 40 points, and after the price has achieved 30 points, you trail your Stop Loss at cost plus 20 points.
Now, if the price begins to decline and stops you out, you will still be at some profits. In Options trading, Trailing Stop Loss is placed based on points. However, sometimes price may move in your favor after hitting your Trailing Stop Loss. While at times like these, we are likely to feel sad, it’s important to see it positively instead since this will not always happen.
Keep your position size small
Another essential aspect to consider is position sizing, which means the number of lots per trade. I have already mentioned the lot size of Nifty50 and Bank Nifty. When you are a beginner with capital as low as ₹5000, you must trade only with the least lot size for at least one year. To simplify the calculation, the size of 1 lot in Bank Nifty is 15 shares, and if you buy one lot of Bank Nifty, it will be 15 multiplied by the Premium. Getting a Call (CE) or a Put (PE) for a premium of ₹100 will cost you 15 x ₹100 = ₹1500.
Which Options Contracts to Buy: ATM, OTM, or ITM?
With just ₹5000, buying ITM isn’t possible at all. Buying an ATM contract wouldn’t be even possible most of the time. However, you can focus on buying OTM 100 or 300 points away from the spot price. It will also balance out the volatility to some extent.
Which technical setup to follow?
There are just so many trading setups to choose from. However, as a beginner, you must start with price action, trend analysis, and volume analysis. Besides, you can experiment with indicators like Fib Retracement, MACD, RSI, EMAs, CPR, and Pivot Points. You can open a free Tradingview account anytime to start your technical analysis journey.
Further, as an Options trader, you should learn the Options Chart. Besides, you can combine your technical setup with advanced Options Strategies like Straddle or Strangle. However, two-legged strategies will require more capital. You can learn them but stick to a one-legged strategy only in the beginning considering your low capital.
Paper Trading & Backtesting
It’s important to ensure you don’t lose your capital fast since you can only trade if your capital is intact. That’s why I recommend spending more time on paper trading in the beginning. Many experts believe that your technical chart is the only teacher to follow as it will teach you something new every day. At the same time, you must also be a good student by maintaining a trading journal. After you jot down the essential learning points in your trading journal, you can backtest them on historical data as well as real-time data on your technical charts.
The trend is your friend
This is a very well-known saying among the trader community, and it makes a lot of sense. Even though, as a directional trader, you can trade both ways, trading with the trend offers more clarity. To do this, you can analyze the trend on higher time frames, like 15m or 1h, and enter positions with the trend at lower time frames, like 5m or 1m. Multiple timeframe analysis is extremely important in Options trading. Besides, some traders also prefer 1D candlestick pattern analysis for more accuracy.
Being stopped out is just a normal thing
You must not feel upset whenever your stop loss is hit since it’s normal in the share market. Even experts can’t help themselves from being stopped out even after entering positions thoughtfully. However, one crucial thing to understand is that you must not change your view just because your Stoploss got hit.
Stoplosses get hit because of fluctuations in market volatility, possibly because of some global or national news. Besides, try not to take a position immediately without an analysis when stop loss is hit. However, one good trick to avoid being stopped out quickly is to enter a position after confirmation and a pullback.
Keep up with Global Indices, and News
If you are an Options Trader, you need to keep up with the performance of Global Indices like Dow Jones, SGX Nifty, and NASDAQ. When Global indices are performing well, it also impacts the Indian markets in a good way. Besides, you must also track Global and National News consistently to trade more confidently. For Major indices, you can refer to the Investing.com major indices page.
Here are some good sources for Global Market News:
Choose a reliable and affordable trading platform
Your strategies will only work if you choose a reliable trading platform. Besides, you need to ensure that the platform you choose comes with low brokerage charges. Next, you have to consider your trading requirements and see which Options trading platform offers the best for your trading style.
There are just so Many Options Trading platforms in India these days. However, one reliable name is Zerodha, and the platform is also beginner-friendly. The best part is that the interface is exceptionally clean and intuitive.
Trading Options can be very profitable if done wisely. All Options traders have their winning and losing days. What’s most important is patience and analyzing the price well before placing an order. It’s also essential to keep your capital intact. Further, you must choose a reliable trading platform.