In trading, you can choose among various approaches/strategies fit according to your financial capacity and risk profile. Among these are option trading and Intraday trading, which can yield exponential returns in very less time if done correctly. Although both are sybilised as two edged swords, nevertheless, both kinds of trading are rather popular among the traders worldwide as they can yield quick returns.
How would you pick which of intraday trading and option trading is better or more fit for you? Here you have to understand the differences and benefits and drawbacks of option and intraday trading. Choosing the ideal method of trading would be simple after you understood the advantages and drawbacks of both approaches.
What is Intraday Trading?
In intraday trading, you must buy or sell or vice versa in an underlying on the same day. This means that, should you have made any intraday trades, you must square-off your position in the same quantity on the same day within the trading hours before the market closes.
In case you forget to square-off your intraday position, your broker will automatically square of your position on your behalf, either for profit or loss. The intraday trade is only settled for profit or loss, thus delivery of underlying does not occur between the buyers and sellers.
The stock price in intraday trading is mainly influenced by the volatility in the market and systematic or unsystematic risk associated with the stock. You can use technical indicators, and candlestick chart patterns to find the stocks for intraday trading.
Advantages of Intraday Trading:
Quick Profits: One of the best advantages of intraday trading is you can earn profits in one day, making your trade positions or investment a high rate of return strategy. As you have to close and exit from your trade position on the same day, you can’t carry forward your trade position as you are not allowed to take delivery of shares in intraday trading.
High Margins: For intraday trading brokers allow margins up to 10 to 20 times the funds available with them for trading. This means you can trade in high trade value even though you don’t have much capital to fund your trade. This kind of leverage provides intraday trading a high-return investment if your trade position manages to book profits.
Short Sell: In a falling market you can make hay while the sun shines, yes trading intraday has another advantage. As in day trading, you don’t need to deliver any shares if you sell any stock, because you will buy again the same on the same day. Hence, you can short-sell, stocks in a downtrend and earn profits from the falling market.
High Liquidity: Your trade position in intraday trading liquidated end of the day provides high liquidity, allowing you to enter into a new trade position. The trade position is in profit or loss, but it will be squared off and your fund will be available for the next trade.
No Overnight Risk: Stock markets globally are also influenced by the significant movement in the global market indices. But in intraday trading, all trade positions are closed before the market closes. This protects you from the overnight risk of market movements influenced by such factors.
Disadvantages of Intraday Trading:
Limited Time
In intraday trading, you have only one day to enter and exit from your trade position. If the underlying doesn’t move according to your assumptions during intraday and you are hopeful of volatile move, there is no scope to carry forward your trade position. You have to square off your position either with small profit or loss.
High Volatility
The stock price in intraday trading can show abrupt movement, if the market is volatile, your trade position can also see the volatility in the stock price movement. Hence, trading in intraday you might face the volatility that can cause you losses if not managed professionally.
Highly Risky
A trader can earn from both volatile and range bound market. It is not always necessary that market will move as per your assumption. During a day, you assumed a range bound scenario for market but if the market suddenly gives a directional move and that move if went against your assumption, can give you big losses.
Time for Analysis
To find the best stocks for intraday trading you should perform the technical analysis, and in intraday, you don’t have enough time on the same day. However, you can find the momentum stocks but if you waste time in analysis, you can miss the opportunity to grab the stock at the right levels, as in intraday there is limited time for the movement.
Overtrading Habit: Some traders are obsessed with intraday trading, they enter into multiple trades at the same time or frequently enter and exit from their trade positions. This kind of overtrading habit increases their trading cost because of the brokerage fees and transaction charges.
High Skills & Knowledge
Trading in intraday needs specific skill set and years of experience of watching the market. If you are a beginner in the stock market, you should start with swing trading and get habitual with reading candles, identifying chart patterns, and other essential concept. It is recommended for beginners to stay away from intraday trading. As described earlier, intraday trading is risky and time-bound approach so footing in wrong shoes can destroy your confidence and your hard earned capital. Only experienced and highly skilled traders can make profits from the intraday trading.
What is Option Trading?
Option trading is totally different from intraday trading. It is a part of another segment called the derivatives market, in which only a few limited designated underlying securities are allowed to trade. In option trading option buyers and sellers both enter into a derivative contract to buy or sell the underlying security with a specific strike price within the expiration date.
In option trading, you can find call options and put options, in which the option buyer enters into the option contract with the right to buy the underlying security at a specified strike price. On the other hand, an option seller enters into the contract with obligations to sell the option contract at the specified strike price within a specific expiration period.
In option trading, the premium is called the price of the option. The price of premium is affected by various factors like strike chosen, volatility, time to expiry, etc. The expiry of the option contract can be weekly or monthly with a wide range of strike prices that you can choose as per your trading strategy, and availability of the funds.
[…] Source link […]