Want to know all about options trading in India? Well you have landed on the right article.
Due to the good potential for massive returns, options are one of the fascinating segments of the investment world. As a result, various asset types are included in investor portfolios. These might be stocks, mutual funds, bonds, ETFs, or any other kind of investment.
Similarly, options are classified as an asset class. Options, if used properly, can provide benefits that stock trading alone cannot provide in certain situations.
There has been a huge rise in the Indian derivatives market's options trading activity during the last several years. The fact that it allows benefitting from all sorts of market moods, whether bullish, bearish, range-bound or extremely volatile, has resulted in a rapid increase in trading activity in this area.
Both experienced and novice investors adopt option trading, which contributes to the industry's rapid expansion. In addition, these two groups are becoming more aware of the freedom that options provide: investors may lock in a price for a stock without being obligated to purchase it at that price.
Investing in options may be a profitable strategy to increase your income while limiting your risk and protecting yourself against market swings. Options may function in a similar way to an insurance policy.
For example, if the value of your stock drops, purchasing options can assist you in offsetting any possible losses on your investment
In this article, we have covered the detailed guide on options trading in India.
What is options trading In India?
what are options in stock market?
Essentially, an option is a contract that allows you the right (or option) to acquire or sell a stock, or even other financial instruments, at a pre-negotiated price(known as "strike price") by a certain date.
Options are often used in the financial markets. There is no obligation to purchase or sell the shares on that day. You may choose to let the option lapse.
You will be obliged to pay a "premium" upfront when acquiring options, which you will lose if you allow the contract to lapse. However, it's crucial to remember that alternatives are available for almost every kind of security.
To begin building your knowledge base in options trading, familiarise yourself with the many kinds of options that are available for trading. Calls and puts are the two primary types of options available.
What exactly is a Call Option?
A call option provides you with the right to purchase shares at a pre-specified price (strike price) within a particular time, known as the option's "expiration."
What exactly is a Put Option?
When you buy a put option, you grant yourself the right to sell shares at a certain strike price before the option expires.
What is Options Trading, and how does it work?
Trading options offer the ability to purchase or sell shares, ETFs, and other financial instruments at a set price within a time frame. You can choose not to purchase shares at a predetermined price or time when using options.
Although options are more difficult to grasp than stock purchases, they allow you to make more money if the asset's value increases.
Here, you are not obliged to pay the maximum-security premium associated with an incentive agreement, which is a significant part of savings. Similarly, selling options might help you reduce risk if the value of the underlying asset declines.
This is broadly known as Hedging.
Let us use an example to explain better how to trade in options
Consider the following scenario: a call option on SBI stock with a strike price of Rs. 200 and a maturity date period of three months. The stock is now trading at Rs. 165 a share.
As per the options contract, you have the option to purchase SBI shares at a strike price of Rs. 200 at any point over the next three months.
If the strike price increases over Rs. 200 at any stage during the maturity period, you may exercise your call option and immediately purchase the shares at the Rs. 200 strike price. As long as the call option is in-the-money, you will earn from this strategy.
In a similar vein, the value of a call option grows as the current price approaches the option's strike price. For example, the stock described above, which now has a price of Rs. 165, is a good example.
If the option has a strike price of Rs. 185, the option's value will be greater than the value of the option with a strike price of Rs. 200. This is because the chance of the stock price falling to Rs. 185 is larger than the probability of the stock price rising to Rs. 200.
How Options Trading Works in India
Opening a trading account for option trading
These days, it is simple to open an account for trading options. Most brokers have websites where you may apply for an account and learn more about their services. Your application will be processed by a broker representative who will contact you.
You must provide identification and address verification papers, and your account will be activated shortly.
Many brokers, particularly discount brokers, feature a paperless account opening procedure in which no paperwork is required. The procedure is straightforward and fast. Additionally, it is entirely online. You must do the following in this situation:
- Visit the broker's website for more information.
- Fill out the form with your information.
- Please provide your banking information.
- Upload the necessary papers, such as your PAN, Aadhar card, address proof, and proof of income, among others.
- It's time to pay
- Sign the application form electronically
To fully comprehend how options trading works, it is necessary first to grasp the fundamentals of Options:
Options are a sort of derivative financial instrument
Equity, commodity, and currency options, among other things, are derivatives of some underlying asset. For example, equity or stock options are options obtained from the ownership of stocks or shares of stock.
In stock options, you may choose between a single stock option, in which the stocks of a single firm serve as the underlying asset, and index options, such as the Nifty or the Bank Nifty, in which indexes serve as the underlying asset.
Option contracts originating from commodities and currencies are commodity options and currency options, respectively.
- Current price
When determining the price of an option, it is critical to consider the stock's current price. It is because stock prices and options premiums are deeply correlated.
An increase in current stock price increases the value of options and vice versa. Conversely, a decline in the current stock price decreases the value of options.
- Period of expiration
There are three contract cycles for options in India: weekly, monthly, and three months. Options expire on the final Thursday of the contract cycle they were purchased. They lose all their value when they expire.
Whenever you sell an Option, you will earn a premium as a result. Depending on the exchange, such as the NSE or BSE, the premium is determined and computed based on option pricing methods. To determine the price of an Option, various elements must be considered.
These considerations include the current price of the underlying security, the stock market's volatility, interest rates, dividends, and so on.
Every option has a strike price
The price at which the buyer and seller have agreed to acquire or sell the underlying asset in the contract is referred to as the contract price. There are many strike prices available for each option, ranging from lower to greater than the underlying asset's current price.
You may purchase or sell an Option at any strike price currently available. Now that you've learned the fundamentals of options trading, we'll go through how to trade options in India in the next section.
The steps below will walk you through the process of trading options in India.
Step 1: To start trading, open a trading account with any broker that provides excellent customer support. The procedures for trading options in India are almost the same regardless of whatever trading platform you prefer.
Step 2: To trade Options, we must establish a margin account in our trading account. The margin requirement changes depending on the buyer's position on the trade. Option buyers need margin to pay for the premiums necessary to trade options.
In contrast, option sellers require a margin to maintain a specific amount of money with the broker to account for Marked to Market (M2M) transactions.
Step 3: After that, we need to determine our position on the underlying asset. If we have a bullish opinion, we may express it by purchasing a call option (or selling a put option). If we have a bearish opinion, we can express it by either purchasing a put option or selling a (or selling a call option).
"Purchase of a Call option gives us the right to purchase the underlying asset on or before the expiration date. Furthermore, purchasing a put option gives us the ability to sell the underlying asset on or before the expiration date."
Step 4: Select the underlying asset that you want to trade, as well as the multiple strike prices that we wish to trade on.
The price movement of particular stocks, indices, currencies, and commodities may all be speculated on by an option trader.
Types Of Options Trading
It might be challenging to choose which sort of Options contract is best for you to invest in since so many different varieties are available.
The best method to get the most out of your investing adventure is to conduct your study or seek advice from professionals in the field.
The following are some examples of options trading in India which includes various kinds of options depending on their expiry cycle:
Options with a conventional expiry cycle are "regular options." You have the option of selecting from at least four alternative expiry months, depending on your desire and business plan.
The weekly option type, commonly known as weeklies, has a considerably shorter expiry period than the monthly option type. They are, nevertheless, based on the same concepts as regular options.
Quarterly options are often referred to as quarterlies. The investor has the option of selecting any expiry cycle between the four quarters that are closest to the current year and the last quarter of the following year.
Lengthy-Term Expiration Anticipation Securities: As the name says, these options are held for a long duration.
Best Indicators For Intraday Option Trading In India
- Relative Strength Index (RSI)
Trading using the relative strength index (RSI), often known as a momentum indicator, is typical among traders who want to know how strong price movements are in the market.
As an oscillator, the indicator is represented on the stock chart while two lines move toward or away as the stock chart is updated.
Stock, index, or other asset's current relative strength index (RSI) is shown as a numeric number ranging from 1 to 100, providing investors and traders with information on whether an asset is overbought or oversold.
If the number is more than 70, the market is considered overbought, and if the reading is less than 30, the market is considered to be oversold. The relative strength index (RSI) is also used to evaluate the market trend.
If the RSI is more than 50, the market is in an upswing, and if the RSI is less than 50, the market is in a downward trend.
- Commodity Channel Index
The Commodity Channel Index (CCI) is a tool for identifying fresh trends in the market. It has three possible values: 0, +100, and -100. If the CCI value is positive, the market is in an uptrend; if the CCI value is negative, the market is downward.
In addition, the CCI is used with the RSI to provide information on overbought and oversold stocks.
- Momentum Oscillators
Because the stock market is so unpredictable, the values of stocks are continually fluctuating. As a result, there are times when the stock market goes through a short-period cycle, although the market is neither bearish nor bullish at the time.
The use of a momentum oscillator may assist traders in identifying such instances. In addition, it assists in determining whether or not the market's attitude has shifted in any direction.
- Moving average convergence divergence (MACD)
For intraday trading, momentum traders believe MACD to be one of the most trustworthy and finest indicators available. This indicator gives information on a trending phenomenon's direction, velocity, and length.
This indicator is based on the convergence and divergence of two moving averages and predicts market trends. A positive value of the MACD suggests an upward trend, whilst a negative value indicates a downward trend in the underlying market.
- Stochastic Oscillator
The accuracy of the stochastic oscillator is easily recognized since it can be used to discern which stocks have been oversold and which have been overbought.
The stochastic oscillator is another kind of oscillator used to identify overbought and oversold circumstances in the stock market. It measures the speed with which a security's closing price moves relative to a set range of prices over a given period.
Like the relative strength index (RSI), the stochastic oscillator is shown as a number between 0 and 100. When the stochastic oscillator rises over 80, it indicates that the share is overbought and overvalued, indicating that it will see significant volatility and fall soon.
A stochastic oscillator value of less than 20 indicates that a stock has been oversold and is thus cheap, indicating a potentially lucrative entry opportunity.
The sensitivity of the stochastic oscillator may be reduced to provide a more accurate picture of momentum over longer periods, which is useful for those wishing to invest or make long-term trades.
To reduce the oscillator's sensitivity to market volatility, take a moving average of the result or increase the number of trading days covered compared to the closing price of the security.
To acquire a better perspective of short-term price changes, traders aiming to trade short-term sometimes boost the oscillator's sensitivity. This increase in sensitivity of security narrows its price range compared to its closing price.
How To Do Options Trading in India
Step 1 - Log in to the trading platform
Access your online trading account by logging in using the ID and password issued to you by your stockbroker. The dashboard will appear when you have successfully signed in.
Step 2 – Incorporate additional funds
A minimum balance of Rs. 1- 2 lakhs is required in your account before you begin to trade Options. If you don't have enough money to trade options, you may use the Add Funds/Withdraw option to supplement your funds.
When you pick the "Add Funds" option, a pop-up box will appear, in which you must enter the amount and select the segment (standard segments for equity/derivatives and currency trading).
Check the bank account information that has already been entered and choose a payment method (UPI or net banking). Then, you will be sent to the bank's or payment portal's website, where you can finish the online money transfer procedure.
Step 3 - Make a watchlist
Determine which options are the most liquid on the trading platform you have an account of and which ones you wish to use to trade them. Following that, you must build a watchlist to keep track of the option you have chosen for day trading.
The search option is located on the left-hand side of the screen, where you may input the option name. You will receive the options with the chosen strike price as soon as they are available. When you've decided on the option in which you wish to trade, click on the "Add instrument" or (+) tab to begin trading.
Step 4 – Make a purchase order
The market depth tab will provide the current BID and ASK quotes and the trade information for the current transaction.
The prices on the left-hand side of the chart are for buyers with call premium prices specified, and the prices on the right-hand side of the chart are for sellers with suggested call premium prices.
To purchase a call option for intraday trading, tap on the blue (B) button and tap on the orange (S) to sell a call option. An informational pop-up window will appear once you tap the purchase button.
To participate in intraday trading, choose the MIS radio option. Then, change the amount and choose the market option to purchase the option at the current market price.
Depending on your trading strategy, you may also put limit orders or stop-loss orders on the market. Following the placement of an order, you may access the order book page to see how the order is progressing.
Step 5 – To Create a square off
When you open the "Positions book," you will see the profit/loss figures for the options contract you bought.
To square off, click on the square button until the "tick symbol" is displayed and the "Exit position" message appears. Choose the "Exit position" button from the drop-down menu to terminate your current option contract.
Step 6 – Sell your options
You must pick the sale tab from the drop-down menu.
On the order form, pick the MIS for intraday trading and enter the amount and the limit price at which you wish to make an order, as well as any special instructions. Then, choose the "Sell" option from the drop-down menu to make an order.
After that, you may check the order book and the positions book to see whether the option sold has been exercised. If you want to square off, you must use the same procedure as described above for Square off.
Options Trading For Beginners Tips
- Buying out-of-the-money (OTM) call options
Because they are inexpensive, purchasing out-of-the-money call options seems a smart place to start for beginning options traders. However, they are one of the most difficult methods to generate consistent money in the options trading industry.
If you stick to this technique exclusively, you may find yourself losing money more frequently than you are making money.
- Break all personal rules
Many traders claim they would never purchase or sell options that were out of money in the options trading community. These absolutes seem ridiculous — until you find yourself in the middle of a deal that has shifted against your interests.
Every seasoned options trader has been in that position. When confronted with this situation, you're often inclined to transgress all types of personal standards. Keep an open mind to new options trading methods that may come your way.
- Investing in illiquid options
The amount of time it takes a trader to purchase or sell something without creating a substantial price change is referred to as liquidity. Conversely, a liquid market constantly has buyers and sellers that are ready and willing to purchase and sell.
Trading illiquid options increase the cost of conducting business, and the expenses of trading options are already greater than the costs of trading equities on a percentage basis. So don't put too much pressure on yourself.
You should make certain that the open interest is at least equal to 40 times the number of contacts you want to trade if you are trading options.
- Failure to factor upcoming events
Although not all market events can be predicted, there are two critical events to keep watch of when trading options: the earnings and dividend dates for the underlying company in which you are investing.
Benefits Of Option Trading
Investors use options to speculate on future investments or hedge against risks associated with current assets. It provides individuals with the potential to make money in any market condition, whether bullish, bearish, or sideways in nature.
You may hold an options position in the same way you would keep a stock position, but for a fraction of the cost.
- Hedging - Increased returns on investment
Hedging is a risk management method used to compensate for losses on investment portfolios. An investor who wishes to hedge risk takes an opposing stake in the same or a comparable asset.
Using options to hedge your risks may help you lower your risk at a fair cost.Consider alternatives as a kind of insurance policy to be protected against the unexpected. For example, options may protect your assets against a downturn like you insure your automobile.
Speculation is betting on the direction of future price developments. Therefore, speculators (traders) who believe that the price of a stock will rise due to their study may either purchase the stock or purchase a call option on the stock in question.
The overall risk associated with purchasing a call option is limited to the premium paid to purchase the option. While on the other hand, your earning potential is limitless.
It is determined by the amount by which the market price will surpass the option's exercise price. In contrast, if the speculator has a negative view of the underlying, he will need to purchase a put option on the asset.
If the market price of the underlying asset lowers, the put buyer profited to the degree that the underlying security's market price fell below the strike price of the option.
If the investor is incorrect and prices do not decrease, the investor loses their option position.
While you may be tempted to hop on the options bandwagon, an essential thing to remember is that you should be aware of what you're getting yourself into before you do.
In addition, you should now have a better knowledge of how options trading works due to the information provided above. What you should do depends greatly on the risks you're prepared to take, the money you have, and how much of the market you're willing to research to make the best decisions for you.
Understanding the various options should not be difficult if the fundamental ideas are grasped. Correct usage may open doors to new possibilities; wrong use can be detrimental to one's prospects.
For example, suppose you're well-versed in online trading options. In that case, there are advanced trading methods in India, such as a straddle, strangle, butterfly, and collar, that may be utilized to maximize profits on your investments.
Frequently Asked Questions
1. How do you trade in options without losing?
Unlike investments that never expire, options expire on a certain day and time. That implies that if you are trading options, you should take advantage of any gains as soon as possible. After purchasing the options, set a "time stop," which signifies that you will sell them by the end of the day, week, or month.
2. What is the best time of day to trade options?
Generally speaking, the greatest times to trade the stock market are between the first two and final two hours of the day—the beginning and end of the day are the most volatile.
3. Which option strategy is most profitable?
To make money trading options and benefit from your investments, you need to sell option premiums. Due to the exceptionally high possibility of profit, selling option premium is a more consistent approach for producing money than other investment strategies.
Additionally, various option techniques can increase profits, such as the long put, the long call, the short put, the covered call, and the long straddle.
4. What is the naked option?
When an option includes a stock (or another asset) that the option seller does not already own, the option is referred to as a naked option.
5. What is the safest way to trade options?
To narrow down the proper companies for an options income strategy, fundamental research and financial ratio assessment are the most effective selection methods.
Providing you choose the appropriate stocks, you will discover that these options tactics are the most profitable methods of earning money with options. As a result, it is the most secure method of trading options.