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Options are derivative contracts that grant the buyer the right, but not the obligation, to either buy or sell a sum of some underlying asset at or before the contract expires at a fixed price. Options can be acquired with brokers through online trading accounts as with any other asset group.
Options are important since they can help an investor hedge their risk or increase leverage for a smaller initial investment. To limit downside risks, a common example would be to use options as an efficient hedge against a weakening stock market. Often, options can be used to produce recurring revenues. Additionally, they are commonly used for speculative purposes, such as wagering on stock direction.
What is Option Trading?
One can buy or sell stocks, ETFs etc. at a fixed price over a certain period by online trading options. This method of online trading also gives buyers the flexibility not to purchase the security at the defined price or date.
Although options trading is a little more complex than stock trading, options can result in great upside potential with low downside risk, which is only limited to the premium you pay while buying the option. Similarly, selling options will reduce your losses if the security price goes down, which is called hedging.
Call and Put Options
A call option gives the owner the right to purchase an asset at a predetermined price, and a put option gives the owner the right to sell the same.
Options Trading Example
Let us try to understand the mechanics of options with the help of an example.
Suppose, you purchase a long call option for 100 shares of Company X at ₹110 per share for December 1. You’d be entitled to purchase 100 shares at ₹110 per share regardless of the actual price of the share is on December 1. On that day, if the shares of Company X are trading at a price higher than ₹110, you have the right to purchase them at a lower price, and hence, make profits. If, on the other hand, the shares are trading at a price lower than ₹110, you can simply choose not to exercise the option. The only loss you would have incurred would be the premium you paid while purchasing the call option.
Related Terms
1. Premium
It is the price you pay to the seller of the option for entering into the contract. You pay the broker the fee which is passed to the writer on the exchange and thereon. Premium is a percentage of the underlying, which is calculated by several factors, including the intrinsic value of the contract options. Premiums continue to adjust, depending on whether the option is in-the-money or out-of-money
2. American and European Options
‘American options’ are options that can be exercised on or before their expiry date at any time. ‘European options’ are options that can be exercised only on the expiry date.
3. Open Interest
It applies to the cumulative number of available positions on an options contract at any given point in time among all market participants. Open Interest becomes zero for a given contract after the expiration date.
Conclusion
Options may seem like complicated derivative instruments, but they can prove to be quite useful financial instruments, providing you with the risk mitigation or the leverage that you need, while also protecting any downside risk. If you’re well-versed in online trading options, there are sophisticated trading strategies in India such as a straddle, strangle, butterfly and collar that can be used to optimise returns.
FAQs
Options are derivative contracts that grant the buyer the right, but not the obligation, to either buy or sell a sum of some underlying asset at or before the contract expires at a fixed price.
How does options trading work in India? ›
Options trading involves buying and selling financial contracts called options. Call options give the holder the right to buy the underlying asset at a predetermined price, while put option give the holder the right to sell the underlying asset at a predetermined price.
What are options in trading and how do they work? ›
An option is a contract that's linked to an underlying asset, e.g., a stock or another security. Options contracts are good for a set period, which could be as short as a day or as long as a couple of years. When you buy an option, you have the right to trade the underlying asset, but you're not obligated to.
What is the average income of options trader in India? ›
Option Trader salary in India ranges between ₹ 1.0 Lakhs to ₹ 8.0 Lakhs with an average annual salary of ₹ 3.0 Lakhs. Salary estimates are based on 92 latest salaries received from Option Traders.
How to make money in options trading in India? ›
Basics of Option Profitability
A put option buyer makes a profit if the price falls below the strike price before the expiration. The exact amount of profit depends on the difference between the stock price and the option strike price at expiration or when the option position is closed.
What is the trick for option trading? ›
Avoid options with low liquidity; verify volume at specific strike prices. calls grant the right to buy, while puts grant the right to sell an asset before expiration. Utilise different strategies based on market conditions; explore various options trading approaches.
Do I have to pay taxes on options trading in India? ›
According to Section 43(5) of the Income Tax Act, profits or losses from Futures and Options trading fall under non-speculative business income. Therefore, it is essential to declare any profit or loss from F&O under the head Profits & Gains from Business and Profession (PGBP).
Is Option Trading a skill or luck? ›
But, unlike teen patti, options trading is not just based on luck. With the right knowledge and understanding of the market, you can make informed decisions that can lead to big profits.
What is the easiest way to explain options trading? ›
An option holder is essentially paying a premium for the right to buy or sell the security within a certain timeframe. If market prices become unfavorable for option holders, they will let the option expire worthless and not exercise this right, ensuring that potential losses are not higher than the premium.
How is money made from options? ›
So here's how you make money with options: When a call is in the money, the buyer of the contract has the right to exercise the option and purchase the underlying stock from the writer at a price that's lower than it is on the stock market. They've paid a small fee—the premium—for the right to buy stock at a discount.
1. Rakesh Jhunjhunwala. Rakesh Jhunjhunwala, arguably, is one of the most famous traders in India of the current times, often regarded as the no 1 trader in India.
How many options traders are successful in India? ›
What is the success rate of options traders? The success rate of option traders is estimated at 75%.
Is option trading safe in India? ›
It comes with limited downside risk, making it a safer investment than futures or margin trading. In addition, options trading can be more complex than other financial instruments, as it requires traders to have a good understanding of the underlying asset and market conditions.
How much profit will I get with $10,000 in options trading? ›
In case you very good as option buyer then 10,000 is enough to get started and you can make 500 rupees per day. But this circ*mstance is true only if you are extremely good as option buyer. In reality even best of the best option buyers do not posses that kind of skills.
Why do people lose money in option trading? ›
Market volatility is crucial in causing losses for futures and options traders. High volatility can lead to sudden and unpredictable price movements, increasing the risk of losses for traders who are not adequately prepared or have not implemented appropriate risk management strategies.
Can I do option trading with 1000 rupees? ›
In conclusion, venturing into options trading with a starting capital of 1000 Rupees is possible, but it comes with its set of challenges and limitations. It's crucial to approach this with a comprehensive understanding of the options market, a well-thought-out strategy, and a clear awareness of the risks involved.
Is options trading legal in India? ›
While binary options trading itself is not against Indian law, any specific rules or regulations governing it are absent. The central bank permits resident citizens to undertake forex transactions through authorized platforms for permitted purposes.
How much money needed for option trading in India? ›
You don't need a considerable sum of money to become an options trader. You can start small with a capital of less than Rs 2 lakhs too. However, as you start small, you need to be a careful trader so that you can cut down on the possibility of losses and enhance the return potential of your trades.
Can I start option trading with 1000 rupees? ›
In conclusion, venturing into options trading with a starting capital of 1000 Rupees is possible, but it comes with its set of challenges and limitations. It's crucial to approach this with a comprehensive understanding of the options market, a well-thought-out strategy, and a clear awareness of the risks involved.
Can I learn options trading in India? ›
GTF Options is one of its kind options trading course, which can make you the best options trader in India. Due to the course's simple and in-depth learning methodology, its subscribers strongly recommend it. The course is designed by GTF, a stock market institute for all types of novice or experienced traders.
