Learn Options Trading with the Indian Stock Market: A Beginner's Guide

Options trading may be intimidating, but with proper knowledge and flexibility in trading, fortune lies beneath such threats. Rising awareness of the Indian stock market seems to make the ability to trade in options a weapon for an old trader as well as a beginner in India. As an introductory guide to options trading in the Indian stock market, this blog is meant to help you prepare for the next step.

What Are Options?

An option is a contract that gives the option to buy or sell an underlying asset that may include shares of stocks at a pre-specified price, often known as the strike price, or before a set date. Options are derivatives, meaning that their value is derived from an underlying asset, like a stock or an index.

There are two types of options:

Call Options: Entitle the investor to buy an asset at a predetermined price.

Put Options: Entitle the investor to sell an asset at a predetermined price.

In India, most options trades are executed on the National Stock Exchange and settled in cash.

How does options trading work in India?

The Indian stock market functions in two broad segments, namely, the equitymarket and the derivatives market. While in the cash market, it is a question of buying and selling actual shares, the derivatives market works in terms of contracts based on an underlying asset, such as a stock or an index.

With options trading, you never actually possess an underlying asset- the stock. What you are actually holding is the option to buy the stock at a later date or to sell it at a certain level. Price for options always varies according to risk factors such as market volatility and time remaining before the expiry and the difference between the current Price for the asset and its strike price.

Key Words You Should Familiarize Yourself With

In order to understand options trading, it is first necessary to familiarize yourself with a few key terms:

Strike Price: That Price at which the underlying asset can be purchased or sold.

Premium: The cost of purchasing a call or put option.

Expiration Date: The last day upon which the option must be exercised

In the Money (ITM): Exercising the option will result in a profit.

Out-of-the-Money (OTM): In this case, exercising the option does not bring any profit.

At-the-Money (ATM): When the strike price of the option and the current rate of the asset are the same

Call vs. Put Options Explained

Call Option Example: The stock price for a company is currently at ₹1,000. Now, you buy a call option with a strike price of ₹1,050. As the stock price increases to ₹1,100 at a time when your call option still exists, you would exercise your option to buy the stock at ₹1,050 with a profit of ₹50 per share.

In case the stock price falls, you can also exercise the non-exercise of the option that will control the loss to the maximum extent of the premium paid.

Put Option Example: Let's assume the stock price is ₹1,000, and you buy the put option at a strike price of ₹950. Now the Price falls to ₹900, so you can sell it at ₹950 and hence earn a profit of ₹50 per share. When prices rise, you simply do not exercise the option.

Benefits of Trading Options

Options trading in India has several benefits:

Leverage: There are times when you would be able to control a big number of shares with a relatively small investment because you are paying only the premium and not buying the shares right away.

Limited Risk: The maximum loss in trading options is limited to the premium paid. This is in contrast to the stock market, where there is virtually unlimited loss.

Hedging: Options can be viewed as insurance over your stock investments. Therefore, if you are holding stocks and fear a price drop, you can buy a put option so as to minimize losses.

Flexibility: You can employ options for speculative purposes and hedge against the risks in your existing portfolio.

Risks in Options Trading

Options trading is an advantageous system, but it is also riddled with latent risks. In the run-up to expiration, an option can quickly become cheaper if the underlying moves in a direction contrary to what might have been anticipated. Volatility can break out into wild swings in the Price of options at any moment. Read the background given above only if one understands these risks.

How to get started with options trading in India

To begin trading options in India, it is necessary to fulfill some very basic steps:

Open a Demat and Trading Account: You will need a Demat account in which your securities are held safely and a trading account to buy and sell options. Many brokers in India offer both accounts.

Select a Broker: That would provide you with the facility to do options trading. One should look for brokers who would charge less, are easy to interface with, and have good customer support. Zerodha, Upstox, and ICICI Direct are some of the popular ones when it comes to options trading.

Understand Market Trends: The best time to trade options is when you know that what is the price movement of an underlying asset, stock movements, and its technical analysis. Keep a close eye on the price movements and news related to the underlying asset along with all the economic indicators.

Start Small: There is no need to start investing big amounts of money when you begin options trading for the first time. You will learn fast, and nobody will even regret it later.

Use a Trading Strategy: There are several options trading strategies. These include covered calls, protective puts, and straddles. Develop a trading strategy that matches your risk tolerance and trading style.

Common Strategies in Options Trading

Covered Call: In this case, you are holding a stock and selling a call option. As the Price of the stock continues to increase, you can sell the stock at strike price and keep the premium.

Protective Put: In this case, you hold a stock and buy a put option. If the Price of the stock falls, the put option restricts your loss.

Straddle: You purchase both a call and a put on the same stock with the same strike price and expiration date. This strategy benefits from dramatic price movement in either direction.

Why Learn Options Trading?

Options trading could prove one of the best diversification methods for your portfolio. Used correctly, they give you a chance to benefit from the volatility in markets, which can make returns more impressive. But since it does involve risks, you are supposed to keep learning and perfecting your strategies.

Conclusion: Begin with Stratzy

More advanced options trading also includes algo trading tools. This will help you automate as well as optimize your trades with Stratzy. With Stratzy, you can connect your existing broker with AI-driven algorithms that maximize profit.

Learn more on how you could get started on algorithmic trading at Stratzy. In and get ready to take your options trading to the next level. Start today and make smarter, faster, and more profitable trades!

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