You heard about trading and then there’s much more to trading other than just buying and selling stocks, right? Options Trading In India is not very common but it helps you in making unlimited profits with limited loss.
When I was introduced to trading, I just knew I needed a Demat account and I then went ahead to open a Demat account with Upstox Discount Broker only to find that Zerodha was an even better broker in terms of Upstox.
I will write a review in-depth on both of the stockbrokers according to my opinion on why and which have the better capability in handling the trades and have better User Interface.
Let’s not waste further time, and get started with Options Trading In India and how to make consistent profits out of it to reach your dream capital and as well learn to trade.
First of all before getting to the point, I would like to make disclaimer to keep things very simple.
Disclaimer (Must Read):You should not buy a shares in stock, or its futures or options, unless you are prepared to sustain a total loss of the money you have invested plus any commission or other transaction charges.
What’s up with the disclaimer? Yes, it is important. Investing is not that simple as buying and selling. There is a whole lot of concept behind the term “Investing” & “Trading”. I have written previously on Stock Market Basics and How I started trading and investing in stock markets.
What Is Options Trading?
The first thing in mind will be this question. When I was first introduced to stock markets, I only thought it would be a bunch of companies where we can buy their shares and hold and in another day trading scenario, buy and sell on the same day i.e, I knew both the Cash’n’Carry (CNC) or Holding and Intraday also called “Day Trading”.
We know both, CNC or Holding implies that we take a long position or hold the shares as long we wish to. It is called holding because the shares are bought and then the shares are credited to your Demat Account.
Let’s keep everything aside, and come back to Options Trading. You might heard about Options let you make Unlimited Profits and the Loss is Limited.
If yes, that’s true.
Options Trading is nothing but a contract which allows its owner the rights but not the obligation to buy or sell the underlying assets. Now you must be feeling like this,
Oops, a definition! Let’s make it easier.
Let’s take an example of our Index, NIFTY 50. It is an index of our National 50 Companies currently trading at 11,930 at the time of writing this article.
Breaking Down Options
The Options Contract are made on this index at various prices such as for example,
Not only limited to this but all the prices starting from 9,300 till 13,450 in the multiples of 50.
These prices are called Strike Price.
An example of how Options look like when you can search and add it to your watchlist to trade,
- NIFTY OCT 11900PE
- NIFTY OCT 11900CE
You might be amazed to look their prices, right? How come the price of both options are within 100 or 200 for example when the NIFTY is clearly trading at 11,930. Isn’t it?
Well, the amount it is in, is the Premium Price for the certain strike price. Each option with a different Strike Price has different prices.
These prices fluctuate as the NIFTY price fluctuates because the option is made on an underlying asset and this underlying asset here in the NIFTY option is obviously NIFTY.
This is the NIFTY Option. Similarly, these options are made for all stocks and our both indices, i.e, NIFTY & BANKNIFTY.
Now we know the numbers written in the options above, it is called Strike Price. Now what is PE or CE?
- PE is a PUT Option
- CE is a CALL Option
Keep this in mind as it is very important to remember,
A PUT Option (PE) is bought when the NIFTY is predicted to go down in this example’s case or whatever the underlying asset is going down.
A CALL Option (CE) is bought when the NIFTY is predicted to go down in this example’s case, or whatever the underlying assets is going down.
Now you also noticed the month right? OCT simply means October. Why is it there and what it indicates?
Well, it indicates the Expiry of the Option Contract. Once the Option Contract expires, the premium price of the expired option becomes Zero. On the expiry, a new contract is created for the next expiry. I hope you’re understanding what is options trading.
We have basically 2 Expiry.
- Weekly Expiry (Every Thursday)
For Example, NIFTY 5th NOV 11900 PE, where 5th November is expiry and it is Thursday, and when it expires on 5th then a newer expiry option is created which will be NIFTY 12th NOV 11900 PE.
- Monthly Expiry (Last Thursday of Every Month)
For example, like the above we took, it’s usually the last expiry of the month.
NIFTY NOV 11900 CE
It has no date written since it usually expires on the last Thursday of the month.
The Options are traded in LOTs. A lot is like a basket and predetermined. For example, you cannot buy a single share option, but a whole lot. Either 1 or 2 lots or depending on how much you want to trade.
NIFTY’s 1 lot contains 75 Shares while BANKNIFTY’s 1 lot contains 25 shares.
Similarly for other stocks, there are predetermined size of lot. For example, RELIANCE have a lot size of 505. Therefore, 1 lot of Reliance Option contains 505 shares.
You understood right? Simple. Let’s revise of what we Learnt so far.
- An option is a contract of an underlying asset that can be any stock or index and is traded at a given premium price which also gives you the right but not the obligation to buy the underlying asset.
- Options have this term in them i.e, PE & CE. PE implies PUT Option and CE implies CALL Option. PE is bought when the underlying asset is falling while CE is bought when the underlying asset is rising.
- Options look like this, for example, NIFTY OCT 19000 PE (Monthly Expiry) while NIFTY 22nd OCT 11900 CE (Weekly Expiry)
How To Trade In Options In India?
To trade in Options, you have to analyze the underlying assets and plan the Strike Price accordingly.
The Strike Price equal to the price of Underlying Asset is the ITM (In The Money).
The Strike Price far from the Underlying Asset is the OTM (Out Of The Money)
For example, the NIFTY is trading at 11,930
The Call Option of 11900 Strike Price, i.e, NIFTY OCT 11900 CE is ITM as it is equal or within 11,900.
The Call Option of 12000 Strike Price, i.e, NIFTY OCT 12000 CE is OTM as it is above the NIFTY Trading Price.
Similarly, for PUT Option is same as well but for OTM, the underlying asset would be below the NIFTY Trading Price. For example, A PUT Option of 11800 Strike Price, i.e, NIFTY OCT 11800 PE is Out of the Money (OTM)
To trade in Options, you simply have to analyze if the market goes up or down and then buy either PE or CE, and make profit.
Unlimited Profit? How is it possible, yes it is possible, because when you buy an Option, the premium you pay for it can increase as much you want to as long as the Underlying Asset prices increases therefore unlimited profit.
However, Limited Loss because the maximum you can loose is the Premium you paid per lot.
You can also make Position in options till the expiry of particular option.
Hope you understand the basics of Options Trading In India. The Options Trading can be very risky and is solely based on amount you put in, it can wipe all capital in a minute or multiply your capital within minutes.
If you know how to trade properly and your strategy is strong in analyzing the stock, then you can make an unlimited profit with limited loss.
Happy Trading, meet you later in next post.