How much money do I need to begin Options Selling?My friend said option selling is profitable but how much money is required?
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- Updated On:18-Mar-2024
- Replies:3
Short Answer
Option Selling requires large capital. Due to this many small retail traders resort to option buying where the margin money required is very less. Although with various strategies you can reduce your overall risk and margin required in Options selling. Know more about how much money is required to start option selling. The difference in the margin money required for selling a naked Option vs Selling a Hedged Option here.
Detailed Answer
What is Options Selling?
Options selling is a part of Options trading where a buyer and seller of an options contract are involved. Both the parties (Option Buyer & Option Seller) have the obligation to buy or sell the underlying security on the date of expiry at the pre-determined price.
For example, the option seller of a Call option is under the obligation to sell the underlying on the date of expiry at a specified price. In the same way, a seller of a Put option will have to purchase the underlying security from the put option buyer on the date of expiry.
Everyone can trade options. There is no set eligibility limit that might prevent you from selling or buying options. But there are certain risk factors that might prevent you from doing so.
Usually call option selling has a level of theoretical risk because the stock price can rise a lot. There is no concept like stock loss in it. So, you can lose money. So, call option sellers must consider buy-back in case the stock price keeps on rallying.
Whereas stock put selling is the complete opposite. Here the risk arises if the values fall. Thus, determine your strategy before selling options.
How much money is required for Option Selling?
Option selling can be done in two different ways:
- Selling Naked Options
- Using Multi-Leg Options strategies
1. Naked Options
To sell naked options (options that are not hedged by a contra position) the margin money required is higher as compared to using options strategies like Iron Condor, Short Straddle, etc. In the naked option selling the minimum margin money required to sell one Lot of Nifty ATM (At The Money) Call option is Rs 95000 approximately. This figure can change depending on the underlying stock or Index. An ATM Call option of Reliance Industry will require Rs 1,20,000. This might provide you with an idea of how much capital is required to sell one Lot of options. Naked option selling is preferred by extreme high-risk-loving traders as the return is more when compared to a hedged strategy. On the other hand, the maximum loss that you as a naked option seller can incur is unlimited/uncapped. Therefore it is always wise to use a hedge against naked option positions.
2. Using Hedged Option strategies
Using multi-leg option strategies or using hedged positions is always recommended for traders as it caps the maximum amount of loss that you can incur. In option selling, the seller faces the threat of unlimited losses in case your view goes terribly wrong. To prevent this from happening you can use multi-leg option strategies that will cap both the profit and loss in any situation. Another benefit of using a hedged position is, the margin requirement to take the trade is substantially less. Where you have to maintain approximately 1.5 Lakh to sell 1 Lot of Naked option, a hedged position will require less than half of that. An Iron Condor in Nifty will require approximately Rs 44000 to implement. This is way lesser than that of selling a Call option in Nifty which costs almost twice.
Conclusion:
To conclude it can be said that with a capital of 1.5 to 2 lakh, you can start option selling with 1 Lot. Although you should maintain some extra margin to make adjustments to your position. This will prevent you from incurring unnecessary margin calls or losses if your view goes wrong. Using hedged positions is always recommended while trading in options. Not only it reduces the margin requirements by more than 65% but also protects you from any oversized losses.
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Discussion (2)
The minimum capital required for selling options might be around Rs 50,000 for hedged strategies, but it is essential to have some extra margin in case of any adjustments. Also, you should remember to exit the short option positions first and then exit the buy positions. By doing this, you will make sure to prevent any margin penalties in case your unhedged option selling position is open at the time of squaring off.
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Akshat Pareek
Options are a concept which entices many traders since it requires very low money to trade. However, option selling is a very different niche and may require a considerable amount of money. Since option selling requires a high amount of margin so it is usually very costly and may range from 1.2- 2 lakhs. Therefore, it is always recommended to start options selling with a good amount of money.