How much money do you need to begin Options Selling?

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.

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.

Tagged With: Options Sellingmargin moneyDerivativesOption Tradingmargin BenefitMulti Leg Option Strategy
Categories: Option Trading
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Related FAQs

How much money can you make as an Options Seller?

Option Selling can be considered as a full-time business for traders. Similar to a business, you cannot expect extraordinary returns in options selling. You, as an options seller have an edge over option buyers and the chances of making money are higher. Know how much money can be made by selling Options.

How much money do I need to start Stock Trading in India?

Its all based on the share you wish to purchase. You can invest one rupee or two rupees in the stock market while there is no maximum cap on your investment.

Which strategies should a Options Buyer use to make money?

Option Buying is more common when compared to options selling. This is because option buying requires less capital and the maximum profit is uncapped. This lures many small retail traders who ultimately lose money when it comes to options buying for various reasons. Follow these strategies to increase your chances of generating profits.

What is the Best strategy for Options Trading?

There are many complex Option Trading strategies out there but the most profitable are some of the simpler ones. The top 3 of them are Long & Short Straddles, Long & Short Strangles and Bull/Bear spreads.

Which is the simplest options strategy for beginners?

Options trading can be done in diverse ways. You can trade Options in unhedged or Naked positions as well as use multi-leg strategies to limit the losses. An endless combination of options can be used to put together a strategy. This can get complex sometimes. But many simple Option strategies can be used by Beginners. More of such strategies are discussed here.

Is Opstra Options Analytics good strategy builder?

Opstra Options Strategy builder is a platform for Options and Futures traders. It provides many tools for trading derivatives, Some of these include Options Simulator, Options backtesting, IV (Implied Volatility) Chart, Option Chain analysis, and much more. Both beginners, as well as advanced traders, can use this platform as it offers all the necessary features for both these groups.

How to use Opstra Options Strategy Builder?

Opstra Definedge is a platform that provides many tools and features to Derivative traders. Both Options as well as Future traders can make use of this platform. Some of the primary tools of Opstra are the Strategy Builder, IV (Implied Volatility) chart, Options Backtesting, Options Simulator, and many more. The Options Strategy Builder is one of the most intensively used tools on the platform.

Which is the best time frame for Options Trading?

Options Trading is a risky business and options traders have to look at various parameters before taking a trade. Choosing a time frame is one of the factors in options traders. Both option Buyer and Sellers use different time frames to trade. Let's see which time frame is most useful for options buying as well as selling.

What is an Iron Condor trade in options?

An Iron Condor is a 4 legged hedged option strategy that includes selling 1 slightly OTM (Out of The Money) Call as well as 1 Put option and, buying 1 Slightly Far OTM Put & 1 Call options in order to cover the risk of the Naked short positions. This strategy is implemented when the overall outlook of the underlying asset is neutral or rangebound and no major moves in any direction are anticipated. The maximum profit and loss are capped in this strategy, and by hedging, margin benefits can be enjoyed.

How does Gamma affects risk in Options trading?

Gamma is an Option Greek that affects the change in the Option premiums. Options traders need to know about Gamma and some other Option greeks to calculate the risk per trade. The effect of Gamma becomes stronger as the expiry approaches. The Gamma also increases as an Option becomes ITM or ATM from OTM. Know more about it here.