How much money is required for Options trading?

Short Answer

Options trading involves two aspects. One is options buying and the other is options selling. To buy an ATM option you will require around Rs 10,000 to Rs 25,000 per lot for an Index or stock option. On the other hand, you will require close to Rs 95,000 to Rs 1,50,000 for selling 1 lot of index option. These amounts change with respect to the time remaining to expiry and other market conditions.

Detailed Answer

What is Options Trading?

Options trading is slightly different from traditional equity trading or trading in stocks. Unlike stocks that are bought and sold on a daily basis, Options are mere contracts. These are exchanged with a promise to exchange the underlying on a future date. The value of these options contracts is determined by multiple factors like Options Greeks and volatility. The price at which these options contracts are exchanged is known as Premium.

Types of Option Trading

Options are typically traded by two sets of people. One represents the Options buyer and the second is the option seller.

1. Option buyer

The buyer of an option pays an upfront premium for the options contract and either sell it on a later date or holds it till expiry. Within this duration, the buyer of the option can make a gain by selling the option at a higher price or incur a loss. In option buying, the maximum amount of risk is the total amount of premium paid by the buyer. Whereas the maximum profit is uncapped. Although the option buyer enjoys limited risk and unlimited reward, the probability of profits is extremely low.

2. Option seller

The option seller receives the premium paid by the option buyer. A seller of an options contract carries limited profit and unlimited risk. The maximum profit is the total amount of premium collected whereas the maximum loss is uncapped here. However, in options selling, the seller enjoys certain benefits like the Time decay (Theta Decay) which increases the probability of profits.

How much money is required for Options trading?

Now that you know the 2 aspects of options trading, the next question is, how much money do I require to start options trading?

Option Buying

Let's first start with the more exciting approach of options trading which is Options buying. To buy an ATM (At The Money) Index (Nifty) option, you will require anywhere between Rs 7,000 to Rs 20,000 per lot, depending on the expiry. A weekly index option will require somewhere around Rs 7,000 which will keep on decreasing as you move closer towards the expiry. Similarly, a monthly index option will require around Rs 15,000 to Rs 20,000 at the beginning of the month. A stock option will cost around Rs 25,000 to Rs 30,000 depending on the stock and time to expiry.

Option Selling

Secondly, Options selling requires significantly more capital when compared to option buying. To sell a weekly index option, you will require around Rs 95,000 and a monthly option will require almost the equivalent amount for one lot. The higher margin requirement is to ensure the safety of the option traders in case of an MTM (Mark to Market) loss.

In case you want to sell a stock option, you will have to pay around Rs 1,30,000 to Rs 1,50,000 in margin for 1 lot.

Hedged Option Strategies

However, there are some ways to reduce the overall margin requirement and also the risk. By taking hedged positions or a combination of both option buying and selling, you can reduce the overall money to initiate the trade. To implement a hedged strategy like an Iron Condor or Iron Butterfly, you will require around Rs 30,000to Rs 45,000 in 1 Lot in Nifty or Bank Nifty options. With a combination of option buying and selling, you will be able to increase your profitability and simultaneously decrease the maximum risk.

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Categories: Option Trading
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Related FAQs

How much money do you need to begin Options Selling?

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.

What is Call Option and Put Option?

Options are a form of conditional derivatives policy that allows the holder to buy or sell the key asset at a fixed price before or after the agreement expires. The two most impactful options are Call Options and Put Options.

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.

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.

Why is Options Trading considered risky?

Options trading is different from traditional share trading in many ways. Trading in options includes multiple factors like high leverage, delivery obligation on the date of expiry, unlimited loss potential, etc. All these factors make trading in options riskier.

What is the minimum amount required for Options Trading in India?

Options are of two types- call option and put option. You need quite an amount of money to trade in options because it has costs such as premium, brokerage. etc. To know more about the topic, read the detailed version.

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.

Why is Options Trading more risky on the expiry day?

Options trading involves many factors such as Options Greeks. Options Greeks like Delta, Theta, and Gamma have the most impact on Option prices towards the end of the expiry. The option premiums are impacted highly by Gamma and Delta on the day of expiry. Learn more about Options greeks and how they impact option premiums.

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.

What to not do when trading Options?

Options trading offers many options to traders, investors as well as hedgers. There are some common mistakes that option traders commit. Five of the most common mistakes are, taking too much leverage, not having a pre-defined stop loss and target, acting on tips on social media, adhering to buying options, and taking unhedged trades.