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.
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.
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.
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.
If you're looking for a straightforward and comprehensive take on options trading, then Sensibull should do the job perfectly. However, if you're and expert and want more complex trading tools, then Opstra is the one to choose.
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.
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.
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.
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.
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.
A collar option strategy is a multi-leg option strategy that involves an existing long position in any security in the Equity or Futures market and buying an OTM (Out Of the Money) Put option and selling an OTM Call option in order to hedge the existing long position from any short term bearishness. The overall Profit and loss are capped in this strategy and this strategy is implemented when the overall outlook of the underlying asset is bearish.
Short call and long call are the call option strategies and individuals buy or sell the shares. There are various differences between them and are important to be known. The elaborated version is described below.
Open Interest is a parameter used by technical analysts and options traders to judge the mood of the market. Open Interest is the total number of outstanding option contracts in a particular strike price of an underlying asset. The OI is an important factor as it defines liquidity and the total number of contracts that are traded at a particular point in time.
With the increasing exposure of the stock markets, more and more people are trying a hand in options trading. Options trading have become a lucrative place for individuals to earn money. The reality is certainly different. More than 95% of individuals lose money in Options trading, There are various reasons behind this. Find out the reasons for losses and the steps by which you can be a profitable options trader here.