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 derivatives tools that can also be considered similar to a contract or a promise between the buyer and seller of the options. An option buyer has the right to buy or sell the underlying assets on the date of expiry. On the other hand, an option seller bears the obligation to transfer the underlying to the option buyer on the date of expiry.
Options are considered as a separate asset class, where you can trade and generate some money. Option prices are determined by some external factors like volatility as well as some pre-defined parameters like the 'Options Greeks'. An option buyer or seller can buy and sell these options to generate a hedge on their investments or speculate on the price movement on them.
Now that you know what is options trading, let's understand how it is different from share trading.
By now you must have put together a clear picture as to what are options and how they are different. Now, let's find out why they are considered riskier.
The leverage in options can be a boom or a bust. In a favorable scenario, you can create extremely high returns on your capital. But at the same time, options contain the potential to erode your capital completely if the trade goes against you. Often traders take on extremely high leverage and end up losing their complete capital in a particular trade.
Options trading have two aspects. One is options buying and the other is options selling. The buyer of an option pays the premium whereas the seller of the option collects it. The maximum profit potential of the buyer of the option is unlimited against a limited risk to the premium paid. Whereas an options seller bears an unlimited risk. If adverse market conditions result in extremely high option prices, the option seller has to either bear the loss or square off the position by realizing the loss. In both ways, if you sell a naked option, the maximum gain represents the premium collected whereas the maximum loss is uncapped.
Options trading involves another aspect of exchange that is absent in equity trading. Both the options buyer and seller have to exchange the underlying on the date of expiry. Although the option buyer doesn’t have the obligation to give/take the delivery of the underlying shares. An option seller has the obligation to exchange the underlying on the date of expiry. In case, you sell a stock option and hold it till the date of expiry, you will have to either buy or sell the required number of the underlying shares. For this, you will have to shell out a minimum of Rs 5-7 lakh. This could be a problem for many small traders who might not have this kind of liquidity. Due to this, option selling or buying is considered a high Capex investment and small traders should trade in them carefully.
By looking at some of the key risks involved in options trading, it is clear that options trading is a high-risk high-reward proposition. Although you can reduce the overall margin requirement by taking hedged positions, still you should not begin options trading unless you have sizeable capital and sufficient expertise in the field.
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.
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.
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.
Yes, individuals can trade US options from India. There are many platforms as well which allows the individuals to trade internationally, it just depends on them what they are comfortable the most with and prefer trading from.
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.
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.
Puts are Calls are both risky in their own terms. For calls it is necessary to make decisions well as there are chances that you make loose the premium. In case of puts it is important to strategize the the options well.
Option Spreads are usually used to hedge a position and try to increase the chances to make money. By doing this we limit our profits but most importantly we minimize our losses that is the most important part in trading, which is to preserve our capital.
If you forget to square off your option contract at the end of the day, the contract will automatically be settled if it's an in-the-money option. The contract would be settled on the expiry date and will be sold at the market price.
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.