Best Options Trading Platform in India
Options trading platform may appear intimidating at first, but it’s simple to grasp after you learn a few basic concepts. Investor portfolios are typically made up of a variety of asset classes.
Options are a different asset class that, when employed appropriately, can provide numerous benefits that stock and ETF trading alone cannot.
A call or put option is a contract that grants the buyer the right, but not the obligation, to buy or sell the underlying asset at a certain price on or before a certain date.
- Option trading is used to make income, speculate, and hedge risk.
- Options are classified as derivatives because their value is derived from an underlying asset.
- A stock option contract typically represents 100 shares of the underlying stock, however options on any underlying asset can be negotiated, including bonds, currencies, and commodities.
More About Options!
Options are contracts that provide the bearer the right, but not the responsibility, to purchase or sell a predetermined quantity of an underlying asset at a predetermined price at or before the contract’s expiration date. Options, like the majority of other asset classes, can be acquired via brokerage accounts.
Futures and Options trading are valuable because they can improve a person’s portfolio. They accomplish this by boosting revenue, offering protection, and even employing leverage. There is usually an option scenario fit for an investor’s purpose depending on the occasion. A common example is using options as a successful hedge against a declining stock market to avoid losses.
Optional revenue can also be generated on a periodic basis. They’re also widely used for speculative purposes, like speculating on the direction of a stock.
With stocks and bonds, there is no such thing as a free lunch. Options are no exception. Before placing a deal, the investor should be aware of the dangers associated with options trading platform. This is why, while trading options with a broker, you’ll normally read anything like the following disclaimer.
Derivatives as Options
Options are included in the category of derivatives, which is a larger category of securities. A derivative’s price is determined or generated from the price of something else. Options are financial derivatives whose value is determined by the price of another asset. Derivatives include calls, options, futures, forwards, swaps, and mortgage-backed securities.
Call and Put Options
Options, which are a type of derivative security, are a type of derivative security. Because the price of an option is closely linked to the price of something else, it is classified as a derivative. When you acquire an options contract, you are given the right, but not the obligation, to buy or sell an underlying asset at a certain price on or before a specific date.
A call option allows the holder to purchase a stock, whereas a put option allows the holder to sell a stock. Consider using a call option as a down payment on a future purchase.
Example of Call Options
A prospective homeowner discovers a new complex under construction. That person may desire the ability to purchase a home in the future, but only when specific developments in the neighborhood have been completed.
The option of buying or not buying would benefit the potential homebuyer. Consider purchasing a call option from the developer to purchase the home for Rs.4 Lakh at any time in the next three years. They certainly can—know it’s as a non-refundable deposit. The developer would not offer such a service for free, obviously! To secure that right, the potential homebuyer must make a down payment.
This fee is referred to as the premium when it comes to an option. It is the option contract’s price. The deposit in our home example could be Rs.2 Lakh, which the buyer pays to the developer. Let’s say it’s been two years and the developments have been completed and the zoning has been authorized. Because that is the contract price, the homebuyer exercises the option and buys the house for Rs.2 Lakh.
That home’s market worth may have risen to Rs.8 Lakh. The buyer, however, pays Rs.4 Lakh. This is because the down payment is locked in at a predetermined price. Let’s imagine, in an alternate situation, the zoning permission doesn’t come until the fourth year. This option has passed its one-year expiration date. Because the
contract has expired, the homebuyer must now pay the market price. In any situation, the developer retains the Rs.2 Lakh deposit.
Example of Put Options
Consider a put option to be an insurance policy. You are probably aware with the procedure of acquiring homeowner’s insurance if you own a property. To safeguard their home from damage, a homeowner purchases a homeowner’s policy. They pay a premium for a set period of time, such as a year. The policy has a face value and protects the policyholder in the event that their home is damaged.
If an investor wishes to hedge their S&P 500 index portfolio, they can buy put options. An investor may be concerned that a bear market is approaching and may be unwilling to lose more than 10% of their long position in the S&P 500 index. If the S&P 500 is now trading at Rs.2 Lakh, they can buy a put option that gives them the right to sell the index at, say, Rs.1.5 Lakh at any time in the next two years.
If the market drops 20% (500 points on the index) in six months, they will have made 250 points by being able to sell the index at Rs.1.5 Lakh while it is selling at Rs.1 Lakh, resulting in a cumulative loss of only 10%. In fact, even if the market collapses to zero, the loss would only be 10 percent if this put option is kept. Purchasing the option carries a cost (the premium), and if the market does not fall during that time, the option’s maximum loss is limited to the premium paid.
Calls and Puts – Buying and Selling
Options can be used in four different ways:
- Buy (long) calls
- Sell (short) calls
- Buy (long) puts
- Sell (short) puts
When you buy shares, you are taking a long position. When you buy a call option, you are potentially taking a long position in the underlying stock. When you sell a stock short, you create a short position. You can potentially short the underlying stock by selling a naked or uncovered call.
Purchasing a put option allows you to short the underlying stock. You can gain a prospective long position in the underlying stock by selling a naked or unmarried put. It’s critical to keep these four scenarios straight.
Holders of options are known as writers of options, while people who sell options are known as writers of options. The key distinction between holders and authors is as follows:
- Call and put holders (buyers and sellers) are under no obligation to buy or sell. They can choose whether or not to utilise their rights. This limits the risk of option buyers to the premium paid.
- If the option expires in the money, however, call and put writers (sellers) are compelled to buy or sell (more on that below). This means that a seller may be obligated to follow through on a purchase or sale promise. It also implies that option sellers face a bigger amount of risks, and in some cases, limitless risks. As a result, authors risk losing far more than the cost of the options premium.
Why To Use Options?
Speculation: It is a wager on the direction of future pricing. A speculator may believe that the price of a stock will rise based on fundamental or technical analysis. The stock or a call option on it may be purchased by a speculator. Because options give leverage, some traders prefer to speculate with call options rather than buy the stock outright. When opposed to the entire price of a Rs.5000 stock, an
out-of-the-money call option may only cost a few pennies or even cents.
Hedging: Options were created primarily for the purpose of hedging. The goal of option hedging is to reduce risk at a fair cost. In this instance, we can consider using options such as an insurance policy. Options can be used to guarantee your
investments against a downturn in the same way that you insure your home or car.
Assume you wish to invest in technology stocks. You do, however, want to minimize your losses. Put options allow you to reduce your negative risk while still reaping all of the benefits at a cheap cost. Short sellers can use call options to limit their losses if the underlying price moves against them, especially during a short squeeze.
How Options Function?
When it comes to valuing option contracts, it all boils down to calculating the
likelihood of future price events. The more likely something is to happen, the more expensive a profit-generating choice will be. A call’s value, for example, rises as the stock (underlying) rises. This is crucial to comprehending the relative worth of options.
The closer an option’s expiration date approaches, the less valuable it becomes.
This is because as we go closer to expiry, the chances of a price change in the underlying stock lessen. This is why having an alternative is a waste of money. If you buy an out-of-the-money one-month option and the stock doesn’t move, the option
loses value with each passing day. A one-month option will be less valuable than a three-month option because time is a factor in the price of an option. This is because the likelihood of a price change in your favour increases as you have more time available, and vice versa.
As a result, an option strike that expires in a year will cost more than an option strike that ends in a month. Time decay is the cause of this squandering function. If the stock price remains unchanged, the same option will be worth less tomorrow than it is now.
Option prices are also affected by volatility. This is because uncertainty raises the chances of a positive outcome. As the volatility of the underlying asset increases, more price changes increase the likelihood of substantial moves both up and down.
Larger price movements increase the risk of an event occurring. As a result, the more the volatility, the higher the price of the option. In this sense, options trading and volatility are inextricably intertwined.
Intrinsic value and extrinsic value, often known as temporal value, can explain fluctuations in option prices. The premium of an option is the sum of its intrinsic and time values. Intrinsic value is the amount of an option contract that is in the money, which in the case of a call option is the amount above the strike price at which the stock is trading. The additional value that an investor must pay for an option over its intrinsic value is referred to as time value. This is the time value or extrinsic value.
Options almost always trade at a premium to their intrinsic value in real life, because the likelihood of an event occurring is never zero, even if it is extremely rare.
The Bottom Line
When you know the fundamental ideas of options, they don’t have to be difficult to comprehend. When used effectively, options can provide opportunities, but when used incorrectly, they can be destructive. Sensibull option trading platform is an AI based by Motilal Oswal.
Que.1 What Does It Mean to Exercise an Option?
Ans. Exercising an option entails carrying out the terms of the contract and purchasing or selling the underlying asset at the agreed-upon price.
Que.2 Traders Use Options, why?
Ans. Traders utilize options to speculate and hedge their positions. A trader might, for example, purchase put options to hedge an existing bet on the price growth of an underlying security.
Que.3 What Are the Three Most Important Options Characteristics?
Ans. The following are the three most significant properties of options:
- The strike price of an option is the price at which it can be exercised.
- The date on which an option expires and becomes worthless is known as the expiration date.
- Option premium: This is the cost of purchasing an
Que.4 What Are the Taxes on Options?
Ans. Call and put options are typically taxed depending on how long they are held. They are subject to capital gains taxes. Beyond that, the specifics of taxable options are determined by the length of time they are held and whether they are naked or covered.