You spend hours researching the stocks that would go up and then invest Rs 1 lakh in that stock. If the stock goes up 5% in a month, you will earn Rs. 5,000 in a month.
If a 5% return in a month is not sound rewarding and you are looking for a way to earn higher returns with the same capital then options trading is the way to go.
You can earn even any double-digit return on your investment within a day through options trading.
Note – Options trading carry the same high risk as of the high-profit potential. You can lose the entire investment in case your trade goes wrong. You can mitigate the risk by learning options trading.
What is Options Trading
Buying/selling options is like buying/selling bets on stock prices. If you want to bet on HDFC stock price, you will have to buy HDFC options, if you want to buy SBI stock price, you will have to buy SBI options and so on.
Options are derivative instruments that derive their value from an underlying instrument like a stock.
For example, you have purchased a lottery ticket with 6 numbers.
When the winning numbers are announced. You will the more the winning numbers in your ticket, the higher will be your winnings, and hence, the higher is the value of the lottery ticket. Here, the value of your lottery ticket depends on the lottery result (underlying asset).
Similarly, when you buy a stock option, the value of the option will move with the value of the stock. Buying options is based on speculating the price of the stock.
The value of the option depends on factors such as volatility, expiry time, and the strike price.
Options are of two types – Call and Put. The value of Call Options increases when the underlying stock prices go up. Whereas, the value of Put Options increases when prices go down.
Disclaimer – All the stocks mentioned in this article are only for analysis purposes, not any recommendation from our side. Take your own decision before trading.
Let’s say you expect that Kotak Bank stock price will cross Rs. 1,400 by the end of September. In this case, you can buy a ‘Call option’ of ‘Strike price’ Rs. 1,400 with September expiry. If it actually crosses Rs. 1,400, you will make money.
The ‘Strike price’ is basically the threshold price that the stock needs to cross to be worth some value on expiry day.
Options expire on the last Thursday of every month. So, September expiry options will expire on the last Thursday of September.
Expiry means that this is the last day when the options will be traded on the exchange. After this date, the options will not be available to trade anymore. So, you have to exit the option on or before the expiry date.
The amount that you will pay to buy the option is called the option premium. Options are traded in ‘lots’. The lot size is different for different stocks.
In the above example, the lot size for Kotak Bank is 400 shares. Similarly, the lot size for Reliance is 505 shares.
If the stock crosses Rs. 1400 in September, the option premium will increase and you will make money. You can exit the option anytime before September end as well.
Let’s say in the above example, your option premium increases to Rs. 20 by 15th September and you feel that you want to book your profits, you can just square off your options on that date. You will make (20 – 11.15) * 400 = Rs. 3,540
Similarly, if you had expected the price to go down below Rs. 1,400, you could have bought a ‘Put Option’ of strike price Rs. 1,400 and September expiry. If it goes down below Rs. 1,400, you will make money. f
How To Start Option Trading in India
You need to open a trading account with a broker to start options trading in India. You will also need to get the F&O segment activated for your account. F&O refers to Futures and Options which is not activated by default for all accounts.
I would suggest you Zerodha to open trading account. Zerodha charge fix brokerage of Rs 20 per trade, and offer good service as compared to other discount brokers.
Zerodha also has partnered with Sensibull to integrate both the accounts. You can place your trade within a few clicks with the combination of Zerodha & Sensibull.
If you already have a trading account but F&O isn’t active then submit a request online with your brokers to get it activated. You would need to submit your income proof like ITR to activate the F&O account.
After opening an account, you will have to add funds in your account. Once you have added funds, you can buy and sell options like normal stocks.
You just need to type the ticker for the option that you are looking to buy/sell in your trading account.
Let’s say you expect HDFC price to go above Rs. 1,900 in September. You will have to buy a ‘Call option’ in this situation. On the search window, if you type HDFC 1900, you will get the list of options available to trade (CE = Call Option, PE = Put Option).
In this case, 1900 is called the ‘Strike Price’. If the stock price stays below the strike price, the call option will be worth zero. Basically, you will lose the amount that you had paid for buying the option.
The options also have a month mentioned in the ticker. The month is the ‘Expiry date’ of the option. Stock options expire on the last Thursday of the stated month.
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Fund Requirement for Option Trading in India
You need cash in your trading account to buy options.
The amount that you need will depend on the type of option that you buy. You may be able to buy 1 lot of index or stock options for as little as Rs. 2,000 as well. Usually, the cheaper the options are, the lesser the chances are that these options will end up in money.
You would need at least Rs. 20,000 to Rs. 25,000 to buy options that have a good probability of making money.
I would advise to use a discount broker for options trading as there is a big difference in transaction costs between regular brokers and discount brokers.
Many full-service brokers charge around Rs. 50 ‘per lot’ for buying options. So, if you buy 10 lots, you will pay Rs. 500. But good discount brokers charge around Rs. 20 ‘per order’. So, you will pay only Rs. 20 even for 10 lots.
Different Ways To Do Option Trade in India
#1. Buying vs Selling
You can either ‘buy’ options or ‘sell’ options.
- If you are bullish – you should either buy Calls or Sell Puts
- If you are bearish – you should either sell Calls or Buy Puts
‘Selling’ calls or puts requires more margin and has more risk as well.
As a rule, most options expire worthless. This means that the value of most of the options on expiry day ends up being zero.
This is because options are traded for a range of Strike Prices but only a few will end up in the money. That’s why option selling is considered more profitable than option buying.
Let’s say you buy the ITC call option and expecting the price will cross Rs. 200 in August. If the option price at the time of buying is Rs. 1.2, you will have to pay 1.2 * 3200 = Rs. 3,840 for buying 1 lot of this option.
In this case, you have been able to buy an option because someone else has opted to sell it. In this case, if this stock does not cross Rs. 200, your option becomes zero on expiry day.
This means that the option seller will get to keep the entire premium that you paid as his profit (i.e. Rs. 3,840).
But, if the stock crosses Rs. 200, then the option seller will have to pay you the difference between strike price and stock price on expiry day.
So, if the stock price is Rs. 203 on the expiry day (last Thursday of August), the option value will be :
Stock price – Strike price = Rs. 3. For 1 lot, you will get 3 * 3200 = Rs. 9,600.
Since, you had paid Rs. 3,840 originally to buy the option, your net profit is :
9,600 – 3,840 = Rs. 5,760
The risk in option buying is limited because the maximum that you can lose is the premium that you paid for buying the option (Rs 3,840 in the above example)
In option selling, the maximum that you can lose is not defined. If in the above example, the stock had reached Rs. 210, the option seller would have lost:
Stock price – Strike price – Premium received = 210 – 200 – 1.2 = 8.8 per option
Total loss = 8.8 * 3200 = Rs. 28,160
Remember, both option buyers and sellers can exit their option trade anytime before the expiry. So, if a position is going against you, you can book your losses early and exit the trade. You need not wait for the expiry day.
Option selling requires very high margin compared to option buying. For perspective, you might need Rs. 35,000 to buy Reliance Put options of a particular strike.
For selling the same option, you will need Rs. 3 Lakh in your account (either cash or pledged shares)
#2. Index vs Stocks
Indices like NIFTY and Banknifty derive their value from the constituent stocks. Banknifty value fluctuates based on stock prices of the banks that are part of Banknifty and the NIFTY value fluctuates based on stock prices of the NIFTY 50 stocks.
In India, options trading is available for NIFTY and BANKNIFTY as well. Unlike stocks which have monthly expiry, NIFTY and Banknifty options are available for weekly expiry.
Indices are much more volatile than stocks. Hence, the opportunity to make profit is also higher. If your view is correct, you can even earn 2-3x of your invested capital within a day. But since it is volatile, it can also go to zero.
For instance, NIFTY is at 11,500 and you expect it to go below 11,400 on the same day. You buy PE option for Strike price 11400 which is trading at Rs. 30.
The NIFTY option lot size is 75 so you will pay 75 * 30 = Rs. 2250 for 1 lot. If your view is correct, and NIFTY goes down, your option value will increase.
Let’s say NIFTY ends up at 11,320 at the end of day, your option value will be approx. Rs. 100 (75 * 100 = 7,500 will be the value of the lot). So, you will make 3x within the same day!
(Note : If it is an expiry day, your option value will be Rs. 80 (11,400 – 11,320). The value is more than 80 in the above case because there is time left to expiry.)
#3. Option Strategies
You can also build strategies with options. Option strategies involve buying two or more options of either different types or different strike prices or different expiry.
With option strategies, you can do very high probability trades with limited downside. You can also limit your margin requirement.
For example, if you are bullish on Reliance share and you decide to sell 2100 PE (Lot size = 505) which is trading at Rs. 29. The premium that you will earn by selling = 29 * 505 = Rs. 14,645.
To sell this option, you will need a margin of Rs. 2.8 Lakh and your maximum loss is not capped.
But, if you also buy a Put of a lower strike price, say 2060 which is trading at Rs. 11, you will pay 11 * 505 = Rs. 5,555. So, the net premium that you earn by adding this trade is Rs. 9,090. The margin required for doing this trade will be just Rs. 56,000.
Making such strategies with detailed calculations is not easy. It is also time-consuming as you will need to check a number of combinations to see which makes the most sense. This is why most retail traders stay away from options.
Here Sensibull comes into the picture who helps you to create different strategies based on your market view.
Options Trading Through Sensibull vs. Directly With Stockbroker
If you want to trade options through your broker, you will be able to buy or sell options easily at the click of a button. But your broker will not provide you trading ideas.
Moreover, if you want to create strategies, you will have to manually calculate your profit or loss in different scenarios.
Also, option price does not move exactly as per stock. So, if you have a Call option for a stock and the stock goes up by Rs.1, your option value will not increase by Rs. 1. There would be a price difference.
You will not be able to project how your option price will change if the stock price moves in a particular direction as it depends on a number of other factors.
All these problems can be solved with the help of Sensibull.
Benefits Of Option Trading Through Sensibull
Sensibull is a one-of-a-kind options trading platform that makes it easy to trade options even for beginners. You must have Sensibull if you already doing or want to start options trading. Right now there is no close substitute available in the Indian market for helping people with options trading.
Let’s understand how Sensibull makes options trading easy.
#1. Easy to Use
Sensibull has a very user-friendly interface. You can just scroll and look at the various options available. The platform even suggests options that you can trade based on your market view of both Indices and stocks.
You can use the ‘Strategies Wizard’ feature to enter your market view and Sensibull will suggest you the strategies to follow.
Option related terms can be complicated for a beginner, they also provide explanations of different terms when you scroll over the options.
#2. Visualize Strategies
The Strategy Builder feature allows you to build your own strategies. Not only will you be able to see the payoff for your own customized strategy, but you will also be able to project changes in option prices in different scenarios.
You can even place orders directly from the Strategy Builder without going to your trading account and manually place orders for each trade. Sensibull will directly send orders to your trading account and you will be able to place a trade by the click of a button.
The automatic order place option is available with the partner brokers with Sensibull.
If you don’t have trading account, then you can open account Zerodha who is also partner with Sensibull.
#3. Virtual Trading
If you are not confident about trading with real money, you can first practice with their virtual trading platform. You can start with real money once you are able to make a few profitable virtual trades.
#4. Educational Resources
Sensibull also has a lot of resources for learning if you are not so familiar with options trading. So, even if you are a complete beginner, you can sign up for the resources and educate yourself about options trading.
#5. Recommended Trades
If you do not even have a market view but still want to dabble in options, the platform will even give you advice about trades that can be profitable.
If you decide to follow this advice, all you will have to do is to click a button to place an order for their recommended trade.
#5. Other Useful Data
By using the ‘Analyze’ option, you can access a lot of other data related to stocks and derivatives. It can help you to shortlist stocks based on different criteria.
You will also be able to find market data like upcoming events, FII/data in this feature in this option.
Sensibull offers 2 different plans for different user requirements, Sensibull Pro and Sensibull Lite.
Lite plan offers option chain, strategies wizard, real-time Profit & Loss, 10 watchlists, open and interest analysis. The Lite plan is suitable for beginner options traders.
The Pro plan comes with advanced tools and features like Implied Volatility (IV) charts, powerful statistical tools, currency options, and all the features of the Lite plan. The Pro plan is suitable for advanced options traders.
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I would suggest you choose 6-month Lite plan. You can learn options trading in 6 months and then you can opt for the Pro plan.
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How to do Option Trading Through Sensibull
Login to your Sensibull account with your trading account credentials. Not all brokers will have integration with Sensibull.
Open sensibull account now to start options trading, in case you don’t have.
So, if you want to place trades directly with Sensibull, you will need to open a trading account with a broker associated with Sensibull. You can open an account with Zerodha.
Let’s say I am bearish on the stock Maruti i.e. I expect the price to fall. I want to build a custom strategy, so I will go to Strategy Builder.
Type the stock name that you want to trade in the Search bar. The current stock price is displayed along with the stock name i.e. Rs. 7072.60.
There are also some ready-made strategies displayed below the search bar.
I select the view ‘Bearish’ and choose the Bear Put strategy. The platform suggests a strategy as per my view.
I want to customize the strategy a bit further. So I click on Add/Edit which opens the Option Chain.
The strategy suggested by Sensibull was to Buy 7100 Put (for Rs. 219.35) and Sell 6900 Put (for Rs. 136).
But my view is that the price will go even below 6900, so I edit the strategy to Sell 6800 Put instead of 6900.
The summary of the max. profit/loss, margin required and the projection of the profit/loss in case of different scenarios is available below the diagram.
Click on ‘Trade All’ after you are sure about your strategy.
Click on ‘Place Order’ to execute each leg of your strategy.
After the above step,you will be redirected to your trading account where you will have to check whether your orders have been placed.
Options trading involves more risk as compared to stock trading. If your market is strong in any particular direction then options trading is most rewarding.
In the initial stage, I would suggest you start with only 1 lot of stocks with a view to learn and build an adequate skill set. You can go for big trades as go get the experience.
Here platforms like Sensibull help you to find the right options based on your market view and create the strategies to minimize the risk.
If you don’t have a Demat account, I would suggest you open demat account with Zerodha along with opening the Sensibull account. Zerodha is a partner with Sensibull to provide integration between both the account. You can place an Options order from the Sensibull account itself.
I tried to provide all the practical knowledge that you need to start options trading in India. If you miss any additional information in this article, please let me know in the comments.