In this article, we will delve into the world of options trading, specifically in India. We’ll explore the basics of options, including their underlying assets, strike prices, put and call options, option premiums, and expiry dates.
Additionally, we’ll guide you on how to start options trading in India, discussing the essential requirements, recommended experience, and popular online brokers like Zerodha, Dhan, Groww, and Kotak Securities.
What is Options Trading? and all related terms
If you are a trader and Investor, there is no doubt you have heard about Futures and Options. While both of these fall under derivatives, these two are completely separate things.
Both futures are options are the contracts to purchase particular underlying assets of the given date.
In the future you don’t have a choice, if you don’t see fit to purchase that underlying asset on that given date at that strike price, you are obliged to purchase that asset once you buy the future contracts.
Suggested: Basic Stock Market Terms
But for Options things are different. for options, a Trader will be a small amount of some to get right to the underlying asset on a given strike price before a specific date.
The difference here is, here in options are not obliged to buy that underlying asset, you can buy that asset sure if you want to but if you don’t see a price fair you can let the premium you already paid get expire.
An option is a contract that gives the buyer the choice to buy or sell something, like a stock, at a specific price within a certain timeframe.
But options traders (usually the buyers) rarely care about exercising that contract.
Considering you have the choice to buy the contract before the expiry time, options traders buy and sell the contract getting their profit from the difference in options premium.
There are a few essential terms that you must know beforehand start to engaging in options trading –
Underlying assets
The underlying asset is the asset that is to be delivered when a contract of warrant is exercised.
However, options traders just trade in the option (without any intention of buying that asset) you have.
Even tho we buy or sell options, traders have to analyze the chart of that underlying in order to predict the future moments of options.
For example, if you want to buy the option of Nifty 50, Nify 50 is your underlying asset.
Strike Price
To put it simply strike price is the price where option buyers think that it is profitable for them to buy or sell the right of any particular underlying assets.
The Strike prices of every underlying asset are predefined. You can check the strike price easily in the option chain.
Put and Call option
There two types of options are available for the Option buyers and these are the Put option and the Call option.
If you think that the price of the underlying asset will go up you will buy the call option which is also referred to as CE in short.
If you think the price of the underlying asset will go down you will buy the put option which is also referred to as PE.
Option Premium
Options Premium is the price that a buyer need to pay the seller to purchase an option contract.
To put it simply, it’s just the price of an option contract. Traders will earn money when the options premium will increase and they sell it at a higher price.
Expiry date
The Option expiry date is the last day of option validity. This is the last date when you can trade in that particular call or put.
On this date, the value of that option can become zero, and you will no longer have the right to buy or sell that underlying asset.
How to Start Options Trading in India
Starting option trading is relatively easy in India, all you need is a Demat account, a bank account.
As for the capital, you can start by just investing little as 5000 rupees.
Investing a small sum is a good idea if you are at a beginner stage in options trading.
It is also recommended that you have a few years of experience in stock trading before trying your hand at options trading in India.
Options trading is suggested for only those who have a strong understanding of the stock market and technical analysis. Also, risk management and understanding market psychology are also aspects that you can’t ignore.
Trading in options is extremely risky, and if you don’t apply proper risk management, it can wipe out all your trading capital in single trading (which is something not really possible in stock trading).
So if you have no knowledge of trading at all, it’s better to start with stocks and once you gain enough experience switch to options.
Now coming on two demat accounts, almost all of the online brokers do offer you the option to trade in options and futures, some of them are –
Zerodha
Zerodha is one of the, if not the most popular online trading platforms in India.
Opening a trading account in Zerodha is easy but you also need to pay 100 rs for account opening (Which is something free in most Online brokers).
Furthermore, if you want to activate the F&O segment (which is essential for option trading) you also need to pay 200 more.
Dhan
While you can trade using its official app into the options and future, Dhan also has a separate app specially designed for the serious options trader. They also do offer some of the premium TradingView features to their customers.
Groww
Groww offers a simple but easy-to-use interface. Using this app you can not only trade in derivatives but also in stocks, and mutual funds.
By default, the option trading is not activated in your demat account here and to trade in derivatives you have to submit the request along with all of the required documents.
Kotak Securities
They offer you zero broking account. It is recommended if you don’t want to pay any booking charges.
It is also worth mentioning that to start trading in options you first have to activate the F&O Segment which is not activated in most of the trading accounts.
To activate F&O trading you have to submit an income proof.
You can use your bank account statement for the last 6 months, ITR copy, and Demat account statement as income proof while submitting a request to activate the F&O segment.
