Options Trading in India — Types of it & Best Examples 2021
The options market, particularly in India, accounts for a considerable portion of the derivatives market. As you might predict, options account for roughly 80% of all derivatives traded, with the rest falling into the futures market. Let’s take a closer look at option trading in India using example & other details.
What is Options trading in India?
You might desire to Buy or Sell shares in the futures market at a specified price in the future. There are two forms of options trading in the derivatives markets based on this premise: Call options and Put options.
- Call options are futures contracts that offer the buyer the right but not the obligation to purchase the actual stocks or index.
- Put options, on the other hand, allow you the right to sell something in the future.
Let’s take a look at each of these two options separately.
Call options
A call option is a two-party derivative contract. The call option buyer gains the right (but not the responsibility) to exercise his option to purchase a certain asset from the call option seller for a set period of time.
Put Options
There can never be a buyer without selling in any market. Therefore, you can’t have call options without put options in the options market. Puts are option contracts that allow you the right to sell an underlying stock or index at a defined price on or before a future expiration date.
A put option is the polar opposite of a call option in this regard. They do, however, share some characteristics.
Understanding Call Option
If you expect the price of the index to gain in the coming days, rather than the price of a specific share, you should buy an index call option as a trader. On the NSE, you can buy the CNX Nifty 50, CNX IT, and Bank Nifty, while on the BSE, you can buy the 30-share Sensex.
Call Option Example for Index
Assume the Nifty 50 is now trading at roughly 17,000 points. If you’re positive on the market and think the Nifty will hit 17,100 in the next month, you may buy a one-month Nifty Call option at that price.
Let’s imagine this call is available at a Rs 20 per share premium. Since the existing contract or lot size of the Nifty is 50 units, purchasing 2 lots of call options on the index will cost you Rs 2,000 in total premium.
Scenario 1
You would not want to execute your option and buy at 17,100 levels if the index remained below 17,100 points for the entire month till the contract expires.
You’re also under no obligation to buy it. You might simply disregard the agreement. The only thing you’ve lost is your Rs 2,000 premium.
Scenario 2
If the index does, however, cross 17,100 points as projected, you have the option to buy at that level. You would, of course, want to use your call choice.
So, keep in mind that you won’t start making money until the Nifty hits the 17,130 level, because you’ll have to factor in the cost of paying the premium into the index’s cost.
This is known as the breakeven point, which is the point at which you make no profit and no loss.
Scenario 3
You only begin to recoup your premium cost when the index is around 17,100 and 17,130 points. So, only execute your option at these levels if you don’t expect the index to grow any more or if the contract’s expiration date falls at these levels.
Originally published at https://profitmust.com on December 7, 2021.
