The derivatives market in India offers different types of instruments for investors to invest in. The derivatives market includes instruments whose value is based on an underlying asset. One of the most popular investments is options.
Options give the investor the right but not the obligation to buy or sell the asset. Unlike futures, you can choose not to buy or sell the asset on the expiration date. An option has an expiration date by which time the holder can exercise the option. It has a price called the strike price. All trades for derivatives are done online.
There are two types of options:
• Call option
• Put option
A call option gives the holder a right but not an obligation to buy the asset at a price. A put option gives the holder a right but not obligation to sell the asset at a price.
How to trade in options:
It is possible to trade in stock and index futures using your regular demat and trading account. However, if you’re wondering how to trade options in commodities, you will need to open a separate commodities demat account to make those trades.
If you are considering investing in stock options, you will need to check the F&O stock list to see whether the exchange has futures and options for the stock that you are looking out for. Once you see the future or option, you need to check the lot size.
Each exchange will have f&o stock list with lot size. Since futures and options are standardized contracts, they have a lot size. This lot size changes and depends on the underlying. For example, crude oil futures have a lot size of 100 barrels. The pricing of the future is decided accordingly.
For option trading, you will need to transfer a margin money amount to your broker. Option trades are done based on margin money. It is not necessary for the option trader to put up the entire value of the transaction with the broker. The margin money allows the trader to make trades with a higher value than the margin put up. Most brokers have a margin calculator which you can use to find out the amount of margin you will need to have with your broker.
There is a term called maintenance margin which is the minimum amount of margin that must be kept with the broker. If the amount goes below the maintenance margin, then you need to transfer funds to the broker.
One important concept you must know for how to trade options is option premium. An option gives the holder the right but not the obligation to exercise it. This puts a lot of risk on the option seller. To compensate for this risk, the option seller charges an option premium. The option premium is different for both call options and put options. Generally, call option premium is higher than put option premium. The premium for the option can be seen on the stock exchange website.