There are many advantages in options trading in India. Options offer built-in flexibility for traders. You can start with small investment and make higher profits. You are entitled to fix stock prices. Let us check out some major benefits in detailed manner.
Buying and Selling Benefits
In option trading, you can either be the buyer or the seller of the option. If you buy a call option in Indian stock market, then you have purchased the right to buy the underlying stock (or other underlying instrument) at the specific strike price on or before the expiration date of the option. If you have purchased a put option, then you have the right to sell the stock at the strike price on or before the expiration date. In both cases, you can also sell the option itself to another buyer or let it expire. This way you can make profit or cut down your losses.
With option basics, your fear about how to invest money in share market and earn more in Indian stocks withers away after you discover several benefits of stock options trading.
Fulfillment of Options Contract
Options contract work for both buyers and sellers thereby securing their investments. A typical scenario is when you sell, or write, options. In these cases, you are obligated to fulfill the terms of the option contract should the buyer wish to exercise it. So, if you sell a call option, you will have to sell the underlying asset at the strike price to the buyer. And in the case of a put option, you would have to buy the stock at the strike price. If you write options, then you need to understand that it is up to the buyer whether or not the contract is exercised and you must be ready to fulfill the terms of the contract. However, it is possible to buy another contract to offset your obligation and in this way you can exit out of the deal.
Additional Benefits of Options Trading
Once you get a handle on option basics, you will understand that there are quite a few benefits to using options to increase leverage and to hedge against potential threats.
Leveraging Options
Perhaps the main advantage of options is the ability to make large profits without a considerable amount of upfront capital. This is due to the use of leverage.
Financial leverage is one of the most significant aspects of trading in options. This factor can give an investor a bigger return while using a minimum amount of capital in the initial stage of investment. Let us take example that is usually shown in free online trading courses, if you have ₹1,000 to invest with and you bought stock in company XYZ that is currently selling at ₹10 per share, then you would be able to purchase 100 shares. If the stock rises to ₹12.50 you could sell the stock and make a profit of ₹250 for a return of 25 percent on your initial investment.
In contrast, by buying options on the stock and using leverage your returns could be significantly higher. If you bought call options on the above stock with a strike price of ₹10 for ₹10 each, then you could by 100 options which would allow you to buy 1,000 shares of stock. If the stock rises to ₹12.50 then you could exercise your option to buy the shares at ₹10 and then immediately resell them for ₹12.50. In this case your profit would be ₹1,500 (or a 150% return) on the same initial ₹1,000 investment. That is the power of leverage. With options in Indian market, a trader can make investments without borrowing capital and can control a larger number of shares with a smaller amount of initial investment.
You can use your interest money from savings account to invest in Indian stocks, start with a small investment, check out fixed deposit calculator to know how much interest money you earned so as to invest interest earnings in the Indian stock market.
