Most retail investor trade in cash market and very few of them participate in trading options. There is lack of clarity about options trading in India. First and foremost reason is that most brokers do not allow their clients taking short position in options, i.e. options writing which most often expires worthless and requires huge margin. One important difference between trading in cash market and options is that trading in cash stocks give you a small piece of ownership in the company, while options are just contracts that give you the right to buy or sell the stock at a specific price by a specific date. It is significant to remember that at all times there are two sides for every option transaction: a buyer and a seller. So, for every call or put option purchased, there is always someone else selling it who most often makes money. Trading options is a zero-sum game. Options buyers have time value as greatest risk. The value of options decrease slowly as it nears expiry.
When a individual sells options, he effectively create a security that didn’t exist before. This is known as option writing and that is the sources of options, since neither the associated company nor the NSE issues options.
The option buyer’s gain is the option seller’s loss and vice versa: any payoff diagram for an option purchase must be the mirror image of the seller’s payoff diagram. Trading in cash market works well ONLY in bull market as price of stock gradually increases, one makes gains after selling the stock at a higher price than cost price. It does not work in bear or sideways market. Options trading is ideal in all market conditions. It can planned to work in bull, bear, or sideways market. There are two types of risk-level in options, one is unlimited risk, and other is limited risk strategy. Writing call or put options has unlimited risk, while buying a call or put has limited risk. Writing a call or put requires huge margin and has unlimited risk and therefore most retail investors chose to stay away from trading options. Most options buyers risk premium and expect huge gain on big movement. Selling naked call or put is very very risky affair and can result in huge loss. Most options buyers are speculators who expect high return at low risk; they make good gain during drastic movement on one side(Eg. Nifty going up/down by 100 to 250 points). Most option traders use options as part of a larger strategy based on a selection of stocks, but because trading options is very different from trading stocks, stock traders should take devote time to understand the options terminology and concepts of options before trading. Option trading can be compared to match-stick fire, if used properly can give you light and brighten your life, if used without proper knowledge can burn one very badly. Options have a great deal of potential, but one should always remember that they are different from stocks. Learning how to use options properly requires effort and dedication; however, once you have a firm grasp of the essentials, you’ll quickly find that options give you more flexibility to tailor the risk and reward of every trade to your individual needs.
😎 Happy trading options!!!
Narendar Rathod, Options strategist, www.assuredgain.com