InvestorQ : What are some of the advantages of trading in stock and index options in the Indian context?
Sam Eswaran made post

What are some of the advantages of trading in stock and index options in the Indian context?

swati Bakhda answered.
4 years ago

Option trading has picked up in a big way in India and they offer some unique advantages. Here are a few of them captured.

a) Options give you a wide choice. You are not restricted only to stocks but you can also play on sectoral indices like Bank Nifty and general indices like the Nifty. You can either bet on specific stories or on the macro market or trend as a whole.

b) As an options trader, you can make your bet for or against a stock. They are also used popularly for hedging. Buying put options limits your potential losses to the amount of premium paid on the option. On the other hand, if you short sell in cash or sell in futures, your risk is unlimited if the stock price movement goes against you.

c) Option trading is a proxy for margin fund; here is how. If you to borrow and invest, the lender can impose a lot of caveats. Simpler way is to go to the options market and buy options. It is like leverage. By buying options instead of the underlying stock, the trader can generate almost the same amount of profit over time with a much smaller up-front investment and limited risk.

d) Option trading is not just about trading price but also about volatility. How to play increase of decrease in volatility if you are not sure of the direction? Options can help. Both calls and puts gain value if volatility is increasing and lose value when the volatility is falling. Options can also be used to set up complex volatility- and time-sensitive trades.

e) One advantage of options is the unique nature. Stocks are discrete as are futures. They essentially give the trader only two choices: buy or sell. By buying and selling a combination of different puts and calls at different strike prices and expiration dates, options traders create sophisticated strategies like straddles and strangles, as well as spreads with limited risk.

f) Finally, don’t forget the most important purpose of options which is to hedge your risk. If you are long on a stock and are worried it could move down sharply before bouncing back; just attach a put option to the stock and leave it. What you lose on the stock will be compensated by the put. On the upside your profits are unlimited once the option cost is covered. That is what makes options trading so unique; and profitable.