How to Trade in Options in the Share Market India

Options are derivatives contracts as they derive their value from the underlying stock. This options contract offers the contract holder the right to sell or buy the underlying asset at a fixed period and a fixed time. Traders of investors can trade using the options on the options trading platform with the help of their brokers.

Derivative trading was introduced in India almost 20 years ago, which also included futures and options. The National Stock Exchange offers trading in the options on 9 indices and almost 100+ securities.

Now, to start trading in India's options market, you must be aware of the terms used in the options market. We shall go through them quickly.

Call option contract: in this contract, the holder has the right to buy the underlying asset at a fixed price and time but is not obliged to buy.

Put option contract: In this contract, the holder has the right to sell the underlying stock at a fixed price and specific time but is not obliged to do so.

Strike price: This is the price on which a trader can execute the call or put options. It is also known as the strike price.

Premium: This is the fraction of the amount you need to pay to enter into any contract. If the contract is not executed, the premium paid is not refundable.

Expiry date: This is the date or day when the contract is considered void; it can be weeks, months, or years.

American and European options: the American options are those that can be executed anytime on or before their expiry, whereas the European options are those that can be executed only on their expiry date.

Those mentioned above are the very basic terms that every new investor must know. Let us now see the stepwise procedure on how to trade in options in India.

1. The first thing you will need to start trading in options is a trading account. The trading account should be linked to your bank account. To open your trading account, you will need an Aadhar card, a Pan card, a cancel cheque, proof of income, and any other document asked by your broker. While opening a trading account, you need to select the F&O derivatives.
2. Next is the margin money; you must need an amount that equals the premium paid multiply the contract value. To simplify, you should have at least 1.5 lakhs to 2 lakhs of money to start trading in the options. It also depends on your trading requirements.

3. Selecting the most liquid options for trading. The contract having the strike price closer to the stock's current price is considered the most liquid contract. To select the most liquid option contract, you may use various websites and the Options Trading Calculator for better results.

1. Choose how you would like to trade, from intraday trading, positional trading, or seasonal trading. In intraday trading, you enter and exit the trade on the same day with limited profit. In the other two types, you enter the trade, apply various option trading strategies and make a good profit before exiting the trade.
2. When you have selected the mode or frequency of trading, you must learn options trading strategies to make a profit.

There are various software that can automate your trade and help you generate more profit. But even operating such software requires a basic knowledge of various option trading strategies.

We want to share a few tips before you start your trading in the options. They will save your investment and help you avoid losses due to wrong steps.

Always remember the target price at which you would exit the trade, even if it is in your favor. You must make sure of the exit points in both directions. When the price moves upwards and downwards, you have to exit the trade when that point is hit.

Accept the loss and move forward: imagine a situation in which you are making some loss. Here, do not try to invest more money because by doing so, you will lose more, instead, accept that loss and try to find another better opportunity.

Allocating only 1% of the total capital you have on the single trade. It is known as the one percent rule. So, even if you lose money in that trade, you are still left with the other 99% of your funds to begin. Some new investors make a huge mistake here. When they think they have some capital to invest in, they either invest all or almost 80% of that and recovering that lost amount is very stressful and time-consuming.

Kalpesh is a experience content writer having vast experience in writing articles of various fields like health, finance, education, textile etc.