If you are a new investor, option trading might be daunting. It may appear to be more difficult than traditional asset classes such as stocks, shares, bonds, and mutual funds. However, there are numerous benefits to options trading, and if you go in with some knowledge and awareness, there are chances here that you may want to take advantage of. Furthermore, it might be a useful complement to a well-diversified portfolio.
Before we get into issues like options trading advice, let's first define an option. An option is a type of derivative whose value is determined by the underlying asset. Futures and options are the two types of derivatives. A futures contract grants you the right to purchase or sell a certain asset at a predetermined price at a later date. An option contract grants you the right, but not the duty, to exercise the option.
Why do you need a trading account for derivatives (futures and options)?
You cannot trade derivatives directly unless you create derivatives account with a regulated brokerage. Trading and clearing members of the NSE f&o segment and the BSE derivatives section include seasoned brokerage firms such as Angel One. These members open the door to the exciting world of the derivative market. At the moment, your equities trading account also serves as a futures (and options) trading account.
When the underlying asset class has significant exposure, a derivatives trading account is required to hedge against market volatility. With the aid of a derivatives trading account, you can afford to take measured risks in futures trading because the margins are negligible.
What precisely is a contract for options and futures?
Both futures and options are derivatives of underlying asset classes, however, they are not the same. The first is that an option is a right (rather than a duty) to purchase or sell an underlying asset at predetermined pricing. A futures contract, on the other hand, is an agreement between buyers and sellers to execute the deal at predetermined prices on a mutually agreed-upon date.
Futures trading example
For example, you use your futures account to purchase one-month equity contracts of ABC Company for Rs.400 per share. If the share price rises to Rs. 450 on the contract's expiry date, you will make a good profit.
How do you trade options in India?
You can take the plunge even if you have no knowledge of how to trade options. Derivatives, such as options and futures, were first introduced in Indian stock markets approximately 20 years ago. The National Stock Exchange trades futures and options contracts on nine key indexes and more than 100 equities.
Options can be traded through your broker or through your trading site or app. However, there may be extra financial restrictions for trading options, such as a minimum income. You will be required to supply extra information such as income tax records, salary slips, and bank account statements.
When you know how to trade options, there are complex options trading techniques in India that you may use to maximize profits, such as a straddle, strangle, butterfly, and collar. Brokerages such as Angel One provide option trading services, which you may use to your advantage.