How to Trade Options In India? Step-by-Step Guide! |

By Trader Pit

July 7, 2021


In this article, I will share you with the basic steps involved in trading options in India.

How to Trade options in India? Traderspit is a free research blog that provides step-by-step guidance on trading options, stock trading and technical analysis from beginner to advanced levels. We have a lot of options traders and option traders who want to learn how to trade options in India.

The world of Forex trading has been around for years and years, but the options market is relatively new. In the past few years, the numbers of people who have gained a fair bit of success in the world of Forex trading through options trading has increased. There are many options traders who have made a decent enough living through their trading with options in the past few years.

A beginner’s guide to options trading in India: Options trading has become very popular in India in recent times. The pandemic has allowed many new and existing traders to understand and learn this new trading profession (options trading).

However, since the skills and steps required to trade options are not taught in schools or academic institutions, it is difficult for most beginners to learn to trade options in India. So today we are going to explain the step by step process of trading options in India in the simplest terms. Let’s get started.

Overview of option trading

The most common concept that most of you may have heard about options trading is the power of leverage.

Leverage in terms of options trading simply means the ability to trade with more power than the direct cost of the transaction allows. Let’s take a simple example from everyday life.

Suppose Ram has a wedding in his house in two months and he needs 100 grams of gold. The current price of 10 grams of gold is Rs. 50,000. However, Aries is a bit skeptical given the volatility of the market and wants to lock in the current gold price to buy in two months. Therefore, to freeze the price of gold, he goes to a jewelry store and makes his offer to buy gold at the current price two months in advance.

But given the current volatility, the jewelry store owner is a bit skeptical about the risk of locking in gold prices. To boost the jeweller’s business, Ram pays him a token amount (say Rs. 2000 per 10 grams of gold) to fix the gold price. Thus, the total amount paid by Ram to enter into a contract with the jewellery shop owner is Rs. 20,000.

Assuming the gold price at maturity (i.e. after two months) is more than Rs 50,000 (per 10 grams), Ram exercises his right to buy gold for one rupee. 50,000. However, if the price of gold remains unchanged or falls after two months, Aries shall not be bound by the agreement. He will only lose the protection money (Rs 20,000) he paid for the deal. And this becomes the income of the owner of the jewelry store.

For example, if the price of gold rises to Rs 57,000 per 10 grams, Rama’s total profit will…

= Total amount of gold * (price in two months – current price – premium paid) = 10*10*(57,000-50,000-2,000) = Rupees. 50,000.

If I relate this example to options, Aries is the buyer of the option, the jeweler is the seller of the option, gold is the underlying asset, the current gold price is the strike price, and the token money paid is the option premium.

A similar scenario applies to the stock market. In this case, if the buyer of an option believes that the price of the stock may rise in the future (based on analysis or research), he can pay a premium to the writer of the option to enter into a contract to buy the stock at a predetermined value. Moreover, the premium paid may be an expense, but if the share price far exceeds the pre-agreed price, the buyer of the option makes a profit.

Basic definition of options trading

In financial terms, an option is a derivative that gives the buyer of an option the right to buy the underlying asset at a predetermined price from the seller of the option on or before the expiration date.

However, the buyer of an option is not obliged to comply with the terms of the contract on the expiry date. He has the right to buy the property if he wants to. However, if he does not want to buy (if the current price is lower than the previously agreed value), he simply loses the prepaid premium.

However, the writer of the option is bound by the terms of the contract because he took the premium at the beginning of the contract. And the seller of the option is compensated by this commission (or premium) for giving up his right to the underlying asset before the contract expires.

Also read : Options trading 101 : The big cat of the trade!

How to trade options in India

Now that you understand the basics of options trading, we will explain how to trade options in India.  For reference and explanation in this article, I will use the Zerodha (Kite) trading portal as it is the most widely used trading platform in India. Below is a step-by-step guide on how to trade options in India.

Step one: You must have a trading account with one of the brokers (e.g. Zerodha, Angel broking, 5Paisa, etc.). If you don’t have one, here’s an article on the best discount brokers in India so you can choose the one that suits you best. The steps involved in options trading in India are pretty much the same regardless of the trading platform chosen.

Step two: To trade options, we need a margin. The margin requirement varies according to the position held by the investor. The option buyer needs margin to pay the premium needed to trade the options. The option writer needs margin because he has to deposit a certain amount with the brokers for the Marked to Market (M2M).

Step three: Next, we need to understand how we value the underlying asset. If we have a bullish view, we can buy a call (or sell a put), and if we have a bearish view, we can express the same by buying a put (or selling a call).

Buying a call option gives us the right to buy the underlying asset on or before the expiration date. And buying a put option gives us the right to sell the underlying asset on or before the expiration date.

Step four: Select the underlying asset you wish to trade and also select the different strike prices you wish to trade at. For example, here is a screenshot of Zerodha Kite where you can select the assets and the strike price.

Let’s say we want to trade a Nifty 50 contract through an option and we have a rising position in the market. So we can trade in an in-currency call option (Nifty 11450 EC), an in-currency call option (Nifty 11500 EC) or an out-of-currency call option.

An in-the-money option is one that will produce a profit if we exercise it now at the current spot level. An out-of-the-money option is one that would be worthless if it expired now, while an in-the-money option is one whose strike price is closest to the current spot price level.

It is advisable not to go out of the money when buying an option, as the chances of being in the money when the option expires are very low and the option usually expires in vain.

Step 5: Suppose we decide to buy an at-the-money option. The next step in the process is to place an order to buy the option. We can choose to buy an option at an existing price or place an order at a specific price by placing a limit order.

So if you look at the ticket in the image above, we have two ways to buy the contract, i.e. the market or the limit.

If we choose the Market Order option, the order will be executed at the current market price. And if we choose the limit order, we can choose the price at which we want to buy the contact. In the image above, the current strike price of the 11500 call contract is 90.65, but the price at which we want to buy the contract is 80.

The total number of shares in a Nifty contract is 75. If the option premium is 60, then the total premium needed to buy the contract = 75*60 = 4,500. And this information is readily available on the ticket presented above.

Step six: The next step in options trading is to check the order book to see if an order has been placed.  We can easily do this by going to the Orders tab and seeing a list of all orders that have been placed, cancelled or executed.

 

Short note
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Seventh step: The last, but most important step in options trading is to check your current position in the market. It is advisable to always have a stop loss for every trade, as it helps us to manage our risk correctly and prolong our trading career.

That’s it. You can see how options are traded in India here. If you are still in doubt, I also recommend you to watch the following video on options trading with Zerodha Kite Demo. This video will help you master the steps involved in options trading in India. Pay attention now!

Final thoughts

In this article we have provided a step by step guide on how to trade options in India. These are the main points you should remember from this article:

  • Options are derivative instruments whose value depends on the value of the underlying asset.
  • Call options give us the right to buy the underlying asset at maturity. Put options, on the other hand, give us the right to sell the underlying asset at maturity.
  • Bullish views can be expressed by buying a call or selling a put.
  • Bearish views can be expressed by buying a put or selling a call.
  • You can use the Zerodha platform for options trading because it is very user-friendly and delays in order execution are rare.

If you have any doubts about options trading in India, feel free to leave a comment below. If you have any questions, please do not hesitate to contact me. Have a nice day and good trade!

Hitesh Singhi is an active derivatives trader with over 10 years of experience in trading futures and options on Indian equities and international energy commodities like Brent, WTI, RBOB, gasoline etc. He has traded on BSE, NSE, ICE and NYMEX. Hitesh’s credits include a degree in business management and an MBA in finance. Follow Hitesh here on Twitter!If you want to trade options in India, but aren’t sure where to start, you’ve come to the right place. You’ll find a lot of people who claim they can teach you how to trade options in India, but they all want to charge you an arm and a leg for the privilege. I personally know of no one who can teach you how to trade options in India, and I want to give you the tools to learn it yourself, for free.. Read more about how to trade in options in zerodha and let us know what you think.

Frequently Asked Questions

How much money do you need for options trading in India?

The amount of money needed for options trading in India depends on the type of options trading. If you are looking to trade options on a stock, the amount of money needed for options trading in India is $10,000. If you are looking to trade options on a stock index, the amount of money needed for options trading in India is $10,000. If you are looking to trade options on a commodity, the amount of money needed for options trading in India is $10,000. If you are looking to trade options on a currency, the amount of money needed for options trading in India is $10,000. If you are looking to trade options on a bond, the amount of money needed for options trading in India is $10,000. If you are looking to trade options on a futures contract, the amount of money needed for options trading in India is $10,000.

What are the steps to trading options?

The steps to trading options are as follows: 1. Determine the expiration date of the option. 2. Determine the strike price of the option. 3. Determine the premium of the option. 4. Determine the amount of the premium. 5. Determine the amount of the option. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. Determine the amount of the

How do you successfully trade options for beginners?

To trade options successfully for beginners, you need to know the basics of options trading. Options are a type of derivative that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a certain price on or before a certain date. Options are traded in the form of contracts, which are standardized agreements between two parties that specify the terms of the trade. Options are traded on the Chicago Board Options Exchange (CBOE) and the International Securities Exchange (ISE). The buyer of an option pays a premium to the seller, who is known as the option writer, in exchange for the right to buy or sell the underlying asset at a certain price on or before a certain date. The buyer of an option has the right, but not the obligation, to enter the trade. The option writer has the obligation to fulfill the terms of the contract. The buyer of an option pays a premium in return for the right to buy or sell the underlying asset at a certain price on or before a certain date.

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About the author

Trader Pit

A yogi who like Finance and Technology. I have been in Indian Stock market for over 12 years now as financial analyst, portfolio manager, trader. Now, I focus on Yoga, Financial Education & Long term investing. 

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