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Futures & Options Trading
why trade in Futures & Options?
Lowest Capital RequirementStart your trading journey in index options with a margin as low as ₹500..
Suitable across market conditionsTune-in with the markets to profit from price fluctuations.
Higher returns on capital through leverageAmplify your potential to profit by utilizing margin trading facility.
Multiple trading opportunitiesTrade across options contracts of multiple financial assets and find your spot to profit.
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What is F&O (Futures and Options) Trading?
“Derivatives” mean a contract which does not have a value of its own but whose value is derived from price movements of underlying assets like stocks. Derivatives trading is a vital part of the financial markets, serving as a means of managing risk through hedging and encouraging trading by speculating on asset price movements. Derivatives contracts involve a buyer (long) and a seller (short) who agree to buy or sell an underlying asset at a predetermined price on a future date. Derivatives trading began with farmers selling the rights to their future crop at an agreed-upon price to hedge against price movements. Derivatives trading, in the stock market in India, began in the early 2000s with the introduction of index futures and options on two stock exchanges, NSE and BSE.
Commonly used derivatives for trading are - Futures and Options (F&O), which are similar in nature with a minute difference. Futures contract obligates both parties to fulfill the contract, which means the buyer of the future contract has to compulsorily buy the underlying asset and the seller has to sell it compulsorily at the agreed price on an agreed expiry date. On the other hand, an options contract gives the buyer the right but not the obligation to fulfill the contract, which means he can either choose to execute the contract (Buy or sell) or not. But, in options contracts, the seller is obligated to fulfill his contract, meaning he has to compulsorily buy or sell the underlying asset at an agreed price, given the buyer chooses to do so. This limits the risk for Options buyers, which is the reason why Options Trading has become a popular choice in recent times.
All F&O contracts have specific expiry dates, which is the day when the contract ceases to exist and traders must either settle the contract by buying or selling the underlying asset or through cash settlement.
What Are the Key Risks and Rewards Of F&O Trading?
For traders desiring to trade in the derivatives market, it is necessary to learn the key technical analysis and have an expert by your side, to guide you to choose the right strikes and provide you with detailed insights on the target, and its stop loss. Beginner traders are advised to trade in lower volumes as the risk associated with trading in F&O increases with the volume.
Let’s learn in detail what are these risks and rewards associated with trading in F&O and how can one manage to limit losses using some smart trading strategies -
Rewards of trading in F&O
Leverage
Trading in F&O allows investors to own larger positions with a relatively small amount of capital, leveraging their potential profits. Let’s understand the concept of leverage through an example.
Suppose you are interested in trading options on a stock, let's say a company's stock 'ABC Ltd.' is currently trading at ₹2,000 per share. You have a bullish outlook on ABC Ltd. and believe the stock price will rise to Rs. 2,200. If you want to buy 250 shares of ABC Ltd. at ₹2,000 per share, it would cost you ₹5,00,000.
Alternatively, you could buy a Call Option for ABC Ltd. with a strike price of ₹2,000. Let's assume the premium for the call option with a strike price of Rs. 2,000 is ₹50 and the lot size is 250 units. In this case, the total premium for the Call Option would be ₹12,500 (₹50 x 250). Leverage comes into play when comparing the initial investment in stock purchase versus the premium paid for the call option contract:
Suppose the stock moves up by 10% as you predicted i.e 200 points. In this case, on stock purchase of ₹5,00,000 you will incur a profit of ₹50,000, which is 10% of your capital investment. But, if you had bought the call option of Rs. 2000 strike, it would be worth at least Rs. 200 at the time of expiry. This means you would make a profit of Rs. 150 on 1 Call Option (200-50) and Rs. 37,500 on 1 lot of call options (150 * 250 lot size). On a total investment of Rs. 12,500 to buy the call, you would make a profit of Rs. 37,500 i.e. 300% by trading in Call Option rather than trading the stock in cash.
Hedging
Derivatives in the stock market can be used for risk management. Traders can use derivatives to hedge against adverse price movements in underlying assets, reducing potential losses. Hedging is a risk management strategy that allows traders and investors to protect their positions from potential losses. In the context of trading options, let's explore how hedging works with an example:
Suppose you own 1,000 shares of 'XYZ Ltd.,' at a purchase price of Rs. 1000 and you are concerned that the stock's price may decline to Rs. 900 shortly. To protect your investment from potential losses, you decide to hedge your position using options.
To hedge your losses in the stock price, you can purchase put options on XYZ Ltd. with a strike price of ₹1,000. Assuming that the lot size for the put option contract is 50 shares, and the premium for one contract is ₹20. You decide to buy 20 put option contracts, which will cover your entire stock position (20*50 = 1000 units).
Total premium for put option contract: ₹20,000 (20 premium amount * 50 shares per contract * 20 contracts)
Now, let's consider how this hedging strategy works:
Let’s assume the price of XYZ Ltd. stock declines by 100 rupees and the value of your stock position decreases from 10,00,000 to 9,00,000. Here, you incurred a loss of 1,00,000 on your stock positions.
However, the put options you purchased will increase the same points in value as the stock price falls. This increase in put option value will offset the losses in your stock position. With the stock price at ₹900, each put option contract would be worth ₹100 (₹1,000 - ₹900), and the total value of the 20 contracts would be ₹1,00,000 (20 contracts * 50 shares per contracts * 100 premium price) yielding a profit of Rs. 80,000 (100000-20000). This gain from the put options would offset a portion of the loss in your stock position and thereby help you reduce your losses.
Diversification
Financial derivatives provide access to a wide range of asset classes, including equities, commodities, currencies, and interest rates, allowing traders to diversify their portfolios and manage risk.
Speculative Opportunities
F&O trading in the share market offers opportunities for traders to profit from both rising and declining markets, making it versatile for various market conditions.
Liquidity
Derivatives markets, including F&O, are generally highly liquid, making it easier to enter and exit positions without significant price slippage.
Risks of trading in F&O
Time Decoy
Options contracts have an expiration date, and their value erodes as the expiration date approaches. Traders may lose money due to time decay if their option position doesn't move in the expected direction
Volatility
F&O markets can be highly volatile, leading to rapid price swings. This can result in unexpected losses for traders.
Margin Calls
Trading on margin means traders can be required to deposit additional funds if the market moves against their positions. Failure to meet margin calls can result in forced liquidation of positions.
How To Trade In Futures and Options?
To start trading in F&O you need to understand the basics of how Futures and Options contracts work and how you can profit from price movements of the underlying assets. Let’s learn with an example of Nifty.
Long Position (Buyer): The long position holder agrees to buy the Nifty 50 index futures contract at a future date and a predetermined price. This position benefits from a rising index value.
Short Position (Seller): The short position holder agrees to sell the Nifty 50 index futures contract at a future date and a predetermined price. This position benefits from a falling index value.
Suppose you are a trader interested in trading Nifty 50 futures:
You believe that the Nifty 50 index, currently trading at 19,000, will rise in the coming month.
You go long by buying one Nifty 50 futures contract expiring in one month at a price of 19,200.
Over the month, if the Nifty 50 index rises to 19,500, you make a profit of (19,500 - 19,200) * 50 = ₹15,000.
Futures trading can be profitable, but it also involves substantial risk, as gains and losses are amplified due to leverage. It's important for traders to have a good understanding of the market and risk management strategies when participating in futures trading.
What Are Common Strategies for Successful Derivatives Trading?
Some of the commonly used futures trading strategies are Long futures, Short futures, Pair Trading, Arbitrage Trading, Spread Trading, hedging etc. Some of the commonly used Options trading strategies are Covered call, protective put, Straddle, Strangle, iron Condor etc.
Let us delve deeper into each strategy and understand the rationale behind each:
Long Futures
Long futures, often referred to as Buying Futures, is a strategy that yields profits when the price of an underlying asset is expected to move up. E.g. If you buy a future contract of a stock A at say Rs. 150 with a lot size of 2000 units and now the stock moves to Rs. 160 by the expiry date, you make a profit of Rs. 10 per lot i.e. Rs. 20000 on your futures position. (Rs. 10*2000 units). On the other hand, if the price of the stock moves lower to Rs. 145, you make a loss of Rs. 5 per lot. i.e. Rs. 10,000 on your position.
Short Futures
Short futures, often referred to as Selling Futures, is a strategy that yields profits when the price of an underlying asset is expected to move down. E.g. If you sell a future contract of a stock A at say Rs. 150 with a lot size of 2000 units and now the stock moves to Rs. 140 by the expiry date, you make a profit of Rs. 10 per lot i.e. Rs. 20000 on your futures position. (Rs. 10*2000 units). On the other hand, if the price of the stock moves higher to Rs. 155, you make a loss of Rs. 5 per lot. i.e. Rs. 10,000 on your position.
As can be seen from above examples, by buying and selling futures without having the ownership of an underlying asset, traders speculate on the price movement of the underlying asset to profit from it.
Hedging
Traders who already hold positions either through delivery of stocks or by the way of physical ownership of commodities, often hedge their positions against price volatility by either buying or selling futures. E.g. If a trader owns 2000 units of Stock A currently trading at Rs. 150 and is expecting price volatility due to an external event such as quarterly results, he/she can choose to hedge position by selling a future contract say at Rs. 155 which obligates him to sell his position to the futures buyer at a pre-agreed rate of Rs. 155 on the expiry day, irrespective of the spot price of stock A post the results – thereby locking profits of Rs. 5 per unit.
Arbiitrage
Arbitrage is a strategy that exploits price differences between related assets or markets or even expiry dates. Traders buy low in one market and sell high in another to make risk-free profits. At times, traders also resort to time arbitrage i.e. if the future of a further month trades at a lower price than the future of the current month, the traders can buy the further month future and sell the current month future to profit from time arbitrage.
Spread trading
Spread trading involves taking simultaneous long and short positions on related contracts. Traders aim to capitalize on price differentials between these contracts, reducing risk exposure.
Pairs trading
Pairs trading involves taking both long and short positions on two related assets. Traders aim to profit from the relative price changes between these assets, regardless of the broader market's direction.
Options trading
Some of the commonly used options strategies are covered call, protective put, long strangle, long straddle, iron condor and many more. Trading in options through strategies involves a deeper understanding of multiple parameters like the market volatility, events affecting the stock price and most importantly the time decay in underlying options.
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F&O Trading FAQs
Can I trade in F&O directly if I have a DEMAT Account?
How do I activate F&O segment in my Demat Account?
What are Options?
What is the margin required to trade in options?
What is a Call option?
What is a Put Option?
How to select the right strike for trading options?
Can I trade in F&O for Sensex and Bankex?
Can I trade in F&O on intraday basis?
What is the square off time for intraday F&O trades?
What does OI mean?
What are the charges for trading in F&O?
The charges involved for trading in F&O are as follows:-
Futures Trading - 0.02% on buy and sell
Options Trading - ₹20/Lot
What is a futures contract?
What is the margin required to trade in Nifty futures?
What is the margin required to trade in futures?
What are derivatives?
Derivatives are trading contracts in the Indian Stock Market. The contracts are named ‘derivatives’ because these contracts don’t have any value of their own, but the value is derived based on its underlying asset. Underlying assets can be stocks (Reliance, HDFC, ICICI, TCS, etc.), indices (NIFTY, SENSEX, NIFTY BANK, etc.), commodities (Gold, Silver, Steel, etc.). Derivatives are popular trading contracts because they allow traders to speculate or hedge against price movements without owning the underlying asset. There are four main types of Derivatives contracts
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Forward Contracts - A private, customizable contract between two parties to buy or sell an asset at a specified future date at a pre-agreed price.
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Futures Contracts - A standardized contract traded on a stock exchange to buy or sell an asset at a future date for a predetermined price.
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Options Contracts - A contract that gives the holder the right, but not the obligation, to buy (Call) or sell (Put) the underlying asset at a specified price before or on the expiry date.
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Swaps Contracts - A customized contract where two parties exchange cash flows or financial instruments. These are typically used to hedge interest rate or currency risks.
What are Futures?
Futures are derivative contracts traded in the Indian stock market. In a futures contract, both the buyer and the seller are legally obligated to execute the trade on the expiry date at a pre-agreed price—regardless of the asset’s market price at that time. This means the buyer must buy and the seller must sell the asset as per the contract terms.
Futures contracts are marked to market daily, meaning profit and losses are settled at the end of each trading day. These contracts are actively traded on exchanges like NSE, BSE, MCX, and NCDEX.
What are Options?
Options contracts are settled daily and traded on recognized stock exchanges like NSE and BSE. They are commonly used in options trading for hedging, speculation, and managing risk.
What are different types of Options?
There are two different types of Options contracts to trade in -
Call Option - A Call Options Contract gives the buyer the right to sell the contract at a fixed price on or before the expiry. Note that in a Call Option - the buyer has an ‘option’ to buy the asset but not an obligation or compulsion.
For example -
You are interested in trading Stock Options for Reliance Industries Ltd.
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Current stock price: ₹1,450
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Based on your research, you believe the stock will rise to ₹1,550 in the near term
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You buy a Call Option contract of 100 units at a strike price of ₹1,450
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Premium paid: ₹50 per unit
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Total cost (premium): ₹50 × 100 = ₹5,000
Scenario 1: Stock Price Rises
If Reliance’s stock price rises to ₹1,550:
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The intrinsic value of your option becomes ₹100 (₹1,550 - ₹1,450)
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You paid ₹50, but your option is now worth ₹100
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Profit per share = ₹100 - ₹50 = ₹50
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Total profit = ₹50 × 100 = ₹5,000 (a 100% return on your investment)
You can choose to sell the option before expiry and book the profits.
Scenario 2: Stock Price Falls
If Reliance’s stock price drops to ₹1,400:
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Your Call Option has no intrinsic value, as it is out of the money
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You may choose not to exercise the option
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In this case, your maximum loss is limited to the premium paid: ₹5,000
In summary
Call Option benefits traders from a rise in stock price. Trading options have unlimited upside potential, whereas the downside risk is limited to the premium paid. Options Trading is ideal for seasonal traders expecting a price increase in the underlying asset
Put Option - A Put Option contract gives the buyer the right to sell the underlying asset at a fixed strike price, on or before the expiry date. Note: In a Put Option, the buyer has the option to sell, but is not obligated to do so.
For example -
You are interested in trading Stock Options for TCS Ltd.
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Current stock price: ₹3,000
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Based on your research, you believe the stock will fall to ₹2,900 in the near term
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You buy a Put Option contract of 100 units at a strike price of ₹3,000
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Premium paid: ₹40 per unit
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Total cost (premium): ₹40 × 100 = ₹4,000
Scenario 1: Stock Price Falls
If TCS’s stock price drops to ₹2,900:
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The intrinsic value of your option becomes ₹100 (₹3,000 - ₹2,900)
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You paid ₹40, but your option is now worth ₹100
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Profit per share = ₹100 - ₹40 = ₹60
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Total profit = ₹60 × 100 = ₹6,000
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You can choose to sell the option before expiry and book the profits.
Scenario 2: Stock Price Rises
If TCS’s stock price increases to ₹3,100:
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Your Put Option has no intrinsic value, as it is out of the money
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You may choose not to exercise the option
Your maximum loss is limited to the premium paid: ₹4,000
What is the strike price of an Options Contract?
What is the Expiration Date in an Options Contract?
How is the premium of an Options Contract calculated?
The premium of an options contract is the price an option buyer pays to an option seller (writer) for the right granted by the contract. This premium is not a fixed value; it's dynamically determined by several factors in the market and is influenced by complex pricing models.
Here's a breakdown of how it's calculated and the key factors that affect it:
Option Premium = Intrinsic Value + Extrinsic Value (Time Value)
Let's look at each component and the underlying factors:
- Intrinsic Value
The intrinsic value is the immediate profit you would make if you exercised the option right now. It's the "in-the-money" portion of the option.
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For a Call Option:
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- Intrinsic Value = (Current Underlying Asset Price - Strike Price)
- If the result is negative or zero, the intrinsic value is 0. (An Out-of-the-Money or At-the-Money call option has no intrinsic value).
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For a Put Option:
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- Intrinsic Value = (Strike Price - Current Underlying Asset Price)
- If the result is negative or zero, the intrinsic value is 0. (An Out-of-the-Money or At-the-Money put option has no intrinsic value).
Example:
- If a stock is trading at ₹500, and you have a Call option with a strike price of ₹480:
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- Intrinsic Value = ₹500 - ₹480 = ₹20
- If the same stock is trading at ₹500, and you have a Put option with a strike price of ₹520:
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- Intrinsic Value = ₹520 - ₹500 = ₹20
2. Extrinsic Value (Time Value)
The extrinsic value, often called time value, is the portion of the option premium that exceeds its intrinsic value. It's the value that investors are willing to pay for the chance that the option will become profitable (or more profitable) before it expires. It decays as the option approaches its expiration date.
Extrinsic Value = Total Option Premium - Intrinsic Value
Several factors primarily influence the extrinsic value:
- Time to Expiration:
Longer time to expiry = Higher time value (and thus higher premium). This is because there's more time for the underlying asset's price to move favorably, increasing the probability of the option ending up in-the-money.
As an option gets closer to its expiration date, its time value erodes, a phenomenon known as time decay (Theta). On the expiry day, the time value becomes zero.
- Implied Volatility (IV):
Higher implied volatility = Higher time value (and thus higher premium). Implied volatility reflects the market's expectation of future price swings in the underlying asset. If the market anticipates larger price movements (up or down), the probability of the option becoming profitable increases, making it more valuable.
High IV suggests greater uncertainty and potential for significant moves, which benefits option buyers. Low IV suggests stability.
- Interest Rates:
Higher interest rates tend to increase call option premiums and decrease put option premiums. This is due to the "cost of carry." For a call option, higher interest rates reduce the present value of the strike price, making the right to buy at that price more valuable. For a put option, the effect is generally opposite. (The impact of interest rates is usually subtle compared to time and volatility).
- Dividends (for Stock Options):
Higher expected dividends tend to decrease call option premiums and increase put option premiums. When a stock pays a dividend, its price typically drops by the dividend amount on the ex-dividend date. This price drop is unfavorable for call options (which profit from rising prices) and favorable for put options (which profit from falling prices).
- Underlying Asset Price (in relation to Strike Price):
While the "in-the-money" status determines intrinsic value, the proximity of the underlying price to the strike price also influences time value. Options at-the-money (ATM) typically have the highest time value because they have the greatest potential to move into profit with relatively small price movements. Out-of-the-money (OTM) options have lower premiums, consisting entirely of time value.
What are Index Options?
What are American Options and European Options?
How do I buy Options?
To buy Options contracts - you must have a trading account with a broker who is a registered member of the leading exchanges (NSE, BSE, MCX, NCDEX). Brokers - such as Motilal Oswal Financial Services Ltd offer mobile and web-based applications that support trading in Options. Through Riise - Motilal Oswal’s online mobile trading app - you can get detailed summary and ready-made expert curated strategies to trade in Options. To trade in Options through RIISE - you will have to follow the below given steps:
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Open a Demat Accountwith Motilal Oswal
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Login through Mobile/Web
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From the Toolbar located at the top, select “F&O”
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Search for the stocks, index options you wish to buy Options
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Click on the stock, index
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Click on “Options” button
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From the dropdown list - select the expiry date of the contract
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From the dropdown list - select the strike price
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Select Call/Put option of contract
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Select BUY
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Choose your trade as Intraday or Carryforward
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Add the number of Lots you want to buy
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Select your order type from the given options
Click on BUY
What are Naked and Covered Options?
A covered option is an option contract that you sell (write) while already owning the corresponding amount of the underlying asset. This ownership acts as a "cover" or protection against the obligation of the option. This strategy is significantly less risky than selling naked options because your potential loss is limited by your ownership of the underlying asset.
What are In-The-Money (ITM), At-The-Money (ATM), and Out-Of-The-Money (OTM) in Options?
In the Money (ITM) Call: A call option is In the Money when the stock’s market price is higher than the strike price. Exercising it lets you buy the shares for less than they’re trading, so you gain the difference.
For example:
Strike price for Reliance Industries: ₹1,500
Current market price: ₹1,550
Because ₹1,5500 < ₹1,500, the call is OTM by ₹50. If you exercise now, you could buy at ₹1,500 and sell immediately at ₹1,550, earning ₹50 profit per share.
At the Money (ATM) Call: A call option is at the money when the stock’s market price is essentially the same as the strike price. Exercising it right now neither and nor costs you anything on the share price—you break even before considering the premium.
For example:
Strike price for Reliance Industries: ₹1,500
Current market price: ₹1,550
Because the market price matches the strike price, the option is ATM. If you bought the shares at ₹1,500 through the option and could immediately sell them for about ₹1,500, you’d have ₹0 profit per share.
Your only out-of-pocket cost in this situation is the premium you paid for the option, so you’re down by that amount unless the price moves in your favor before expiry.
Out of the Money (OTM) Call: A call option is Out of the Money when the market price of the stock is below the strike price. Exercising it would cost you money instead of saving you money, so you’d lose.
For example-
Strike price for Reliance Industries: ₹1,500
Current market price: ₹1,300
Because ₹1,300 < ₹1,500, the call is OTM by ₹200. If you chose to buy the shares at ₹1,500 at current price, you would pay ₹200 more than the market price, plus you’d also be out the premium you paid for the option.
How do I use Call and/or Put Option?
You should buy a Call Option when you expect the price of a stock or index to rise. This strategy is suitable if you're bullish on the market but want to limit your risk. For example, if Reliance is trading at ₹1,450 and you expect it to move to ₹1,500, buying a call option with a ₹1,500 strike price can help you benefit from the upward move without buying the stock outright.
On the other hand, you should buy a Put Option when you expect the price of a stock or index to fall. This is a good choice if you're bearish and want to profit from a decline without short-selling. For instance, if the Nifty index is at 25,000 and you anticipate a drop to 24,500, buying a put option within the range of 24,800 - 24,500 strike price can help you gain from the downward trend
What is the difference between trading stocks and options?
Trading options means buying or selling contracts based on stocks, offering higher leverage with lower upfront cost but higher risk due to time limits and complexity..
Which are the Options trading exchanges in India?
In India, Options trading is available on four major exchanges:
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NSE (National Stock Exchange): Offers options on stocks, indices, currencies, and interest rates.
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BSE (Bombay Stock Exchange): Offers options on stocks, indices, and currencies.
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MCX (Multi Commodity Exchange): Offers options on commodity futures like gold, silver, and crude oil.
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NCDEX (National Commodity & Derivatives Exchange): Specializes in options on agricultural commodity futures like chana and mustard seed.
What are the benefits of trading in Options?
The benefits of trading in options are:-
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Low Capital Requirement: Control large positions by paying only the premium, not the full stock price.
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Limited Risk: Maximum loss is limited to the premium paid (in buying options).
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High Leverage: Small price moves can lead to significant returns.
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Profit in Any Market Direction: Use calls in rising markets, puts in falling markets, and strategies for sideways markets.
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Hedging Tool: Protect your portfolio against losses using options as insurance.
What are Long Dated Options?
What is the difference between Options and Futures?
Whereas, for Options trading - a buyer has the right but is not obligated to honour the contract at expiry, i.e - the buyer can either buy or let the contract expire. Therefore, the margin required is comparatively low with unlimited potential for upside with limited risks to premium paid.
How are Futures Contracts settled?
Do I have to pay the Initial Margin and Mark-to-Market Margin to the broker?
The Initial Margin is a mandatory upfront deposit that acts as a security to cover potential losses. It is calculated based on the volatility and risk of the contract and must be maintained throughout the trade.
The Mark-to-Market Margin is settled daily. If the price of your futures position moves against you, the loss is deducted from your account, and you may be required to top up your margin. Conversely, if the price moves in your favor, you receive a daily credit.
Both margins are collected by the broker and passed on to the exchange to ensure smooth and secure trading.