So you have made up your mind to do options trading? The world of options is exciting and number of options traders are increasing every year in the Indian market. But how to do option trading, and where should one start from? To learn this you have landed in the right place. In this article, we will provide you with a step-by-step approach to begin your options trading journey.
But before moving ahead, it is important to check who can do options trading in India. For example, if you do a government job then it is important to check can government employees do trading as it is one of the speculation.
So, as per the rules a government employed person is not allowed to trade but can do investment like mutual funds, long term investment in the stock market.
Now, coming back to the main topic, how to do options trading in India, here is the step by step guide.
How to do Option Trading India?
In the last few years, there is a tremendous increase in the number of options traders in India. As per the latest SEBI data the average number of individual traders trading in F&O segments has risen to 45.2 lakh in FY22 which was only around 7.1 lakh in the year 2019.
This means that there is an increase of 500% in the number of F&O traders as compared to past years.
But do you know how many of them are actually making a profit in the trade?
Out of these active traders, only 11% are able to make a profit. So is option trading gambling and leads to more losses than profit.
Well, this is not actually true. The main reason behind losses is a lack of knowledge and understanding. Moreover, most of the option traders don’t even know the basics and the way to do option trading in India.
So, if you are looking forward to begin the journey and to learn options trading in India, here is a guide for you.
Step 1 – Educate and Read about Options trading
It’s not a good idea to jump directly into trading such as Options. So it is always better to invest your time in education first and then start when you feel confident about the concepts, terminologies, and strategies.
There are multiple educational resources like stock market courses available on the internet that can help you in clearing the basics of Options trading. Additionally, consider attending seminars, webinars, or workshops by reputable financial institutions or trading professionals.
You can also gain knowledge by referring to some of the best books on option trading.
Step 2 – Open a Trading Account
Now that you know what options trading is, you have to open a trading account to get started. You can choose a reliable brokerage firm that offers options trading. For example, in India, we have Angel One, Motilal Oswal, Sharekhan, etc. as popular brokers.
While you are picking your broker, look for a broker that provides:
- User-friendly Platform with an advanced option chain.
- Competitive Pricing
- Robust Customer Support, and
- Wide Range of Trading Tools
To complete the account opening process, you have to submit necessary documents like Identity Proof, Address Proof & PAN Card Copy, and fulfill regulatory requirements. Along with this, you need to activate the option trading segments by submitting some additional documents like income proof.
Step 3 – Choose the Option Contract
One can trade options in the index or in stocks. However, there are thousands of companies listed in the share market, but when it comes to the derivatives segment there are only a few hundred stock options.
You can choose to trade in an index option or stock option by comparing risk and reward. For example, talking about Nifty 50, its performance depends upon the 50 companies listed under Nifty. Due to a diversified portfolio, there is a limited impact on the underlying value of the index.
On the other hand, stock options value completely depends upon the individual company and hence gets impacted by any report, sectoral news, etc.
Also, when it comes to volatility, index options are less volatile and hence less risky than stock options. On the basis of all these parameters, one can choose to trade either in index or stock options as a beginner trader.
IV in option chain also plays a vital role in determining future volatility and in analyzing the premium value.
You can choose the option contract after analyzing the market trend using PCR in option chain or other market indicators.
Step 4 -Pick Option Trading Strategy
Getting success in the first go needs a well-defined plan. Know about all the risk factors, your goals, and popular option trading strategies, and then start trading. We recommend you start with small capital first in order to learn the process.
As a beginner, you can start option trading with 1000 rupees as well but to make that trade successful, it is important to plan your trade and set a strict target and stop loss value.
A trading plan helps you stay disciplined and makes your decision-making process more systematic.
Here is what you have to do after developing a plan :
- Analyze the market movement.
- Choose your option type either Call or Put
- Predict and choose your strike price
- Decide the right option trading time frame. It can be weekly, monthly or quarterly.
- Choose your position long or short.
- Keep analyzing the market till its expiry and make decisions.
On the basis of the above parameter, choose the option trading strategy that works and fits in your trading plan. For example, if you are bullish towards a market, then instead of buying naked call option, buy call at one strike price and sell a call option at another strike price. This prevents you from any major loss in the volatile market.
There are many more strategies that you can execute to earn the maximum profit.
Step 5- Stay Attentive and Updated with Market News
Any news, event, or announcement has a huge impact on implied volatility that changes an LTP in options. It is therefore important for both option buyer and seller to keep up with the latest market news and developments is crucial for successful options trading.
Stay informed about economic indicators, company announcements, policy changes, and other factors that can impact the market and increase implied volatility. Financial news websites, business channels, and market analysis reports are valuable resources to stay updated. Use this information to identify potential opportunities and make informed trading decisions.
Step 6- Maintain a Trading Journal
As a beginner, starting with small trades and gradually increasing your exposure as you gain experience and confidence is advisable. Monitor your trades closely, track your progress, and evaluate your performance.
There are trading journals or you simply maintain a diary with the details of everyday trades. This helps you in analyzing your mistakes and also in developing the strategies where you successfully made good profits.
How to do Option Trading in Bank Nifty?
After gaining a basic understanding of options trading, let’s have a quick look at how to do option trading in bank nifty.
Bank Nifty is the index that helps in determining the performance of the banking sector. It consists of 15 top banking stocks listed in the stock market. Now to trade in the Bank-Nifty it is important to do the sectoral analysis by considering the existing macro and micro-economic parameters along with some other parameters like repo rate and reverse repo rate.
This helps in determining the current banking revenue and future growth.
On the basis of this, you can trade in a call or put option. For example, you are bullish about the banking sector. In this scenario, you can either buy a call option or sell a put option.
However, if we consider the difference on the broader level, then buying an option is cheaper as the buyer needs to pay a premium amount only, on the other hand, to sell an option one needs to maintain an option trading margin in the trading account that is quite high and depends on volatility, trend, and many other factors. Know how option selling works, before taking a short position in the option market.
How to do Bank Nifty Intraday Trading in Options?
Most of the trades in the index are intraday. To do intraday trading in Bank Nifty, follow the steps as mentioned below:
- Analyze the market trend.
- Determine support and resistance
- Choose the strike price and expiry
- Check OI data. Generally, the trader chooses the strike price with a high OI value.
- Calculate stop loss and target with the help of delta or support and resistance.
- Choose to Buy/Sell
- Enter details like lot size and choose trading products (delivery or intraday).
- Click on Confirm.
Your order gets executed. Now, keep a watch on the trend and plan to exit the market once the premium hits the target or stop loss.
Since you are doing intraday trading, if the market continues in the same direction after hitting the target, still it is recommended to exit from the current position and take a new trade position accordingly.
How to Make Profit in Options Trading?
Now comes the major concern, how to make a profit in options. It is a generally known fact, that option sellers make more money in the share market, but have you ever thought about why option buyers lose money?
Well, every option comes with an expiry and an option buyer pays a premium for a particular contract (strike price) that has an expiry. This means if the option does not expire in the money then the buyer will lose the whole premium value.
On the other hand, sellers earn profit from that premium. Even if the buyer square off the position before expiry, the premium value declines due to time decay in options that reduces the premium value with each passing day.
In order to earn maximum profit, it is therefore recommended to buy options in the trending market and sell options in the range market. Also, to safeguard your position, one must trade using options strategies by opening multiple buying and selling positions in the market.
Conclusion
In conclusion, options trading is intriguing when it comes to making short-term profits but comes along with a handful of risks as well.
So we recommend you to read trading psychology books as well, which can help you better in the stock market. You can also enroll in our online options trading course. We have experts with decades of experience in the stock market.
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