Why Should You Trade in Options?

4 mins read
by Angel One

In stock market, there are broadly 3 instruments in which you can trade such as:

  • Cash Stocks (Delivery)
  • Futures
  • Options

So, why is trading in Options so popular? Because it gives trader a chance to:

  • Make Wealth on Small Capital
  • Grow your capital Faster
  • Make returns even in falling market

Let’s examine each of the above reasons in detail.

Make Wealth on Small Capital

Imagine, you are on your trading screen. You are analyzing the Nifty Chart which is trading at 16000, and you noticed that there is a good chance for the Nifty to go up.

So, you can trade this bullish view in three ways:

  • You can Buy Nifty ETF (Delivery)
  • You can Buy Nifty Futures
  • You can Buy Nifty Option (call)

Let’s understand how much capital you will need in each of them:

Which one to trade in a bull market? QTY Current Price Capital
Buy Nifty ETF (Delivery) 50 16000 8,00,000
Buy Nifty Futures 1 lot (50) 16000 1,00,000
Buy Nifty Option (call) 1 lot (50) 150 7,500

To trade in 50 Qty, when Nifty is at 16000; You will need :

  • 8lakh capital in Nifty ETF (Cash/Delivery)
  • 1lakh capital in Nifty Future
  • Rs.7500 capital in Nifty Option (Nifty’s 16000 Call Option price will be Rs.150, that’s what you need to pay to trade)

So, to trade your Bullish view, you will just need Rs.7500 which is 100times less than trading Nifty in the Cash market. That’s the leverage you get when you trade in Options.

But you must be thinking, low capital means low returns, high capital will give higher returns. You could be absolutely right in your logical thinking.

So, let’s prove them wrong with real numbers:

Nifty moves up by 100 points to 16100 i.e. by 0.6%

Trade QTY Buy Price Sell Price Profit Capital Profit as % of Capital
Buy Nifty ETF (Delivery) 50 16000 16,100 5,000 8,00,000 0.60%
Buy Nifty Futures 1 lot (50) 16000 1,00,000 5,000 1,00,000 5%
Buy Nifty Option (call) 1 lot (50) 150 2,00 2,500 7,500 33.00%

If Nifty moves 100pts from 16000 to 16100, then if you would have bought:

  • Nifty ETF (Cash/Delivery) – You would have made Rs.5000 on capital of 8lakhs i.e. mere 0.6%
  • Nifty Future – You would have made Rs.5000 on capital of 1lakhs i.e. 5% return.
  • Nifty Option – You would have made Rs.2500 on capital of Rs.7500 i.e. 33% return on capital.

So if you are right in predicting market direction, you can make returns with even low capital in trading Options.

Grow your capital Faster

In the last example, we made a 33% Return on Capital. To make 33% return in Cash/Delivery it might take a couple of years for a stock to move 33% which you are holding.

But in Options you just need 100pt move in Nifty to make such an excellent return in single trade (as we saw in last example).

And for Nifty to move 100points is not uncommon, you can see nifty moving 100pts up-down in an hour.

Even if you capture 50points move, or even 20 pts move in Nifty you can still make a handsome return on your capital.

Make Returns even in falling Market

You all must have heard about the Market Crash, people get into panic when the market falls.

The biggest fear for a Cash/Delivery trader is ‘Kahin Market Gir na jaye’.

As all other traders wish the market to keep going up, Option traders do not care whether market go up or down, they can make returns, even when market falls.

So here you can see the Nifty chart, where Nifty fell from 16720 to 16570 i.e. 150 pts fall in just 40 minutes. An Option trader can trade this opportunity also by Buying Put option (will discuss this later blogs in details). So, if you can predict that the market is going to fall, rather than worrying you can make returns out of it by trading in Options.

This article wanted to drive your attention towards Options trading which you might not be aware of or having little knowledge about. In this series we will be bringing structured blogs on Options trading, which will make you confident to trade Options and get benefits out of it.

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Next ArticleOptions Trading Basics – Part 1