Options debuted in the stock market in 1973. An option is a contract that allows the buyer the power, but not the responsibility, to sell (in the case of a put) or purchase (in the case of a call) a specific asset at a specific price on or before a specific date.
Before moving forward with that, let's read why it is beneficial to trade options.
Advantages of Option Trading
Many traders and investors often avoid options due to the misconception they are too hard to understand. However, that is not true. They are more complex than equities but definitely understandable with a bit of research and interest.
Moreover, they offer you the following four key advantages:
1. They Are Highly Cost-Effective
Options allow you to take the same position as a stock but for lesser money. For instance, if you wish to purchase 100 shares of a stock trading at INR 500, you would have to spend INR 50,000. However, if you choose to buy an INR 125 call representing 100 shares, you would be spending just INR 12,500. This way, you can use the remaining funds to take more positions in the market and add the element of diversification to your portfolio.
2. Lower Risk
If options are bought carefully, they can expose you to lower market risks. This is because options demand a lesser capital commitment upfront and are less prone to the potentially serious impacts of gap openings. Options are also a better and safer way of hedging than stocks.
3. Higher Return Potential
Since options require you to put a lesser amount of money to get the same holdings as stocks, they help you enjoy a better rate of return on your investment. For example, Mr. A buys 100 units of a stock worth INR 1,000 and Mr. B buys a call option of INR 120, representing 100 units of the same stock. Let's say the delta of the option is 80%, that is if the stock price rises by INR 100, its call option's price will appreciate by INR 80. If this happens, Mr. B will enjoy a return of 75% and Mr. A will get a return of 10% only.
4. Highly Flexible
Options offer you a multitude of options for investing your money. They can be utilised in a variety of ways to create new positions. There are mainly two types of options: call options and put options. You have an option to buy and sell both these types of options depending upon which trading positions you are more comfortable with.
Trading in options opens a wide array of investment opportunities for you. Where you can leverage them to your advantage on an options trading app along with keeping it light on your pocket. Moreover, the flexibility offered by options may be a popular segment in the online trading setup.