Learn How to Start Options Trading in India for Rs 10,000: Options trading can be one of the fastest ways to make or lose money on the stock market, depending on how it’s executed correctly. With proper knowledge and guidance available from knowledgeable traders, traders may make millions off each trade they complete; but without this foundational understanding their capital may quickly erode away and cause financial disaster for themselves and the trader they entrust their capital with can lead to complete loss and eventual collapse of trading accounts.
Even though Rs 10,000 may seem like an insufficient capital to start stock trading, it can still provide enough funding for you to learn both the fundamentals and technicalities involved with investing in stocks or options trading. Here, we will focus on starting options trading with Rs 10k; in particular we’ll look into starting options trading in India along with important concepts associated with trading them. Let’s get going.
What is Options Trading?
Before delving deeper into how to begin options trading, let us first give an introduction into exactly what constitutes options trading.
Options are derivative instruments which grant their purchaser the right to acquire the underlying asset (stock, indexes etc) at a pre-decided price at or prior to an agreed upon date (known as expiry).
Take an example: Say, if a stock is currently trading at Rs 100 and an individual believes its price can climb up to Rs 150 by month-end, an ‘Option buyer’ could enter into an option contract with another seller to buy at this predetermined price before expiration and pay an option premium accordingly. This same strategy also works when trading indexes like Nifty or Bank Nifty.
Reiterating, the option buyer is not bound to honor his/her contract upon expiry. He/She can opt to buy the asset if desired; but should the trade not go as expected, any premium paid will simply be forfeit. Conversely, however, an option seller is obliged to fulfil its commitment under agreement since a premium was collected upfront.
Index and Stock Options can both be traded using options contracts; however, unlike with stock trading, options trading is done using lots. Each exchange sets their lot sizes accordingly – Nifty currently has 50 lots per contract while Bank Nifty 25. When trading options of either of the indexes mentioned here you need to buy at least 50 multiples when trading its options contracts.
Assuming you, as an Options Buyer, purchase one lot of 50 quantities at Rs 40 each then your initial trade price would be Rs 2,000 payable directly by Option Buyer to Option Seller; lot size can then be expanded according to personal trade size preferences and money management needs.
Options Buying vs Options Selling
Capital requirements (also referred to as margin) is one of the primary differences between trading options and investing in stocks or bonds directly.
As an Options Buyer, you pay the premium (say Rs 5,000). While your maximum loss could be the premium itself, its potential is unlimited (since stocks could theoretically crash to Zero before rising again to new highs) Therefore it’s essential that at least this premium amount be kept in your trading account in order to complete an exchange transaction successfully.
On the other hand, for an Options Seller the margin requirement can be quite steep. Sellers essentially sell options first before buying them later at discounted costs; trying to “eat up all” any premium that has been accrued through such sales/purchase strategies before expiry dates occur – although any maximum profit or losses potential might exceed any received premium payments (buyers profit is Sellers loss/vice versa).
For example: An Option Buyer sells premium of Rs 5,000 to an Options Seller; this seller’s maximum earning potential would be this Rs 5,000; however if the trade doesn’t go as expected and goes beyond Rs 50k when executed he could lose much more and only be allowed to trade when having sufficient margin.
Start options trading in India with Rs 10,000 by becoming an Option Buyer since less capital will be necessary here.
It means you must buy options by paying their premium price, with hopes that any favorable trade will raise its premium value, making you money from it; on the other hand, any trade gone bad could result in up to the amount paid as premium payment being lost as potential loss.
How to Start Options Trading in India with Rs 10,000?
Are You Wanting to Start Options Trading in India with Rs 10,000? Below Are Steps You Should Take Now:
1. First things first – open both a trading and demat account! You have various top brokers like Angel One or Zerodha available, however we highly suggest going with Zerodha for optimal experience trading.
2. While opening your demat account, be sure to activate derivate segment trading so you can trade Futures and Options without incurring extra charges for activation of such segments. There will not be an extra fee applied when activating them either.
3. Once your trading account is active, add funds. Simply put, this involves moving money from your savings account into the trading account in order to trade. For example if you plan to add Rs 10,000 capital in this manner here are the steps for adding funds into a Zerodha Trading Account:
4. Once your account is active and you’ve added funds, you are ready to begin trading options.
Option trading can be done both on indexes (Nifty and Bank Nifty being two popular derivatives), stocks, as well as derivatives like futures contracts and options contracts with weekly expiry and monthly expiry that each Thursday while stocks only offer one expiration. We will look at both types in this article; let’s begin with indexes as an easy example first.
A) Options Trading with Bullish View
Nifty currently trades at 17,692 points as of Tuesday 25th Oct 2022 (Last Thursday of this month). It will reach its monthly expiry on 27th Oct 2022 – last Thursday before its monthly period comes to an end on 27th Oct 2022 (Last Thursday).
Now if you believe Nifty will reach a value higher than 17,700 before its expiry date, purchasing Nifty 17,700 CE could prove fruitful. Or for even greater assurance of success, consider even buying Nifty 17,800 CE options to signal further optimism on its behalf.
Note: Nifty 17,400 CE or 17,500 CE purchases indicate your bullish bias; however, due to current levels already being higher than these figures your bet may already have come true and premiums may increase significantly – also known as being ‘In the Money”.
Ideally, when trading goes well and the market moves in your favour up until expiry time, your premium amount will grow as the premium decays by its expiry date. Otherwise, depending on whether it moves closer or farther from that date than expected, premium value could either decrease or increase as it decays away by its expiry.
B) Options Trading with Bearish View
If you take an extremely bearish view and believe the market will drop below 17,600 by expiry (its current level is 17,692), PE options might provide the solution – specifically Nifty 17,600 PE will do the trick; but for extreme bears there’s even the possibility of purchasing Nifty 17,500 PE as this premium could rise as more traders sell when trading drops beneath that level and this way you could increase profits as your purchased premium increases in price if it falls.
Note: Similar to earlier, 17,800 PE or 17,900 CE futures contracts that are “In the Money” can also be purchased here as your bet has already come true; premiums will therefore increase accordingly.
Simply, Call and Put buying allows you to choose your view of the market and, if it proves correct, creates the potential to make money. Let’s further illustrate this using an example.
C) Buying Nifty 17,800 PE
Imagine this scenario – if you hold a bearish view and intend to purchase Nifty 17,800 PE options, at minimum one lot must be bought.
1 Lot equals 50 Quantities in Nifty 50 Index and its current premium is Rs 84.90
In this instance, the premium is calculated as Rs 84.90*50 = Rs 4,245
In case the market declines significantly, say premium prices drop from Rs 105 to Rs 105.3 in price; your gross profit per lot would then equal (Rs 105.3- Rs 84.9.) * 50 = Rs 21 per lot or Rs 1005.
If the trade goes against you and Nifty goes bullish (up), the premium value of Rs 84.90 can even decline further before its expiry date and you lose that premium amount altogether.
One Crucial Point to know while Options Trading
Be wary of overtrading or taking too many trades as this will lead to considerable costs related to brokerage fees and taxes alone.
Once a trade is complete, brokerage fees of Rs 20 + Rs 20 = Rs 40 are already gone (most brokers charge this rate for Options Trading). If you make 10 such trades per day for five consecutive days in one week – representing 50 transactions totalling – this amounts to Rs 1,000 worth of brokerage charges; plus an extra amount estimated between 500-600 in taxes/exchange charges which brings your total outlays closer to PS1600-1600 in lost funds.
Overtrading with just Rs 10,000 capital may cost most of it through brokerage fees and taxes (read about options trading charges here.).
Few Other Points to Know While Trading Options
Option buyers have the potential to make significant profits quickly if the market shifts quickly in your direction, providing ample opportunity for profit making opportunities.
Options traders, unlike long-term investors, can profit no matter whether the market rises or falls by purchasing Call or Put options that match market movements.
Time is against option buyers and in favor of option sellers. If the market remains flat (i.e. does not move), your premium will quickly depreciate, leading to your money disappearing forever.
Limit your losses to 10-20% per trade with stop loss to reduce losses and protect premium. If the trade doesn’t go in your favour, better to quit quickly to preserve capital than continue trading hoping that things turn around later on.
Margin Required for Options Selling
So far we’ve only covered how much capital is necessary when buying an option; but every buyer also requires sellers. Let’s also explore what margin is necessary when selling options.
If you want to sell one lot (50 quantities) of Nifty 17,700 PE, the margin required will exceed Rs 1 lakh (1 03 804. 90 to be precise). When trading multiple lots simultaneously, that margin increases even further.
Because of this difficulty in becoming an options seller with limited capital, we noted above.
In this article, we covered how to start options trading in India with Rs 10,000 capital. By exploring this topic in greater depth, it should now be clear to you how an Options Buyer could begin trading options using just that sum of capital.
Trading indexes require paying an initial premium of Rs 100 on 50 lots purchased, equalling an approximate total cost of Rs 5,000. Premiums could even decrease at certain strike prices and days closer to expiry; Option buyers can purchase either Calls (CE) or Puts (PEs), depending upon whether their trade goes in their favour; when this occurs, premium prices increase while otherwise they decline until ultimately reaching Zero at expiry for those holding incorrect views.
As is with this article on starting options trading with Rs 10,000 in India, we hope it has been informative for you. Should any queries regarding options trading arise for you feel free to post in the comment section. Wishing all readers an amazing day and happy trading!