Call Writing Vs Put Writing – What’s The Difference?

Call Writing Vs Put Writing – What’s The Difference?

Know the difference between Call writing vs put writing: Generally while investing in the stock market, you will come across a lot of volatility and protect yourself from the short-term volatility in the market, the market has provided us with something called options that help us hedge our risk. Options consist of two parties which are the buyer and the writer.

In this article, we will cover the writer’s side of options and discuss Call writing vs Put writing.

What Is An Options Contract?

An options contract is a type of derivative contract whose value is derived from an underlying asset. This contract is made between the parties namely, the buyer and the seller/writer for a future date at a predetermined price.

In this contract, the buyer gets the right but not an obligation to execute the contract on or before the expiration date. For this choice, the buyer of the contract will have to pay a premium to the writer while entering into the contract.

The seller/writer on the other hand is giving up the right of execution and is obligated to execute or not execute the contract depending on the choice made by the buyer. The writer receives a premium from the seller for giving up this right.

For the buyer, the loss is limited to the premium paid with the potential to earn unlimited profit. For the writer, the profit is limited to the premium received with the potential to incur an unlimited loss.

What Is A Call Option?

A call option is a contract entered between two parties where the buyer of the contract gets the right to buy but not an obligation to buy the underlying asset on or before the expiration date.

What Is A Put Option?

A put option is a contract entered between two parties where the buyer of the contract gets the right to sell but not an obligation to sell the underlying asset on or before the expiration date.

What Is The Benefit Of Writing An Option?

With the above explanation, it is understood that the upside for the option writer is limited to the premium received and the loss can be unlimited. Then why do individuals opt for writing an option contract?

To explain in simple terms, the odds of winning while selling an option contract is much higher than buying an options contract. This is because of the time factor in options.

As the time comes closer to expiry, the price of the options contract keeps decreasing and eventually Out of Money Options turns to zero on the day of expiry.

So even if the price goes right in the direction of the buyer of the option, there is still a probability of the buyer losing due to time decay. This is the reason individuals go for writing an option contract.

Now that we have learned the benefit of writing an option contract, there is a dilemma of call writing vs put writing, which one to choose? Keep reading further to find out.

The Payoff In Call Writing Vs Put Writing

Although call writing and put writing are similar in nature, they can be differentiated by when they are written and when they break even. Let’s take a look at the payoffs for each of these separately.

Call Writing

A call option is written when the seller expects the price of the underlying asset to fall. The sellers of the call option are bearish in nature and they start losing when the price of the underlying asset starts increasing. Let us now look at the pay-off pattern of Call writing

Strike price 2000
Premium400

Payoff for call option writer at different spot prices during expiry

Price at Expiry (Spot price)Strike price Premium receivedNet Payoff
12002000400400
16002000400400
20002000400400
240020004000
28002000400-400
32002000400-800
Payoff For The Call Option Writer

As you can see from the above diagram, the maximum profit by the call option writing is limited to the premium received and the loss can be to the extent of a rise in the prices of the share. Losses can be to any tune while writing Call Options.

Put Writing

A put option is written when the seller expects the price of the underlying asset to rise. The sellers of the put option are bullish in nature and they start losing when the price of the underlying asset starts decreasing. Let us now look at the pay-off pattern of Call writing

Strike price 2000
Premium400

Payoff for put option writer at different spot prices during expiry

Price at Expiry (Spot price)Strike price Premium receivedNet Payoff
22002000400400
20002000400400
18002000400200
160020004000
14002000400-200
12002000400-400
Payoff For The Put Option Writer

As you can see from the above diagram, the maximum profit by the call option writing is limited to the premium received and the loss can to the extent of decrease in the share price. The losses can be huge even for the Writer of Put Option.

Also Read: Options Trading Vs Intraday Trading – Which is Better?

In Closing

In this article, we briefly discussed what are options, the benefits of writing options and the payoff in Call writing vs Put writing.

Through this article, we understood that call writing is entered with a bearish sentiment and put writing is entered with a bullish sentiment. Though the chances of going right in options are better, you should also remember that if the market doesn’t go in your favor, you’ll end up losing a lot of capital. Hence it is always advised to trade in options up to the extent of your risk appetite.

Tags: What is put writing and call writing in the share market?, What is Writing Call Options in Stock Market?, When does one sell a call or buy a put option, What are call writing options?, How To Analyze Call and Put Writing, Selling/Writing a Call Option, Put writing means, Call writing example, Put writing means bullish or bearish, Explain carefully the difference between writing a put option and buying a call option, Call writing means bullish or bearish, Difference in Call Writing Vs Put Writing

Know The PE and CE Meaning in Share Market – How To Use Them?

Know The PE and CE Meaning in Share Market – How To Use Them?

Exploring PE and CE Meaning in Share Market: CE and PE in the field of Financial Market are option trading terms/jargon. Options trading is a complex segment in the world of trading. This form of trading is difficult to understand even for individuals having a background in Financial Market.

This is because several technical terms are used in this segment. These include ‘CE’, ‘PE’, ‘lot size’, etc. Traders who are willing to enter this segment need to have clarity of these terminologies and their application. While the equity market is known for long-term investing, most traders go for the futures and options market. They try to gain from the market in the short term.

Most individuals are attracted to this market because they believe that quick money can be made in this market. However, they forget that this market has the capability to erode the entire capital that has been invested. Thus, it is of utmost importance to have a strong understanding of this market.

Let us now learn PE and CE Meaning in Share Market and when to purchase and sell them in this article.

Basic Terminologies Used in PE and CE

Before delving deep, the following are critical terms that beginners need to understand: 

  • Strike price: The strike price means the price at which an Options contract can be exercised. Simply put, it is the price at which an Options buyer will buy or sell an underlying asset if he/she wishes to exercise their right.
  • Premium: Option premium means the current market price of an option contract. Therefore, it is the income received by the seller of an option contract (writer) to another party. 
  • Expiration: When the option reaches its expiry date and gets settled.

Now that we have understood the basic terminologies, let us move on to discuss PE and CE Meaning in Share Market. Since these are quite complex, we have explained these terms individually. Read on to find out!

What is CE?

CE is nothing but a Call option. Precisely, CE is known as Call European. These contracts give the option holder the right, but not the obligation, to buy a stock, bond, product, etc. at a pre-determined price upon expiry.

In short, purchasing a call option will give the trader a choice to purchase a fixed number of shares of that company. If the trader decides to go ahead with the transaction, it will be done at a fixed price (called the strike price) before a particular date (called the expiry date).

The buyer of the call option gains when the price of the underlying asset increases. Therefore, the buyer of the call options predicts that the underlying asset’s value will increase in the near future. 

For Example:

  • Trader A has a bullish stance on shares of XYZ Company.
  • The current Price of One share of XYZ Company = Rs. 850
  • Strike Price Bought = 900 CE
  • Premium Paid = Rs. 15 
  • Shares Per Lot = 200
  • So, the total premium Required to buy one Lot would be = 200*15 = Rs. 3000

If everything happens as per expectations, and the price of an underlying asset in the cash market goes above INR915 (strike cost of INR900 + premium of INR15), that trader will start making money.

When to buy CE?

Traders buy the call option when they expect that some news can push the stock’s value higher. One option for a trader is that he/she buys underlying asset in the cash market, and holds it for the long term. However, what if the trader wants to make quick money as he/she is opportunistic. A call option is apt in a situation like this. This can be explained with the help of an example.

The spot price of the stock is INR100 and positive news is expected in the market. The trader buys the call option at the strike price of INR110. Now, when the news is released, the stock should go up in the cash market. 

When to sell CE?

Traders can consider selling call options when they expect that the upside is limited for the stock or there can be a downfall. This makes the trader indifferent to whether the stock is stable or goes down as long as the spot price does not exceed the strike price.

A quick example to explain this process- 

  • Consider a security XYZ with a spot price of INR60. 
  • You can sell a call option on the stock for a strike Price of 60
  • The Premium for the same is Rs. 50.
  • One contract will fetch you INR500 (INR5 * 100 shares). 
  • Now upon expiry, if the share price is trading below Rs. 60, then the call Option would expire worthlessly and the seller of the Option would pocket the premium.
  • The Break-even point will be INR65. Above INR65, the call seller starts to lose money beyond the premium he/she has received. 

PE – What is it in the stock market?

PE is also known as Put Option. More specifically, it means Put European. A put option is the exact opposite of the call option. A put option means a contract that gives the holder the privilege, but not the commitment, to sell a particular underlying security at a specific price and within a specific time period.

The holder of a put option expects that the price of an underlying asset will fall in the near future. The holder will benefit when the underlying asset’s price (i.e., spot price) falls below the strike price.

When to buy PE?

Traders start purchasing the put option if they expect that the spot price of the underlying asset will fall in the near future. Therefore, a trader needs to keep a close watch on the stock’s movement. If the spot price of the asset increases, that trader can disregard the put option. In this case, the loss will be limited to the amount of premium paid.

Say,

  • There is the expectation of Bearishness in the Market (Owning to anticipated poor results)
  • The current share price of the company is Rs. 1000
  • One could express his bearish views by buying a Put Option for a Strike price of 950 (say)
  • Premium to be paid = Rs. 10
  • Shares per lot = 200
  • Premium to be paid = 200*10 = Rs. 2000

If the spot price falls to Rs. 950 per share, the premium of INR10 per share is not covered. Therefore, a trader will make money if the spot price in the cash market falls below Rs. 940.

When to sell PE?

A trader will choose to sell a put option if he/she expects that the underlying security will rise in the near future. Selling a put option permits you to potentially own the stock at both a future date and at a more favourable price. Writing a put option results in immediate income for the writer.

This is because a writer tends to keep a premium if the sold is not exercised by the buyer and it expires OTM. Selling a put option means you have an obligation to purchase the security at a predetermined price from the buyer of the option if he/she exercises the option. One should only enter trades where the net price paid for the asset is attractive.

Say,

  • The share price of XYZ Company = Rs. 100
  • If you feel that the outlook looks positive, then you can buy 100 shares of the same and it would cost Rs. 10000 (100*100)

OR,

  • You could choose to sell a Put Option of the same share for a strike price of 80 expiring 1 month down the line.
  • The Premium for the same is Rs 10
  • So, Premium Received for writing would be = Rs. 100*10 = Rs. 1000
  • So, if the share price drops to Rs. 80 or below, then that has to be bought at Rs, 80, as the Put Option has been sold.
  • And if the share price stays anything above Rs. 80, then the premium received would be the income for the same.

So, the Selling put option when you have a bullish stance on the market does the twin objective of income at the time of writing and also improves the entry price of the underlying asset.

Also Read: The Minimum Amount Required for Options Trading in India!

Is selling PE And Buying CE the Same?

Though the intention of selling PE and buying CE is done with the same bullish intention, they are quite different in terms of execution.

While selling PE you become the writer of the option and are obligated to execute the option on demand of the buyer for the premium received. When buying a CE you receive the choice to execute the options contract for the premium that you pay.

As per the margin requirements, the seller of PE requires a huge margin as the loss can be unlimited. On the other hand, the buyer of CE only requires to pay the premium while buying the options contract which is the maximum loss incurred by the buyer.

As per earning money in the option, an individual has more chances of earning money by selling PE as opposed to buying CE. This is because the option greeks favor the option seller more than the option buyer.

In Closing

In this article, we discussed the PE and CE Meaning in Share Market and also when to buy and sell them.

While using options can be risky, there are individuals making huge profits by using these instruments strategically. Traders engage in trading options by using appropriate option-trading strategies. If these strategies are used adequately and in a disciplined manner, most of the time traders can end up making healthy profits.

Selling options is considered an income-generating strategy. However, this strategy comes with unlimited risk if the underlying asset moves against the trader’s bet.

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How to Calculate Profit in Options Trading? – Basics of Options Profitability

How to Calculate Profit in Options Trading? – Basics of Options Profitability

Understanding how to calculate profit in Options trading: Options are considered one of the most complex products that traders come across in the world of the stock market. Due to this, beginners, as well as experienced traders, tend to avoid this segment also due to the high risk involved in it.

But one should take into account that the high risk associated with options also carries a high reward in the form of high returns. So, with proper judgment and implementing the right strategies, options trading can prove to be an excellent way to increase your net worth.

In this article, we are going to look at ways in which one can become profitable in options trading. However, before we discuss how to calculate profit in options trading, let us also brush up on the basics of options trading first.

What are the Options?

Before jumping into the conceptual analysis of various methods to calculate profit in options trading, let us understand what options mean. In order to understand options in a simple manner, you’ll first need to understand what a futures contract is.

A futures contract is an agreement made between two parties through an organized exchange, wherein one party agrees to buy and the other party agrees to sell a commodity or a financial asset, at a pre-decided price on a future date. 

So on the date of expiration of the futures contract, the buyer has to buy and the seller has to sell the commodity or financial asset irrespective of them being in profit or loss. This is where options come into play.

An options contract is just like a futures contract, but here, the buyer of the option contract has a right to execute the order (i.e. to buy or sell the commodity) on the expiry of the contract but not an obligation to do so.

The term option refers to a financial instrument that is based on the value of underlying securities such as stocks. An options contract offers the buyer the opportunity to buy or sell depending on the type of contract they hold for the underlying asset.

So during the expiration of the contract, the buyer of the contract has a choice of not executing the contract if he incurs a loss in doing so. For having the privilege of choice of execution, the buyer has to pay a price to the seller of the contract called “option premium”.

Quick Read: 5 Best Options Trading Courses For Beginners!

Who All are Involved in an Options Trading Contract?

Here are the two parties that are involved in an Option Contract:

Buyer of option: He is the one who has a right but not an obligation to execute the contract. For having this right, the buyer has to pay a price to the seller (forgoing his right). This price is also called Fees, Option Premium.

For an option buyer, the loss incurred is limited to the premium paid by him, because he has a choice of not executing his trade upon expiry.

Seller/ Writer of option: He is the one who writes the contract and gives his right to the buyer of the Option. He receives the ‘option premium’ and is hereby obligated to sell/buy the underlying asset if the buyer of the option chooses to exercise his right.

For an option seller, the profit incurred by him is limited to the premium received by him, and the loss incurred can be unlimited when the buyer executes the contract.

Basic Terminologies Used in Options

Here are the key terminologies that you should know in order to do the calculations of Profit in Options Trading:

  • Spot Price: It refers to the current price of a security at which it can be bought/sold at a particular place and time.
  • Strike Price: It is a set price at which an option contract can be bought/sold if exercised.
  • Option Premium: It is the price that the option buyer pays to the option seller.
  • Break-even point: It is the point at which total cost and total revenues are equal.
  • Underlying Asset: It is the security upon which a derivative contract is based. Security can be an asset or commodity like crude oil, gold, or stock.

Moneyness of an Option

Moneyness of options is a term to describe whether a contract is either “in the money”, “out of the money”, or “at the money”.

  • In the money option (ITM): This option would give the holder a positive cash flow if it is exercised immediately.
  • At the money option: (ATM)This option would give the holder a zero cash flow if it is exercised immediately.
  • Out of the money option (OTM): This option would give the holder a negative cash flow if it is exercised immediately.

Calculation of Profit in Options Trading

Now that we have understood what an Option is, let us move on to how an individual can earn profit in options trading.

1. Profit Calculation in Call Option

In a call option, the buyer of the option contract will get the right to buy the underlying asset but not the obligation to do so. For this right, the buyer pays a ‘premium’ to the seller.

With the help of an example, let’s now determine the profit-making scenario of a call option buyer and seller.

1.1 Buyer of Call Option

Example 1; Buyer buys a call options contract with a strike price of Rs 1,500 and pays a premium of Rs 200. We will now take a look at the profit or loss situation at different spot prices during expiry for the buyer.

  • The spot price reaches Rs 2,000: Here the market has moved in the favour of the buyer of the options contract. The profit he will make in this situation is calculated using the call option profit formula –

Profit/ Loss=Spot Price – Strike Price – Premium Paid

Profit/ Loss = 2000-1500-200 = 300

  • The spot price stops at Rs 1,500: Since the spot price is at the same level as the strike price, the buyer will incur a loss limited to the premium paid, irrespective of him executing the order or not.

Loss= 1500-1500-200= -200

  • The spot price closes down at 1,200: Here the market has moved against the favor of the buyer of the options contract and he will not execute the contract. The loss will be limited to the premium paid by him. 

Loss= -200

Profit in Options Trading | Buyer of Call Option

It should be noted that, as the strike price is Rs 1,500 and the premium paid is Rs 200, the buyer of the option contract will start making profits only when the spot price rises above Rs 1,700(break-even point). 

1.2 Seller of Call Option

Example 2: Seller writes/sells an options contract with a strike price of Rs 1,500 and receives a premium of Rs. 200. We will now take a look at the profit or loss situation at different spot prices during expiry for the seller. Let’s understand how to calculate profit on options:

  • The spot price reaches Rs 1,200: Since the market has moved against the buyer of the contract, he will choose not to execute the contract and the seller/writer of the contract gets the benefit of the premium received.

Profit= 200

  • The spot price stops at Rs 1,500: Since the spot price is at the same level as the strike price, the seller will get profits limited to the premium paid, irrespective of whether the buyer executing the order or not.

Profit=200-1500-1500= 200

  • The spot price reaches Rs 2,000: Here the market has moved in the favour of the buyer of the options contract. So the loss the seller will make in this situation is:

Received= 200

Paid to the buyer= 2000-1500= 500

Net loss for the seller= 200-500= -300

Calculate Profit in Options Trading | Seller of Call Option

The profits for the seller/writer of the call option are limited to the premium received by him and his profits start reducing once the spot price exceeds the strike price. The seller/writer will start making losses when the spot price exceeds Rs 1,700.

2. Profit Calculation in Put Option

In a put option, the buyer of the option contract will get the right to sell the underlying asset but not the obligation to do so. For this right, the buyer pays a ‘premium’ to the seller.

With the help of an example, let’s now determine the profit-making scenario of a call option buyer and seller.

2.1 Buyer of Put Option

Example 3; Buyer buys a put option contract with a strike price of Rs 1,500 and pays a premium of Rs 200. We will now take a look at the profit or loss situation at different spot prices during expiry for the buyer.

  • The spot price reaches Rs 1,000: Here the market has moved in the favour of the buyer of the options contract. The profit he will make in this situation is:

Profit/ Loss=Strike Price – Spot Price – Premium Paid

Profit = 1500-1000-200 = 300

  • The spot price stops at Rs 1,500: Since the spot price is at the same level as the strike price, the buyer will incur a loss limited to the premium paid, irrespective of him executing the order or not.

Loss= 1500-1500-200= -200

  • The spot price goes to Rs 1,800: Here the market has moved against the favor of the buyer of the options contract and he will choose not to execute the order. The loss to the buyer is limited to the premium paid by him

Loss= -200

Buyer of Put Option

It should be noted that, as the strike price is Rs 1,500 and the premium paid is Rs 200, the buyer of the option contract will start making profits only when the spot price drops below Rs 1,300 (break-even point).

2.2 Seller of Put Option

Example 4: Seller writes/sells a put options contract with a strike price of Rs 1,500 and receives a premium of Rs. 200. We will now take a look at the profit or loss situation at different spot prices during expiry for the seller.

  • The spot price reaches Rs 1,800: Since the market has moved against the buyer of the contract, he will choose not to execute the contract and the seller/writer of the contract gets the benefit of the premium received.

Profit= 200

  • The spot price stops at Rs 1,500: Since the spot price is at the same level as the strike price, the seller will get profits limited to the premium paid, irrespective of whether the buyer executing the order or not.

Profit=200-1500-1500= 200

  • The spot price reaches Rs 1,000: Here the market has moved in the favour of the buyer of the options contract. So the loss the seller will make in this situation is:

Received= 200

Paid to the buyer= 1500-1000= 500

Net loss for the seller= 200-500= -300

Seller of Put Option

The profits for the seller/writer of the put option are limited to the premium received by him and his profits start reducing once the spot price drops below the strike price. The seller/writer will start making losses when the spot price decreases below Rs 1,300.

Also Read: What is Put Call Ratio in Options Trading? How to Interpret it?

What Is Option Formula?

Following are the option formula used to calculate the intrinsic value for call options and put options:

Call option

Intrinsic value = Underlying Stock’s Current Price – Call Strike Price

Time Value = Call Premium – Intrinsic Value

Put option

Intrinsic value = Call Strike Price – Underlying Stock’s Current Price

Time Value = Put Premium – Intrinsic Value

In Closing

People frequently think that trading options are difficult. But if you properly understand the derivatives sector, you can highly increase your chances of increasing your wealth.  

You can increase you improve your expertise in options through various educational sources and by practically applying the knowledge you’ve gained in options.

So here we come to the end of this article on calculate profit in options trading, hope you are walking away with more knowledge about options than you came in with, Do let us know if you have queries regarding profits in options trading in the comment section below. Also, If you want to learn more about investing and trading, subscribe to our courses on FinGrad.

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The Minimum Amount Required for Options Trading in India!

The Minimum Amount Required for Options Trading in India!

Minimum Amount Required for Options Trading in India: The General instinct of any trader is to find the right trading opportunities at right time, which would help him to deploy the capital at the right place and generate maximum return on his Investment. 

While trading in the cash market, the amount of capital required is generally equivalent to the number of shares multiplied by the per-share value. Say, if the share price per share of Reliance industries is Rs. 2500 and, if you want to buy 100 shares of the same company, then the total capital required to purchase the shares would be = 2500*100 = Rs. 2,50,000/-. 

And if you were to buy shares for the purpose of Intraday trading, you might get leverage of 5x, meaning with the capital of 100 shares you could express your views by buying 500 shares. But that is still very high as it would still need a capital of Rs. 50,000 (20% of full value) and you would have to square off your positions on the same day.

But, what if there were a method that allowed you to express your views on shares in any company and get a massive amount of leverage?  That would be great, isn’t it? And that is where Derivatives trading comes into the picture. 

Derivatives are tradeable financial instruments that derive their value from the underlying asset’s value. Futures and Options are the two highest traded derivative instruments.

In this article, we will keep our focus on Options Trading. And also talk about the minimum amount required for Options Trading in India. We will talk about the margin required from both buyers’ and sellers’ perspectives.

What exactly are the Options?

Options are derivates of product that derives their value from the value of the underlying asset. It gives the buyer the right to buy or sell the asset at the pre-decided price at the time of the expiry. And the seller is obligated to honour the agreement if the buyer chooses to exercise the option.

The buyer is having the right because he pays the premium upfront and the seller is obligated because he receives the premium at the time of writing the contract.

Now having understood that there are two parties involved in options trading. It is important for us to understand the cost or the minimum amount required for options trading in India. The Margin required to trade options is largely impacted by the volatility and the prevalent market sentients.

factors to consider for understanding the margin required to trade Options

Here are some of the factors to consider before we understand the margin required to trade Options. 

  • Existing Volatility

It is very important for us to know about the prevalent volatility has a huge bearing on the minimum amount of money required to buy options. If the Volatility is higher, then the premium required to buy the options will be higher and if the volatility is on the lower side, then the premium charged will be lesser. India VIX is one of the best volatility indicators to watch out for if you are looking to buy or sell options.

  • Prevailing Trend (or sentiment)

This is another factor that one needs to look for if they are looking to buy/sell options. If the Existing Trend in the market is Bullish, then the premium for the Call Options will be more expensive as compared to the premium for Put Options (even for the strike prices that are equidistant from the spot price). And Similarly, if the existing trend in the market is Bearish, then the call options would be less price compared to the Put Option. 

Now, let us further our discussion about the Minimum Amount Required for Options Trading in India. This amount required varies for Both Option Buyer and Option Seller. 

Minimum Amount Required for Options Trading in India

Let us understand who Option Buyer is, “Option buyers are those traders, who buy the right on the underlying asset from the Options seller, to be bought or sold upon expiry. The Buyer of the option pays the premium to the seller of the option.” 

Here, the maximum loss for the option buyer is the premium paid because he has bought the right and he will exercise it only when the price moves in his favour. And if the position goes against him, then he would not exercise his right.

Eg: Trader A has a bullish stance on the Nifty 50 and the spot price of the Nifty is 17500. Trader A wants to buy the Call Option of strike Price 17550 and pays a premium of 60 units. And one lot of Nifty has 50 shares. So, the total cost incurred to buy this option will be Rs. 3000 (60*50).

So, the premium quoted is the maximum amount required to buy that Option. Now the question is what is the Minimum amount required to Buy an Option?

To answer this question first we need to find the product that trades in Derivatives contracts and has the least number of shares per lot. The Bank nifty is a derivative contract that has 25 shares in it and says if any strike price has a premium of 1 unit charged then the minimum amount required would be Rs. 25 (1*25). But taking a contract with a 1 unit premium would be like charity, as the chances of them expiring In the Money is very less (as they are Deep Out of Money Options).

So, it is best advised to take options that at the least, are slightly Out of Money. Out of Money have the least amount of Premium Charged and that is followed by At the Money and In the Money Options having the highest premium charged against them. 

Type of OptionsPremium Charged
Out of MoneyLeast Amount of Premium 
At the MoneyMore premium compared to Out of Money and lesser than In the Money
In the MoneyHighest Premium Charged

(image: Premium required depending on the level of Moneyness)

Margin Required to Sell Options

Writing an Options comes with its own inherent risks. Unlike the Option buyer, whose risk is limited to the tune of Premium paid but in the case of the Options Seller the risk is practically unlimited as he is obligated to honour the contract and the price of the underlying asset can drift to any extent. 

If you are the seller of the Call Option, then the price of the Underlying asset can move upto any extent. Similarly, if you are a seller of the Put Option then the price of the underlying asset can fall practically upto Zero. So, that is where the amount required to sell options is very large. 

Margin Required to Sell Option is the summation of Span Margin And Exposure Margin.

What is SPAN Margin?

Span Margin is an acronym for  Standardized Portfolio Analysis of Risk. These are advanced forms of Algorithms that are used to ascertain the margin requirements according to global assessments of one-day risk in traders’ account. In simple terms, it is the minimum amount of money that a trader needs to have in addition to exposure margin to be able to sell an Options contract. 

Can I start option trading with 1000 rupees?

No, you cannot start trading in options with 1000 rupees. The amount required to buy an options contract depends on the lot size of the option multiplied by the options contract which will be significantly higher than 1000 rupees. Selling or shorting an options contract will require even a higher level of margin as sellers have the possibility to incur higher losses. While it is possible to buy some options contracts that are far out of the money, the chances of you winning in those trades are close to zero

What is an Exposure Margin? 

Exposure Margin is those margins that is calculated by the broker over and above the SPAN Margin. Exposure margin is collected by the broker to protect themselves from the erratic swings that can happen in the market. The exposure margin is calculated depending on the existing risk and volatility prevalent in the market. 

So, simple terms, 

Margin required to sell Options = SPAN Margin + Exposure Margin

Margin Calculator ZERODHA | Minimum Amount Required for Options Trading in India

(Image: Margin Calculator ZERODHA)

So, from the image above it can be seen that the Minimum amount required to sell Option depends on the existing trend and volatility and it is the summation of SPAN Margin and Exposure Margin. 

Also Read: What is Stock Options Trading? Learn Options Trading With Examples!

To conclude

Trading Options come with their own set of inherent risks and regulations. The minimum amount required to trade Options varies from product to product and also the prevalent state of the economy and the market.

In the case of Call Option, the amount required is the premium at that point in the market for that particular strike price and in the case of Put Options, the minimum amount required is the summation of Span Margin and Exposure Margin.

Happy Trading and Money Making!

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What Is Hedging In Option Trading? Uses, Strategies & More!

What Is Hedging In Option Trading? Uses, Strategies & More!

Understanding What Is Hedging In Option Trading: Options trading as a derivative instrument was introduced to protect the interest of the farmers. This was a form of protection tool which would safeguard the interest of the parties involved.

Say, if a farmer produces a wheat crop that is due for harvesting after 2 months. But he is fearful of the fact that when his crop would be ready, then he might not get the desired price and it might be considerably lower than what he wants to sell it for.

And similarly, the Agricultural produce buyer might be fearful that when he is to buy the crop, the price of the crop might be considerably higher than what he wishes to pay. 

So, to protect the interest of both the farmer and the buyer, Options were introduced as a hedging instrument. Here, the price of the produce (agriculture) to be bought or sold was prefixed.

So the farmer would not have to worry about the price he would be receiving and even the buyer of the produce (crop) would also not have to worry about the price fluctuations. So, the earliest use of Options contracts was for the purpose of hedging.

So, let’s get started with the article to learn more about What Is Hedging In Option Trading.

What Is Hedging In Option Trading?

In the world of Finance, Hedging is a simple procedure via which the individual/firms mitigate their risk on their existing position in the market.

One could do this either by formulating a strategy around it to protect against potential downside or by taking an opposite position in the Derivatives (F&O) Market. We will delve into it in the due course while understanding this article.

Quick Read: Options Trading Vs Intraday Trading – Which is Better?

To Define Options

Options are Derivatives Instruments that derive their value from the value of the Underlying Asset. The instrument holder has the right to buy/sell the underlying asset at an agreed-upon price on Expiry.

And the seller of the instrument is obligated to honour the agreement. The Buyer has the right because he pays a premium to the seller and the seller is obligate because he receives the premium upfront. 

Use of Options in the Stock Market

The earliest use of Options in the stock market was generally for the purpose of hedging. The buyers of the stock would want to protect themselves from unforeseen price fluctuations and also to protect the profits made on stocks/securities bought by them.

It is only a recent phenomenon that Options as a trading instrument are used for the purpose of speculative trading. 

Even the best (Investors, Traders, Hedge Funds, etc) use Options in various forms to protect themselves from the downside risk and also improve the entry price of their Investments.

The Ace Investor, Warren Buffets’s company Berkshire Hathway Use ‘Selling Naked Put Options’ as a way of Improving the entry price for the asset that they are invested into. Warren Buffet is of the view that “One should be fearful of the Traders, when they are greedy and Be greedy when they are fearful”.

He believes that traders sometimes give undue weightage to the bearish momentum and that provides an opportunity to get higher premiums for deep Out of Money options by Selling/Writing them. The sellers can take advantage of that and pocket the hefty Premium. 

Now, having understood the basic premise of Options as a Hedging Instrument, let us understand how can one use Options for the purpose of Hedging.

Various Strategies of using Options as Hedging Instruments

There are various means and ways via which a trader can hedge his/her position using options. We will try and understand all the scenarios with the help of an example:

Let’s say that you have bought shares of ICICI bank and you have a bullish outlook on the same in the future. The buying price per share is Rs. 850 and it is trading right now at Rs. 880 per share.

But there have been some rate announcements coming from RBI and that might have a negative impact on all the Banking stocks and ICICI bank being the leading player in the banking sector, would be one the first ones to be impacted because of that. 

Now we will try and understand, how could one hedge using options in his existing position in ICICI bank. 

1. Hedge Using Covered Call

This is a simple strategy that is being used by the traders when they are expecting downside movement in the shares in the shares of the company that they are holding. So under this strategy, you write/sell an Out of Money Call option and Pocket the premium.  

The Objective here is to better or improve the entry price or even if the option expires in the money for the Option buyer, then you would make money on the shares bought in the cash market plus the Premium received for writing. Let us understand with the help of this example. 

In the Initial part of this Article, we bought shares of ICICI Bank at Rs. 850  and it was trading in our favour at Rs. 880 but because of the announcement of an interest rate increase by RBI, the share prices are expected to be negatively impacted. So to hedge ourselves, we write an Out of Money Call option.

Call Option sold: 900 Ce

Premium Received = 20 units (Say)

Days left to Monthly expiry = 7 days

Now, there are two scenarios possible upon expiry. 

If the share price of ICICI bank falls to say Rs. 860, then

  • The Call Option sold will expire worthless for the Option Buyer and the premium received would be income for us.
  • So, net income on Option sold = 20 units
  • The initial entry price on ICIC bank improves by 20 units and the new entry price of ICICI bank for us would be = 850-20 units = 830 units.

Or, If the share price of ICICI Bank goes up and expires at say Rs. 925, then

  • The Option sold would be exercised by the Option Buyer.
  • The loss made on the Option Sold will be = 925 – 900 – 20 = 5 units (loss)
  • The Profit on the shares of ICICI bank bought at Rs. 850 will be

= Rs. 925 – 850

= Rs. 75 per share

So, it can be easily deduced from the above scenarios that the Covered Call strategy potentially protects us from the downside risk when the market comes us and if the markets were to go up also, then we could lose money on the Option sold but the initial position of buy (for which the hedge of Covered call was taken) makes money and our initial bullish views stay intact. 

2. Hedge using Married Put Strategy

This is a very simple and classic strategy that is being used by both traders and investors if they are looking to hedge their existing position. Here in this strategy the trader/investor has a bullish bias on the market but there could be some news or events in the market that could impact their holding in a negative way.

So, to protect themselves, under this strategy they buy Put Options With an equal number of shares. So, if the market drifts on either side, then the trader stands to gain.

Let us Understand the implementation of this strategy by continuing our example of ICICI bank:

ICICI bank share purchase Price: 850

Current Price: 880

Put Option Bought (implement Married Put strategy) = 870 pe by paying a premium of 10 units

If the share price of ICICI bank falls to say Rs. 830, then

  • The Put Option bought will be expiring In the money.
  • Profit on Put Option Bought = 870 – 830 – 10

= 30 units

  • Loss on the existing shares of ICICI bank shares bought in the Cash market 

= 830-850 = Rs. 20

  • So, overall profit when the market comes down to 830 = 30-20 = Rs. 10/share
  • So, it can be deduced that the Married strategy works as a protective shield even when the market drifts massively on the downside.

If the share price of ICICI bank falls to say Rs. 850, then

  • The Put Option bought will be expiring In the money.
  • Profit on Put Option Bought = 870 – 850 – 10

= 10 units

  • Loss on the existing shares of ICICI bank shares bought in the Cash market 

= 850-850 = Rs. 0

  • So, overall profit when the market comes down to 830 = 10/share          

Now, say If the share price of ICICI bank goes up and is at Rs. 900 at expiry, then

  • The Put Option bought will be expiring Out of money.
  • Loss on Put Option Bought = 10 units (Premium Paid will be loss)
  • Profit on the existing shares of ICICI bank shares bought in the Cash market 

= 900-850 = Rs. 50

So, overall profit when the market goes up to 900 = 50-10 = Rs. 40 per share

From the various scenarios above, it can safely be deduced that the Married put strategy is very useful when one is looking to hedge using Options. This works even better when the market suddenly drifts on the downside.

And just in case bullish momentum stays intact, the cash position will make money and the only loss here will be to the tune of Premium paid to buy the Put Option. 

3. Hedge By Buying Put Options Throughout

Now the implementation of this strategy for the purpose of Hedging using Options requires thorough research on the stock for which the strategy is to be employed.

Let us run through the checklist of factors:

  • First, we need to see the seasonality of the stock under consideration. If the stock is bullish for 5 months (say) and bearish for 7 months, then we will have to try and hedge it by buying Put options for those 7 months. Note here, that this strategy is implemented based on the historical movement of the stock prices. 
  • Having understood the likely movement, we will continue with our example of ICICI bank. Let us assume that ICICI banks stay bullish for 7 months and have bearish momentum for 5 months. Then we would be buying Put Options for those 5 months and covering ourselves for the downside risk. 
  • Say we go slightly out of Money Put options and the premium we pay is 1% of the total cost of buying shares of ICICI bank. Then in that case ICICI bank needs to move a minimum of 5% every year in our favour to cover the cost incurred to buy the Put options. 
  • The cost incurred might sound a lot, but it covers you against a potential reversal in the market and also has the chance of making money on the Put options bought.

Also Read: Option Trading Strategies For Beginners

In Closing

From the discussion above it can be seen that Options has a hedging instrument that has a lot of potential of covering us against the downside risk and also potentially make some money if the market comes down.

But one needs to be also aware of the risk associated like the premium being lost or the sometimes upside potential being capped. But if you are looking for a long-term and viable trading strategy then Options have a lot of potential of Protecting your downside.

So that brings us to the end of our article on “What Is Hedging In Option Trading,” which we hope you enjoyed. Please submit your thoughts in the comments section below.

Happy Trading and Money Making!

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What is Stock Options Trading? Learn Options Trading With Examples!

What is Stock Options Trading? Learn Options Trading With Examples!

Understanding what is stock options trading: Options Trading in the modern world of trading has become a Marvel of its own. It is specifically because of the Factor of “Leverage” that comes along with Options Trading. Leveraging gives you the ability to be able to participate in a bigger game than what your capital would allow in the cash Market. 

Let us understand it with the help of this simple example. Say, you are willing to buy 250 shares of Reliance Industries. And the current share price of Reliance Industries is Rs. 2600 per share. 

Total capital Required to buy shares in the Spot/Cash Market = Rs 250*2500 = Rs. 625000

Total capital Required to buy one lot (250 shares) in Futures Market = Rs. 1,44,388

What is Stock Options Trading

Source – Zerodha

Now, say the stock price of RIL rises to Rs. 2750, then the profit and ROI for both cash market and Futures trade would be –

In Cash Market

Capital Invested = Rs. 6,25,000

Selling Price = Rs. 2750*250 = 687500

Profit Made = Rs. 62500 (687500-625000)

ROI = 10%

In  Futures Market

Capital Invested = Rs. 139744

Profit Made = Rs. 62500

ROI = (62500/139744)*100 = 44.72%

Now, if we look at the calculator above, it can safely be assumed that the Futures market is way better in terms of Return on Investment provided by the market. But, it would be a little too premature to assume that. Before coming to a Final conclusion, we should also see what would be the ROI if similar views were using Options.

Also Read: Basics of Futures and Options Trading in India (For Beginners)!

Say, you have bullish views on the market but don’t have enough capital or you don’t intend to use a large amount of capital to express this view, you could simply express your bullish views by using a very small portion of your capital. Let us find out how-

You buy ATM (At the Money) Call option (Ce) of Strike price = 2500

The Premium for the same is = 80 units

Share per lot = 250

Total Premium Paid = 250*80 = Rs. 20000

Now, by the expiry of this contract if the share price of RIL goes to Rs. 2750, then the profit made on the Futures Contract would be –

Profit on Options Contract for RIL = (Final Price – Strike Price)*250 – Premium Paid

= (2750-2500)*250 – 20000

= 62500 – 20000 = 42500

ROI = (42500/20000)*100 = 212.5%

So, after all the calculations, it can be safely concluded that return on investment (ROI) is the highest for Options trading, followed by Futures trade and then Cash Market trading.

But, higher ROI comes with its own set of risks and challenges. Let us explore a little more about what is Stock Options Trading.

What is Stock Options Trading?

It is a simple form of trading whereby the bullish or bearish views on that particular stock can be expressed by using Options. 

Say, if you have bullish views on the shares of XYZ company, then it can be expressed by buying Call Options and, if you have bearish views on the shares of XYZ company, then even that be expressed by buying Put Options. 

What is a Call Option in Stock Options Trading?

Call Options to give the buyer of the option, the right to buy the shares of the particular company at the predecided price on or before Expiry. The Buyer of the option has the right to buy the underlying stock and the seller of the option is obligated to honour the contract.

What is Put Option in Stock Options Trading?

Put Options give the buyer of the option, the right to sell the shares of the particular company at the predecided price on or before Expiry. The Buyer of the option has the right to sell the underlying stock and the seller of the option is obligated to honour the contract.

What is Premium in the Stock Options Trading?

Premium is the price paid by the Option buyer to the Seller of the option to have the right on the underlying asset to be bought or sold upon expiry. The buyer has the right because he pays the money upfront and the seller is obligated because he received money upfront at the time of writing of Option. 

Who are the Players involved in Stock Options Trading?

The profile of people using Options as trading products depends on the purpose of Trade. There are generally three categories of users.

  • Hedgers – These are those categories of traders, who use options to hedge their existing position in the stock market. Say, you have bought shares of TCS and you have a bullish stance on the shares of TCS over a long time. But there are some rumours doing rounds in the market that might impact the share price of TCS in near future in a negative way. So, you could hedge yourself against downside risk by using options. You could simply buy Put Options and in case the market comes down, then you could protect yourself from downside risk and in case the market continues to keep going up, then all you stand to lose is the premium paid to buy the Put option.

For Example 

  • You have bought shares of TCS at Rs. 3200
  • To protect against downside risk you hedge it by buying a Put Option of Strike price 3200 (Pe)
  • The Premium for the same is 50 units.
  • So, if the share price comes down to Rs. 3020
  • Then the profit made on the Put Option bought would be (3200-50-3020) i.e., 130 units.
  • And if the share price of TCS goes up to Rs. 3400, then the maximum loss on the Put option would be to the tune of Premium (50 units) paid. But the Position in the cash market would be in favour of Rs. 200 (3400-3200)
  • Speculators – These are those categories of Market Participants who take a bet on the directional movement in the stock prices and take Options positions accordingly. And if the market goes in your favour, then the returns can be exponential as can be seen from the example of Reliance Industries above. If you expect the share price of the stock to go up, you could buy Call Option or Sel Put Option and if you expect the share price to go down, you could buy the Put Option or sell Call Option.
  • Arbitrageurs – These are those market participants who benefit from the difference in prices and take advantage of it. And eventually, bring the market to parity. 

How to Express Bullish or Bearish View using Options?

There are various combinations of strategies that one could formulate to express Bullish/Bearish views using Option in the Stocks. However, the following are 4 simple ways to express it:

  • If your stance is Bullish, you could buy Call Option and Pay Premium, the profit potential here is unlimited.
  • If your stance is Bullish, you could also sell/write the Put option and receive Premium, the profit potential is to the tune of Premium received but the loss potential is Unlimted. The Premium here is received at the time of selling the Option.
  • If your stance is Bearish, you could buy Put Option and Pay Premium, the profit potential here is unlimited.
  • If your stance is Bearish, you could sell/write the Call option and receive Premium, the profit potential is to the tune of Premium received but the loss potential is Unlimted. The Premium here is received at the time of selling the Option.

In Closing

Option Trading brings along with it, a trading mechanism which can enable a trader with small capital to participate in a bigger game. But it does come with its own set of challenges, so one has to be careful and diligent while trading stock options.

That pretty much concludes our post on what is options trading today. We hope you enjoyed reading it. Happy Trading and Money Making!