Understanding Options Trading Vs Intraday Trading: The stock market is a very volatile place that keeps fluctuating and creates several trading opportunities for the individual trader.
But as there are different trading strategies one can use, there arises a question of which is the best trading strategy. Options trading and intraday trading are two of the well-known trading forms that are commonly used by traders
In this article, we will be covering Options trading vs Intraday trading and see which is the more convenient trading strategy for the individuals
What is Options Trading?
Options is a type of derivative contract which is made between two parties to buy and sell the underlying asset at an agreed price in the future. Here, the buyer of the options contract has the right to execute the options contract, but not an obligation to do so. For this privilege, the buyer of the options contract has to pay a premium to the option seller. And the seller is obligated to Honor the contract.
Positions in Options Trading
The options contract is divided into call option & put option and individuals can take 4 types of positions based on their sentiment toward the market.
In the case of Bullish sentiments
- Buy a Call Option: In this position, you buy a call option by paying a premium to the seller. Here your losses are limited to the premium paid to the call option seller.
- Sell a Put Option: In this position, you write (sell) the put option contract for which you will receive the premium from the seller. Here your profits are limited to the premium received from the put option buyer.
In the case of Bearish sentiments
- Buy a Put Option: In this position, you buy a put option by paying a premium to the seller. Here your losses are limited to the premium paid to the put option seller.
- Sell a Call Option: In this position, you write (sell) the call option contract for which you will receive the premium from the seller. Here your profits are limited to the premium received from the call option buyer.
advantages of Options trading
Here are the advantages of Options trading:
For the Option Buyer
- Limited loss and unlimited profit for buyers: In case you buy a call or a put option, your loss will be limited to the premium paid to the option seller. In case the buyer goes right, the potential of earning profits will be unlimited
- The choice to execute the contract: If the options contracts do not go in favor of option buyers, they have a choice of not executing the contract.
- Low financial Commitment: While entering the options contract, the margin required by the buyer of the options contract is only the premium paid to the seller.
For the Option Seller
- Upfront payment: The seller of the options contract receives the premium upfront while entering the options contract.
- More chances in favor of the seller: The seller of the options contract has more chances of being right due to factors such as time decay and volatility.
disadvantages of Options trading
Here are the disadvantages of Options trading:
For the Option Buyer
- Time Decay: As the days to expiry come closer, the value of the options contract keeps decreasing. Thus the chances of the buyer going right in the option decreases.
For the Option Seller
- Limited profit and unlimited loss: While the potential to earn profits is limited to the premium received by the option seller, the potential for incurring loss is unlimited.
- Huge margins required: As the potential for downside is huge for the option seller, a huge margin is required to be deposited as a safety against the loss by the seller.
What is Intraday Trading?
Intraday trading refers to a type of trade wherein you open a buy or sell position and exit the position on the same day. In an intraday trade, the positions of the individuals will be auto-squared off if they fail to exit their position by the end of the day.
To know more about square-off, you can follow our article on what is square off
Positions you can take in an Intraday Trade
Here are ways in which you can take a position in an intraday trade
Through a Long Position
Taking a long position refers to individuals buying the shares. An individual will take a long position with a bullish sentiment about the market. Individuals will own the shares when they take a long position in the market.
Through a Short Position
Taking a short position refers to individuals selling the shares. Short positions are taken with a bearish sentiment about the market. An individual will owe the shares to someone while taking a short position in the market
advantages of Intraday trading
Here are the advantages of Intraday trading:
1. Requires Low Capital
Intraday trading provides a margin facility to the traders. This means that individuals can place larger trades while only paying a small amount of capital.
2. Gives higher returns
Intraday trading provides the individual to earn more profits with less capital because of the margin facility.
3. Eliminates the chances of overnight risk
As intraday trading occurs within the day, it eliminates the chances of overnight risk that may arise from global or local news that may impact your profitability.
4. Can benefit from Bullish and Bearish Market
As intraday provides individuals to take both long and short positions, they can take advantage of both upward and downward moments in the market.
disadvantages of Intraday trading
Here are the disadvantages of Intraday trading:
1. Small Trade intervals
Intraday trading provides the individuals only a small time window for their trades to go right as intraday trading is done within the day.
2. Risk of loss
As intraday trading is done using a margin facility, the individuals can incur more losses if the trades do not go in their favour
Options Trading Vs Intraday Trading
| Options Trading | Intraday Trading |
|---|---|
| Individuals can enter an options trade in 4 different positions | Individuals can enter an intraday trade in 2 different positions |
| Has a monthly and a weekly expiry depending on the contract | Must be squared off within the end of the day |
| Market factors and Options Greeks influence the price of the contract | Intraday trading only relies on the market factors |
| Margins required by the option buyer are limited to the premium price paid margins needed by the option seller are the amount required to cover the losses | Individuals get leverage on the margins available to them, They can buy or sell more shares with less capital. |
In Closing
In this article, we covered Options Trading Vs Intraday Trading by discussing Options trading, Intraday Trading, their advantages and disadvantages of both, and then compared the two trading strategies.
Each of the trading strategies comes with its comes pros and cons. Thus it is important for individuals to understand their purpose of trading, their risk appetite & their limitations, and then select the best trading strategy that is suitable for them.
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