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 Options||Premium Charged|
|Out of Money||Least Amount of Premium|
|At the Money||More premium compared to Out of Money and lesser than In the Money|
|In the Money||Highest 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
(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.
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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