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Options trading is a fast-paced, financial market tool to leverage capital, hedge current portfolios, and produce income. However, to effectively navigate the options market, it takes a substantial understanding of the particular market mechanics. One of the simplest paths to successful options trading, for the new trader in India, is to start with basic, risk-defined options trading strategies. This guide takes the basics of options trading and highlights the best three strategies for beginners in India to trade in the options derivatives market safely.
Basics of Options Trading
Options are a derivative instrument that give the buyer the right, but not the obligation, to buy (Call option) or sell (Put option) an underlying asset (stock, index, etc) at a pre-defined price (Strike Price), on or before some fixed future date (Expiration Date). The buyer (or owner) of an option also pays an upfront price, known as the Premium, for the right to exercise the option. Trading options is generally considered less risky than second-selling options, since options maximum loss, is limited to paying the premium.
Enroll now in our Option Greeks Trading Course.
To deep dive into the derivatives world of trading, please see our guide on Start Trading in Derivatives Market, and to analyze direction in the stock market, The Guide to Technical Analysis in Stock Market.
Top 3 Beginner-Friendly Strategies
The journey to becoming a successful options trader or options investor begins with simple, directional strategies or strategies that can result in income generation techniques with defined risk. Look at the three best options trading strategies for beginners in India to make the step into options trading for the first time.
1. Long Call (Buying a Call Option)
This is the most basic strategy for a bullish market outlook (expecting the underlying asset's price to go higher).
How it Works: You buy a Call option by paying a premium. You will profit if the underlying asset's price goes significantly higher than the Breakeven Point: (Strike Price + Premium Paid) before expiration.
Best Used When: You are strongly confident in a sharp upward price movement to occur in a stock or index.
Risk Profile: Limited Risk (Maximum loss is the premium paid). Unlimited Reward (Profit has no cap).
Capital Requirement: Relatively low, as you pay the premium only.
Dive deeper into the components of the options market with the Financial Market Course for beginners.
2. Long Put (Buying a Put Option)
This is the most basic strategy for a bearish market outlook (expecting the underlying asset's price to go lower).
How it Works: You buy a Put option by paying a premium. You will profit if the underlying asset's price goes significantly lower than the Breakeven Point (Strike Price - Premium Paid) before expiration.
Best Used When: You are strongly confident in a sharp downward price movement to occur in a stock or index, or to hedge an existing long position.
Risk Profile: Limited Risk (Maximum loss is the premium paid). Substantial Reward (Profit is capped once the underlying price reaches zero).
Capital Requirement: Relatively low, as you only pay the premium.
Master it with the Option Trading Strategies.
3. Bull Call Spread
This is a great method for novices to use with a moderately bullish view. It is a lower-risk alternative to a Long Call in that it involves both buying and selling a call option.
Here’s How it Works:
Buy a Call option (Lower Strike Price).
Sell a Call option (Higher Strike Price) on the same underlying asset and expiration.
Best Used When: You expect the price to increase, but only to a certain price.
Risk Profile: Limited Risk (Maximum loss is the net premium paid). Limited Reward (Maximum profit is the difference between the strike prices minus the net premium paid). The upfront cost and risk are less than a single Long Call.
Advantage: This method is often more capital-efficient and risk-defined, which is great for novices with small capital and for generating income at a defined, low risk, when compared to naked option buying.
If you are a trader who wants to manage the complexities of options, I would urge you to take the Advanced Level Options Trading Course.
How to Do Risk Management?
Risk management is very important for options trading, especially with highly leveraged products here in the Indian market.
1. Determine Your Max Loss and Use Spreads
Before entering any trade, calculate your maximum loss. It is simply the premium paid for Long Call and Long Put strategies. If you are using a spread, like the Bull Call Spread, your loss is the net premium that you paid to establish that spread.
Limit Allocation of Capital: Do not risk more than 2-5% of your trading capital on any one trade.
Spreads: The Bull Call Spread or Bear Put Spread have both defined and limited risk and potential reward, and are safer for beginners.
2. Paper Trading and Focus on the Fundamentals
Prior to risking real capital, you can practice your chosen options trading strategy in a Paper Trading application. Paper trading will allow you to see the effects of not only price movement, but time decay (Theta) on your position, and be risk-free.
If you want to practice to gain experience without risk of loss, check out the List of the Top 10 Paper Trading Apps.
3. Continual Education and NISM Certification
The options market is not easy to navigate. Education is a precursor to success in this asset class, and it must be pursued on a continual basis. Trying to grasp the option pricing model without understanding the Greeks (Delta, Theta, Gamma, Vega) is not possible if you want to apply risk management to options trading strategies.
Formal Learning: It is a recommendation, especially for assessing concepts around risk. We appreciate that some may recommend a more formal education or training, such as the Risk Management Course.
Getting Certified: Completing SEBI NISM certification exams, especially the Equity Derivatives Module, provides a sound preliminary knowledge and understanding. Relevantly, consider the NISM Series VIII course.
Conclusion
Options trading can be a lucrative career or pastime in the Indian markets with discipline, if you stick to options trading strategies. For beginners, the focus should be on risk-defined options trading strategies, such as the Long Call, Long Put, and the Bull Call Spread, plus following strict guidelines for preserving capital. Start small, keep analysing the market (Technical Analysis Crash Course and Fundamental Analysis Crash Course), and an open mind to possibilities can ultimately turn your first steps into a successful trading endeavour.
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