how to trade options in India 2020

How to Trade Options In India? Step-by-Step Guide!

A Beginner’s Guide on How to Trade Options in India: Options Trading has been quite popular in India in recent days. Because of the pandemic situation, a lot of new and existing traders have been able to understand and learn this new craft of trading (Options Trading).

Nonetheless, as the skills and steps required to trade Options is not taught in schools or academics, most beginners find it difficult to learn how to trade options in India. Therefore today, we are going to explain the step by step process on how to trade options in India in the easiest possible words. Let’s get started.

Brief Overview of Options Trading

The most common concept that most of you must have heard about trading via options is the power to leverage.

Leveraging in terms of Options trading would simply mean, the power to trade at higher capacity then what the direct value of trade would allow. Let us understand this with the help of a simple scenario from day-to-day life.

Say, Ram has a wedding in his house two months down the line and for the purpose of the wedding, he needs to get 100 grams of Gold. The current price of 10gms of Gold is Rs. 50,000. However, Ram is a little skeptical about the volatility in the market and wants to lock in the current price of Gold, to be bought two months down the line. Therefore, with the objective of freezing the price of gold, he visits the jewelry shop and puts forward his proposition of buying the gold at the current price, two months down the line.

Why are Gold prices skyrocketing? Is it a good time to buy?

But looking at the current volatility, the jewelry shop owner is a little skeptical of taking the risk of fixing the price of Gold. Therefore, to incentivize the Jewelry shop, Ram pays him certain token money (say, Rs. 2000 per 10 gm of Gold) to fix the price of Gold. Therefore, the total money paid by Ram to enter the agreement with the jewelry shop owner is Rs. 20,000.

Let’s suppose, if upon expiry (i.e. after two months) if the price of gold goes above Rs 50,000 (per 10 gm), then Ram will exercise his right to buy the gold at Rs. 50,000. However, if the price of gold after two months remains unchanged or goes down, then Ram is not obligated to honor the agreement. He merely stands to lose the token money (Rs. 20000), which he paid to enter into the agreement. And that becomes the income of the Jewelry shop owner.

For example, if the price of Gold were to increase to Rs. 57,000 for 10 grams, then the overall benefit of Ram will be –

= Total gold * (Price after two months – Current price – Premium paid) = 10*10*(57,000-50,000-2,000) = Rs. 50,000.

Now, if I were to relate this example to options, then the Ram is the Option buyer, the Jewelry shop owner is the option seller, Gold is the underlying asset, the current price of gold is the Strike price and token money paid is the option premium.

A similar scenario is also applicable to the stock market. Here, if the option buyer believes that the price of a share may go higher in the future (through his analysis or study), he/she may pay a premium to the options seller to enter in a contract to buy the stocks at the pre-decided value. Further, the premium paid might be an expense, however, if the share price goes way above the pre-decided agreement price, then the option buyer will make profits.

Basic Options Trading Definition

To define in financial terms, Options are a derivative instrument that gives the right to option buyer to buy the underlying asset at a pre-decided price from the option seller, on or before expiry.

However, the option buyer is not obligated to honor the contract upon expiry. He has the right to buy the asset if he chooses to. However, if he does not wants to buy (in case the current price goes below the pre-decided value), he will simply lose the premium paid beforehand.

Nevertheless, the Option seller is obligated to honor the contract as he/she has taken a premium at the starting of the agreement. And the option seller is compensated in the form of this fee (or premium) to give up his right on underlying assets till the expiry of the contract.

Also read: Options Trading 101: The Big Cat of Trading World!

How to Trade Options In India?

Now that you have understood the basics of Options Trading, we’ll be covering how to trade options in India next.  For the sake of reference and explanation, I will be using the trading portal of Zerodha (Kite) in this article, as it is the most commonly used trading platform in India. Following are the step by step procedure to trade options in India.

Step 1: You need to have a trading account with one of the brokers (For example, Zerodha, Angel broking, 5Paisa, etc.). If you don’t have one, here’s an article on the best discount brokers in India so that you can pick the one that suits you the best. The steps to trade options in India are almost same in any trading platform you chose.

Step 2: We need to have a margin in our trading to be able to trade options. Based on the position taken by the investor, the margin requirement varies. Option buyer needs margin to pay for the premium required to trade options. And option seller needs margin as they have to keep certain money with brokers to account for Marked to Market (M2M).

Step 3: Next, we need to understand as to what is our view on the underlying asset. If we have a bullish view, then we can buy a call option (or sell put option) and if we have a bearish view, then we can express the same by either buying a put option (or selling a call option).

“Buying a Call option gives us the right to buy the underlying asset on or before expiry. And Buying a Put option gives us the right to sell the underlying asset on or before expiry”

Step 4: Select the underlying asset you chose to trade and also select the various strike prices that we choose to trade upon. For example, here’s a screenshot from Zerodha Kite where you can choose the asset and strike price.

zerodha kite astrike price

Now, say we are looking to trade Nifty 50 Contract via Option and we have a bullish stance on the market. Therefore, we could trade In the Money Call Option (Nifty 11450 CE), At the Money Call Option (Nifty 11500 CE) or Out of Money Call Option.

An In the Money Option is one that would make money if we were to exercise it right now at current spot levels. An Out of Money option is one that would be worthless if we were to expire it right now and an At the Money option is one that is the closest strike price to the current spot price levels.

It is advised to not to go too out of money while buying an option as the chances of them expiring in the money by expiry, is very less and more often than not, they expire worthlessly.

Step 5: Let’s say, we decide to go ahead and buy an At the Money option. Then, the next step in this process is to place an order to buy the option. We can choose to buy the option at the existing price and we can also choose to place the order at a specified price by placing a limit order.

options trading in zerodha kite

Therefore, if you look at the ticket in the image above, we have two options to buy the contract from i.e. Market or Limit.

If we choose the option of market order then the order is executed at the current market price. And if we choose Limit order, then we can choose the price at which we want to buy the contact. In the image above, the current rice of the contract 11500 call option is 90.65, but the price at which we want to buy the contract is 80.

The total number of shares in one contract of nifty is 75. If the option premium is 60, then the total amount of premium required to buy the contract will be = 75*60 = 4500. And this information is directly available on the ticket shown above.

Step 6: The next step while trading options is to check in the order book if the order has been placed.  We can do that by simply clicking on the orders tab and we can see the list of all the order which have been placed or canceled or executed.

Step 7: The last but the most important step while trading options is to monitor the existing position in the market. It is always advised to have a stop loss for every trade as it will help us in having good risk management and also prolong one’s trading career.

That’s all. This is how you trade options in India. If you still have any doubts, I will strongly recommend you to also watch the below video on how to trade options using Zerodha kite Demo. This video will help you even more to learn the steps for Options trading in India. Watch it Now!!

Closing Thoughts

In this article, we discussed how to trade options in India through a step-by-step guide. Here are the key takeaways from this article:

  • Options are derivative products that derive their value form the value of the underlying asset.
  • Call options give us the right to buy the underlying asset upon expiry. On the other hand, Put options give us the right to sell the underlying asset upon expiry
  • Bullish views can be expressed by either buying a call option or selling a put option.
  • Bearish views can be expressed by wither buying a put option or selling a call option.
  • One can use the Zerodha platform to trade option as it is very user friendly and there is rarely any delay in the order execution.

If you still have any doubts on how to trade options in India, feel free to comment below. I’ll be happy to answer all your queries. Have a great day and happy trading!

LIC IPO 2020 - Are You Ready? | Expected IPO Dates & Details cover

LIC IPO 2020 – Are You Ready? | Expected IPO Dates & Details

LIC IPO 2020 Details: Earlier this year Finance Minister Nirmala Sitharam announced during the 2020-21 budget that the government would sell a part of its holdings in LIC through means of a public listing. Judging by the size of the company it could be the largest IPO the country has seen. The IPO of LIC may even be bigger than this expectation as the government also plans to incentivize the participation of retail investors by offering discounts on IPO price and issuing bonus shares.

Today we take a look at where the IPO stands as we almost near the end of 2020. In this LIC IPO article, we’ll discuss a brief history of IPO, why the government is going for LIC IPO, the Expected dates of LIC IPO, and much more. Let’s get started.

LIC India – Brief History

LIC was founded in the year 1956 and is wholly owned by the government. The state-owned life insurance and investor is the oldest and the largest in the country. The company is headquartered in Mumbai. There are currently 24 insurance companies operating in the country but none of them come close to LIC which holds a 69% market share. 

Moreover, As of 2019, Life Insurance Corporation of India is the biggest insurance company in India and had a total life fund of ₹28.3 trillion. The total value of sold policies in the year 2018-19 is ₹21.4 million. LIC settled 26 million claims in 2018–19. It has 290 million policyholders. The company is estimated to have assets worth Rs. 34 trillion.

The government had initially expected to offload a 10% stake. But later revised it to 25% as SEBI guidelines state that within 3 years of listing the minimum public shareholding should be at least 25%. The government is expected to incentivize retail investors with a 10% discount followed by a bonus issue. Of the shares offered 5% of the shares are expected to be reserved for retail investors and employees of LIC.

This IPO is expected to increase transparency in the affairs of the company as all financials will be required to be released to the shareholders. The company’s investments in bonds and equity are expected to come under greater scrutiny post the listing.

lic details financials

(Source: LIC Annual Report 2019-20)

When will the LIC IPO be held?

Currently, the LIC IPO stands delayed due to the COVID-19 pandemic and its occurrence depends on future market conditions. The pandemic has delayed a lot of the pre IPO work.

  • IPO Date: Yet to be Announced (Expected Q4 2020/21)
  • Price Band: —
  • Minimum Lot Size: —
  • Issue Size: —

The government still has to value its business and value its physical assets. Valuations of the company are expected to be completed in a short period of time but valuations of its physical assets which is the most crucial part of the pre IPO process may take from 6-8 months. This means that the IPO will not hit the markets this year. The earliest estimates state that the IPO may occur in the 4th quarter of 2020-21.

The LIC IPO 2020 will offer a good opportunity to retail investors and the company’s employees to become investors in one of the most reputed companies in India. Moreover, the IPO may also offer listing day gains to the shareholders. Further, whether LIC Policyholders will get any reserved quota in this IPO is yet to be decided.

Why has the government chosen to disinvest LIC?

The government plan to sell LIC is part of its Rs. 2.1 trillion disinvestment plan which was announced in the budget. The government expects to raise up to Rs. 90,000 crore from LIC and IDBI bank stake sales. Out of this, the government aims to raise Rs.20,000 cr. from sales of IDBI. As of September, the government has raised Rs 4.99 trillion through its disinvestment process. There is very little to rejoice about as the Narendra Modi government will have to use this to try and bridge the budget gap that has now been widened due to the coronavirus lockdown.

The LIC IPO will contribute significantly to the governments’ aims to meet its funding requirements Unfortunately the governments plan to disinvest its stake in LIC and other companies like Air India, BPCL, Concor have been delayed due to the pandemic. 

As the government is required to give up 25% of its stake in the company, the proposed IPO is estimated to be worth Rs.3 lac cr. This raises the problem as the market may not find sufficient buyers in India. In order to combat this, the government has decided to disinvest in tranches starting with 10% but this too may not be absorbed by the domestic markets. Hence, the government has looked into listing the company in overseas bourses in order to attract large investors. With the decision still in progress, the government has already received pitches from global stock exchanges.

Also read: ‘Vi’ – Vodafone-Idea Rebranding’s Reasons and Benefits!!

Closing Thoughts

The Price of the IPO is not known as the price is generally announced a week before the shares are opened up for the subscription. There is a good probability for oversubscription especially after considering that investors around the world and retail investors domestically have been left dry especially if they are IPO hungry as many IPO’s have been derailed.

The LIC listing could turn out to be bigger than expected and could turn LIC into India’s biggest companies in MCAP that can compete with the likes of Reliance and TCS.

zerodha success story discount stockbroking India

Zerodha Success Story: Journey to Biggest Stockbroking in India!

Zerodha Success Story in Stockbroking Industry in India: Trading and Investments are the two terms everyone wishes to experiment but are reluctant to step in due to many reasons like lack of knowledge, hefty commission and brokerage charges, uncertainties in the market and so on. 2008-2010 were the years when the biggest global financial crisis happened and the world was facing a trading hush. In India, the stockbroking companies that existed also experienced a downfall and were using old technologies to provide stockbroking services. Many young generation people were not educated enough to even think of trading at a very young age.

While all of these were encountered by almost every broker in India, Bangalore based discount broking firm, Zerodha was founded in 2010 by Mr. Nithin Kamath that provides trading services at discounted brokerage fees and user-friendly interface with reliability. This firm enjoys a massive client base of over 2.5 million users. Let us deep dive into the journey of how Zerodha success story and discuss how it became the biggest discount broker in India in this article.

Quick Note: As of October 2020, Nithin Kamath and Nikhil Kamath, the founders of Zerodha, India’s biggest stock brokerage company in terms of volume of trade, are the newcomers in the Forbes’ list of India’s 100 richest 2020. Their net worth is estimated at $1.55 billion. Read more here.

The founding of Zerodha: How did it start?

The Co-founder of Zerodha “Nithin Kamath”, before establishing Zerodha, was working in the call center in the night and he used to trade during the morning hours. At the age of 17, he got introduced to the stock markets by his friend and since then he started trading.

Although he made a good chunk of money by trading in stocks, he lost all the money during 2001 and 2002 when the markets crashed. Over a period of time, he was landed a cheque from a foreign HNI to manage his money. Eventually, he joined Reliance Money as a sub-broker and made a lot of money by adding big clients to Reliance money. Nevertheless, again lost a significant amount of money in the second market crash in the middle of the global financial crisis in 2008-09.

After trading for full time for over 10 years, this Maverick decided to become a broker when he thought that the time has come to provide a different kind of stockbroking services that he never came across during the 10 years span of his trading. He felt digitization and online user-friendly platform are the need of an hour when he first thought of starting Zerodha. Nitin Kamath also observed that the reason why the young generation is not willing to start trading is that there are high brokerage charges implemented on the transactions. His aim was to become an online broker using the latest technologies that is more people-first than profit-first.

zerodha office nithin kamath

Zerodha is derived from the Sanskrit word Rodha which means Obstructions. The name Zerodha means ‘No Obstructions’. Hence, the founder aimed at providing a hassle-free, low brokerage trading platform. He targeted clients who are young and more tech-savvy to contribute to the capital market ecosystem. According to him, he wanted more of a Google-like platform with a simplicity to use rather than a Yahoo-like platform. When he felt the need to change the system, he along with his younger brother, Nikhil, started Zerodha and the rest is the history or rather a case study for everyone.

The Secret Formula of Zerodha’s Success

It is indeed a fact that there is no short cut to success. However, Nithin Kamath, when founded this discount broking firm, decided to provide technology-efficient and cost-efficient services to its customers. He observed that there is a huge lag between the commissions charged by the other brokerage firms and the amount of money actually received by the customers.

In addition to that, the technology that was used was too old and Nithin felt the need to introduce a smart platform that enables users to trade online comfortably. He thought of providing services at a low cost where the idea of charging low commission clicked into his mind. He also wanted to attract more young customers who often do not enter into trading due to high commission charges. With this aim, he started his firm and today it has become the biggest discount broking firm. He believes if we do not depend too much on foreign capital and invest for our own companies, the day is not far when India will become an economically strong country.

Surprisingly, the firm hardly spent any money on advertising or marketing for its own firm. They do not run any advertisements. The founder believes in ‘the word of mouth is your true marketing’. Thus, with a very low operating cost Zerodha was able to capture a large number of customers. Interestingly, trading is provided free of cost at his stockbroking firm if the period of holding for shares is longer than a day.

They make money by charging a flat fee of Rs. 20 for futures, options, and intraday trading. While other competitors charge much more than this which is based on the percentage of a transaction traded. Its business model on which it works is ‘low margin – high volume’.

Innovation and New Additions

Zerodha brokerage calculator cover

In order to stay competitive, the firm launched many products to expand its reach and to overcome some challenges they were facing. Below is a brief on what each product provides:

— Console: It is a central dashboard of a customer’s account with Zerodha that will provide in-depth reports and visualizations to get more insightful idea.

— Kite: It is a sleek trading and investment platform using the latest technologies. It eases the customer’s experience to trade and transact in the stock market.

— Kite Connect API: This is mainly focused on independent traders and startups to enable them to build an innovative trading and investment platform. Using algorithms, retail traders can automate their trades.

— Sentinel: A platform that enables you to create market alerts. The alerts can be customized based on price, trade quantity, and open interest. The interesting aspect of this product is that you do not need to be a Zerodha customer in order to use Sentinel.

— Z Connect: This is a blog facility regarding stocks, trading, and investment with Zerodha. They publish articles and information on this blog and any user is allowed to ask questions and post comments.

— Varsity: One of the challenges faced by this firm was that it lacked in providing research services to its customers who are sometimes clueless about what and when to buy or sell. To overcome this, they come up with Varsity that gives a vast collection of stock market lessons on the go.

— Coin: It provides a commission-free purchase of mutual funds directly delivered into the customer’s Demat account.

— Rainmatter: It is an incubator that provides funding as well as mentorship to startup companies in capital markets and gives minority stake in exchange.

Source: Product information from Zerodha.com

In addition, Zerodha has also partnered with a lot of leading stock market platforms and portals like Streak, Sensibull, etc to create more value for their clients.

zerodha partners senseibull smallcase etc

Let us Talk about Challenges

Despite the tremendous success and huge customer base, Zerodha also had to confront a few challenges as described below:

  1. First of all, Zerodha does not provide stock advisory or any market-related calls that would enable its customers to decide on what to buy and sell.
  2. They also suffered from a lack of delivery of valuable advisory reports and analysis of one’s investments and trading activities be it either weekly or quarterly. Most of the big full-service brokers provide research reports.
  3. As Zerodha is mostly online and no offline support branches, inefficient customer support, and lack of quick customer service are the biggest challenges that this firm faces.
  4. Technical errors like app down for a few minutes or charting errors were reported previously which was basically because of the high market traffic situations.

Also read: 8 Best Discount Brokers in India – Stockbrokers List 2020

Closing Thoughts

To sum up, competing with big players like HDFC and ICICI is indeed a daunting task that the genius was able to cope up. However, there are other competitors too such as Upstox, Groww, SAS Online, Angle Broking, TradingBells, etc. However, the founder wishes to continue with his low margin strategy. This firm also developed a strategy to start selling Treasury bills, Government Securities, and Sovereign Gold Bonds which is everyone’s preference while the markets are facing a downfall.

Nithin strongly believes in not running after the money but to do the right things for a long period of time. This is what is the reason his firm has become one of the top-most broking firms in the country over the eight to nine years of time. To add to that, after facing so many challenges, the firm has made its way to persistently increase its customer base year by year. To get more insights you can read Zerodha review 2021.

That’s all for this post. I hope this Zerodha success story is inspiring for all the budding entrepreneurs and business enthusiasts who are planning to make something big in the stock market industry. Stay safe and happy investing.

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