Learn how to start options trading in India with Rs 10,000: Options trading is one of the fastest ways to make or lose money in the stock market. If you’ve mastered how to do options trading correctly, you can make lakhs of money from your trades. However, if traded without proper knowledge, it can lead to the erosion of the entire capital of the trader.
Although a capital of Rs 10,000 is not a big amount to do stock trading, however, it can be a good amount to learn the basics and technicalities of trading stocks and options. In this article, we’ll discuss how to start options trading in India with Rs 10,000. In addition, we’ll also cover a few important concepts to know while trading options. Let’s get started.
What is Options Trading?
Before we dig deeper into how exactly to start options trading, let us give you a brief introduction to what exactly is options trading.
Options are a derivative instrument that gives the right to ‘Option Buyer’ to buy the underlying asset (Stock, indexes, etc) at a pre-decided price from the ‘Option Seller’ on or before a fixed date (Known as expiry).
For example, if a stock is currently trading at Rs 100, and the ‘Option buyer’ thinks that the price can go to Rs 150, by month’s end, he can enter into a contract with another ‘Option Seller’ to buy at this pre-decided price, on or before expiry by paying a small premium. The same can be done for the cases of indexes like Nifty or Bank Nifty.
Coming back to the concept, the option buyer is not obligated to honor the contract upon expiry. Here, the Buyer has the right to buy the asset if he chooses to. However, if he does not wants to buy (in case the trade doesn’t go in his favor), 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 start of the agreement.
You can trade in Indexes or Stocks for options. However, unlike stock trading, options are traded in lots. The lots are pre-decided by the exchange. For indexes, Nifty has a lot size of 50 and Bank Nifty has a lot size of 25. It means that you’ve to buy at least 50 quantities (and the same multiple) while trading in its options.
For example, if the premium price is Rs 40 and you (as an Options Buyer) is purchasing 1 lot of 50 quantities, here, your initial trade price will be Rs 40*50 i.e. Rs 2,000. This amount will be paid by the Option Buyer to the Option Seller. The lot size can be increased based on your trade size and money management.
Options Buying vs Options Selling
One of the biggest differences between Options Buying and selling is the Capital required (also known as margin).
When you’re an Options Buyer, you’re paying for the premium (let’s say Rs 5,000). Here, the maximum that you can lose is the premium, however, the potential to earn is unlimited. (Stock can crash to Zero, but can go up to infinite price theoretically). That’s why you need at least the premium amount to keep in your trading account to make the trade.
On the other hand, for the Options Seller, the margin required is quite high. Sellers basically mean that they will sell the options first and buy them later. They’ll try to eat up all the premium by selling it at a higher price and later purchasing it at a lower cost, sometimes even close to zero in case of the expiry dates. For the options seller, the maximum profit is up to the premium that he has received, but the maximum loss potential is unlimited. (Note: Buyers profit is Sellers loss & vice-versa)
For example, in the previous case, let’s say the Option Buyer is selling the premium of Rs 5,000 to the seller. The maximum that the seller can earn here is Rs 5,000. However, if the trade doesn’t go in his favor and the premium goes to Rs 50,000 when executed, the seller will lose this huge amount. That’s why he is only allowed to make trades when he has a bigger margin.
To start options trading in India with Rs 10,000, you can only become an Option Buyer as lesser capital is required here.
This means that you can only buy options and pay for the premium price. If the trade goes in your favor, the value of the premium will increase and you’ll make money out of your trade. On the other hand, if the trade doesn’t go in your favor, you can lose a maximum of up to the Premium amount paid to buy that contract.
How to Start Options Trading in India with Rs 10,000?
If you want to Start Options Trading in India with Rs 10,000, here are the steps:
1. First, you need to have a trading and demat account. You can open your account with any of the top brokers in India like Zerodha, Angel One, etc. We’ll recommend you go with Zerodha, the best broker to get the best experience of trading.
2. While opening your demat account, you need to make sure that your derivate segment trading is active. It allows you to trade in Futures and Options. There are no extra charges taken to activate these segments.
3. After your trading account is active, add funds to your account. This simply means adding an amount from your savings account to the trading account in order to make trades. For example, if you’re planning to add a capital of Rs 10,000 to your trading account, add this fund. Here are the exact steps to add funds to Zerodha trading Account.
4. Once your account is active and you’ve added funds, you’re ready to start options trading.
You can do options trading on Indexes (Note: Nifty and Bank Nifty are the most traded derivatives). On the other hand, you can also do options trading on stocks too. For indexes, they have weekly expiry along with monthly expiry that expires every Thursday. On the other hand, for stocks, there is only monthly expiry. In this article, let’s start with the easiest one to consider as an example.
A) Options Trading with Bullish View
Currently, Nifty is trading at 17,692 points as of Tuesday 25th Oct 2022. The monthly expiry will be on 27th Oct 2022 (Last Thursday).
Now, if you’re bullish and think that Nifty will end up at a value way more than 17,700 by the expiry date, you can buy Nifty 17,700 CE for that expiry date. If you’re more bullish, you can buy even Nifty 17,800 CE, which means that believe Nifty will end up at even higher levels than 17,800.
Note: You can also buy Nifty 17,400 CE or 17,500 CE, which again means that you’re bullish on these figures. However, as the current nifty levels are already higher than 17,400 CE or 17,500 CE, your bet is already true, and the premiums will be higher here. These are also called ‘In the Money’.
If the trade goes in your favor and the market moves high by the time of expiry, you’ll make profits as your premium amount will go higher. On the other hand, if your speculation was wrong, in that case, you’ll lose the premium as it will decay by the expiry date. The premium value will increase based on the movement of the index and how closer or farther it is from the expiry dates.
B) Options Trading with Bearish View
If you’re having a bearish view and think that the market will end up below 17,600 by the expiry date (the current level is 17,692 points), you can buy Nifty 17,600 PE options. If you are extremely bearish, you can even buy Nifty 17,500 PE and if the market falls below that level, you’ll be able to make profits as again the price of your purchased premium will increase.
Note: As in the earlier case, you can also buy 17,800 PE or 17,900 PE, which are ‘In the Money’. As the current nifty levels are already lower than 17,800 PE or 17,900 CE, your bet is already true, and here the premiums will be higher.
In short, using Call and Put buying, you can choose your view of the market and if your view is correct, you will be able to make money. Let’s understand it further with the help of an example.
C) Buying Nifty 17,800 PE
Let’s suppose, you ended up with a bearish view and plans to buy Nifty 17,800 PE. Here, you’ll need to buy the options in at least 1 lot.
For Nifty, 1 lot = 50 Quantities & the current premium is Rs 84.90
In this case, the premium required will be Rs 84.90*50 = Rs 4,245
If the market declines significantly, in that case, let’s suppose the price of this premium goes to Rs 105. Here, your gross profit per lot will be (Rs 105- 84.90) * 50 = Rs 20.1*50 = Rs 1,005.
If the trade does not go in your favor and let’s say that the Nifty goes bullish (higher), then the premium value of Rs 84.90 can even decay to Rs 0 by the expiry date and you’ll lose your premium amount.
One Crucial Point to know while Options Trading
Do not overtrade or take a lot of trades because here a lot of the amount will go to brokerages and taxes only.
If you are buying and selling, it makes once complete trade, and here Rs 20 + Rs 20 = Rs 40 is already gone in brokerage. (Please note that most of the brokers charge Rs 20 Per trade for Options Trading). If you’re making 10 such trades in a day for 5 consecutive days in a week, it means a total of 50 trades. This will result in the brokerage of Rs 20*50 =Rs 1,000, along with an extra amount say Rs 500–600 in government taxes & exchange charges. A total of Rs 1500–1600 is gone.
If you overtrade with a capital of just Rs 10,000, most of your capital will erode only in brokerages and taxes. (Learn more about Options Trading Charges here.)
Few Other Points to Know While Trading Options
- As an Option Buyer, if the market moves in your direction in quick time, you’ll be able to make a lot of money.
- Unlike long-term investors, whether the market is going up or going down, options traders can make money by purchasing the right Call or Put options.
- Time is against the option buyer and in favor of the option seller. If the market doesn’t move (i.e. goes sideways), then your premium will decay and you’ll lose entire money.
- If you use stop loss and limit your losses to 10–20% per trade, your loss will be lower and you’ll not end up losing the entire premium. If trade is not in your favor, better to quit and save your capital than go for the ‘hope’ trading.
Margin Required for Options Selling
So far, we only showed you how much capital is required if you’re buying an option. But for every buyer, there is a seller. Let’s also look into the Margin Required for Options Selling.
If you wish to sell the 1 lot (50 Quantities) of Nifty 17,700 PE, the margin required will be over Rs 1 lakh (Rs 1,03,804.90 to be exact). If you want to trade in multiple lots, the margin will be even higher.
That’s why we mentioned that it’s difficult to become an options seller with small capital.
In this article, we explained how to start options trading in India with Rs 10,000 capital. From the above discussion, you may have learned that you can become an Options Buyer and start trading in options with Rs 10,000.
For trading in indexes, if the premium is Rs 100 and you’re buying 1 lot of 50 quantities, you can buy it with Rs 100*50 = Rs 5,000. The premiums can be even lower at different strike prices and days closer to expiry. Option buyers can buy Call (CE) or Put (PE) for showing their bullish or bearish view respectively. If the trade goes in favor, the price of the premium will increase. Otherwise, the premium price will decrease and eventually fall to Zero by the time of Expiry for the ones with wrong views.
That will be all for this article on how to Start Options Trading in India with Rs 10,000. We hope this article was useful to you. In case if you have any queries regarding options trading, feel free to ask them in the comment section below. Have a great day and Happy trading.
Kritesh (Tweet here) is the Founder & CEO of Trade Brains & FinGrad. He is an NSE Certified Equity Fundamental Analyst with +7 Years of Experience in Share Market Investing. Kritesh frequently writes about Share Market Investing and IPOs and publishes his personal insights on the market.
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