Ever wonder how some investors can effortlessly grow their wealth through the stock market? It's not just luck; it's smart investing. While buying and holding stocks is a common approach, it might not always yield the returns you're aiming for. This is where options trading can make a difference.
Let’s learn more about options trading and how it can enhance your investment approach while aiming for higher returns.
An option is a derivative contract that gives you the right, but no obligation, to buy or sell an asset at a predetermined price within a specific timeframe. This contract's value is derived from the underlying asset, like a stock, commodity, etc.
There are two types of options:
1. Call Options: Allow you to buy an asset.
2. Put Options: Allow you to sell an asset.
Other important terms in options trading are the strike price and the premium. The strike price is the set price at which you can buy or sell the asset. For example, if you have a call option with a strike price of ?500, you can purchase the asset at ?500, regardless of its market price. The premium is the upfront fee you pay to hold the option, which is non-refundable.
Some of the ways in which options trading can elevate your investment strategy are:
1. Flexibility in Various Market Conditions
Options trading offers the flexibility to profit in any market condition. Whether the market is up, down, or stagnant, there are strategies that can help you make the most of the situation. If you anticipate a market rise, call options can be profitable. Conversely, if you expect a market drop, put options can help you gain.
2. Risk Management
Options can act as a hedge or a cushion against potential losses, especially during volatile markets. For example, if you own shares of Infosys and are concerned about market volatility, you can buy a put option. This provides a safety net by allowing you to sell the shares at a predetermined price, limiting your losses.
3. Benefit of Leverage
Options involve the use of leverage, which essentially allows you to control more shares with less capital, increasing potential profits. Instead of buying more shares outright, you can use a smaller amount to buy options contracts. If the stock price moves as expected, you benefit from the price changes without a significant initial investment.
4. Customising Your Investment Approach
With options trading, you can tailor your investment strategy as per your risk tolerance and market expectations. Employing a mix of call and put options can balance potential gains and losses, helping you stick to your financial goals amidst changing market conditions.
Also Read - How to do Nifty Intraday Option Trading?
Lately, there has been a lot of speculative activity observed by SEBI (Securities and Exchange Board of India) in the securities markets. As part of its measures to curb speculation and, thereby, volatility in markets, SEBI is proposing stricter criteria for stocks to be included in the Futures and Options (F&O) trading segment. This will likely push stocks with lower turnover out of the F&O segment, thereby restricting market manipulation. Low turnover refers to stocks that are infrequently traded, indicating low trading volume and liquidity in the market.
Options trading can significantly enhance your investment portfolio, but it requires practising caution. According to SEBI's report, 89% of retail traders in equity futures and options suffered losses in FY22. This highlights the importance of thorough research and a well-thought-out strategy. If you want to up your options trading game, you can explore some of the best learning resources on Sharekhan Knowledge Center.
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