Stock Options Definition
A stock option is a type of option where the underlying asset is a stock. The other type of options defined based on the underlying are Index options. Before we discuss stock options in further detail, check information on Call options and Put options. They payoffs and risk-rewards applicable for stock options shall be the same as any other call option/put option.
Stock Options are a derivative instrument wherein the underlying asset is a corresponding Stock viz. RIL or SBI or TCS. All stock options have respective lot sizes, different strikes and multiple expiry periods. It is a derivative like Futures but unlike Futures your profit/loss will not be linear depending on the up move/down move in corresponding stock. Also we have to keep in mind that not all stocks will have respective options or futures derivatives, only select few stocks are allowed by SEBI to have derivatives in options and futures.
Trading Stock Options in India
The Stock Exchange for trading stock options in India is the National Stock Exchange. Instrument type on the SAMCO online trading platforms - OPTSTK. While trading stock options in India, clients must select the instrument type OPTSTK on either of the SAMCO trading platforms. Average Notional Contract Value of Stock Options in India - Rs. 5,00,000 (Lot sizes are approximated assuming a notional contract value of Rs. 5 Lakhs) Margins for trading stock options in India - to calculate margins on stock options, refer the SAMCO span calculator.Things to remember while trading stock options and building options trading strategies in India
- Illiquidity - In India, the depth of trading in stock options is still relatively shallow. A lot of stock options are illiquid with very few contracts traded and low open interest. Traders must bear in mind that the illiquidity of a stock options contract can severely impact trading strategies and profitability.
- Determining fair value of options - Due to the wide bid-ask spreads in stock options contract, it may become difficult for stock options traders to judge the true value and price of an option contract. The bid for a contract would be Rs. 1 and the ask may be Rs. 8. In such a situation, it can be tricky for a trader to try and figure out the correct fair price of the option. We would recommend traders to calculate the stock options price/value on the SAMCO option price calculator.
- Avoid Market orders while trading stock options in India. Due to the illiquid nature of contracts, placing market orders in stock options can be detrimental. It is advisable to trade in stock options only using the Limit order type.
Summarizing Stock Options
Instrument - Stock Options Option Type - Call Options| Stock Call Options | Buyer of Call Stock Option | Seller/Writer of Call Stock Option |
| Premium – Paid upfront | Premium – Received upfront | |
| Margin – Not Applicable | Margin – Applicable as per SPAN calculator | |
| Risk – Limited to Premium | Risk – Unlimited | |
| Reward – Unlimited and increases as the price of the stock increases. | Reward – Restricted to the premium amount received upfront. | |
| Intent – Price of stock will go up | Intent – Price of stock will either fall or NOT go above a certain price |
| Stock Put Options | Buyer of Put Stock Option | Seller/Writer of Put Stock Option |
| Premium – Paid upfront | Premium – Received upfront | |
| Margin – Not Applicable | Margin – Applicable as per SPAN calculator | |
| Risk – Limited to Premium | Risk – Unlimited | |
| Reward – Increases as the price of the stock decreases. Maximum reward = Strike Price in case the stock price goes to Zero (Only possible in theory) | Reward – Restricted to the premium amount received upfront. | |
| Intent – Price of stock will go down | Intent – Price of stock will either rise or NOT go below a certain price |
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