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What is Option Selling and How Does it Work?
How does option selling work? When you begin to trade stocks, you will always desire to book profits to a greater extent, isn't it? It is certainly possible provided you adopt option selling while you are on trade. I have penned a few strategies that can benefit you in developing your option sellingRead more
How does option selling work?
When you begin to trade stocks, you will always desire to book profits to a greater extent, isn’t it? It is certainly possible provided you adopt option selling while you are on trade.
I have penned a few strategies that can benefit you in developing your option selling trade plans and made a comparison with option buying.
Option Buying:
As an option buyer, my underlying assets will lose their value if the stock market maintains at the same level, or the wind blows against your asset values. Henceforth, you must remember your long asset shall retain a profitability of about 33 percent in case you continue to be an option buyer.
Option Selling:
Contrary, if you engage your short assets in options sellings then you will tend to make profits in two out of three scenarios. These scenarios are bull market, bear market and consolidating market.
Scenario (Bull Market): It is the situation when the market trend is moving in your direction and if you sell a put, you will make a profit.
Scenario (Bear Market): The same holds true when the market stocks are moving slowly in your direction.
Scenario (Consolidating): You may enter a trading environment once you find its movement conducive to your option selling. But, over a period, you might lose patience due to its very slow movement of stock price. In such situations, you are most likely to lose time value.
Option Selling Strategies:
You can adopt trading strategies for option selling in either of the ways and they are hedging based options, or direction option selling.
Hedging Based Options:
Hedging Based Options is mostly applicable for the risk averse traders and I do prefer these neutral trading strategies, independent of the bearish/bullish market.
This kind of hedging based options are usually adopted by the traders/investors in the Indian stock markets. More significantly, these options are utilized in the index options (Nifty & Bank Nifty).
When I implement hedging based options then I utilize the selling strategies such as straddle, strangle, and butterfly.
Directional Options Selling Strategies
Directional options selling involves traders in selling stocks based on the market movements (bearish/bullish).
For selling analysis, at times, I seek aid of the chart patterns for technical analysis. So, for the bearish market, I go for put option and for bearish market adopt for call option selling.
In option selling, I do take the aid of support and resistance levels.
Right Strike for Option Selling:
You must be cautious in selecting the right strike otherwise the risk factor shall enhance exponentially. Therefore whenever you desire to sell a call option then you are recommended to sell the strike at the resistance level or slightly above the resistance level.
See lessWhich Index is Good for Options Trading, Nifty or Bank Nifty?
Why is the Nifty considered a better index for Options Trading? I shall always tell beginners to prefer options trading with Nifty Index rather than Bank Nifty, since it is less volatile. Over time, you are advised to trade in bank nifty to make higher benefits. Bank Nifty Index is more volatile thaRead more
Why is the Nifty considered a better index for Options Trading?
I shall always tell beginners to prefer options trading with Nifty Index rather than Bank Nifty, since it is less volatile. Over time, you are advised to trade in bank nifty to make higher benefits.
Bank Nifty Index is more volatile than Nifty and also you can earn more in Bank Nifty. But If you are a beginner in options trading, Nifty is the best option to make consistent profits.
After getting confidence on handling trades in Nifty you can shift to Bank Nifty to make high profits.
Difference Between Nifty and Bank Nifty
Generally, it is said that the Bank Nifty is easier to follow than the Nifty Index. Bank Nifty involves risk higher than Nifty.
You can trade in options and lot size is the basic measure of shares in quantities. For Nifty options trading 1 lot – 50 quantities, and Bank Nifty options trading 1 lot – 25 quantities.
When you compare other parameters like volatility, the bank nifty can move quicker than nifty, if nifty moves 1 percent then bank nifty will rise by 1.5 percent.
Bank Nifty A Sectoral Index:
Bank Nifty is a sectoral index focusing on bank stocks alone. They include private and public stocks and you can find those traded in Futures & Options (F&O) segments in the National Stock Exchange.
The bank index stocks are measured using free float methodology, and they are weighed based on free float market capitalisation.
The indexes are rebalanced semi annually and the valuations are obtained on the real time basis in the trading hours.
Bank Nifty Weightage Stocks List: July 2023
HDFC Bank Ltd. (HDFCBANK) – 28.42%
ICICI Bank Ltd. (ICICIBANK) – 24.04%
State Bank of India Ltd. (SBIN) – 9.89%
Kotak Mahindra Bank Ltd. (KOTAK BANK) – 9.40%
Axis Bank Ltd. (AXISBANK) – 9.35%
Nifty 50 Top Companies:
Nifty comprises 50 top companies listed under the National Stock Exchange based on free float market capital, further their trading values is an indicator of the economies.
You will observe that the Nifty is a combination of multiple stocks from different sectors which bear different weightage.
When news affecting the national/international economy gets aired then these Nifty stocks go highly volatile.
Nifty 50 is utilised for different purposes, you can find those benchmarking structured products, ETFs, fund portfolios, and launching of index funds.
Top 5 constituents by weightage:
- HDFC Bank Ltd. 13.77
- Reliance Industries Ltd. 9.56
- ICICI Bank Ltd. 7.87
- Infosys Ltd. 6.01
- ITC Ltd. 4.55
See lessWhat is Margin Shortfall Penalty?
What are Margins and Margin Shortfall Penalty? You need not panic if you receive a margin shortfall penalty from the stock exchange. It is a simple fine that is levied by SEBI on those traders failing to maintain sufficient margins for all positions in trade options. Essentially, you will be leviedRead more
What are Margins and Margin Shortfall Penalty?
You need not panic if you receive a margin shortfall penalty from the stock exchange. It is a simple fine that is levied by SEBI on those traders failing to maintain sufficient margins for all positions in trade options.
Essentially, you will be levied to pay a penalty whenever there is a margin shortfall. Such a margin shortfall may occur due to an increase in margins by exchanges, or stapled with market losses or on the removal of spread or hedge position.
You as an investor must follow the regulated SEBI rules such as the updated SPAN, and Exposures. You must maintain stock physical delivery margins when you are allocated with derivatives all the time.
Otherwise , you may fall prey to two types of margin shortfall penalties and they are EOD & Peak Margin Shortfall.
The penalty is applied on your margin shortfalls by the stock exchanges and usually, it will be a percentage of the shortfall amount.
Another additional amount on the penalty known to be GST (18%) shall be applicable, and likely to be deducted from the trading account.
Reasons that Bind to Margin Shortfall
When you take an option position there may be an increase in margin and this can be due to three specific reasons.
Balancing the Margin Shortfall:
Percentage of the Margin Penalty:
The penalty structure shall be applied when you encounter situations such as : short reporting by you (client) or absence of clearing members per instance or peak margin.
If the margin held by you (client) is less than 1 lakh or less than 10 percent of the applicable margin then the penalty will be 0.5 percent. Likewise, margin > 1 lakh or > 10 percent of the applicable margin, the penalty will be 1.0 percent.
If the margin shortfall is more than 3 consecutive days then the penalty will be 5 percent and if the margin shortfall continues for more than 5 days in a month then penalty will be 5 percent each day.
See lessWho are the Successful Option Traders in India?
List of Richest Option Traders in India Every year you will find more and more successful option traders evolving in India. In which, few make an upside growth while others follow a downside. But, to reach the top, hard work, dedication, and clear cut understanding of the facts and figures that moveRead more
List of Richest Option Traders in India
Every year you will find more and more successful option traders evolving in India. In which, few make an upside growth while others follow a downside.
But, to reach the top, hard work, dedication, and clear cut understanding of the facts and figures that move around the stocks should be known.
I would like to pendown a couple of traders having performed so well that their views on stocks tweet, retweet everywhere.
1. Azim Hashim Premji
Azim Hashim Premji, has established Premji & Associates and made investments in stocks having a significant stake in Wipro, Tube investments, and JK lakshmi Cements. Better known for his philanthropic activities, he is often referred as the Czar of the Indian IT industry.
2. Ramesh Damani
Ramesh Damani, has made an investment of INR 10 lakh in Infosys and an IPO was released in 1999 that triggered his profitability. In addition, he has made some investments in Goldiam International, Godrej Industries, Panama Petrochem, and others.
Damani made an entry into the stock markets when the sensex was at 600 points in 1999. Ramesh Damani holds a bachelor degree in Commerce from the HR College in Mumbai and pursued an MBA from California State University.
3. Ashish Dhawan
Recognised to be a stock market investor, philanthropist, and an entrepreneur, Ashish Dhawan, is currently positioned as CEO of Central Square Foundation.
He holds around 16 stocks that value INR 1,971 and his business has grown by 81.07 percent last year and in fact spiraled by 651.38 in five consecutive years. Some of the important companies where he has investment made are IDFC Ltd., Birlasoft Ltd., Equitas Holdings Ltd., and Glenmark Pharmaceuticals.
4. Sunil Singhania
As CIO of Reliance Mutual Fund, Sunil Singhania, is well recognised investors and traders, and is listed among the top Indian Traders.
He made effortless growth in the stock business, his portfolio rose by 260 % and in five consecutive years he realized business by 11,004.55 percent.
He does maintain a highly diversified portfolio, and they are Paras Defence and Space Technologies Ltd., Saregama India Ltd., Mastek Ltd., Route Mobile Ltd, Polyplex Corporation Ltd and others.
5. Vijay Kedia
Vijay Kedia, built his career in Stock Market businesses at the age of 19, and continued the same professions till now.
He took challenges in Intraday trading that gave him much of his success. Kedia holds in Mahindra Holidays, Elecon Engineering, Repro India and others.
See lessOption Traders who Made Millions
Most Successful Option Traders: After years of practical experience, I can name many option traders, who made millions through options. Your question is pretty interesting but I am a little curious about whether you know the secret funda of their success. Besides successful millionaire traders, letRead more
Most Successful Option Traders:
After years of practical experience, I can name many option traders, who made millions through options.
Your question is pretty interesting but I am a little curious about whether you know the secret funda of their success.
Besides successful millionaire traders, let me tell you the key points they usually focus on, and what is option trading that fascinates every aspiring trader.
Key Points Followed by Millionaire Traders:
If you go through the statements of a billionaire/millionaire you will find several of these stated points coincidental.
Some of those facts are to maintain the habit to learn, learn, and learn, to develop a winning strategy, and to define calculated risk management techniques. In addition, stay disciplined, be patient, and choose the right mentor in the stock market scenario.
What is Options Trading:
Options trading is a steady flow of buying and selling of stocks belonging to various portfolios. In the course of buying and selling contracts, you can utilise different strategies that form the building block of option call, and option put.
The strategies like strangle, straddle, and butterfly are used for option selling. You will come across strategies like naked call option, and married put that are suitable for option buying.
Option Traders who made Millions
Karen Bruton:
Certain people are spoken about quite often, since their business success fascinates all. Karen Bruton, has set her mark as a super trader for the outstanding performances.
In a few years of effort, she has made an exceptional progress of $41 million with an investment of $100,000. Karen’s most favorite strategy is conservative strategy known to be ‘selling strangles’ that did give consistent income over investments.
Nicolas Darvas:
Nicolas Darvas belonged to the 1950s and established a mark in the stock markets by framing his own trading system called ‘Darvas Box.’ As a professional dancer, she earned $2 million and her winning funda included an excellent fundamental and technical analysis.
Tim Sykes:
Tim Sykes, during his college days made an investment of $12,000 and it turned $4.3 million when he was 22. He is good at teaching option trading and stocks and conducts training courses in the online platform.
List of Billionaire Option Traders
Warren Buffett:
Known for his value investments, Warren Buffett has made huge money on option trading. In fact, Buffett earned a huge amount in premiums about $4.9 billion.
Bill Ackman:
Bill Ackman is a hedge fund manager, and holds a position of CEO in Pershing Square Capital Management which made huge profits in option trading.
He is involved in credit default swaps, a form of options contract. In 2020, Bill Ackman makes 2.6 billion for an investment of $27 million.
See lessWhat is the Average Salary of an Option Trader in India?
What is the average salary of an option trader per month? Option Traders are the key people of the stock markets and their average salaries in different capacities such as tutor, specialist, and analyst do differ. The salary of an option trader is completely dependent on the country, experience andRead more
What is the average salary of an option trader per month?
Option Traders are the key people of the stock markets and their average salaries in different capacities such as tutor, specialist, and analyst do differ.
The salary of an option trader is completely dependent on the country, experience and the size of the firm. However, to express in a grosser level the average salary of an option trader in India is in the bandwidth of Rs. 1.0 Lakh to Rs. 8.3 Lakhs per month.
Salary of Option Trading Tutor:
You can join platforms like Udemy and provide guidance on how to trade options online. An online tutor in India can get around Rs. 40,000 per month for instance, tutors in Mumbai will charge around Rs. 1500 per hour.
Tutors Need Skills to Deliver Online Virtual Lectures:
Salary of Specialist
You can earn an average salary of Rs. 6.4 Lakhs as an Options Trading Specialist and you must have specific skills to function the duties effectively.
Salary of an Analyst
You must be able to conduct research on global trade, analyse data and regulations. HR experts in Indeed say, the average salary of a market analyst in India is Rs. 2,50,000 per year.
Skills Needed by Analyst to Conduct Option Trading:
You must hold analytical skills, research skills, focus skills, customer service skills, and detailed oriented skills.
See lessWhat is the Option Trading Success Rate in India?
What percentage of option traders are successful? Option trading is risky and the success rate in India is quite low, say about 11 %. No matter, traders involved in option trading take all preventive and corrective measures such as stop loss, and trading strategies like strangle, butterfly, and straRead more
What percentage of option traders are successful?
Option trading is risky and the success rate in India is quite low, say about 11 %. No matter, traders involved in option trading take all preventive and corrective measures such as stop loss, and trading strategies like strangle, butterfly, and straddles for option selling still volatile markets prevents the profitability which ultimately leads to little success.
Likewise, for option buying, you will find strategies such as momentum strategy, breakout strategy, reversal strategy, etc yet very few mark profitability levels.
In a broader sense, investors/traders who indulge in option selling can make big money in trading stocks while option buying traders make a little money in comparison.
Hence, you can take it for granted that selling options can pay rich dividends. Even in selling options or engaging in futures and options you need to be highly cautious because they produce limited profits and can cause high risks in trading.
The stock trading dynamics are such that option buying generates huge profits and low risks. The chances of losing money is more in option buying even though you select all risk management techniques such as stop loss.
Your success rate depends on the guidance and advice given by the stock experts provided you are well driven by good stock brokers such as Zerodha, 5 Paisa, Upstox, etc.
Therefore, if you want to be a leader in the stock markets then one must consider several issues such as the type of option you choose to trade.
The kind of underlying asset portfolio you maintain, the prevailing market conditions, and the trading strategies you adopt to keep up the win situation, and a trustworthy broker.
In the long run, option sellers make better returns than buyers and usually, the market trends between -1% to 1%.
Securities and Exchange Board of India (SEBI) has released information stating that 11 percent of the traders made profit in the futures and options (F&O) during the financial year 2021-22.
Statistics reveal that the average loss is at Rs. 1.25 lakh. There is an impressive increase in the individual traders of about 500 percent from FY19 to FY22.
See less