Should you trade in Options?

Option trading may seem risky and complex to a beginner so many traders refrain from this. However, to some trading in options sounds very lucrative as it yields quick and good returns, but on the flip side even losses are huge. Options are risky, but when a trader is equipped with sound knowledge he is bound to reap profit.

Equity market gives us scope to earn in cash, futures and options segments. Cash segment yields good returns in long-term or medium-term investment. Trading in futures demands more capital and huge risk is involved in it. We can go long on futures and take a short position in options for a safer trade. This not only hedges the position, but also reduces the margin required. Let us understand this with the help of an example. We will trade in SBI scrip in all three segments and see what the return on investment would be.

Equity segment

Right now SBI shares are trading at 520 per share. 100 shares of SBI would need a investment of Rs 52,000. Assuming our view is bullish and if the share price moves to 530 next month what would be the profit? By investing Rs 52,000 we get a profit of Rs 1000 (10*100). ROI is 1.9 per cent.

Futures

SBI futures lot size is 1500. The capital required would be Rs 1,52,000. Assuming if the price moves from 520 to 530. It would give a profit of Rs 15,000 (10x1500). ROI is 9.8 per cent.

Options

SBI 520 CE (call option) trading at Rs16. If options price moves to Rs20, then profit would be Rs6,000 (1500 *4). For this the capital required is only Rs 25,000. RoI is 24 per cent.

As shown above the returns are high in options. This is what lures option traders. So far we have only analyzed the positive side of options. Likewise if our view goes wrong or some news of a scam (which is not new to Indian markets) related to the banking sector appears the loss would be huge. However, there are many positive things about option trading such as less capital requirement. High return on investment and there are options strategies wherein a novice investor can hedge position by taking an entry on buy and sell side.

For intraday players when options are traded with strategies we can make consistent profits by maintaining proper loss. Risk management and capital protection are like pillars for a strong intraday player.

(The author is a homemaker who dabbles in stock market

investments in free time)