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Top 8 Essentials to Know Before Buying Options in India
Things to know about buying options.
When should a trader buy an option (call or put)? Typically a trader would buy call option on the index or stock when they expect the price to go up sharply. They would buy put options when they expect the price to go down sharply. In both cases, the accent is on the word “sharply”. The option trade has to make profits after covering the option premium paid, so a sharp movement on either side is needed when you buy options. But, that is not all, there are a few more things to know about buying options.
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Key Insights On Options Trading in India
In India, buying call and put options is possible with 1, 2, and 3-month maturities, but only near-month options are highly liquid—illiquid options may lead to higher exit costs.
- One of the useful options trading tips India is that buying options doesn’t require daily mark-to-market margins; the premium paid is the max loss, though ITM options attract higher margins in the final week due to physical delivery.
- When buying call and put options, assess three key factors: the price movement must exceed the premium, profit-to-risk ratio should be at least 2:1, and time decay must be included in your cost calculation.
- Volatility is a major factor in pricing—higher volatility makes options more valuable, offering potential gains while limiting loss to just the premium.
- A crucial risk in options trading is liquidity and time decay; traders must manage both to avoid losses from stagnant price movements or expiry erosion.
- STT on options is lower than on futures, as it's applied to the premium value only—not the full contract size—making it a cost-effective tool.
- Option premium = Intrinsic Value + Time Value. For example, if a Reliance 2700 call trades at ₹38 with spot at ₹2728, intrinsic value is ₹28 and time value is ₹10.
- Time value erodes toward expiry, making options “wasting assets.” That’s why one of the common options trading tips India is to buy early in the month.
- Options are versatile—they can hedge portfolio risk, enable low-cost leveraged trades, or be combined (e.g., strangles) to benefit from volatility without needing to predict direction.
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FAQs on Buying Options
What should I know before buying options for the first time?
Understand that options are time-sensitive, leverage-based contracts with limited risk (premium paid) and unlimited gain potential. Learn key concepts like strike price, premium, expiry, and how calls and puts work before trading.
How do I assess my risk tolerance before trading options?
Consider how much capital you’re willing to lose and your comfort with volatility and quick price swings. Options can deliver fast gains or losses, so only trade with money you can afford to risk.
Why is market volatility important when buying options?
Higher volatility increases the probability of profitable price moves, making options more valuable. It also raises premiums, so you must factor in cost vs. potential reward.
How do I choose the right strike price and expiry date?
Select a strike price based on your market view—ATM for balance, ITM for safety, OTM for leverage. For expiry, near-month options are more liquid, while longer expiries reduce time decay.
What factors affect the premium cost of options?
Option premiums are influenced by intrinsic value, time value, volatility, and proximity to expiry. News events, earnings, and market sentiment can also cause sharp price changes.
What is a good exit strategy when trading options?
Set predefined profit/loss targets or trailing stops to lock in gains and minimize losses. Avoid holding too close to expiry to reduce the impact of rapid time decay.
How important is monitoring the underlying asset during options trading?
Very important—since options derive their value from the underlying asset's price. Continuous tracking helps you react to market movements and adjust positions effectively.
