I want to trade in stock options (not index options). Request you to provide basic things to check/follow before doing option trading in stocks — Ramanuja Reddy

When you are trading options, whether they are on index or stocks, basic things are common. Make sure to check the trend of the underlying asset and it is always better to hang on to the existing trend rather than trying to predict the reversal.

And using charts, you can note the key support and resistance levels and conclude as to whether the security is most likely to appreciate or depreciate.

For instance, when you see a stock, which has been in an uptrend, break out of resistance, you can be confident of it producing further gains. So, you can either buy call options or sell put options. Deciding between these two depends on your prediction of whether the stock is set to rally quickly, or it is likely to see only a gradual gain (may be a rally after a period of consolidation).

Nevertheless, you should know that a breakout will not always lead to a rally and so, make sure to place a stop-loss to limit your loss in case your prediction goes wrong. You can check our Big Story on options published a couple of weeks back which can help you in many ways.

But if you’re new to option trading, our suggestion would be to start with index options rather than stock options. Because by taking exposure to stock options, you’ll be subject to stock-specific events/risks which you should be wary of.

Another important aspect is settlement type in case you hold your position till expiry — index options are cash settled whereas stock options are compulsory delivery i.e. if your stock options expire in the money you may have to buy or sell the stock amounting to the contract value.

For example, the derivatives lot size of Reliance Industries is 250 stocks. That means, if you hold say 2,500-strike call option and if it expires in the money, you’ll have to buy 250 shares at ₹2,500. This will cost you about ₹6.25 lakh.

Stock options might require more margin depending on the stock which you trade, especially when it comes to selling. Therefore, index options can be a better place to start.

Send your queries to derivatives@thehindu.co.in

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