Let’s discuss option contracts. There are two types of options contracts available: A call and a put. For those who don’t know, a call option gives the buyer of the contract the ability to purchase an asset at a price (strike price) within a predefined period (until expiry). On the other hand, a put lets you sell an asset at a specific price (strike price) within a predefined period (until expiry).
For options trading in India, we need to consider how all factors affect these options’ value.
The first factor we’ll cover is Interest rates. And if you’re why interest rates matter, then let me tell you that the higher the interest rate, the more expensive it is for an investor to purchase a call option. It happens because the purchaser of a call option needs to pay money upfront and hold on until expiry. If there are high interest rates, this can get quite expensive, so if someone is buying calls, they need higher-than-average returns to break even.
Generally speaking, Indian traders prefer options with low volatility. It gives them more time before expiry and hence more profits (which translates into more chances at recovering losses). That’s why we see most traders exiting their trades around two weeks before expiry rather than letting it run all the way through. But if we’re optimistic and believe that the price will increase, then we want volatility (or risk factor) as it gives us more chance at significant profits.
If you’re unfamiliar with a dividend is: it’s a part of a company’s earnings that they give back to shareholders in cash or stock (depending on what kind of license the company has). The important thing for traders to note here is that call options lose value when there are high dividends due to this added income.
And if you’re expecting an asset price increase, but huge dividends are coming in, then buying calls can end up losing you money. We would recommend avoiding calls in such situations.
Skew is a situation where out-of-the-money call options have more demand from buyers than do in-the-money call options. Why would this be the case? Well, if you’re familiar with American-style options, then you’ll know that they can be exercised anytime before the expiry.
In such cases, people will naturally pay more for an option that gives them a chance at profits early rather than late. It also happens to be why traders prefer American-style options over European ones.
Liquidity refers to how much activity there is in a market, and it’s a massive factor for Indians because we want to avoid exponential growth calculations while placing our trades. If there’s low liquidity, then small amounts of capital will significantly impact the price. On the other hand, if there’s high liquidity, large sums of money can be injected into the market with little effect on the price.
Some tips to remember
Visit websites that offer free educational content on a stock market or financial topics online. Many portals provide free learning strategies for traders who master their craft. These sites often have personal trainers who help educate people on various concepts related to options trading. Most of these sites tend to have paid membership plans where you can upgrade your subscription and receive personalized guidance from experts.
Keep up with the latest things in the market – many traders share their learning strategies or write about overall industry trends on their blogs. They usually provide links to interesting articles outside of their circle, which gives you a better idea of how markets work and how to keep track of news affecting individual stocks.
Don’t forget that one of the best ways to learn something is by watching others do it well. You could join online forums – they not only help you search for information but also put you in touch with like-minded traders, many of whom are happy to help others succeed in this industry.