What is Option Selling

In India, when people talk about selling options, they often use the term "writing" options. Let me explain this with an example. Imagine you are the one who wants to sell a call option. In this case, it's called "writing" a call option. What you're doing is giving someone else the opportunity to buy a stock from you at a specific price, which we call the "strike price." This deal holds for a set amount of time, no matter how high the stock's market price goes during that time. 

  

What is Option Selling? 

In India, when you buy a call option, you get a special right. It's like having a ticket that lets you buy a certain stock, but you don't have to if you don't want to. This special price is called the "strike price." Imagine it as the point when your ticket turns into real shares of that stock. Similarly, when you buy a put option, you get another special right. You can sell a particular stock at a specific "strike price." Each of these rights has a time limit. 

Now, there's a cost you need to pay upfront when you have these rights, and it's called the "option premium." If your option has something we call "intrinsic value," then you'll have to pay a higher premium compared to options without this special value. 

So, what makes an option valuable and profitable? Well, there are a few things to consider. First, the current price of the stock in the market matters. Then, there's that strike price we talked about earlier, and how much time is left before your special ticket expires. These things together decide the value of your option. 

Options can be valuable in two ways: intrinsic and time value. Intrinsic value is like the difference between the special strike price and the current market price. It's like how the worth of your home can change over time. If your option is "in the money," it means it has a higher intrinsic value, and that's good for you. But if it's "out of the money," it's not as valuable. These less valuable options also come with cheaper premiums. 

You can learn option selling strategies with the best options trading course

 

 

How to Sell Options 

In the Indian stock market, traders often use financial tools called "put" and "call" options to make investments and manage risks. Let's break down these concepts in simpler terms, especially for our Indian audience. 

 

What is Put Option?

When you sell a put option, it means you believe that the stock market and the shares you're dealing with will do well. It's like saying, "I think things will go smoothly." But here's the twist: the people buying these put options have the opposite belief. 

The sellers of put options expect that the stock's price will either stay the same or go up beyond a certain price level called the "strike price." Now, why do they do this? Well, when you sell a put option, you get money upfront, and you might not even have to buy the stock later if things go as planned. This is why selling puts can be attractive. 

If, when the option expires, the stock's price is higher than the strike price, you make a profit. However, selling puts is a bit different from buying them. Your maximum gain is limited to the upfront payment you receive. 

  

What is Call Option?

Now, let's talk about call options. When you sell a call option, you're essentially agreeing to sell your stocks at a fixed price before a certain date. In exchange for this agreement, you receive a payment, known as a "premium," from the buyer of the option. 

Here's the catch: if the stock price goes up significantly, you might end up selling your stocks for less than their market value, and you could lose money. So, when you sell a call option, you have to be careful because your potential losses can be significant. 

It's crucial to understand that when you sell a call option, your potential profit is limited to the premium you received. However, your potential losses can be much more significant, even unlimited. To manage this risk, there are different strategies you can use when selling call options, such as "covered call" and "sell to close."

Example: Let's look at some examples to illustrate these concepts further. 
Imagine you decide to sell a call option for Reliance shares with a strike price of 2600 and receive a premium of INR 5. If the stock price remains at or below 2600, you make a profit. In this case, you get to keep the 5 rupees premium, and your profit remains at that amount. 

However, if the stock price goes above 2600 plus the premium of INR 5 (that's 2605), you start facing losses. The more the stock price goes up, the more you lose. Your potential loss can be substantial, and it becomes clear when the stock price significantly deviates from the strike price. 

In summary, when the spot price stays below 2600, your maximum profit is 5 rupees. If it goes above that, your losses can be significant. At 2605, you neither gain nor lose anything on expiry. 

 

 

How to do Option Selling: A Beginner’s Guide 

  

Step 1: Open an Options Trading Account  

Before you start trading options, you need to open an account specifically for options trading. It's a bit different from a regular stock trading account because it requires more money. This is because options involve predicting how stocks will move, and it can be complicated. Brokers want to make sure you know what you're doing before they allow you to trade options. They'll check your experience, your understanding of the risks, and your financial readiness. All of this information will be recorded in an options trading agreement that you'll need to request from your broker. 

If you do not have a Demat account, please click on any of the links below -  

  

Broker Name	Account Opening Charges (In INR)
Nuvama Wealth	Free
Angel One
Alice Blue
Paytm Money
Zerodha	200/-

  

Step 2: Choose Which Options to Sell 

Options come in two types: call and put. 

When you sell an option, it depends on what you think the stock will do: 

1. If you expect the stock to go up, you can sell a put option. 
2. If you think the stock will stay steady, you might sell both call and put options. 

If you believe the stock will drop, you can sell a call option. 
 
  
 
Think of options like insurance. You buy insurance not because you want an accident, but just in case it happens. Similarly, you buy options hoping you won't need them. 

 
Step 3: Predict the Option's Strike Price  

When you buy an option, it's valuable only if the stock price ends up "in the money" when the option expires. "In the money" means the stock price is either above or below the strike price (depends on call or put options). 
 
Let's say a company's stock is at INR 100 now, and you predict it will go up to INR 120 in the future. You'd buy a call option with a strike price below 120 rupees. This way, if the stock rises above that price, your option is valuable.  
Similarly, if you think the stock will fall to 80 rupees, you'd buy a put option with a strike price above 80. 

But you can't just choose any strike price. Options have a range of strike prices, and these increments are standard, like INR 1, 2, 2.50, 3 etc based on the stock price. The option's price, called the premium, is made up of intrinsic value (the difference between the strike price and stock price) and time value (affected by factors like stock volatility, time until expiration, and interest rates). 

 

Step 4: Decide on the Option's Time Frame 

Every option contract has an expiration date, which is the last day you can use the option. You can't just pick any date; you have to choose from the options available in the option chain. 
 
There are two types of options: American and European. European options are traded in all exchanges in India.  

Expiration dates can be daily, weekly, monthly, or yearly. Daily and weekly options are riskier and are for experienced traders. For long-term investors, monthly or yearly expirations are better because they give the stock more time to move in your favor.  
Additionally, longer expiration periods help options retain their time value, which is important because time value decreases as the expiration date gets closer. Longer contracts give you more time to react if the trade goes against you. 

 
How Much Margin is Required for Option Selling? 

In India, when you trade in options, there are important things to understand about something called "margin." This margin is like a security deposit you need to keep with the exchange. It's there to protect against big losses if the option prices move in a way that's not in your favor. 
 
Now, there are two types of margins you need to know about:

1). Initial Margin: This is the minimum amount of money you have to deposit when you first start trading. It's like a safety net to make sure people don't gamble too much. As long as you have enough money in your account to cover this initial margin, you can trade freely. But if your account balance drops below this initial margin, you'll have to add more money to get back to the required level. 

2). Maintenance Margin: This is the minimum amount of money you must always keep in your trading account. If your account balance falls below this maintenance margin, you'll get a call asking you to fix the situation. If you don't, the broker can sell some of your investments to make sure your account goes back to the initial margin level. 
 
This system helps both investors and the brokerage firms. Investors don't risk losing everything, and brokers don't have to cover huge losses for investors who can't meet their obligations. 
 
Let's take an example: Mr. A sells a call option for Infosys shares. He gets Rs 10 for each share, and the total value of the option is Rs 582,000 (because it's 600 shares at a strike price of 970). In this case, the margin required is Rs 116,400, which is 20% of the option's total value.

 

 

What Happens if We Don’t Sell Options on Expiry? 

In India's stock market, the last Thursday of each month is a significant day, especially for those involved in futures and options trading. This day is known as the "expiry day" for monthly futures and options contracts. Traders have a crucial task to settle their trading positions before this day arrives. 

Now, let's break this down a bit. Imagine you're a trader in India, and you like to buy and sell things like shares or contracts for the future prices of shares. Well, every month, there's this special day, the last Thursday of the month. On this day, you have to finish all your trading business related to these monthly contracts. 
 
Now, there's something called "Nifty" and "Bank Nifty" that traders really like to trade. These have both weekly and monthly contracts, and the weekly ones expire every Wednesday for Bank Nifty and every Thursday for Nifty but note this last Thursday of month will be traded as expiry for both Nifty and Bank Nifty. 
 
Now, here's the important part. Traders often think it's a good idea to do options trading on the expiry day. But, and this is a big but, you've got to know how to do it right and what to expect from the market. 
 
  
 
So, what happens if you forget to square off your options on the expiry day? To put it simply, if your stock options contract turns out to be profitable (we call it "in the money"), you'll have to actually buy or sell the shares, depending on your bet. But if your option ends up not making any money (we call it "out of the money"), it basically becomes worthless. 
  
Now, when it comes to things like Nifty and Bank Nifty, if your options make money, they'll settle with cash. But if they don't make money, they just vanish. 
  
Now, here's a twist. Sometimes, you don't really have to go and buy or sell actual shares, even if your options are making money. Instead, you might have to pay something called "STT" on the profit, which is usually 0.125% of the profit amount. But if you're on the other side, the selling side, and your options don't make money, you don't have to worry about STT on expiry day. It's because you already paid it when you started the trade. So, no double dipping! 
  
Remember, it all depends on whether your options are making money or not. If they are, you'll keep the money you got for selling those options. That's the deal. 

 

 

Is Option Selling Profitable? 

In the world of trading, you might have heard about something called "writing options." But is it a profitable strategy in India? Well, it can be, but it's not that simple. Let's break it down. 

 
What is Option Writing 

Option writing means you sell an option to someone. This option gives them the right to buy or sell a certain stock or asset at a specific price. If they exercise this right, you'll have to do the transaction at that price. 
 
  
 
Profit Depends on How You Do It 

Now, whether writing options make you money or not depends on how you do it. If you just sell options without a plan, you might not make much money. It's like cooking – if you don't follow a recipe, your dish might not turn out tasty. 

 
Skills Matter 

Your skills as a trader matter a lot when it comes to option writing. If you're good at it, you can make money. If you're not, you might end up losing. It's like playing cricket – if you're a skilled batsman, you're more likely to score runs. 

 

When Option Writing Works 

 Option writing can be profitable when you do it right. This happens when: 

1. Options Are Priced Right: If the options are priced well compared to how they usually behave, you have a better chance of making money. 
2. Implied Volatility is in Your Favor: Implied volatility is how much people expect the price of the stock to change. If it works in your favor, you can profit. 
3. No Surprises: If there are big events or news coming up that could change the stock's value, it might not be a good time to write options. 

  

Many Factors at Play 

There are many things to consider in option writing. It's not just about buying and selling. Here are some factors:   

1. Historical Volatility: How much has the stock's price changed in the past? 
2. Implied Volatility: What do people expect will happen to the stock's price? 

Earnings and Events: Are there big events or company earnings reports coming up? 

 
These are just a few factors. There are more, and they can affect whether you make money or not. 

 

It's Not Guaranteed  
Remember, not every option you write will make you money. Some might actually make you lose. It's a bit like farming – you might have a great crop one year and a poor one the next. 

 

 

The Key to Success 

But here's the thing – by avoiding common mistakes and planning your trades carefully, you can improve your chances of making money through option writing in the Indian trading market. It's like driving a car – if you follow the rules and drive carefully, you're less likely to have accidents. 
 
So, yes, writing options can be profitable in India, but it's not a sure thing. Your skills, strategy, and understanding of the market play a big role. Just like in any other field, practice and knowledge can lead to success.