Advantages of option Trading

Words like "risky" or "dangerous" have been incorrectly attached to options by the financial media and certain popular figures in the market. However, it is important for the individual investor to get both sides of the story before making a decision about the value of options.

There are four key advantages that options may give an investor: they may provide increased cost efficiency; they may be less risky than equities; they have the potential to deliver higher percentage returns; and they offer a number of strategic alternatives. With advantages like these, you can see how those who have been using options for a while would be at a loss to explain options' lack of popularity in the past. Let's look into these advantages one by one.

1. Cost Efficiency
Options have great leveraging power. As such, an investor can obtain an option position that will mimic a stock position almost identically, but at a huge cost savings.

 2. Less Risk 

There are situations in which buying options is riskier than owning equities, but there are also times when options can be used to reduce risk. It really depends on how you use them. Options can be less risky for investors because they require less financial commitment than equities, and they can also be less risky due to their relative imperiousness to the potentially catastrophic effects of gap openings

3. Higher Potential Returns
You don't need a calculator to figure out that if you spend much less money and make almost the same profit, you'll have a higher percentage return. When they pay off, that's what options typically offer to investors.

4. More Strategic Alternatives
The final major advantage of options is that they offer more investment alternatives. Options are a very flexible tool. There are many ways to use options to recreate other positions

TRADE STATS OF 30 NOV 2015

As on Nov 30, 2015 15:30:45 IST
Product	No. of contracts	Turnover (cr.)*	Premium Turnover (cr.)
Index Futures	1,83,358	10,434.94	-
Vol Futures	0	0.00	-
Stock Futures	5,26,257	28,051.41	-
Index Options	12,51,332	74,484.88	761.85
Stock Options	1,84,660	10,290.91	241.85
F&O Total	21,45,607	1,23,262.15	1,003.70

THREE WAYS TO BUY AN OPTION

When you buy equity options you really have made no commitment to buy the underlying equity. Your options are open. Here are three ways to buy options with examples that demonstrate when each method might be appropriate:

Hold until maturity....., then trade:-

This means that you hold onto your options contracts until the end of the contract period, prior to expiration, and then exercise the option at the strike price.

When would you want to do this? Suppose you were to buy a Call option at a strike price of $25, and the market price of the stock advances continuously, moving to $35 at the end of the option contract period. Since the underlying stock price has gone up to $35, you can now exercise your Call option at the strike price of $25 and benefit from a profit of $10 per share ($1,000) before subtracting the cost of the premium and commissions.

Trade before the expiration date :-

You exercise your option at some point before the expiration date.

For example: You buy the same Call option with a strike price of $25, and the price of the underlying stock is fluctuating above and below your strike price. After a few weeks the stock rises to $31 and you don’t think it will go much higher - in fact it just might drop again. You exercise your Call option immediately at the strike price of $25 and benefit from a profit of $6 a share ($600) before subtracting the cost of the premium and commissions.

Let the option expire :-

You don’t trade the option and the contract expires.

Another example: You buy the same Call option with a strike price of $25, and the underlying stock price just sits there or it keeps sinking. You do nothing. At expiration, you will have no profit and the option will expire worthless. Your loss is limited to the premium you paid for the option and commissions.

Again, in each of the above examples, you will have paid a premium for the option itself. The cost of the premium and any brokerage fees you paid will reduce your profit. The good news is that, as a buyer of options, the premium and commissions are your only risk. So in the third example, although you did not earn a profit, your loss was limited no matter how far the stock price fell.