Certainly, options trading has matured, at least in the Indian equities markets. In terms of daily volumes, options are not only quite liquid but also far larger than the cash market and the futures market. In this article, we’ll examine the benefits of options trading for both sellers and purchasers. 

What Are Options Trading’s Benefits?

Trading options have several advantages. Let’s look at a few unique advantages of option trading.

1. Trading options enables risk hedging. For instance, your risk is reduced if you are long a stock, and you purchased a lesser put option. For instance, if you own a stock of Rs. 810 and you purchase a put option for Rs. 800 with a premium of Rs. 5, your maximum loss is Rs. 15. That is the strength of options since your loss is guaranteed no matter how low the price drops.

2. Options enable you to lower the cost of stock ownership. If the price of the stock you own is just staying the same, for example, you may sell higher call options and receive the premium, which would cut your cost of owning the asset.

3. The fact that future and options trading is much more cost-effective is one of the key benefits. Options enable the trader to take an options position with lower margins. For instance, an investor must pay Rs. 16,000 to buy 200 shares of a firm at Rs. 80 each. However, the premium needed would be about Rs 4,000 if he were to buy call options with identical weighting.

4. High returns, or a multiplier impact on returns, are a possibility with options. How? Read on. As a result, assuming the right strike was picked, the option pays the same profit as buying shares outright. If you think of it in terms of ROI or return on investment, the percentage return would be significantly larger in comparison because we are obtaining options on a lower margin while maintaining the same profitability.

5. Options allow for the systematic transfer of risk from someone wishing to hive off risk for a fee to someone ready to accept that risk in exchange for a fee. Since it offers an appropriate secondary market for risk, which separates the options market from other financial markets, this is one of the key advantages of options trading.

6. A crucial characteristic of options is their capacity to provide liquidity and, thus, encourage price discovery in the underlying market. Options are a valuable tool for evaluating complex risk variables, hence this function is essential.

The fact that the options-related data typically functions as a lead indication is a very significant advantage of the options. For instance, data points like as option strike accumulation, changes in options interest across strikes, and sudden increases in implied volatility in the options are all crucial leading indicators of how things may develop in the future.        

By Manali