Options
The options market is a specialized segment of the financial market, where investors engage in buying and selling options contracts. These contracts are a type of financial derivative that grants the holder the right, but not the obligation, to buy or sell an underlying asset at a predetermined price, referred to as the strike price. This transaction can occur on or before a specific date, known as the expiration date. As of July 20th, 2023, there are 185 stocks included in the Futures & Options (F&O) list.
Options trading is a method used by investors to speculate on the future direction of the overall stock market or individual securities, such as stocks or indices. In our recommendations, all trades are normal (NRML) in nature, involving index options or stock option positions. We advise on various strategies like naked options, spreads like (vertical, calendar, diagonal), iron butterfly, straddle, strangle, iron condor and more. It's important to note that these trades do not have a set validity period. The decision to exit a trade is advised by us and can range from a day to a week or longer. While we do recommend 0DTE (zero days until expiration) option trades, these are not suggested on a daily basis. Our strategy is to capitalize on favorable market opportunities as they arise.
Risk Involved
The options market, known for its complexity, stands in contrast to the relatively straightforward nature of stocks. It's a highly volatile market where option prices can quickly fluctuate. These changes are influenced by various factors including economic shifts, geopolitical events, company-specific news, and the overall sentiment of investors. Such volatility can lead to either significant gains or losses for those investing in options.
Options are unique in that they have a set expiration date, and their value tends to decrease as this date draws closer. This aspect of time decay means that if the price of the underlying asset does not move as anticipated, the buyer of the option could suffer financial losses. Another critical factor in the options market is implied volatility, which reflects the market's forecast of the future volatility of the underlying asset. Fluctuations in implied volatility can lead to changes in option prices, affecting investor returns.
Liquidity is another challenge in the options market. Many options are illiquid, which can lead to difficulties in executing trades at desired times or facing wide bid-offer spreads. Additionally, changes in interest rates have a direct impact on the options market, with higher interest rates often leading to increased option prices.
Investing in options carries its own set of risks, including the hazard of holding a call or put an option overnight. While option contracts are inherently risky due to their complex nature, understanding how options work can mitigate some of this risk. As an option holder, the primary risk lies in potentially losing the entire premium paid for the option.
The actions of Foreign Institutional Investors (FII), Foreign Portfolio Investors (FPI), and Domestic Institutional Investors (DII), such as buying or shorting, can also introduce substantial volatility to option premiums. This underscores the complex and dynamic nature of the options market and the importance of careful consideration and understanding for investors engaged in options trading.