Any special advantages for Options over equity trade? and Disadvantages of Options?
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Equity is an asset class. When you buy an Equity share, you are buying a stake in the company.
Options & Futures are derivative contracts whose values are derived from the values of the stocks. These are contracts which have specific expiry dates post which they cease to exist.
Trading in F&O has its own advantages & disadvantages. Few of them are:
Advantages:
- Leveraged product allowing you to make a higher % of return
- Allows you to short sell & hold
- Higher Risk - Return ratio
- More Strategic Alternatives
- Lower capital requirement (buying options)
Disadvantages:
- Leverage if not used right can wipe off your capital in no time
- No corporate action benefits like Rights, Bonus, Dividends
- Not available for all contracts
- Effect of time decay
I suggest you gain sufficient knowledge before you venture into F&O trading.
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Equity:
If you want to buy 2000 shares of TCS, you need to spend atleast 2000 x 2400 = 48 lakhs rupees.
After investing 48 lakhs rupees say in a months time, TCS price is 2700, you earn a profit of 300x2000= 6 lakhs rupees (upon sale of those 2000 shares)
Options:
If you buy 2000 shares of TCS (At the money, option say strike price 2400, premium is 70 rs per share), you need to spend 2000x70 = 1,40,000 rupees.
After investing 1.4 lakhs, say in a months time TCS price is 2700, your option premium will be close to 300+. (Deep in the money), You will get 300x2000= 6 lakhs upon sale of those 2000 shares (16 option contracts).
All these explanation are hypothetical, to explain how Options are leveraged contracts. Now you decide!
Disadvantage:
To simply put, if TCS share price stays below 2400, for the whole month and during expiry, (you have got time only until expiry, that is the limitation with options), your 1.4 lakhs will be a loss. :(
This is not the case with Equity, if TCS price is 2400, the values of those 2000 shares remain at 48 lakhs even at the end of the month.
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Check out the web resources shared by at tradingqna .com
http://tradingqna.com/7079/understand-options-trading-anybody-please-explain-options
Hey Ravi
Check out some useful resources below.
http://www.nasdaq.com/investing/options-guide/
http://justtrading.in/getting-started-with-trading-how-to-trade-options/
http://zerodha.com/z-connect/queries/stock-and-fo-queries/basics-on-options-shortingwriting
Happy Trading
Mohan
How you get profit when price decrease from 2400 to 1700 ?
That’s a typo dude, it should be 2700, corrected it now! Thanks for pointing it!
Pretty useful…
HI For learning Options Trading and you can refer zerodha Varsity Option Module.
and for videos you can check
https://www.youtube.com/edit?o=U&video_id=YgB8daYqV0Q
Equity trading involves directly buying and selling company shares or stock funds. When you buy a share, you own a small piece of that company. If the share price rises from your purchase price, you make a profit by selling it later at a higher cost. If it drops lower than you paid, you lose money. With stocks, your losses per investment are limited to the amount you originally put in. Stocks provide a relatively straightforward way to invest and make money as a company’s worth grows over the long-term.
Options trading works differently. Instead of buying part ownership in a company, you’re buying a contract allowing you to potentially buy or sell its shares at a set price, until the contract expiry date. Options let you speculate on a stock’s movement without purchasing it. Options gives unique trading strategies but contain additional complexity and risks compared to equity trading. Overall options require more market knowledge and active position management.
Stocks can be held forever if there isn’t any fundamental changes in company. Options eventually expire worthless unless key actions are taken.