Is Options Trading Profitable? There are several questions that arise in the traders’ minds about investing in the stock market, and the entire stock market is a vast ocean. Let’s see Is Options Trading Profitable or not?

What are the Options?

An option refers to a financial instrument that is based on the value of the underlying securities, such as stocks. An options contract offers the buyer an opportunity to buy or sell, depending on the type of contract they hold.

Every contract will have a specific expiration date, and so the holder will have to exercise the option before that date.

The stated price on the option is called the strike price.

Options are generally bought and sold through online or retail brokers.

Types of Options Trading:

There are two types of options trading available in India:

Is Option Trading Safe

Call Options:

A call option is basically a two-party derivative contract.

Here, the call option buyer gets the right, but not the responsibility, to exercise his option to purchase a particular trade from the call option seller for a set period of time.

Understanding Call Options:

If you think that the price of a particular index is going to gain in the coming days rather than a specific share list, you can go for an index call option as a trader.

On the NSE, call options are CNX Nifty 50, CNX IT, and Bank Nifty, while on the BSE, call options are Sensex.

Put Options:

Put options allow the buyer the right, but not an obligation to sell a specific quantity of a stock at a specific price on or before the contract’s expiration date.

Understanding Put Options:

There are two types of put options namely: American and European.

American put options are more flexible because they allow you to close the trade before the expiry date of the contract.

European put options can be exercised on the expiration date.

Types of Call and Put Options:

There are four positions while trading in call and put options. They are as follows:

Types of Call and Put Options
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Buy a Call:

  • Here, it is believed that the stock will rise, i.e., the particular stock is in a bullish trend.
  • Unlimited reward.
  • Risk or loss is limited to the premium paid.
  • Only three things can happen here on expiry:
Market price > Strike priceIn the money call optionProfit
Market price < Strike priceOut-of-the-money call optionLoss
Market price = Strike priceAt the money call optionBreak-even (no profit, no loss)
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Sell a Call:

  • Here, it is believed that the stock will fall, i.e., the particular stock is in the bearish trend
  • Profit is limited to the premium paid.
  • Risk is unlimited.
  • Three things happen here on expiry:
Market price > Strike priceIn the money call optionLoss
Market price < Strike priceOut-of-the-money call optionProfit
Market price = Strike priceAt the money call optionProfit in the form of the premium amount paid
Credited: Trading Fuel Research Lab

Buy a Put:

  • Here, it is believed that the stock will fall, i.e., the particular stock is in a bearish trend.
  • Unlimited reward.
  • Risk or loss is limited to the premium paid.
  • Three things happen on expiry:
Market price > Strike priceOut of the money put optionLoss
Market price < Strike priceIn the money put optionProfit
Market price = Strike priceAt the money call optionLoss up to the premium paid
Credited: Trading Fuel Research Lab

Selling a Put:

  • Here, it is believed that the stock will rise, i.e., the particular stock is in a bullish trend.
  • Profit is limited to the premium paid.
  • Risk is unlimited.
  • Three things happen on expiry:
Market price > Strike priceOut of the money put optionProfit
Market price < Strike priceIn the money put optionLoss
Market price = Strike priceAt the money call optionProfit in the form of the premium amount paid
Credited: Trading Fuel Research Lab

Differences between Call and Put Options:

Given below are the main differences between the two:

BasisCall OptionsPut Options
MeaningIt will give the buyer the right but not an obligation to buyIt will give the buyer the right but not the obligation to sell
Reaction to dividendCall options loose value when the dividend date is nearPut options gain value when the dividend date is near
ProfitsProfits are unlimitedThe profits are limited because the stock price will not become zero
LossesLoss is limited to the premium amount paidThe maximum loss is the strike price minus the premium paid
Expectations of the investorThe buyer believes that the stock price will rise/ increaseThe buyer believes that the stock price will fall/ decrease
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What are stocks?

Stock consists of all the shares into which the ownership of the company or corporation is divided.

In simple language, the stock is used to describe the ownership certificate of the company.

Differences between Stocks and Options:

Stocks and options both work differently. The following are a few differences between the two:

BasisStocksOptions
DefinitionSecurity which represents the ownership of a fraction of the companyA financial instrument that gives you the right to buy or sell shares of an underlying security for a set price at a future date
OwnershipStocks represent ownership in the companyStock options represent the choice to buy or sell a stock
Dividend/ Voting RightShareholders receive voting rights in the important matters of the company and the dividends are also paid by the companyStock option holders do not receive any dividend and also do not enjoy any voting right
Investor typeBeginner, long-term, or hands-off investorsActive traders or advance investors
ExpiryIt does not expire till the company exists. Hence, it is also referred to as an assetThey expire at a future date called the expiration date after which the holder cannot buy or sell. Hence, it is also referred to as an expense.
ValuationThe prices are based on primary market forces as well as other company fundamentals.The prices are largely based on the price of the underlying stock, time of expiration, and other related factors.
Trading/ InvestmentInvestment instrumentTrading instrument
BenefitsRequire less attention and possible dividend paymentsGreater returns and hedge against volatility.
RisksMight lose the entire principal and slower returnsIncreased risk of loss.
Is Options Trading Profitable?

Some of the good and bad things about options and options trading:

Is Options Trading Profitable or Risky?

  • Options are risky only if we fail to understand them.
  • There is only a high-risk option when you are a complete seller.
  • The risk to the buyer is only up to the premium amount.
  • A proper hedging strategy or proper market judgment is required to control your risk as well as your loss.

Trading options is a zero-sum game:

  • Options are like insurance policies and can be used as risk management tools.

Options are difficult to understand?

  • Options are not difficult to understand because there are only two options- Call and Put, where you can only buy or sell.

It is very easy to make money with options:

  • How to trade and invest successfully requires a lifetime of work, focus, and dedication.
  • Here, the key is to find and maintain a high level of success in markets and to trade and invest according to your own risk tolerance, investment goals, and time horizon with proper risk management.
  • Options cannot just be used for speculation but can also be used for hedging, leverage, and protection.

Selling options is like receiving free money:

  • Selling options for collecting cash looks safe, but there is an unlimited risk attached.

Option sellers are only making money:

  • The utter fact is that both buyers and sellers make a profit because without sellers, there would be no buyers, and without buyers, there would be no market.
  • Options sellers win at times.

Is Options Trading Profitable than stocks?

Options trading is known to be less risky than equities if they are traded well and strategically.

Options are safer than equities since they require a very lower amount of capital than equities and are completely unaffected by the fatal effects of market fluctuations.

How can options be used to offset risk?

Options generally reduce risk through hedging. The following are some risk-aversion strategies:

Is Options Trading Profitable
Credited: Trading Fuel Research Lab
Conclusion:-

Options are best for those who wish to enjoy the flexibility and reduce the risk by hedging.

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Author

Prashant Raut is a successful professional stock market trader. He is an expert in understanding and analyzing technical charts. With his 8 years of experience and expertise, he delivers webinars on stock market concepts. He also bags the ‘Golden Book of World Record’ for having the highest number of people attending his webinar on share trading.