Chapter 2 | 2 min read
Opting for Options
Introduction
Why should a trader consider options instead of only buying shares? In this lesson, we compare equity shares, futures and options on four key points: trend suitability, capital requirement, return on investment and pre-defined risk.
1. Trend Suitability
Nifty does not always go up. In many months of the year, the market either falls or moves sideways.
- Shares: you profit mainly when prices rise (intraday short selling aside).
- Futures: you can profit when prices rise or fall, but not when the market is flat.
- Options: with the right strategy, you can aim to profit when the market goes up, down or sideways. That is why options are called a friend for every trend.
2. Capital Requirement
Suppose you expect a stock, say Reliance Industries (illustrative prices), to rise from Rs 1,400 to Rs 1,470 in the next month. Assume one options lot is 500 shares.
| Buy Shares | Buy Call Option | |
| Quantity | 500 shares | 1 lot (500) |
| Price | Rs 1,400 | Rs 30 premium |
| Capital needed | Rs 7,00,000 | Rs 15,000 |
3. Return on Investment (ROI)
Reliance rises to Rs 1,470 as expected.
- Shares: profit = Rs 70 x 500 = Rs 35,000. ROI = 5% on Rs 7,00,000.
- Option: the 1,400 strike call rises from Rs 30 to about Rs 75. Profit = Rs 45 x 500 = Rs 22,500. ROI = 150% on Rs 15,000.
But the Risk is Real
- If Reliance closes below Rs 1,400 at expiry, the call becomes worthless and you lose the full Rs 15,000 premium.
- If Reliance rises only to Rs 1,420 at expiry, the call is worth Rs 20, less than the Rs 30 you paid. The stock gained about 1.4%, but your option lost about 33%.
This is the key lesson: with options, you must be right about direction, size of the move and timing.
4. Pre-Defined Risk
With many option strategies, you know your maximum loss before you enter the trade.
- You know the exact risk and reward in advance.
- In a sudden gap-up or gap-down, the loss of an option buyer stays limited to the premium. In shares or futures, a big gap can cause a large loss.
Summary Comparison
| Point | Shares | Futures | Buying Options |
| Works in sideways market | No | No | With strategies |
| Capital | High | Medium (margin) | Low (premium) |
| Maximum loss | Large | Very large | Premium paid |
| Time limit | None | Expiry | Expiry |
Compare on GoPocket
On the GoPocket app, look at a stock price and then at its option premiums in the F&O segment. Calculate how much capital you would need for shares versus one lot of options. This simple exercise shows why traders use options.
Key Takeaways
- Options can work in rising, falling and sideways markets.
- They need low capital and can give high ROI.
- You can lose the full premium, so control your risk.
Disclaimer: Prices, premiums and lot sizes are illustrative. Derivatives involve high risk.
