This is a common question that every trader has when he starts trading . Let us go more in details and understand “Are Index Options More Profitable or Stock Options”.
We will Cover below topics :
- What is an Index Option
- What is a Stock Option
- Which is more Profitable in terms of trading
What is an Index Option :
Before Understanding Index Options , lets understand what is Index. Index is a way to measure performance of a group of assets typically basket of Stocks trading in exchange.
What does Index represent :
Index is way to understand the market, Using Index going up or down ,we measure the market trend. If Index goes up , we believe the trend is upside, same goes to Index going down .
What is Index Options :
Options are a way to trade in market , Options are types of derivatives , it works as a non obligation to buy/sell of the underlying assets till expiry. Its a way that allows you to trade in underlying assets without any obligation to buy or sell that asset. Assets here would be a group of Stocks trading under that index.
Example : NIFTY 50 , Its an index of top 50 companies trading in National Stock Exchange. Similarly we have Bank Nifty which is made up of all top Banking Shares.
What is a Stock Option :
Stocks are companies that are traded in Exchanges. Options are a type of derivatives and are a way to trade in market . Underlying asset of the options here would be the Stock i.e. Company take an example of Reliance. When you trade i.e. buy/sell Stock Options, you actually trade the right of the stock but you don’t have an obligation to actually buy Stock .
Options work in a lot sizes . A lot size is the quantity of Stock defined by SEBI for that Stock Option. Index Option Lot size for example: Bank Nifty is 25 . When you buy 1 Lot of Bank Nifty Option , You actually buy right of 25 Bank Nifty Index.
Similarly , when you buy 1 Lot of Stock option , i.e. Reliance , you buy rights of 250 reliance shares.
Now that you have understood Index Options and Stock Options , Lets now talk about Pros and Cons:
Pros of Trading in Index options :
- Its Highly liquid meaning more people trade
- You have option of next month contract which is liquid to hedge your current position
- Margin is very less and underlying premium is also very less
- Index is less volatile than Stocks.
- Index never comes under F&O ban whereas stock options are often banned to trade after F&O ban.
Based on the above points when you are trading in Indices, there are more chances of earning a profit , however your profit margin might be less. On the other hand, when you trade in stock options, the profit margin increases when you earn a profit.
The bottom line is there is no good or bad choice in trading and to determine are Index Options More Profitable or Stock Options . You can trade both options depending on your risk appetite, margin and profit depends on how you trade.
You can also read our other article on “Best ESG Funds to Invest in India” https://equitygyan74899394.wordpress.com/2021/10/26/best-esg-funds-to-invest-in-india/