Options Trading is a way through which you can make money in a stock market. It enables a trader to lock in a buying or selling price for stocks at that quoted price. On a short budget, you can reach out to Zerodha which is one of the best brokers. It can be used for carrying out business on options trading.
Buying options in Zerodha is a very straightforward process. There are two highly efficient options-trading platforms offered by Zerodha: Kite and Sensibull.
Kite is Zerodha’s flagship trading platform. It has a clean interface, speed, and reliability. It is a good choice for enabling traders to monitor the markets in real-time and then execute trades seamlessly. On the other hand, Sensibull is an advanced options-trading package.
It was targeted at small and beginner traders. It includes intrinsically implemented strategies, real-time data, and analysis tools. Sensibull can easily be put to use for making well-informed and rapid decision-making by traders. Let us find out how to buy options in Zerodha.
What Are Options in Trading?
Options are a type of financial contract. It gives the right to the owner to buy or sell an asset at a predetermined price within a set time frame. They are commonly used in various financial markets, including stocks, commodities, and indices.
These financial options are used in the stock market for two different purposes: trading risks and trading on the likely direction of the stock market.
There are two main types of options:
- Call options
- Put options
Options can be used in many ways for different purposes like hedging against potential losses, generating income through premiums, or speculating on price movements.
Understanding Call and Put Options
Before entering into options trading, it is important to understand the call and put options. They are the foundation of options trading-
Call Option: A call option offers you the ability to purchase the share at the pre-decided price or the strike price of the option before the time of its expiration. If you have a fear that the share price could go up, you buy a call option. For instance, you believe that an option would increase from 100 to 120; and then you bought a call option in it to get more profits in it.
Put Option: You purchase a put option as a form of trading under the belief that the market price of the underlying stock may decline. A put option allows a holder to sell a share at a predetermined price before a contract expires. For instance, if you think after some time, the price will go down from ₹ 120 to ₹ 100, selling with a little help of a put option will bring money into your pockets.
Benefits of Trading Options in the Stock Market
Options trading is a type of financial contract. It comes with several benefits. If you are into options trading, check out the possible benefits-
- Leverage: Options allow traders to control a large number of shares by deploying small capital funds. For example, it takes one less money to buy a call option compared to actually buying the underlying shares.
- Flexibility: You will have the chance to earn in any direction a market moves. The calls or puts will ensure that you take advantage of any price move in either way.
- Limited Risk: The most critical risk in the case of buying options is limited only to the premium amount you paid for the option. In this regard, the loss potential is not similar to that with stocks.
Getting Started with Zerodha Account
To trade options on Zerodha, you first need to set up a trading account and ensure that options trading is enabled. Here is the complete process from setting up to trading-
Setting Up Your Zerodha Account
- Open a Zerodha Account: You would be able to open your trading account using an online form available on the site of the provider. In this process, you need to upload your PAN card, Aadhaar card, bank details, and other documents. In addition, it requires you to complete your KYC process.
- F&O Segment Activation: Intraday Options trading is enabled in a client account only when the F&O segment has been activated.
- Add Money: After opening an account, you are supposed to add money to your trading account. This is done when you log in under the tab “Funds” of Zerodha Kite and add money through the options of UPI, net banking, or NEFT.
Requirements for Trading Options on Zerodha
If you opt for a trading option on Zerodha, here is the list of requirements-
- Income Proof: To activate the F&O segment, Zerodha requires you to provide income proof. This can be your bank statement, income tax returns, or salary slip.
- Margin Requirements: While buying options don’t require much margin, selling options may require a higher margin to cover potential losses. Make sure to understand Zerodha’s margin policies before you start trading.
How to Buy Options in Zerodha
After setting up and funding your account, you’re ready to start buying options. Here’s how you can buy options in Zerodha. It is a very straightforward process even for beginners.
Step-by-Step Process
- Login to Zerodha Kite: Log in with your Zerodha credentials at kite.zerodha.com or open the Kite mobile app.
- Add Funds: If you haven’t added the required money yet, navigate to the “Funds” section and transfer using the preferred payment form.
- Search for the Option Contract: It’s simple. Search for the stock or index options that you want to trade in the Kite search bar. For instance, to trade Nifty options, enter the search bar with “Nifty”. You will get a list of calls and options available to you.
- Add the Option to Market Watch: To trade an option, just click the “+” button next to the option you want to trade. That will give you the option to monitor its price in your Market Watch.
- Place a Buy Order: You can click the ‘B’ button by the option you have added. Afterward, the buy order form will appear in which you will need to choose the type of order (limit or market), set the quantity, and submit the order.
- Check Order Status: Once your order is placed, check the execution in the ‘Orders‘ section. You can modify or cancel the order if it has not been filled.
- Monitor Your Position: After you place an order, the position of your trade can be tracked in the “Positions” section. You can record it on your profit or loss in the “Records” section. Watch the market and your position and be able to make informed decisions on when to sell or take your trade-off.
Zerodha gives you a set of powerful tools to assist you in the analysis and trading of buy options in a more efficient way. These tools ensure that you get all the information and insight required to make well-informed trade decisions.
Options Chain Tool
The Options Chain tool is a powerful resource for options traders. It gives real power to the trader by presenting to you all the different kinds of buy options contracts that are available for a particular stock or index. It shows you all the available strike prices and the data corresponding to them such as premiums, open interest, and volatility.
The Option Chain tool will make the user view various buy options side by side and help you make the right choices regarding which one would suit your strategy.
For example, if a trade is in the Nifty options, then it would give you a view of the demand level mirrored through the OI. It will simply guide you on which strike price is likely to provide you with the best risk-reward ratio and thus make the correct choice. In addition to this, the view of the liquidity level within the marketplace helps protect you against slippage when entering or exiting your trades.
Market Depth and Data Analysis
Market depth shows the top 5 bids and asks prices for a buy options contract. It provides the level of liquidity at what price. The more liquid an option is, the better it remains to buy or sell without depressing the price too much. Market depth also shows the number of pending orders, the highest and lowest prices of the day, and the last traded price.
Technical Charts and Indicators
Zerodha brings you advanced charting tools with over 100 technical indicators. They help you better study price trends and market behavior. Use the moving averages, Bollinger Bands, Relative Strength Index (RSI), etc., to identify your trading opportunities and make better decisions.
Common Mistakes to Avoid While Trading Options
Options trading is highly rewarding but comes with its risks. Many traders seem to make everyday mistakes, though which lead them to losses. Here’s how you can avoid that mistake:
- Overleveraging: it is so easy to lose immense sums. Because when there’s too much leverage, that’s when it means immense loss. Only risk what you can afford.
- Ignoring Time Decay: The value of the option declines by time decay, hence affecting your long-time holds.
- Lack of a Systematic Approach: Trading without a clear strategy leads to losses; one must set the entry and exit points and targets beforehand.
- Failure to Monitor Liquidity. One of the most common mistakes is failing to monitor liquidity. For any option trading, it should be made sure that there is sufficient liquidity, particularly for deep out-of-the-money strike prices. Low liquidity makes spreads very wide and, consequently, does not let enter trades at cheap prices or exit at good prices.
- Deducing Misunderstanding of Volatility: The price of the Option is the primary thing to be established through volatility. Normally people take it for granted, and that leads to contracts being mispriced. Using Zerodha’s tools for regular analyses of Implied Volatility (IV), one can say that an option is either underpriced or overpriced, which would lead to better decisions.
Conclusion
Trading options in Zerodha is very easy but requires caution. The following steps to open up your account, set off searching for the right options, and use the right tools from Zerodha, such as an Option Chain and market depth can be helpful.
Remember to avoid common mistakes like overleveraging, ignoring time decay, and trading without a plan. With careful planning and strategy, options trading can be a rewarding experience.
Frequently Asked Questions
Q.1 Do I need a special account to trade options in Zerodha?
No, there is no special account required. You need to have a demat trading account with Zerodha and enable your F&O segment.
Q.1 What margin is required to buy options in the Zerodha platform?
To buy options in Zerodha, your required margin is the premium of the options multiplied by the loot size.
Q.2 Can I trade options in Zerodha using the Kite app?
Yes, you can trade options in the kite app easily.
Q.3 What is the lot size for Zerodha’s options trading?
The lot size of Zerodha’s options trading varies. It depends on the underlying assets.
Q.4 Can I sell options before it expires on the platform?
Yes, you can sell an option before it expires on the platform.
Q.5 What is the broker fee for buying options in Zerodha?
They charge about ₹20 brokerage fees on buying options. However, it can vary from time to time.
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