Best Stocks for Options Trading in India
Options trading was introduced as a tool to provide a hedge to investment into different securities and as way for price discovery for a stock or any other underlying asset.
In options trading a person can either buy a contract or sell one. In a call option, the buyer has the right, but not the obligation, to buy the underlying asset at a fixed strike price at a future date, while a put option gives the buyer the right, but not the obligation, to sell the underlying asset at a particular price and at a particular time.
Options trading can be used for any type of asset whose prices have some benchmark such as stocks, indices, currencies or commodities.
Understanding the Terms Associated with Options Trading
Strike price – The price at which the underlying asset will be bought or sold in future.
Premium – The money to be paid for buying the option contract.
Lot size – The number of shares in an option contract.
Strike price interval – The strike prices at which at which an option contract can be traded.
Expiry date - The execution date for an option contract.
Open interest – Total outstanding position in a particular option contract
How a Person Makes Profit from Options Trading in Stocks
A Call Option: As explained earlier, a call contract gives the buyer the right, but not the obligation, to buy the underlying asset. So, if a stock is trading at Rs 100 and let’s say someone buys a near-term call option at a premium of Rs 5 for a lot of 100 shares at a strike price of Rs 110. This means the buyer has paid Rs 500 (Rs 5*100 shares) for a right to buy 100 shares at Rs 110 per share within a month. If the shares were to rise to Rs 120, the buyer can use this right and make profit of Rs 500.
Profit = Rs 10 (Current share price minus strike price)*100 (the lot size) minus Rs 500 (the total premium paid).
A Put Option: This gives the buyer the right, but not the obligation, to sell the underlying asset. So, let us say a stock is trading at Rs 100 and someone buys a put option at premium of Rs 5 for a lot of 100 shares at a strike price of Rs 90. This means the buyer has bought the right to sell the shares at Rs 90 within a month by paying a premium of Rs 500 (Rs 5*100). If the stock price were to move to Rs 80, the buyer of the put contract will make a profit of Rs 500.
Profit = Rs 10 (Strike price minus the current market price)*100 (lot size) minus the Rs 500 (the total premium paid).
Factors to Consider When Evaluating Best Stocks for Options Trading in India
Volatility – You should have an appetite for volatility for investing options trading. A more volatile stock will have varying strike prices, offering more opportunity and also more risks.
Date to expiration – A longer option contract will give buyer more opportunities to make profit.
Strike Price and Current Price – A lower difference between the two leads to higher chances of booking profit.
Premium - A higher premium will cut into your likely profit from an option contract.
Dividend or bonus – Price of a stock adjusts to factors like bonus share allotment or dividend payout. So, it is important to keep a watch on their dates.
Overview of Best Stocks for Options Trading in 2023
This list can keep changing depending on many macro and micro economic issues and, fundamentals and technical of the underlying stock
Reliance Industries – With a market cap of around Rs 16.7 trillion, RIL stock offers plenty of opportunity in options trading. RIL is the biggest conglomerate in India with business operations from retail to oil refining to telecom.
State Bank of India – India’s largest bank SBI has a great track record in delivering growth and offers many opportunities in options trading. It has market cap of around Rs 5.2 trillion and trades on both BSE and NSE.
Infosys – One of India’s largest software services companies, Infosys has a stellar growth record, both in terms of earnings and stock performance over the past decade. Listed on NSE, BSE and is part of all big indices. It has market cap of around Rs 5.5 trillion.
Tata Consultancy Services – The biggest Tata company in terms of market capitalisation (around Rs 12 .2 trillion) and India’s biggest software exporter, TCS has been one of the favourites of those in options trading.
Bharat Petroleum Corporation – High liquidity makes BPCL one of the favourite stocks for options trading. BPCL is one of India’s biggest oil refiner and retailer with a market cap of around Rs 790 billion.
HDFC and HDFC Bank – The HDFC twins, which are set to merge in the near future, have one of the highest market cap in the industry and will become the biggest private sector financial company after the merger. They already offer plenty of opportunities in options trading individually and will do so more when combined. The market cap of HDFC Bank is around Rs 9 trillion and of HDFC is Rs 5 trillion.
Adani Enterprises – The flagship company of the Adani Group has managed to claw back most of the losses it suffered after the Hindenburg issue and has again become one of the favourite stocks for options trading. It has a market cap of Rs 2.85 trillion.
Options trading provide an excellent way to punt on a stock movement without having to buy te stock and also to provide a hedge to your investment. But you have to careful too as a volatile market can wipe out your entire investment. Keep a close track of the stock movement if are interested in options trading and be in loop of news that can change the movement of stocks that you are invested in.
Why invest in options trading?
Options trading give the advantage of betting on a stock fall or rise without actually owning the stock.
Is options trading safer than stocks?
While options trading is cheaper than buying a stock, on the downside the erosion in investment can be much more too.
Is options trading suggested for beginners?
Anyone can do options trading, but a good understanding of the stock markets and a grip on the likely movement of a stock is critical to start options trading.
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