If you want to do options trading in the Indian Stock Market, and you don’t want the returns to be wiped away by expensive brokerage fees then you need to make a crucial decision of choosing the best broker for options trading in India. There are two kinds of brokers we have in India namely traditional full service brokers and discount brokers. Both the categories of brokers provide trade execution (trading platform) as well as Call n Trade facility but traditional brokers charge much higher brokerage than the discount brokers. If you are wondering what is brokerage then it is the commission you need to the stock broker on any buy or sell order. Traditional brokers generally provide more services than discount brokers such as relationship management, research reports and advice and offline support via offices throughout the country. In this article you shall get to know the best broker for options trading in India.
Options are a type of derivative security. They are a derivative because the price of an option is intrinsically associated with the price of something else. Basically, options are contracts that give the right, but not the obligation to buy or sell an underlying asset at a set price on or before a specified date. The right to buy is known as a call option and the right to sell is known as a put option.
Terminologies in Options Trading
Option Writer: Seller of the Option. The person who goes short on the option.
Option Buyer: Buyer of the option. The person who goes long on the option.
Strike Price: Price of the underlying at which the option can be exercised.
Premium: Upfront payment made by the option buyer to the option writer. Option price.
Expiry Date: The date on or before which the option can be exercised.
Here is a real life example for to make things clear and will help you understand what is going on, in case you are confused.
Suppose you want buy a cupboard on 28th December 2017. You have the following three choices :
1. You can go to the furniture shop on 28th December, ask the price and pay for it. This is same as the regular procedure for buying stocks in the market. You must be familiar with it.
2. You see that the price of the cupboard today is ₹9000. Since you are willing to buy it next month you enter into a futures contract with the seller that you will buy that particular cupboard for ₹9000 on 28th December.
Why would you do that?
Because you think that price of the cupboard next month may go up to, say, ₹9500 and you want to buy it for ₹9000. So, in a way you are hedging your risk.
Why would the seller do that?
He might think the price for cupboard in the market may go low to, say, ₹8000. He has got his ₹9000 secured with him. On (28th December) the day of the Future’s expiry you have to do the required transaction and buy the cupboard at ₹9000.
3. You tell the seller that I will come and buy the cupboard for ₹9000/- on 28th December.
He asks, “What if you do not come?”
You say, “Take this 50 rupees as security, but I want the cupboard at ₹9000 on 28th December.”
Now on 28th December, you saw the price of the cupboard in the market is ₹9200. You will go to the shop and buy it for ₹9000.
Your profit = ₹(9200–9000–50) = ₹150.
If the price of the cupboard on 28th December is ₹8600, what will you do? Definitely, you won’t go that shop at all. You will buy that cupboard anywhere in the market for ₹8600.
This way, you’ll lose your 50 rupees which you gave to the seller but it would still be profitable to buy from the market.
Here 9000 is the strike price at which the contract is entered. 50 is the premium charged by the seller for letting you have the right to buy.
In a futures contract, you need to buy the stock at predetermined price.
So now that you have understood how options work. To choose best broker for option trading in India, you need to consider the following points :
5paisa is India’s Premium Discount Broker. 5paisa.com is backed by one of India’s leading financial services companies – IIFL which has over 2.9 million happy customers across various business segments.
ABM is in the business of offering investments & trading in Stock and Securities through its various affiliations with Stock Exchanges. It offers Portfolio Management Services, investments in Debt instruments and Mutual funds through it digital platform.
One click options strategy
Free Call n Trade facility
Advanced charting tools with integrated buy / sell
Aditya Birla Money Options Trading Brokerage: Rs 50 per lot
So, these are the best broker for options trading in India. The highlights of each of these brokers along with their options trading platform and their brokerage charges for options trading have been clearly mentioned for quick reference. Since options trading is not a simple concept to grasp, the basics of options trading have been explained along with examples.
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If you have any queries feel free to ask it in the comments section below. If you know about any other broker that could be the best broker for options trading in India, do comment about it and it will surely be considered.
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