How to Trade Options on the NSE
Trading options on the Indian NSE is similar to trading options on other stock exchanges. However, there are also some key points of difference, ranging from the inefficiency of the Indian commodities market to the fact that you will be trading in a foreign currency, which exposes you to different risks than would trading in your own currency.
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Instructions
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Options Trading
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Sell an options agreement if you want to make a steady, fixed income. The price of this is the yielding of decision-making capability with regards to the product, as it will be the option-holder's decision whether you sell to him at the agreed-upon price or not.
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Buy an options agreement if you want to manage your risk and speculate at the same time. The price of this is simpler--all you have to do is pay the regular fees.
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Assess your profit potential in relation to the options fee. So, if you are a buyer with $100 worth of salt, and the option to sell it at $100 in 6 months costs $20, then you will lose money unless the price of salt falls to less than $80. If you are a seller, assess whether the steady income is worth it--you could lose a great deal to opportunity costs if you are forced to sell at a price that is substantially lower than market value.
Get Specific For India
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Ensure that your options can be legally traded. In 2010, 41 commodities can be legally traded on the futures market; ensure that you are investing in one of these or face legal consequences.
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Ensure you manage your market risk. The Indian commodities market was not very efficient in August 2010. Therefore, commodities can become dramatically overvalued or undervalued without much notice. Prepare yourself for this risk.
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Compensate for currency exchanges. If you enter the NSE with U.S. dollars for a few years, then get out with a tidy profit, you could have this profit eaten into by a rise in the value of the rupee or a fall in the value of the dollar. Use swaps or other hedges to manage this risk.
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Tips & Warnings
While risk management is important, it is not foolproof. Remember: You are investing, and you could lose your money.
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