Long Options in India, a Profitable Long term Derivatives game ?

Trading Long Options in India - Basics, Advantages & Disadvantages

What is Long Option ?

Long Options are basic option derivatives contract available, normally for Index, which can be traded for Long Maturity. It has huge time period for expiration, usually more then a year. Check out NSE¹ for contracts.

Some developed market like USA, Singapore the time limit is more then 5 years as well but for underdeveloped or developing markets it can be up to 5 years. The major limiting factor here are Margin, Liquidity and Volatility.

Long Option in India

In India, the main index is Nifty 50 where we have Long Options available. Nifty 50 is index tracking 50 largest company registered & traded in India with respect to Market Capitalization.

For Nifty 50 Long Options available till next 5 years but with different expiry. The different time period available are next 7 Weeks, next 3 Months, next 4 Quarter and next 6 Semi-annually.

This different time period available for trading, speculation or hedging based on purpose of transaction but these are subject to Liquidity available for the strike, current volatility and Risk Appetite.

Advantages in trading Long Options

Lets discuss some advantages in trading Long Options for short positions

1. Wide range for breakeven.

   Since the period of expiration in long, the premium received from shorting Long Options generally gives wide rang of safety for breakeven.

   If you short straddle at the money for nifty of 6 months expiry then it will probably give range of 1,000 to 1,200 points from current trading level which huge.

2. Less number of Adjustments.

   As we discuss earlier, since the range for breakeven is wide, the number of adjustments require normally are less. Adjustment require only in case of Black Swan Events

   Huge gap up or gap down are risky but manageable through skills and experience. Major risk would be huge Directional Move followed with Huge Volume.

3. Hedge with weekly options.

   The possibility of unlimited losses can be taken care of with buying weekly or monthly options in given series. It is very important to know your Risk Appetite.

   Hedging is two way saver here since it will limit losses at the same time it will reduce Margin requirement which is very important for long term trading.

4. Idle for part time as well.

   Since rom above points, it is clear that shorting Long Options are good option strategy as they provide wide range with less adjustment by reducing margins it can be deployed with less time. The time investment is also low and can be done by part time trader as well.

   Many Investors trades in Covered call strategy for their stocks to get rental income same way they can also trade in Long Options as it is less time bound.

5. Overnight Theta Decay

   The people make money in shorting Option by only 2 ways - Theta Decay or Directional Move with Delta.

   Long options will give huge theta decay but it has risk which we will address in disadvantages.

Disdvantages in trading Long Options

Lets discuss some disadvantages in trading Long Options for short positions

1. Margin requirements and Margin Call

   If you are in options selling then you need Margin for shorting any contracts. Recent rules by SEBI are proving no Margin Leverage but Margin Benefits provided for Hedge positions.

   The Peak Margin rules, another recent announcement by SEBI made Margin call hits on regular basis for high volatile market conditions.

2. Margin Double for 9 Months contract

   If you short Long Options then margin in need to be given, but if you traded contracts with expiry of more then 9 months then Margin require are doubled to cover volatility in the market.

   Suppose we are in month of Jan XX, if we wish to short Nifty option July XX then margin will be “x” but for August XX contracts margin will be “2x”.

3. High Vix & High Premium

   The Option premium generally derives it Value from Gamma, Theta, Rho, Vega and Implied Volatility. The India Vix defines the general expectation of volatility as full market.

   If the India Vix in increased then Option premium also increases without respecting theta decay. In this scenario it is necessary to take decision to stay in market or close the position.

Long Options are really good instrument for Trading, Speculation or Hedging. What’s are your views ?

You can also read our latest article on Best Gold Investment Options in India

1. Check NSE website.