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Disclaimer The recommendations are purely a view point and there is no guarantee on the returns. Shriram Transport Finance Company Ltd. The Securities and Exchange Board of India Sebi has now allowed the bourses to introduce the European style of trading stock options. Till now, only the American style was being used at the exchanges.
Under the current style, a buyer can exercise the contract at any time during its tenure. However, in the European stock option, a buyer can do so only on the expiry day. As the exercise date is limited in the European option, it removes the uncertainty about possible early execution.
How to Trade Options In India? Step-by-Step Guide! | Trade Brains
The lack of this uncertainty is expected to encourage more investors to trade stock options. This also makes the pricing and valuation simpler than that of the American option.
While the ability to execute an American option at any time during the contract makes it more flexible, it also renders it more expensive. Investors may not have the freedom to choose between these two styles as Sebi has asked the stock exchanges to opt for only one of these. Traders must bear in mind that the illiquidity of a stock options contract can severely impact trading strategies and profitability. Determining fair value of options — Due to the wide bid-ask spreads in stock options contract, it may become difficult for stock options traders to judge the true value and price of an option contract.
The bid for a contract would be Rs. In such a situation, it can be tricky for a trader to try and figure out the correct fair price of the option.
Step By Step Guide On Options Trading in India 2021: Indicators, Strategies
Avoid Market orders while trading stock options in India. Due to the illiquid nature of contracts, placing market orders in stock options can be detrimental. It is advisable to trade in stock options only using the Limit order type.