If you’re looking to earn money from intraday trading in the Indian stock market, you have two popular options to go with: options trading and intraday (equity) trading. You can do option trading in stocks and indices and intraday trading in stocks.
Options trading, especially buying options, is indeed a way you can earn some quick money on an intraday basis if you really have mastery over it. The risk involved, however, is immense in option buying, while intraday trading in stocks is not that risky as long as the premium (option price) decay is not involved in the process.
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On the flip side, you need to compulsorily square off your positions in intraday trading before the market day ends, but in options, though never recommended as a profitable thing in naked buying, you can carry over the positions to the next day or the next week as per your expiry dates.
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In this article on option trading vs. intraday trading, I would like to take a look at the whys and why-nots of these two intraday trading instruments in the Indian market. This will be quite helpful for a beginner who is seriously looking to make it into the universe of intraday trading in the stock market.
Intraday vs. Options Trading – Interest Over Time in India
The above Google Trends data evidently shows that there has been an increasing popularity for the keyword ‘options trading’ in India since January 2022.
Until then, as per the data, people were more interested in intraday trading, as it (the blue line) constantly stayed over the red line of option trading.
Maybe the post-Covid economic scenarios might have driven more youngsters to option trading since it attracts them as one of the most lucrative intraday trading instruments.
The new-gen Youtube-backed fin-influencer traders might also have impacted the trading habits of people over the period, by the way.
What is Options Trading?
Being the most-hyped and popular instrument of trading in India, I would like to start with options trading, though intraday trading in equities seems to be an incredible way (maybe, in my personal view) for a beginner to start with as it can get the trader acquainted with the price and chart movements quite effectively and, of course, with minimal risk.
Options, as you might know, are a type of derivative that is derived from the underlying assets, either stocks or indices, in the case of the Indian stock market. You can also find options in currencies, commodities, bonds, and more.
When it comes to options trading, you can either sell or buy (put and call options), but buying is indeed the most affordable method for beginners, as long as selling options is a bit expensive and the risk in selling is indefinite.
In the case of buying options, you have a kind of limited risk as you will only lose a fixed and stipulated amount, which is the premium required for buying one or more bundles of options of either a stock or an index.
Why Options Trading?
- Minimum Capital & Less Risk (Options Buying).
- Quick Intraday Profits.
- Cost-Efficiency.
- Large Number of Options Strategies.
There are many reasons why a beginner should choose or would tend to choose options trading, i.e., buying puts or calls, at least in the initial stage of their trading career.
One of the main advantages of option buying is the expected higher returns.
A quick move in the index or stock prices may double your capital in option buying, provided that the premium movement has good momentum.
Yet another reason is the cost-effectiveness of option buying. If you have mastery over following the chart movements and related premium hikes and downs, you are likely to get good returns at a faster rate compared to intraday trading, equity buying, and more.
Minimum capital and less risk are two other main reasons why you should go for option buying. Options selling has a different story in these cases, but to buy options, you need only minimal capital, and the maximum risk is only the spent capital, i.e., the premium.
Moreover, you can apply a large number of strategies in options in accordance with intraday, weekly, or monthly expiries. A mix of buying and selling also gives you an edge in gaining profits, though the overall return is limited to some extent in some of the strategies.
But you are lucky enough to have an abundance of strategies in options trading.
Why Not Options Trading?
- Increased Volatility (Indices).
- Time-Bound Theta Decay.
- Lower Liquidity (Stock Options)
- Higher Brokerage Charges.
There is a sea of reasons why one should stay away from trading options.
Option selling, in my view, is indeed not very favorable for a beginner without a better knowledge of the market and its nuances, but in buying puts and calls, though the risk is limited, the chance for your account balance to get wiped out is roughly 50%.
If you fail to understand the abrupt market movements, you may lose all your capital in a few minutes. At the same time, even a sideways market will end in the gradual depletion of your capital because of the time-based decay in premium rates.
Of course, time decay is the main disadvantage of buying trades (puts or calls) in options, as these contracts are purely based on time, whether weekly or monthly.
As you may know, the same thing is a boon for the sellers, by the way, as they get the decayed premium rates as earnings in their wallets.
Lower liquidity and relatively higher brokerage charges compared to equity intraday trading should be the other main concerns for traders in options.
What is Intraday (Equity) Trading?
To put it simply, buying or selling shares in the stock market on the same day is called intraday trading. It is all about trading the stocks at their spot prices, whether short-selling or taking long positions, and exiting with profits before the market day is over.
The main advantage is that the brokerages give you leverage to do intraday trading. So you will require only minimal capital to do bigger trades, thanks to the higher leverage offered by the leading brokerages.
Intraday trading in stocks enjoys several advantages over options trading for a beginner, and it has some awful disadvantages, as well. I would like to take a detailed look at them below in the article on option trading vs. intraday trading.
Why Intraday (Equity) Trading?
- Not Highly Volatile.
- No Time Decay.
- Leverage for Big Trades.
Compared to options trading, the first and foremost advantage of intraday trading is that you are not affected by time decay.
With that being said, if you are confident about the move, whether uptrend or downtrend, of a particular stock, you can invest in it with no more worries in equity intraday trading, long or short.
If the stock moves up or down as per your convictions, you can pocket a huge profit, for sure. This is the simple reason why I always recommend intraday trading for beginners, at least in the early stages of their trading career.
Yet another main reason, in my view, is the stable and almost predictable movement of the prices.
The indexes are highly volatile, so options trading has always been a bit tricky, but the stocks individually are not that volatile, and you can judge the movement of a stock’s price based on several factors like quarterly results, news, and other global and national cues.
You get the same advantage in stock option trading, though. But there again you have the barrier of time decay.
The final thing, as stated above, is the availability of leverage, which is also available in options, as options are already highly leveraged instruments for intraday as well as positional trading.
Anyway, leverage in intraday trading is an incredible attraction since it enables a trader with limited funds to be a part of the stock market and make a living if he or she is skilled enough to do that job perfectly.
Why Not Intraday (Equity) Trading?
- Intraday Square Off.
- Limited Price Movements.
Though there is no such thing as time decay as there is in options trading, intraday trading, as its name suggests, is completely time-bound. Here, the trade is only for a day. You need to make a profit or book the loss before the trading day ends.
In options trading, you have the option to carry over a trade until the expiry date, even if it will seriously affect the premium prices due to time decay in option buying.
But you have no option to carry over an intraday trade as long as it will be auto-squared off by the broker as the market day ends.
Luckily enough, if you have enough funds in your account, you can convert your intraday positions to delivery if you think you have a fundamentally strong stock in the fold at the end of the day.
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Vahid Vee is, by profession, a blogger and search marketer, and by passion, a stock investor and trader who loves to write on various ready-to-go platforms and systems that help people make good decisions in trading and investing. As an investor and trader on F&O, swing, and long-term positions in the Indian stock market, he is excited to share with you his experiences over at TradeTranz here. #Contact him @ vahidvee@tradetranz.in – LinkedIn – Quora – Reddit