Know the key differences before trading these index options

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Index Options List at Firstrade Securities Inc

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What is index option trading and how does it work?

Read The Balance's editorial policies. Reviewed by. Full Bio Follow Linkedin. No worries for refund as the money remains in investor's account. Index Options Explained Just like a derivative future contract, options too are an derivative product where the buyer holds a right to execute option of either buying or selling of an underlying asset at a certain pre-determined price also known as the strike price during a pre-determined time period.

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Premium payable upfront Selling Nifty Options — Premium received up front. Other Index Options in India While Nifty Options and Bank Nifty options are the most popularly traded contracts, there are a few other Index options also available for trading in India.

What is an Index Option?

Things to remember while trading Index options and building options trading strategies in India Determining fair value of index options in case of far out of money contracts — Due to the wide bid-ask spreads in far out of the money index options contract, it may become difficult for index options traders to judge the true value and price of an index option contract. The bid price for a contract in case of far out of the money contracts would be Re. In such a situation, it can be tricky for a trader to try and figure out the correct fair price of the option.

Avoid Market orders while trading index options in India. Due to the illiquid nature of index options contracts, placing market orders in index options can be detrimental.

It is advisable to trade in index options only using the Limit order type and not market orders. Often ahead of events of high economic importance, it may be better to avoid trading in options all together and in case one must, it should be a hedged options trading strategy instead of trading naked options. Reward — Limited to the premium amount received up front.