‘Index options have much better liquidity than individual options’

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: With little room left for the markets to go up, investors are baffled as to where to invest and reap good returns. Rahul Jain of The Financial Express, in an interaction with derivatives analysts, gets their opinions on seeking an exposure to the derivatives markets and things one should keep in mind while investing. Excerpts:

According to you, which is better from the both? Futures, options or combination of both? Why?

Futures and options have different risk reward profiles. Hence they are meant for a different category of investors and traders. Futures have a linear risk reward profile and hence they are meant for traders who would like to play the linear movements of the market.

Options have a non-linear profile and are suitable for people who would like to incorporate time as an important component in their analysis.

Options generally give steady returns to people who write them on their underlying equity holdings. They are particularly useful in a sideways market. The risk is greater in options in my opinion, since the amount of leverage is much higher than in futures.

How can an investor earn by investing in options in this kind of market?

The best course of action in a sideways market, which is what we have right now, is to write options against the underlying portfolio so that some kind of regular returns are achieved, as the market may remain ranged for many months. Writing of options will be much better than buying options in this market, but against the underlying asset.

Which is better investing in? Stock options or index options?

Index options have much better liquidity than individual options. Individual stocks in a sideways market become very difficult to trade.

Apart from going short and long, what are the other strategies an investor can use and how risky it is for them?

Several strategies can be used by an investor to take advantage of a sideways market. Writing covered calls, straddles, and strangles are particularly useful. Covered calls are writing of options against particular stocks or index. Writing straddles involve selling of put and call options at the same strike and the amount of premium received indicates the range of profitability. Writing strangles involves writing put and calls of different strikes and hence providing another variation of playing ranges.

What are long-term Nifty options? How it is beneficial for long-term investors?

Until now, current month options were the only options available and hence time value was very important. With longer-term options, options with expiry up to 5 years would be possible and hence traders and investors would have more choices in exercising their views.

Would you recommend waiting for the expiry or squaring off the position and getting the profits, considering the current trend of the market?

In this kind of a sideways market, profits need to be taken off the table at regular intervals, otherwise the market is likely to move sharply in the other direction. In different market contexts, the perspective on profit booking has to be different.

What risk and mistakes must an investor overcome while investing in options?