Have you ever traded options based on different stocks? You might have noticed how options contracts aren’t available for all the stocks in the market. It happens because only a few stocks are optionable. Beginners in the stock market might not be familiar with the term ‘optionable stocks’. Let us discover what these are and a lot more about these stocks.
Before delving deeper, it is essential to understand options. An option is a financial contract based on any underlying asset , say stock. An options contract allows the holder to buy or sell the underlying asset on a future date at a pre-decided price. The pre-decide price for the transfer of the underlying asset is called the strike price. When the market is not in favour upon the expiry of the contract, one has the right to not exercise options.
Stocks can be used as underlying assets for options. However, not all stocks are used in options. Stocks that qualify for option contracts are called optionable stocks. These stocks have the required liquidity and trading volume on the stock exchange(s). The conditions for these stocks might change from one jurisdiction to another. An optionable stock will have listed options with ample liquidity for investors. Stocks that do not meet the listed criteria do not have listed options on exchanges.
Now that you understand the optionable stocks meaning, let us discuss their benefits. These stocks can help you earn higher returns with derivatives trading. You can invest in calls and put options to benefit from future price movements. For instance, you can invest in a call option upon suspecting the price of an optionable stock will grow. The call option will allow you to purchase the particular stock at the strike price, even when the market price is high on the expiration date.
Optionable stocks are essential for hedging in today’s high-risk scenario. You can see how rising prices have affected the stock market. Luckily, you can hedge your portfolio against rising prices with such stocks. You can invest in options and buy/sell stocks at better rates. When the market prices are not in favour, you can ignore the options contract. Many investors prefer options due to the flexibility in exercising the contract.
Investors can use call/put spreads to benefit from price movements. Options can allow investors to make profits even during adverse price movements.
As discussed above, there are certain conditions for a stock to become optionable. Investors must be familiar with these conditions before indulging in option trading. The Securities and Exchange Board of India (SEBI) is responsible for setting the conditions of optionable stocks in India. It allows stocks with a market-wide position of INR 50 crores or more to become optionable. Also, a stock should be in the top 500 stocks based on market cap and trading volume for the past six months to become optionable.
It is crucial to note that a company that filed for dissolution cannot come under this category. Companies receiving winding-up notices cannot trade options either. In addition to these guidelines, the stock’s sigma order size (median quarter) should not be less than one lakh. When stocks fail to meet the aforementioned conditions for three successive months, they are not considered optionable.
One can easily find optionable stocks on recognised stock exchanges like the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). You can use a trading platform and a brokerage account to access stocks online. While every stock is not optionable, there are still several in the market. The liquidity for options based on some popular stocks is high on almost all stock exchanges. Some examples are Reliance Industries Limited, State Bank of India, HDFC Bank Limited, etc. You can find multiple option contracts for these stocks on Indian stock exchanges.
Optionable stocks can help investors build a strong portfolio. These stocks have associated option contracts on stock exchanges. There are certain conditions for stocks to qualify as optionable. These stocks can help investors indulge in price speculation through options trading. Also, investors can protect themselves from rising prices by holding or writing off options. One can build a diverse portfolio with the help of stocks in India. Search for available optionable stocks now!