Indian Options vs American Options

Indian Options American or European
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I trade options regularly in the Indian as well as the American market. They are very different in their pricing models, trading volume, expiry cycle, lot sizes, and even trading frequencies. For example, the Indian options are European style options where the Options contract can only be exercised after the expiry. On the other hand, the American style options can be assigned early. This article discusses in detail how Indian Options differ from American options and how you can use this information to change your trading strategies.

1. Lot Size and Margin Requirement

Indian equity and index options have different lot sizes. For example, NIFTY 50 options have a lot size of 50 while the Bank Nifty options have a lot size of 25.

Further, the equity options have different sizes. The lot size for trading Indian Oil (IOC) options is 6500 while the HCL Tech Option lot size is 700. This leads to different margin requirements for different stock or index options. This can be really challenging for traders trading with capital below Rs. 500,000 or Rs 5 lakhs.

On the other hand, the American options (both index, ETFs, and stocks) have a fixed lot size of 100. So, if you want to open a credit spread trade with a $2 spread between the strike prices, the margin requirement is $200. This margin requirement does not change with expiry cycle, instrument (ETF/stocks), or implied volatility.

I sometimes, fail to understand why Indian brokers charge an extra margin on a hedged credit spread with defined loss when there is increased volatility in the index/stock. This can lead to a margin shortfall for a small trader with capital below Rs. 500,000 if he has several positions opened simultaneously.

This is a real advantage of trading in American options.

2. Expiry Cycles

The NIFTY 50 and Bank Nifty index options have a weekly expiry cycle. If you trade in the Indian markets, you would know that although the Indian index options have weekly expiry cycles, only the current week, the next week and the monthly expiry options have enough liquidity to trade in them.

As for the Indian stock or equity options, the expiry cycle is every month.

The Indian options are available up to 2 months ahead of the current month. For example, it is March 2 today. You can trade with NIFTY 50 options for March, April, and May. The options in the June expiry cycles are not available.

On the other hand, American equity and stocks can have weekly expiry. Only the stocks or equities with less liquidity and trading volumes have monthly expiry.

Several ETFs in the American market also have 3 expiry cycles in a week. The index ETFs like SPY (E-Mini S&P 500), QQQ (E-Mini Nasdaq 100) and IWM (E-Mini Russel 2000) have expiry on Monday, Wednesday, and Friday of every week. These ETFs are very liquid.

In the American market, it is possible to buy or sell options as far as 1 year or more. This is a major limitation of the Indian market.

If you follow Warren Buffet closely, you would know he regularly sells Puts against his owned stocks which are as far as 10 years ahead.

3. Limitations in Option Strategies

Since there are not enough volatil

4. Option Assignment

Conclusion

The US market often acts as a mother market and influences the Indian market significantly. The IT sector in India is the most vulnerable sector to Global markets and market sentiments in the US. Therefore, Indian traders usually keep an eye on NASDAQ 100 and S&P 500 futures to determine the sentiment of the foreign investors in India.

Moreover, there is almost 5 hours gap between the closing of the Indian stock market and the opening of the American market. Therefore, it makes a lot of sense to trade in both American and Indian markets.

About Post Author

SurajPanigrahi

I started this blog for my love of writing and disseminating my views on things that excited me. I don't have a clear direction with this blog. However, you can find content mostly related to higher education, career development, MedTech, finance, and budget travel hacks. Background: After graduating in Mechanical Engineering from IIT (BHU) Varanasi, India, I pursued a dual degree Master's program in Europe (MS in Biomedical Engineering at RWTH Aachen, Germany and MS in Bioengineering at Trinity College Dublin, Ireland). I am currently working as a 'Manufacturing Engineer' in a MedTech company in Ireland.
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