Here are the 5 Key differences between stock options and index options in the Indian market:
Table of Contents
Underlying Asset
The underlying asset of stock options is an individual stock, while index options are based on the performance of an underlying index, such as Nifty or Bank Nifty.
Settlement
Stock options in India are settled through compulsory physical delivery of the underlying asset, while index options are settled in cash. This means that if you exercise a stock option, you will have to take delivery of the underlying stock, whereas for index options, the profit or loss is settled in cash.
Liquidity
Index options are generally more liquid than stock options as they have a larger number of participants trading them. This means that it may be easier to buy and sell index options at any given time, while stock options may have lower liquidity.
Risk
Stock options carry company-specific risk, while index options are generally considered to be less risky as they are based on the performance of a basket of stocks. The risk associated with stock options is higher because it is dependent on the performance of an individual company, whereas index options represent a diversified portfolio of stocks.
Investment strategy
Investors can use stock options to hedge against the risk of owning an individual stock or to speculate on its price movements. Index options, on the other hand, are commonly used as a hedging tool for a portfolio of stocks or as a means of taking a broad market position.
