Thread by @scorpiomanojFRM

#Learning
Why Options is riskier than Futures?

Let us take an eg of Nifty futures at 11000 and an equivalent OTM 11300 call with a delta of 0.33 and OTM put 10700 assuming a delta of -0.33.

It might appear that selling futures at 11000 (delta -1) technically equals....

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selling 3 OTM 11300 calls (delta -0.33 X 3 = -0.99), at for eg 150.

Now let us assume futures moved up by 100. The percentage loss is 0.91%.
The price of the OTM calls is likely to go by 0.33 X 100, ie 33, meaning it will be at 188. The percentage loss is 25.3%.
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2) When you are selling 1 lot fut (delta -1) you require approx Rs 1.4 lacs per lot margin. For selling one lot of OTM call (delta -0.33), approx you require Rs 1.2 lacs per lot. So for 3 OTM call sell (delta -1), u require Rs 3.6 lacs, way higher than a similar delta futures..

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The big difference in margin despite a similar delta with futures, is because of the risk involved and nothing else. The risk is what I have described in S.No. 1, in layman terms.
3) There are other factors that might not move futures ,...

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but can change the option price. For eg, volatility. If volatility spikes, the option prices can go haywire, whereas futures are not effected. There can be an argument that vol spikes are usually accompanied by underlying crash. It is not always.....

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There are instances where the IVs have spiked with negligible changes in the underlying, for eg if the market is anticipating an important outcome of an event.
4) Hence never consider Options selling as similar to going long or short in futures as the case may be....

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Options selling (also option scalping) has the potential of your capital getting wiped out at a way way faster rate and way way quicker time than the corresponding futures.