What is Optionable Stock?

Have you ever engaged in option trading based on various stocks? Not all equities in the market are offered as options contracts. Because so few equities are optionable, it occurs. The word “optionable stocks” may not be familiar to novices in the stock market. Let’s learn more about optionable stock benefits, risks, etc.

Optional Stocks meaning

A stock with options listed and tradeable on a market exchange is considered optionable. Not every business that engages in public stock market trading offers exchange-traded options. A minimum share price and a minimum number of outstanding shares are two examples of minimum conditions that must be satisfied, contributing to this.

Presently, there are several hundred more exchange-traded funds (ETFs) with listed options than there are companies with approximately 6,000 optionable equities.1. An optionable stock gives investors the ability to buy and sell shares of the underlying stock at a predetermined price by allowing them to purchase options on the underlying stock.

It is more difficult to hedge holdings in non-optionable stocks, which increases the difficulty of reducing the associated risks. An investor can work with their broker-dealer to set up an over-the-counter (OTC) options contract for similar stocks.

These days, it’s effortless to check online to see if a stock has options listed on it. The simplest method to determine if a stock is optionable is to visit the Cboe Options Exchange website and see if the stock in question has any options listed.

Benefits of optional stock

Here are some of the advantages of optional stock options: –

1. Protection against risks

Investing in the stock market has risks. Risks come from various sources, most of which are out of your control. Implementing efficient risk management techniques is critical to keep your gains from diminishing. 

You can reduce risk with optionable equities by using the put option. You can sell the share at the strike price if you have a put option. Thus, by exercising the put option, you can effectively offset your losses if the price of the share drops.

2. Amplify gains

Gains can be amplified with option-rich equities because call options let you buy a stock at its strike price, so you can increase your profits even if the price rises. For instance, if the price of a stock has increased from ₹ 250 to ₹ 300, you can purchase it at  ₹250 by executing a call option, resulting in a profit of ₹ 50.

3. Customised investment strategies

This is yet another significant advantage. You can experiment with different put-and-call option combinations with optionable equities to optimise your profits. Optionable stocks are like a toolbox of different tactics depending on your goals and risk tolerance because investors have different comfort levels.

4. High liquidity

When making investments in the stock market, liquidity is essential. You can have trouble turning your stocks into cash when you need it if they are not sufficiently liquid. In an emergency, this can become problematic. With optionable stocks, things are different, though. Optionable stocks have higher trading volume than other equities, increasing their liquidity.

What makes a stock optionable?

Investors must be aware of these terms before engaging in option trading. The Securities and Exchange Board of India (SEBI) established the terms governing optionable stocks in India. It permits equities to become optionable if they have a market position of at least ₹ 50 crores. A stock must also rank in the top 500 equities for the previous six months to be considered optionable according to market capitalisation and trading volume.

It is important to remember that a corporation that has filed for dissolution is not eligible for this. Businesses that get winding-up notifications are also prohibited from trading options. In addition to these rules, the stock’s sigma order size (median quarter) should not be less than one lakh. Stocks are not deemed optionable if they don’t meet the previously stated requirements for three consecutive months.

How to find optionable stocks?

Optionable equities are readily available on reputable stock markets such as the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). You can access stocks online using a brokerage account and a trading platform. There are still several stocks available that need to be more optionable. Options based on certain well-known stocks have a lot of liquidity on practically all stock exchanges. Reliance Industries Limited, State Bank of India, HDFC Bank Limited, and others are a few instances. On Indian stock markets, you can discover numerous option contracts for these stocks.

Risks of trading optionable stock

While there are benefits to trading optionable stock, it’s essential to consider the risks involved.

1. Market volatility: Optionable stocks can be more volatile than traditional stocks due to their short-term nature and leverage. This means they can experience significant price fluctuations, making it a riskier investment.

2. Time limitations: Options contracts have expiration dates, meaning investors must act within a specific timeframe or risk losing their investment. This can add pressure and uncertainty to trading optionable stocks.

3. Complex strategies: Trading options can be more complex than buying or selling stocks, requiring a deeper understanding of the market and various strategies. This can make it difficult for beginners to navigate and potentially lead to losses if not executed properly.

The bottom line

You can increase your portfolio’s potential for profit and reduce risk by including optionable equities. Options trading is a complicated game; to fully utilise its potential, you must fully educate yourself.

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