Trading in derivatives appeals to most investors as it offers a chance to earn high returns. The two most popular types of derivatives are “futures” and “options”. Both involve buying or selling an asset at a future date and price.
 

However, the main difference between them is that in a futures contract, both the buyer and the seller are obligated to complete the trade, whereas, in an options contract, they get a choice to back out if the trade doesn’t look profitable. This makes options more flexible and even popular among traders.
 

If you are a beginner, you can start options trading with small capital of less than Rs. 2 lakhs. This minimises your risk while you still get some exposure to options trading. To successfully trade options with minimal initial investment, follow these tips.

• Before doing options trading with small capital, always understand the market. You can do so by studying market trends and volatility.
• Start small and begin with 10-20% of your capital. This lets you learn gradually without risking your entire investment.
• Always wait for trades to close before starting new ones.
• Predefine your “stop loss” and “target amounts” to control risk.

When doing options trading with small capital, you need to carefully manage your risk and maximise your chances of profit. These five important tips can help you trade smartly:

1. Understand the options market before investing

Options trading is complex. It involves predicting future prices, which several traders find challenging. Be aware that when you enter an options trade, you bet on price changes. But the other party is also betting for profit. Only one of you can be right while making predictions.
 

Therefore, before trading, it is important to completely understand how options work. To do so, you must study:

• Market trends
• Volatility
• Pricing models

Next, by having realistic expectations and knowledge of the market, you can make smarter investment decisions and even choose trades that have the best potential for profit.

2. Start small

Since you are doing options trading with small capital, avoid investing everything at once. For example, if you have Rs. 2 lakhs, start by putting only 10% to 20% into one or two trades. By doing so, you can smartly limit your risk in case a trade doesn’t go as planned. Furthermore, managing smaller investments allows you to learn without risking your entire capital.
 

As a proven tip, always wait for your open trades to close before starting new ones. This gives you a clearer picture of your profit or loss and prevents you from being overexposed to market risks.
 

3. Choose the right holding period

In options trading, the “timing” of holding your investment plays an important role. It is worth mentioning that options have a limited shelf life. Holding onto them for too long can lead to losses. Thus, Instead of waiting for too long, it's better to enter and exit trades quickly. For maximum benefit, you can time your trades during periods when prices are about to rise or fall sharply.
 

Also, by keeping a short holding period, you can capitalise on market movements and make quicker decisions. This way, you can minimise losses or lock in profits before the option expires.
 

4. Pre-define the “stop loss” and “target” amounts  

While doing options trading with small capital, it is always preferred to set limits for:

• How much loss you are willing to take (stop loss)
  and
  How much profit do you aim to gain (target)
   

There are online tools and calculators that can help you figure out these values based on market conditions. By setting these limits beforehand, you can control your risk and avoid emotional decisions.
 

Also, through a calculated stop loss, you can exit trades if they aren’t going well, while a target helps you lock in profits when your goal is reached.

5. Avoid impulsive buys and ‘hot tips’  

Just because someone else made money on an options trade doesn’t mean you will, too. Please note that markets behave differently and stock price movements don’t always reflect options performance. Therefore, it is important to avoid jumping into a trade based on news or what friends say.
 

"Hot tips" from unverified sources are often risky and unreliable. Make sure you do your own research before entering a trade. While making your assessment, always try to understand the reasons for price movements and not get carried away by hype.