An option is a
written contract from a seller that gives the buyer the right, but not the
responsibility, to purchase (in the case of a call option) or sell (in the case
of a put option) a specified asset at a fixed future price (also known as the striking
price or exercise price).
written contract from a seller that gives the buyer the right, but not the
responsibility, to purchase (in the case of a call option) or sell (in the case
of a put option) a specified asset at a fixed future price (also known as the striking
price or exercise price).
The seller gets
paid by the buyer (referred to as a premium) in exchange for providing the
option.
Understanding Options
Trading
An investor or
trader can purchase or sell stocks, ETFs, and other securities at a specific
price and by a specific date with the use of options trading. This kind of
trading gives investors the freedom to choose not to buy a securities at a
specific price or on a specific date.
How Does Options
Trading Work?
A trader or
investor gains the ability to use an option at any moment, provided it is not
expired, when they buy or sell an option. It is not necessary to execute an
option at the time of expiration if one is just buying or selling it.
therefore viewed as derivative securities.
Strategies in Option Trading
-
Long
call options trading strategy - Short
call options trading strategy - Long
put options trading strategy - Short
put options trading strategy - Long
straddle options trading strategy - Short
straddle options trading strategy
Participants in Options
1. Buyer of an Option
The one
who, by paying the premium, buys the right to exercise his option on the
seller/writer.
2. Writer/seller of an Option
The one
who receives the premium of the option and thus is obliged to sell/buy the
asset if the buyer of the option exercises it.
3. Call Option
The holder of a call option has
the opportunity—but not the duty—to buy an asset at a fixed price before a
given date.
4. Put Option
A put option
gives its holder the choice—but not the obligation—to sell the asset at a
predetermined price before a specific date.
Notable Terms in Options
Trading
1. Premium
The price
that the option buyer pays to the option seller is referred to as the option
premium.
2. Expiry Date
The date
specified in an option contract is known as the expiry date or the exercise
date.
3. Strike Price
The price
at which the contract is entered is the strike price or the exercise price.
4. American Option
The option
that can be exercised at any date until the expiry date.
5. European Option
The option
that can be exercised only on the expiry date.
6. Index Options
These are
the options that have an index as the underlying. In India, the regulators
authorized the European style of settlement. Examples of such options
include Nifty options, Bank Nifty options, etc.
7. Stock Options
These are
options on the individual stocks (with stock as the underlying). The contract
gives the holder the right to buy or sell the underlying shares at the
specified price. The regulator has also authorized the American style of settlement
for such options.
Profitability Scenario in
Options
1. In-the-Money Option
An in-the-money (ITM) option is
one that, if promptly exercised, would result in positive cash flow for the
holder.
For instance, a call option on
the index is considered to be in-the-money if the current index value exceeds
the strike price (spot price > strike price).
2. At-the-Money Option
An at-the-money (ATM) option is
one that, if it were executed right now, would result in zero cash flow, or
neither a profit nor a loss.
For instance, in the preceding
instance, the option is ATM if the current index value equals the strike price
(spot price = strike price).
3. Out-of-the-Money Option
An option that, if exercised right
now, would result in negative cash flow is known as an out-of-the-money (OTM)
option.
For instance, in the
aforementioned scenario, the option is considered out-of-the-money (OTM) if the
index value is less than the strike price (spot price < strike price).
How to do option trading?
You will first have to open an options trading account, choose
the option you want to buy or sell, and predict the options strike price for
starters.
How option trading work?
An investor or trader may exercise an option at any point prior
to the option’s expiration date when they buy or sell it.
An option does not have to be exercised by the buyer or seller
before it expires. Options’ structure qualifies them as “derivative
securities.”
Put differently, the value of assets, securities, and other
underlying instruments, among other things, affects the price of options.
Is option trading safe?
It is best to have a foundational grasp of trading under your
belt before delving into options. Next, you want to outline your investing
objectives, including but not limited to capital preservation, income
production, growth, and speculation.
Your broker may impose additional requirements, including
revealing your net worth or the kind of options contracts you wish to trade.
What is option trading with example?
Options can be used to peculate on changes in the market, but
they are also commonly used to hedge stock positions. For instance, a trader
may buy put options to cover an existing bet on the underlying security’s price
increase.
Is Option Trading Better Than Stock Trading?
Even while options trading is a little more
difficult than stock trading, if the investment’s price increases, it can help
you earn much larger returns.
