Options trading is a financial instrument that gives you the opportunity to buy or sell an underlying asset at a predetermined price until the contract expires. The key difference between futures and options is that options give you the right, but not the obligation, to buy or sell an underlying asset. This means that if the market doesn’t move in your favour, you can choose to not exercise the option. These contracts are bought and sold like stocks on stock exchanges such as National Stock Exchange and Bombay Stock Exchange (BSE).
Types Of Options
There are two types of options traded in the share market: call options and put options.
Call options give the holder the right to buy a security at a fixed price up to expiry date. A call option gives the buyer the right to buy shares at a specified price or higher. So, if they are exercised, they can be used to buy the underlying stock at the predecided fixed price irrespective of the current market price.
Put options give the holder the right to sell shares at a specified price up to expiry date. A put option gives the buyer the right to sell shares at a specified price . So, if they are exercised, they can be used to sell an underlying stock at a fixed price, irrespective of the current market price of the asset.
Key things you must know before starting options trading
Strike Price: In options trading, the strike price is the price at which the underlying asset can be bought or sold if the option is exercised. It is also known as the exercise price.
Options Premium: In options trading, the premium is the price that an investor pays to buy an option contract. The premium is determined by a number of factors, including the strike price, the expiration date, the volatility of the underlying asset, and the underlying asset’s current price.
Options trading is a form of speculation where investors purchase a put or call option on an asset that has the potential to increase in price over time. When the price of this asset reaches certain levels, you can sell your option and make a profit. Investors use options trading as a way to hedge against risk, as well as to make money from market movements. While there are several different types of options available, there are only two types that are traded: calls and puts. There are several indicators for options trading you can use to help you make informed decisions when deciding on which ones strategies to implement while trading options.
Options Trading In Four Easy Stages
Create an account to trade options
You must establish your expertise in options trading before you can begin trading. Creating an options trading account demands more funds than establishing a brokerage account for trading stocks. People who are well-versed in the market and have the time to monitor it. Brokerage companies interview prospective options traders to gauge their trading expertise, risk awareness, and financial stability. After going through this process you can open your trading account.
Decide which options to sell or acquire
Recall that a call option is a contract that grants you the right, but not the responsibility, to purchase a stock at a set price within a specific time frame. This price is known as strike price. The right to sell shares at a certain price before the contract’s expiration is provided by a put option, but it does not obligate you to do so.
Determine the strike price of the option
Only if the stock price ends the option’s expiration time “in the money” does an option purchased stay valued. In other words, either higher or lower than the strike price. (It is above the strike for call options and below the strike for put options.) You should purchase an option with a strike price that corresponds to where you think the stock will be at the end of the option’s term.
Establish the potential time frame
Every options contract contains an expiration term that specifies the final day that the option may be exercised. You can’t just make up a date right here either. The options available to any investor when the investor calls up an option chain are your only options.
You can easily trade futures and options on any good trading platform. For instance, Kotak Securities offers the best stock market app to trade in all market segments. The app consists of several features that make options trading simpler. Download the app to enter the derivatives market.