A Brief Overview
With options, it is possible for you to diversify your sources of income. Although there exist several risks associated with options trading, there also exist several rewards. While you might be under the impression that options trading is tough and best suited to experts, it is in fact a possibility for all to try provided the right know-how is imparted.
To learn more about the pros and cons associated with options trading consider reading the article linked here.
Understanding What Options Trading Entails
Options provides you with a choice to buy or sell specific securities at a specified price on a specified date and time.
While buying an option entitles you to trade the underlying asset that is tagged to, you aren’t obligated to do the same. Should you decide to trade, you exercise your option.
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Looking at the Main Categories of Options
Within the world of options trading, there exist a number of options that can be traded. These each fall into two primary categories of options which are call options and put options.
Understanding Call Options
Call options entitle you to buy an underlying security at a predefined price within a certain time frame. A simple way of understanding this can be to think of it as calling the underlying security to you. Here, the strike price is used to refer to the price paid by you. The expiration date refers to the end date by which you have the right to exercise a call option.
Call options can exist in both, an American style as well as a European style.
- American style call options entitle you to buy the underlying assets at any point in time leading up to the expiration date.
- European style call options only permit you to buy the underlying asset on the expiration date.
In India, the Nifty options are in the European style whereas options on individual stocks are in the American style.
Understanding Put Options
Put options are opposite to call options. Rather than having the right to buy an underlying security, you have an option to sell the underlying security at a set strike price. Simply put, you can understand this as putting the underlying security further away from you.
Options Trading in Action
Options trading can be engaged via an online brokerage account that permits trading to occur as per account holders choices. When looking at options trading, the following points become relevant.
Buying a Call
Buying a call implies you’re buying a contract such that you can purchase a certain stock or asset by a predetermined expiration date. Prior to buying a call, you must consider the following.
- Purchasing a call option makes sense provided you think the price of the underlying asset is likely to ascend prior to the expiration date.
- Purchasing a call option might not be a viable bet if the price of the underlying asset is likely to dip prior to the expiration date.
Instances in which buying a call option makes sense have been examined in the following example. You buy a call option for 50 shares of EFG stock, and hope the price rises. Your call option contract allows you to buy shares at INR 100 each. In the interim, the price of the stock rises to INR 500 each. You can use your call option contract to buy this stock at a Rs.100 and enjoy discount of Rs.400 per share.
Buying a Put
Buying a put implies you’re buying a contract such that you can sell a certain stock or asset by a predetermined expiration date. Prior to buying a put, you must consider the following.
- Purchasing a put option makes sense provided you think the price of the underlying asset is likely to descend prior to the expiration date.
- Purchasing a put option might not be a viable bet if the price of the underlying asset is likely to increase prior to the expiration date.
Consider the following example. You buy a put option for 100 shares of stock XYZ at INR 100 per share. Prior to the options expiration date, stock XYZ’s price falls to INR 75 per share. Should you decide to exercise your option, you could still sell the 100 shares of stock XYZ at the higher INR 100 price per share.
When to buy Put and when to buy Call
In short you buy a call when you expect either the index or the stock to go up and buy a put when you expect the index or the stock to go down. Insta Trade on the Angel One APP allows you to trade options in a simple manner, with all the tools and information you need on the same screen.
In order to successfully navigate the options trading landscape and engage in options trading, learn more about Insta Trade on the Angel One application on your smart device today.
Now that you are familiar with options trading, consider reading about 5 popular options trading strategies.
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