We understand what is the basics of futures contracts and options contracts. Now here we are going to understand more deeply about options contracts. Also, we will be covering How to select call option & how to select put Option.
Trading in the options market is much more difficult. You need to understand the concepts to make a trade. Compare to the options market, the cash market / Equity market is simple and easy to trade, but in the options market, you need to create a strategy. You need to understand whether you need to follow the indicator or you need to follow price action
What is Options Trading?
Options trading is a derivative market tool like futures, in which the value of an options contract is derived from an underlying asset. A buyer and seller are entering into an agreement. In the future market buyers and sellers are making contracts. At the time of expiry, the buyer should buy at the agreed amount. but coming to options trading the buyer has a right to exit the contract but the buyer needs to pay a premium amount to enter into the contract. Which is not repayable in any condition.
What is the basic jargon you need to understand in Options trading
- Strike price
- Underlying price
- Exercising an option contract
- Option premium
- Option expiry
- Option Settlement
Strike price
It is a price at which the buyer and seller agreed to enter into the option contract. Mainly strike price represents the price of the contract on the day of expiry.
Strike price example in NSE
Underlying Price
In a derivative market, the option contract is derived from the underlying asset. That is Underlying asset is the price, which the asset trades in the spot market
Exercising an option contract
Exercising an option contract means the buying and selling of the option contract on the day of expiry
The option premium is considered the money required to pay by the buyer to the seller. This allows the buyer to exercise the option contract at the time of expiry. The option premium is not refundable at any time.
Option expiry
Option Contract also will have an expiry like a future contract. In India Future and options expire on the last Thursday of the month. In DowJones option expires third Friday of the month.
Options settlement
There are two ways the settlement will happen one is physical and another one is a cash settlement
What did you require for options trading?
1 Demat account
For the first step of options trading you need a Demat account and in which you need to activate Derivative market trading. Once you have all these you can start Option trading
2 Option buying or option selling
When you select options trading you can go with two methods one is option buying and another one is option selling.
If you think that the market will go upward direction then you can buy a call option or sell a put option
If you think the market will go down then you can sell a call option or buy a put option
Both of these depend on the forecasting that you made on the stock market. We will be covering the call option and put option in a separate blog because its required more focus.
3 selection of strike price
The call option or put option is based on the strike price you chose. Suppose the market is moving around 18000 and you are thinking that at the time of expiry market will reach 18200 then you can select the call option
If the market is moving around 18000 and you are thinking that the market will reach 17800 then you can choose the put option. These numbers are mainly known as strike prices.
Basically, for the call option, you need to select the higher number, and for the put option, you need to choose lower numbers.
4 Option Time frame
When you made an options trade you are entering into the option contract after that either you can wait for the expiry date to exit or if you make some percentage of profit you can exit this options trading.
5 Discipline
You will get confused by seeing this word but this is the main thing that we need to follow.
When you start ready to do trading in the options market you should have some strategies to be followed and you should follow these strategies. You should always have a profit market and loos margin. Options trading is the best way to make money and the best way to lose money. You should have a stop loss in your all trades and you should follow the profit loss margin example you should take a decision that you will follow the 10: 30 method. which means a maxim of 30% profit and a maxim of 10% of the loss. This will help you to protect your capital from huge losses.
Options trading is better than stock trading?
In 2022 most of the stock markets showed high volatility. Many of the stock markets reached 52 Week lows and some of them got 52-week highs. Due to various reasons, we experienced all these in 2022. Covid 19 will be one of the major reasons for all of these. We can look of them into the reason behind the market volatility
What is the reason for stock market volatility?
There are many reasons associated with market volatility. Few examples are
- The inflation rate increased in many countries like the United States
- Russia – Ukraine war
- Lockdown due to covid 19
- Raising oil prices
These are the major reason for the market volatility. When it comes to options vs stocks we cant select a proper one because. Options trading gives high risk and high reward. Coming to the stock market 52 weeks low is the best time for the long-term investment you can use the benefit of averaging stocks. If an investor is ready to take risks he can choose options trading for making money in a shorter period and invest in stocks for long-term benefit.
Conclusion to options trading
Options trading is one of the best ways to make money. You should understand the basic concepts of options contracts and strike prices. You should follow the market regularly wise and always be updated about the economic condition. It will have a direct impact on the stock market. You should adopt the successful options strategies. Don’t act like a greedy person. Don’t overtrade and limit your loss and limit your profit.
One thing everyone should understand is options trading always gives high risk and high reward. the people who are ready to take risks can go for options trading Else you can choose a stock investment. Hope this will add some input to your basic understanding of option trading.