Options trading are contracts that give the bearer the right, but not the commitment, to either buy or sell an amount of some underlying asset at a pre-determined price at or before the contract expires. The party taking a long position that is buying the option is called buyer/holder of the option, and the party taking a short position that is selling the option is called the seller/writer of the option; the contract value and lots size are similar to futures.

Options Trading In India

The Indian stock market trading is concerned. Options are secondary products the price of which depends upon the price of the underlying security. Options trading works like a contract but at the same time, this needs to be noted here that in options trading, the buyer does not have the obligation to exercise the option. He may or may not exercise the option to buy or sell a security. If you are a beginner-level trader, then you need to understand some of the intrinsic aspects of this form of trading, Option trading is an excellent way of minimizing the risks.

For Instance…

For example, an options trader holds a share with a current market price of Rs100, which he thinks is overprized and soon the market will go down. So, he enters into an option to sell the shares at Rs95 per share and pays a premium of Rs4 per share.

Now, if the market crashes down, and the shares trade at Rs90 per share, he can still sell the shares at Rs95, saving the loss of otherwise being able to sell the shares at Rs95. And if the market goes up by any chance, taking the price to Rs110, he can choose to not exercise his option and sell the shares at Rs 110. And only end up paying Rs4 premium.

Types of Options Trading

There are two types of options trading:

• Call Option

Call options are financial contracts that give the option buyer the right, but not the obligation, to buy a stock, bond, commodity, or other assets or other investments at a specified price within a specific time period.

• Put Option

A put option is a contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a pre-determined price within a specified time frame.

Options Trading vs. Equity Trading

Here are the most fundamental differences between Options and Equity:

In equity trading, you make money only by betting on the direction whereas, In Options trading, you are not just betting on direction – you are betting on direction, time, and volatility.

Options are leveraged which means your profits, and your losses, are quite magnified as compared to your investment. Options trading allows you to construct structures with pre-determined profits and losses. You can decide how much you will get or lose on a maximum. And that is a great way to limit your fear and greed.