What is options trading?
Option trading is another classification from derivatives. Technically speaking, options are defined as “The right, but not the obligation, to buy (for a call option) or sell (for a put option) a specific amount of a given stock, commodity, currency, index, or debt, at a specified price (the strike price) during a specified period of time”. As there are very complex definitions and explanations, traders are often unable to understand what exactly options and option tradings are. In this article we try our best to explain you in the simplest way we can.
Initially we would like to introduce that every stock which is trading in futures also trades in options. The expiry time remains same as it is for future, mostly last thursday of the month. Options are once again divided in to ‘call option’ and ‘put option’ simply called as ‘CALL’ and ‘PUT’ respectively. When the price of particular share increases, the call option (CALL) increases and PUT decreases. As well, when the price falls down, interestingly reverse happens, PUT value increases and CALL value drops. So first thing we got here is there is no immediate reason to short sell options even if you predict that markets will fall also due to the following reason:
If a trader knows that particular price of the share is going to fall, he can buy put and when the price falls, his put raises and puts him into profit. Of course when he knows markets go up, he purchases the call and make the most out of it. So, in both the cases, the trader is buying the option, CALL or PUT. Finally, every option carried two terms with it – Strike price and premium which are discussed in our next articles.
Summary of the article:
Option trading is performed with call options or put options
Best suitable for low investment traders
Options trading gives a good opportunity to earn more in less time.
Call options to be bought when markets are expected to go up
Put options are to be bought when markets are expected to go down
High risk traders can make advantage of this kind of trading
Risk reward ratio is very high when compared with cash or futures trading
In this trading type, profit is unlimited with limited amount of risk
Capital requirement is less when compared with the other two types of trading
Hedging and speculation are the applications of option trading.
Posted on: 2016-06-27 15:00:39 Updated on: 2016-06-27 15:00:39