What is Options Trading, How Option Trading Works

What is Options Trading

Option trading popularity has increased significantly in India. This contract is between a buyer and a seller. Today a large number of people are turning towards the share market.

Option trading is a means of trading in shares through which many people are earning lakhs of rupees from option trading in the share market.

Option trading can be a bit difficult for beginners but you can learn options trading with the right knowledge. It may take a few months to learn this.

If you learn it with the right knowledge then option trading can be a good option for you to earn money. Through this article you will know What is Option Trading, Rules of Option Trading, and how to do trading Online?

What is Option Trading?

Option trading is a financial option in which a person or investor has the option to buy or sell a certain asset at a certain price at a specific time.

Option trading is a tradable contract that allows the buyer and the seller to buy and sell securities at a strike price on a certain date by paying some premium. In options trading, call and put options are bought and sold.

If someone feels that the price of a share is going to increase in the future, then through option trading, he can buy or sell the share for the future by paying a small premium amount without paying the full amount.

Options trading is used by investors to fulfill various financial objectives. It also protects you from big losses.

If share prices fluctuate in future, you will lose only the amount of money you paid for your premium.

Options trading, also known as financial options or marketing strategies, is used by investors to draw conclusions about how high or low the value of an asset will be in the near future. Without actually needing to buy any property.

It allows the investor to trade in multiple instruments such as securities, ETFs or index funds at a pre-determined rate after a certain period of time.

How Option Trading Works with Examples?

Suppose you are a businessman and you want to start a business. For this you need a land.

You come to know that the government is going to start a new highway project and where this project is going to start, you are getting a land for Rs 25 lakh.

Now you know that if you do not buy land now, then the price of that land may also increase in the future after the highway is ready.

But at present you have only Rs 15 lakh. In such a situation, you want to buy the land at the current market price i.e. Rs 25 lakh only. So you can make a contract with the person who owns the land.

Instead of paying the full amount to the land owner, you can give a small premium amount of about Rs 1.5 lakh and make a contract that you will buy that land after 3 months for Rs 25 lakh. This contract can be very beneficial for you.

But if for some reason you do not buy this land in future, then the owner of the land can keep the premium amount paid by you.

This is exactly how option trading works. Through option trading you can buy and sell shares in the market. This can help you earn big profits. Besides, it also saves you from big losses.

What are Call and Put options in Options Trading?

Option trading depends on call options and put options. Call and Put are two essential types of options in option trading to buy and sell any securities like Banknifty, Nifty, Stocks.

Call Option – Call option is denoted by Call European (CE). It provides the right to buy a fixed asset at a fixed price.

A call option should be bought when the prices of an index or stock are expected to go up. As the indices and stock prices increase in the market, the price of the call option also increases.

Put Option – Put option is denoted by Put European (PE). Put option gives the right to sell a certain asset at a certain price. Put options should be purchased when a fall in market indices or stock prices is anticipated.

By buying a put option, if the price of the option falls according to your specified price, you can make a huge profit.

But if the price spikes and you fail to sell your option at the right time, you may have to suffer huge losses.

Important Terms for Option Trading

Strike Price: This is the price at which an option is sold or bought.

Premium: This is the amount paid to buy or sell an option.

Option Greeks: These are various parameters that measure the option price and option movement. These Greeks are usually Vega, Theta, Rho, Gamma and Delta and are important in options trading.

Expiry Date: This is the date when an option expires and the right to exercise the option expires.

Margin: It is a fixed amount that is required by the trader as a margin or security amount considered appropriate which allows the trader to make his buy or sell.

Investor: This is the person who takes the decision to buy or sell the option in option trading and does the option exchange.

Exchange: It is a medium through which options can be bought and sold. Options are traded in the exchange markets and option prices are determined on these exchanges.

Trading Strategy: This is a plan that a trader uses to buy or sell options. It is based on a certain analysis and approach which helps the trader a lot in taking decisions.

Risk Management: It is an important trading skill that helps the trader to manage risk appropriately. Risk management ensures that the trader can manage his investment amount and avoid additional losses.

Benefits of Option Trading

Limited Risk: Option trading is a certain risk management method which helps the trader a lot in limiting the risk.

Traders invest here using a pre-determined margin amount which can protect them from additional losses.

Flexibility: Options trading allows traders to choose between different options, making their investment strategy flexible.

Here the trader can invest at different close and distance levels using different option schemes and diversify his exchange strategy.

Alternative Income: Option trading provides the trader with the possibility of alternative income. Here the trader can invest according to his plan with the aim of maximum profit or maximum gain and can organize his investment strategy.

Quality of Timing: In option trading, the trader has to pay great attention to the quality of timing. It allows the trader to buy and sell options on different time frames such as day or month, which helps the trader to monitor the trade time frame.

How to Trade Options?

In today's digital era, you can easily do option trading in your smart mobile. To do trading, first of all you have to install the trading app in your smart mobile, after that you can do option trading.

To start option trading in the commodity market, first of all it is very important to have a trading account. If you already have an account in the futures market, you will have to give a consent letter to your broker for option trading.

Only through this, investors can buy or sell any asset in future or option in commodity exchange.

What is Options Trading - Video

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