What is Option Trading

What are Options?

Options are contracts that grant the holder the right, but do not bind them, to either buy or sell a sum of some underlying asset at or before the contract expires at a fixed price. Options can be acquired with brokers through online trading accounts as with any other asset groups.

Options are important since they can grow the portfolio of a person. They do this by adding revenue, offering security and even leverage. Typically, there is an alternative scenario suitable for an investor's target, depending on the situation. To limit downside risks, a common example would be to use options as an efficient hedge against a weakening stock market. Often, options can be used to produce recurring revenues. In addition, they are commonly used for speculative purposes, such as wagering on stock direction.

What is Option Trading?

One can buy or sell stocks, ETFs etc. at a fixed price over a certain period of time by online trading options. This method of online trading also gives buyers the flexibility not to purchase the security at the defined price or date.

Although it's a little more complex than stock trading, if the security price goes up, options will help you make comparatively better money! This is because you do not have to pay the full premium for the insurance of an options contract. Similarly, selling options will reduce your losses if the security price goes down, which is called hedging.

Call and Put Options

A call option gives the owner the right to purchase an asset, and a put option gives the owner the right to sell the same. Consider a call option for a potential buy as a down payment.

Options Trading Example

There are several examples of options trading that rely primarily on which technique you use. But let's consider a trader buying a call and putting an option on Infosys (INFY) as a simple idea of what a standard call or put option will be.

For example, if you purchased a long call option (remember, a call option is a contract that gives you the right to purchase shares later) for 100 shares of Infosys stock at ₹110 per share for December 1, you'd be entitled to purchase 100 shares of that stock at ₹110 per share regardless of whether or not the stock price has changed by December 1. You'd expect Infosys' price to rise for this long call option, thereby allowing you to reap the benefits when you can buy it at a cheaper cost than its current value. However, if you chose not to exercise the right to buy the shares, you will only forfeit the premium you paid for the option because you are not expected to buy any shares.

If you were buying a long-placed Infosys option, you would bet that the price of Infosys shares would decline before your contract ends. Therefore, if you wanted to exercise your right to sell those shares, you would sell them at a price higher than their current value.

Read more Here: How to Trade in Futures and Options?

Related Terms

1. Premium

It is the price you pay to the seller of the option for entering into the online trading options. You pay the broker the fee which is passed to the writer on the exchange and thereon. Premium is a percentage of the underlying, which is calculated by several factors, including the intrinsic value of the contract options. Premiums continue to adjust, depending on whether the option is in-the-money or out-of-money.

2. American and European Options

‘American options' are options that can be exercised on or before their expiry date at any time. 'European options' are options which can be exercised only on the expiry date.

3. Open Interest

It applies to the cumulative number of available positions on an options contract at any given point in time among all market participants. Open Interest becomes zero for a given contract after the expiration date.

Conclusion Online Trading in Options

Options should not be difficult to grasp if the basic principles are understood. It can provide opportunities when used correctly and can be harmful when used incorrectly. If you're well versed in online trading options, there are sophisticated trading strategies in India such as a straddle, strangle, butterfly and collar that can be used to optimise returns.