101 Guide for an option trading in india.

Investment Plans 15 May 2021 1:40:PM

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Futures and Options are financial instruments and are also popularly known as derivatives contracts. Options markets have seen a substantial increase in volumes and are gaining popularity nowadays because of the opportunity option trading strategies provide. Options (In options trading ) as a tool can be used by all three types of market makers namely: hedgers, speculators, and arbitrageurs. Also, Options are traded in all types of asset classes namely: Equity, Currency, Commodities, etc.

What is an Option  (in Option Trading)?

An Option is a contract that gives the buyer of an option a right, but not the obligation, to buy or sell the underlying Index/Stock on or before a particular day (Expiry date), at a particular price (strike price), for a price (Premium).

Now let us try to simplify the above theoretical definition.

Options are of two types Call Option and Put Option. Let’s understand how to trade options by keeping equity markets as our asset class. Options trading inequities are done on Index options and stock options. Index options have Index as the underlying asset. For example, options on Nifty, Banknifty, and Finnifty. Stock options have individual stocks as the underlying asset. For example, option on Reliance, Hdfcbank, TCS, etc.

Let’s take Reliance as an example for a better understanding of simple plain option trading strategies.

Buying a Reliance Call option: This strategy can be initiated when the view on Reliance is bullish. The buyer of a call option is one who has a right to buy Reliance but not the obligation to buy at the strike price. For owning this right, the buyer pays a price to the seller of this right called ‚Äėoption premium‚Äô to the option seller. If the Spot price of Reliance closes above the strike price on the expiry day, the position would be said to be in profit.

Selling a Reliance Call option: This strategy can be initiated when the view on Reliance is bearish or sideways. The Seller of a call option is one who receives the option premium and is thereby obliged to sell Reliance if the buyer of the option exercises his right to buy. If the Spot price of Reliance closes below the strike price on the expiry day, the position would be said to be in profit.

Buying a Reliance Put option: This strategy can be initiated when the view on Reliance is bearish. The buyer of a put option is one who has a right to sell Reliance but not the obligation to sell at the strike price. For owning this right, the buyer pays a price to the seller of this right called ‚Äėoption premium‚Äô to the option seller. If the Spot price of Reliance closes below the strike price on the expiry day, the position would be said to be in profit.

Selling a Reliance Put option: This strategy can be initiated when the view on Reliance is bullish or sideways. The Seller of a Put option is one who receives the option premium and is thereby obliged to buy Reliance if the buyer of option exercises his right to sell. If the Spot price of Reliance closes above the strike price on the expiry day, the position would be said to be in profit.

Risk and return profile of option contracts

Risk Return

Long Call

Limited (Premium Paid)

Unlimited

Short Call

Unlimited

Limited (Premium received)

Long Put

Limited (Premium Paid)

Unlimited

Short Put

Unlimited

Limited (Premium received)

A long option position has a limited risk (premium paid) and unlimited profit potential. A short option position has unlimited downside risk, but limited upside potential (to the extent of the premium received). Options are leveraged instruments and should be used carefully after fully understanding the inherent risks of options trading.

Now Open your Demat account with Few easy steps and start trading in options with one-stop investment avenue GEPL Capital. 

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