While dealing with the stock market, it is important to know what avenues of trading you have to create wealth. Of course, no single way guarantees high and consistent profits. However, you can increase your chances of making money in every kind of market whether bullish or bearish. One such trading method is option strategy trading. While you will learn its technical aspects in an options trading course, here’s an overview of options trading with an example and its various situations.
What is Options Trading?
In options trading, you have the right to buy or sell an asset (like a stock) at a particular price (strike price) before a specific date (expiration date). However, it should be noted that there is no compulsion to buy or sell the asset.
Options are two types of options – calls and puts. Call options give you the right to buy and put options give you the right to sell. Let’s look at two real-life applications or examples of option trading for a better understanding.
Here’s an example of call-and-put option trading.
1. Call Option Buying
Let’s say you buy a stock of a company trading at INR 350. You predict a rise in the stock’s price in the next month. Accordingly, you buy a call option with a strike price of INR 355 and an expiration date, which is a month away. The option premium cost is INR 2 per share. You buy a contract for 100 shares, thus making the premium cost INR 200. Before the expiration date, the company’s stock price increases to INR 375. So, now your call option is worth INR 375-INR 355 X 100 = INR 2,000. When you subtract the initial premium, your profit comes to INR 1800.
2. Put Option Buying
Let’s look at the put option now. You’ve purchased 100 shares of a particular stock. They are currently trading at INR 1,000 per share. You are worried about a possible drop in the price. Hence, you decide to buy a put option to safeguard your investment. So, you buy a put with a strike price of INR 990 with a month’s expiration. The premium is INR 5 per share. So, the total premium price is INR 500.
It so happens that the company’s stock price drops to INR 960, making your put option worth INR 990-INR 960 X 100 = INR 3,000. When you subtract the premium from it, the amount comes to INR 2,500. Thus, the profit covers your losses resulting from the price drop, thus protecting your investment.
There’s a simple logic while engaging in option trading. If the stock price goes up, you can use your right and buy the stock. If not, you may not buy it. On the other hand, if the stock price stays flat, you wouldn’t want to exercise the option.
3. Option Selling
Now it is not always necessary that the market will either keep going up or down. Sometimes the market may also stay sideways. In situations like this, it is best to sell options. For example if you expect Nifty to stay below 22000 till next thursday, which is the expiry day, you would want to sell 22000 Call. Similarly, if you expect Banknifty to stay above 48000 till expiry, you would want to sell 48000 put. This way if banknifty stays above 48000, you will get the entire premium you got for selling the option, risk free.
But the issue here is, it is not so simple. Selling options requires at least 2 lac of capital. To reduce this cost it is important to buy an opposite call or put depending on the strategy. Now which call or put to buy is a skill that comes with training, practice and some calculations. Along with this, we also have to decide how much loss or profit to take. How much of a breakeven do we need to come in profit? All these questions will be answered in our special Option Strategy Course, which will help you make money from options in every kind of market. All this will be taught in a simplified language without the use of complicated jargon with proper hand-holding and practice.
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We hope the above gave you an overview of options trading. Join Wealth Note for the best trading courses in Pune to learn options trading and various other aspects. With experienced faculty members, a comprehensive course syllabus, and practical exposure, we help you develop the capabilities to make informed and independent decisions. Call +91 70666 66464 to explore our option trading course.