What is option trading?
Introduction to Option Trading
Options trading is a type of financial trading that allows traders to buy or sell the right to buy or sell an underlying asset or sell shares at a set price within a specific time frame. A Call option is used when you expect the prices to increase/rise. A Put option is used when you expect the prices to decrease/fall.
There are two main types of options in the Indian market:
Call Options
Think of call options as "buy" options. When you buy a call option, you're hoping the stock or index price will go up. Buying call option is limited risk and unlimited profit. The call option short form is CE.
Put Options
Just the opposite of the call option: think of put options as "buy" options. When you buy a put option, you're hoping the stock or index price will go down. Buying a put option is limited risk and unlimited profit. The put option short form is PE.
You have to know about the Option component:
1. Strike price:
The price at which you can buy the underlying stock or index. Also known as the exercise price, this is the amount at which the buyers and sellers agree to execute the options contract on a future date. It constitutes the set price of the underlying asset and selling price if the options contract is exercised before the expiration date.
2. Spot price:
It is the current price of the underlying asset within the stock market. It is the underlying asset's current price at any given time in the stock market. This is the price that the buyers analyze to calculate their potential profit and loss amount. The spot price of the underlying asset directly affects the buyer's decision for the contract.
3. Option Premium:
The option's price, is for either buyer or seller. Whenever the premium of an option on any stock or Nifty Bank or Nifty index is calculated, then the current price of that option is multiplied by its lot size, then the premium price has arrived.
4. Option Expiry:
When the option expires and is settled. The expiry of call and put is different for index options and stock options. in our Indian market weekly & monthly expiry for Options Trading.
All Stock Option expiry are monthly (Last Thursday of the Month) like Future Trading and Index Option weekly and monthly expiry, all index Option expiry mentioned below.
The last Thursday of the month will be the monthly expiry for all NSE Index option contracts and the Nifty weekly expiry is every week on a Thursday, if any holiday on Thursday then the expiry contract will expire one 1 day before.
The last Friday of the month will be the monthly expiry for all BSE Index option contracts and the Sensex weekly expiry is every week of the Friday, if any holiday on Friday then the expiry contract will expire one 1 day before.
5. Lot size
To trade in calls and puts we cannot buy two or five quantities, we always have to buy in a lot size, in which there are different quantities within the lot size.
Lot size may be changed as per Stock and index price & price movements
Index Derivatives Contracts | Lot Size |
Nifty 50 | 75 |
Bank Nifty | 30 |
Nifty Midcap Select | 120 |
Nifty Financial Services | 65 |
Nifty Next 50 | 25 |
BSE Sensex | 20 |
BSE Bankex | 30 |
BSE Sensex 50 | 60 |
For stocks also different lot sizes as per stock price.
How to work Option Trading?
Option trading in India is very popular and pretty straightforward once you get the hang of it. Here's a simple step-by-step:
Choose a stock or index you want to trade options.
Decide if you think the price will go up (call) or down (put).
Pick an expiry date and strike price.
Do an analysis for the market upside or downside.
Buy the option contract that you want.
Set your stop loss and target which is pre-decided.
Wait and watch the market.
Decide whether to exercise your option or let it expire.
Advantages of Options Trading:
Limited risk: You can't lose more than the premium you paid for option buying.
Leverage: Control a large amount of stock with a small investment.
Flexibility: Lots of strategies to choose from.
Potential for high returns: If you're right, you could make a good profit
The disadvantage of Options Trading:
You could lose your entire investment, if the market doesn't move your way like the sideways market.
Options have an expiry date, so timing is crucial for trade.
It can be complex and confusing for beginners.
How to Start Options Trading?
Open a trading account with a broker (The best broker is Angel One Click here for a Demat Account).
Study the market and learn about different option strategies as per market condition.
Start with small quantities and practice with paper trading.
Keep learning and adjusting your strategies
