What are the options trading?
An option is a contract that gives the buyer the right, but not the obligation, to buy or sell the underlying asset at a certain price on or before a specific date. Options are derived from their value from an underlying.
The trader buys or sells options to hedge the risk, and for income.
Introduction to Options Trading:
Options are those contracts whose value is derived from the value of an underlying asset like stock options.
Options can be bought by the buyer seeking the opportunity to increase in price or sell depend on the view of the trader.
Owning a call option, do not represent ownership in the company.
Options are bought or sold settled on the last Expiry day and at strike price.
Option buyer or seller can exit from options at any time, weather he option buyer or aoption seller. Options contract are less risky then futures contract.
When a trader buy an option contract, trader view is ,the stock price to go high up to a certain point. So buy a call option. Same with the put options contract.if the stock price is going downward. Buyer buy put option contracts.
Buying a Options contract is benefit for a buyer of options that if it goes in his favor he makes the money or if it goes against his position he only loses the premium where he bought it.
The buyer has to pay only a one-time premium fee to buy an option contract. And he can sell it at any point in time. And an option seller is opposite to option buyer; he can just sell the option contract. Buyer can make an unlimited profit by option buying and seller can only make a limited profit by selling an option
Call and Put Options
Call Options and Put options are those instruments that their movement depends on the movement of the stock price. Buying a call option is that the trader is expecting the price of the certain stock to move up in the future and the same with the call option writer. A put option is bought by the trader he is expecting a shortfall in the stock price. Options writer’s profit is limited in comparison to option buyers.
Terms used in Options Trading
Strike Price Options
The call option buyers only make money upon expiry the spot price is above the strike price. The strike is the executable price of the options contract. Similarly, put option buyers makes money if the spot price is below the strike price.
Underlying Price options
The spot price of the underlying asset of a derivative is Underlying price.
In The Money options
In The Money options are those call options something which is already increased. For example See Figure
At The Money options
At The Money Options are those whose strike price and the spot price of the underlying asset are same.
Out of Money options
when a call option of certain strike price is above the price of the underlying asset called Out of Money options.
Expiry of options.
Monthly Option contracts expire on the last Thursday of every month. A weekly option contract expires on every Thursday and if there is a holiday on Thursday, options expire on Wednesday. Expiry of options contracts. There are different types of options contract one index options and second is stock options. Weekly expiry of index options and monthly expiry of stock options. The expiry of weekly and monthly options is on last Thursday in the Indian stock exchange.
Call options contract above the strike price on expiry becomes zero and of no use the same with put options. The options contract below the strike price becomes worthless.
Buy a call option only when one study the pattern and anticipate there is a increase in the price of stocks. Of the time factor play an important role in options trading. One should use their analogy and anticipate the market and accordingly buy or sell the options contract of different strike prices.
Future vs options
A future option is that contract which a buyer can buy or a seller can sell at any point in time. But lot size is already defined and it very from stock to stock. Future options contract also expires on a monthly basis.
Future contact is different from stock and also different from options contracts
Buying a stock is like buying a piece of a company and future is directly propionate to the price of the stock price.
Futures contract does not have time decay problems because the value is directly proportional to the value of stock price.
Liquidity plays an important role in futures trading. One can trade in any point of time. Future contract are easier to understand as comparison to options contracts.
Buying a future contract is onetime fee is required with the premium present.