Hello friends, How all are you ? Welcome to Stocksvibe.com-Share market magazine or we can say Encyclopedia for all beginners. In this article, we are going to explain A to Z about Options Trading.
What is exactly Options trading & what are the different-different terms used to trade Options in India.
What are the Options in share market
As you know, Share is the smallest unit of the company. If you are owning share of any company, It means you are part of that company. Similarly, Option has its own definition.
Options are derivative form of the share.
If you are buying an Option Derivative of any share, you are doing a contract of the shares for particular time period and specific price. This is the contract between two parties to deliver shares to another party on pre-set time period and pre-set price
How exactly Options Traders make money ( Guide for beginners in India)
Let me explain you this with desi Indian example. We Indians are fascinated with Real Estate, I will explain you in same context.
Suppose, you have some surplus amount of money and you want to invest in real estate. You visited 2-3 property dealers and they show you property far from your city. Value of this property is around Rs. 20 Lac acc. to property dealer & Property dealers are selling to you on future prospects like upcoming Metro projects, industrial advancements or any other big financial developments projected. Now, you are attracted towards this land and on the same time, you are not sure about everything what he projected.
As property dealer had declared value of Land around Rs. 20 lac and you don’t want to invest all amount on single time. So, you set up a contract with owner which states that you can buy all properties in 3 months at 20 lac.You have to pay Rs. 25000( Random Number) to the owner for the Rights of Contract. Acc. to this contract, you get a right o buy buy not obliged to buy.
In the 3 months, if you find that property useful, you can fulfill your contract and get the property
If you found all upcoming projects as fake announcement, you can decide not to purchase & lose your contract money.
In the meantime of 3 months, you can sell your contract also if you get any useful deal from other person.
That’s how Option trading work. These are just contract or derived form of the shares. You get exposure of big profit/big loss in options trading. After a fixed amount of time, Options(contract) expires & value of your Options also become zero.
Before moving further about how to do Option Trading for beginners in India, Let us understand some terms which are used in Stock Options trading:
- Strike price (Price which you do predict for share)
- Premium (Amount which you pay for buying the option)
Type of Stock Options:
- CE (Call Option-It gives right to buy share before specific time period)
- PE (Put Option-It gives right to sell share before specific time period)
Let us understand, Call Options example & Put Options example one by one;
Call Option Example:
As PNB Stock is trading at Rs. 80 today & you are predicting that this will blast this month. Acc. to blast, I mean to say It can go upto 100 or 120. So, you bought a contract for PNB 90 CE which means you can get share at Rs. 90 after a fixed amount of period as per option. If PNB is trading at Rs. 120 at that time, still you will be able to buy PNB at Rs. 90 acc. to this contract/Option.
As you had bought at an contract, Let’s figure out all possibilities;
- If Stock price goes up to Rs. 95; now you have 2 options either sell the contract to any other option trader in profit or buy the stocks at Rs. 90 which is trading at Rs. 95.
- If Stock Price goes down to Rs. 60; It will not make any sense to buy the stock at Rs. 90 which is trading at Rs. 60; So, your contract will get expired & contract value will be zero.
- If stock Price goes flat to Rs. 80 at the end of time period, It also not make sense to buy the stock at Rs. 90 which is trading at Rs. 80, your contract will get expired & contract value will be zero.
I hope, you all understand now how Call option trading work; you will get profit only in one scenario.
Same scenario is applicable on PUT call which give you right to sell share at price defined on contract; no matter whatever is the price of the share.
In Short, If you are expecting price to increase, Buy the call option while if you are expecting price to decrease, Buy the put option & wait for booking profit. Stay tuned for next. Do let us know in comments in case of any feedback.