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What is Option trading
What Is Option Trading Definition Types And Strategy
- Option trading, About which it is often heard that a lot of money can be earned in a very short time in this trading, so stay with this article. That is why in today’s article we are going to tell you so that you can know what is option trading! And how is it different from stock trading? What are its advantages and disadvantages? How many types are there and much more like this, so stay till the end of the article!
What is option trading? What are options in the stock market? Option trading for beginners
It will not be a new thing for you people that money can be earned by buying shares in the stock market, but do you know that it is possible to earn money in this market even without buying shares!
I think this can be a new thing for most of you and nowadays everyone likes to earn money, so this method of trading is called option trading. It is often heard about this that a lot of money can be earned in a very short time in this trading, so in such a situation it is very important to know about this trading.
So in this article we will discuss with you what is option trading, how is it different from stock trading, what are its advantages and disadvantages, what is the risk in it, how many types are it?
Option trading is a type of financial contract that gives you the right to buy or sell shares in the future.
Option trading is a lesson of the stock market and it is a type of derivative trading.
What is derivative trading?
Derivative trading takes place in both the stock market and the commodity market. Let us tell you that the commodity market includes gold, oil and agricultural products.
And the stock market includes share bound mutual funds and derivatives.
While in stock trading you have to buy a part of the company, in derivative trading you bet on the price of something i.e. the underlying asset.
The special thing in this is that you do not have that thing. In this type of trading you can bet on the price of anything that will rise or fall and these are called underlying assets.
There are two types of derivative trading, futures and options and apart from these forwards and swaps also come under derivatives.
So after the basic concept of derivative trading, now let us focus on one of its types i.e. option trading and know how it is different from trading stocks.
So buying stocks is like you have opened a shop of something and you have become its owner and whatever be the entire profit or loss of the shop, it is yours. Similarly buying options in option trading is like buying goods in a shop. They keep a part of the stock and tell the shopkeeper that if its price rises in the future, then we should also get some percentage from it. The shopkeeper says okay but if its price falls in the future, then the premium you have paid will be gone. This is called option trading.
Options are mainly of two types.
- Call Option
- Second Put Option
Call option is a contract in which you get the right to buy shares at a fixed price by a fixed date in the future, but it is not necessary to buy it. This fixed date is called the expiry date. The fixed price is called the strike price. To buy this right, you have to pay a small amount i.e. premium. This premium depends on many factors such as the current price of the share,
Strike price, once additional till the expiry date.
If the share price exceeds the strike price before expiry, then the call option becomes available. In such a situation, you can earn money by exercising this right.
Let’s understand this with an example! Suppose the share of the company is ₹ 1800, now you think that it will go up to 2000, then you buy a call option whose expiry is after a month and the strike price is ₹ 1900, you have paid ₹ 50 premium for it, now if the share of that company becomes 2000 then the price of your option will increase, you can earn good profit by selling it.
But if the share of that company becomes ₹ 1600 then the price of your option will become zero and you will have a loss of ₹ 50, in this way you can have both profit and loss from the call option!
And now let’s talk about put option, put option is a type of contract in which you get the right to choose which thing you want to put in the market.
Like you can sell a stock at a fixed price and by a fixed date but it is not mandatory to do so.
In put option, the strike price is the price at which you can sell the stock in future.
To understand it better, let’s understand it with an example. Suppose you have invested in an acid and you fear that its price may fall, then you can limit your loss by buying a put option. For this you can buy a put option with a strike price of ₹ 100.
And this means that you are buying the right to sell that stock at ₹ 100 per share after a month, whatever the price of the stock at that time. For this you have also paid a premium of ₹ 5 per share.
If the share price becomes ₹ 80 after a month, you can exercise your put option and sell the share for ₹ 100. This will give you a profit of ₹ 20 per share.
But if the share price becomes ₹ 120 after a month, you will not exercise your put option because you can sell the share in the market for ₹ 120, but in this case your put option will expire worthless and you will not get back the premium of ₹ 5 paid.
So this is how the call option becomes worthless. The option gives you the right to buy the share and the put option gives you the right to sell the share
If you think the price of something will increase then you can use the call option and if you think the price of something will decrease then you can use the put option
In option trading, there are many types of strategies in these two different options of trading!
This strategy is made based on your estimate about the market, for example, if you think that a stock will rise, then you will adopt one kind of strategy and if you think that the price of the stock will fall, then you will adopt another kind of strategy.
One strategy is Bullish Option Strategy and one is Bearish Option Strategy and one is Natural Option Strategy.
Bullish Option Strategy: Bullish Option Strategy means that you are assuming that the price of the stock will rise, on this basis you buy or sell some options.
Bearis Option Strategy:- Bearish Option Strategy means that you are assuming that the price of the stock will fall, on this basis you buy or sell some options.
Neutral Option Strategy:- Natural Option Strategy means that you are assuming that the price of the stock will not rise much and will not fall much, that is, the price will remain almost stable, on this basis you buy or sell some options.
Out of these, using the right strategy at the right time is an experience. , it is possible only on the basis of knowledge and risk
It is also very important for you to know that there is a lot of risk in option trading
But option trading is done in India, you can do it on stock exchanges like NSE National Stock Exchange and BSE Mumbai Stock Exchange
Conclusion:- In this article we have explained in detail about option trading, its advantages and disadvantages, everything is explained in detail in this article. Thank you.
