The usual way to profit from the stock market is by investing in stocks that have the potential to rise in price. However, do you know you can also benefit from a falling market? Yes, it can be done using options. In this options trading guide, you will read all the important aspects of trading options and how you can trade this investment instrument as a beginner.
As a beginner in this market, first, you need to understand what an option is and what is option trading. So, options are derivative contracts, meaning options derive their value from other underlying assets. Options are contracts where the buyer of the contract gets the right to buy or sell the underlying asset at the specified price (at the time of the contract – known as the strike price) on a specified date. Here the most important term is "right" options, providing the right to buy or sell the underlying asset but with no obligation.
There are two types of options – one is the call option which gives the right to the call option buyer to buy the underlying asset. At the same time, the other one is the put option which offers the right to sell the underlying asset at the specified price on the selected date.
For buying options, you do not need to pay the entire amount of the underlying asset but rather a premium for predicting the asset's price movement. So, you bet on the direction of the underlying asset price for which you need to buy the option contracts.
Let’s take an example to understand how options trading works. Suppose you think X company’s share price will rise in the next three months. The current market price of this company is Rs. 500 (suppose). So, you purchase option contracts with the strike price of Rs. 500, and the maturity is 3 months.
Now, after 3 months, at the maturity date, X's share price rises to Rs. 800. In this scenario, you have the right to buy the shares of company X still at Rs. 500 due to the call option you have. So, you exercise your call option and buy the shares at Rs. 500 and then sell them in the market at Rs. 800 making Rs. 300 per share as profit.
However, what if the market doesn’t move as per your prediction? Quite possible, right? Suppose, the price of X falls to Rs. 300 at maturity. Since the call option offers right but no obligation, you can leave the call option you purchased, and you do not need to buy any shares of X at Rs. 500 when the price is Rs. 300 in the market. The only loss you will have is the premium you paid for buying the option contracts.
Options Trading For Beginners includes the following steps –
By following all the steps mentioned above, you can start your options trading journey as a beginner smoothly.
If you are new to Options trading in India, following the steps above, you can easily understand how this works. Make sure to do your research well to make the best out of option trading.
