Oct 31, 2013

Options Trading –What are Options?

Options constitute a lucrative trading tool in the stock markets..Many people are unaware of the options although they may have used them in someway or other at some point of their life..When talking of Options in stock markets,they cause a lot of confusion especially to newbies ; what is an Option and how it works.
Flow Chart-Futures & Options ( F& O )
In markets,you trade in two segments;either in Cash or in Futures & Options (F&O). F&O segment operates in monthly contracts.These contracts remain valid for a month and do expire in last week of the month on a day as determined by the concerned stock exchange..

What is an Option ?

By definition, an Option is a contract which gives the buyer or the seller the right but not the obligation to buy or sell the underlying for that contract. at a specific time and at a specific price.The amount given to buy this contract is called the Premium.The buyer is not bound to buy the underlying in that period and he/she may let the contract to expire .In this way,he/she has to loose all the premium paid to acquire the contract.Other alternative is that the person squares of his/her position by selling that contract in the market .The difference of the selling price and the buying price of that contract is returned to him/her.
Types of Options :-
Options are of two types-
1.Call Option

2.Put Option

Option Strikes Of Infosys
Call Option-Call option is defined as the option to buy the underlying at or before the fixed time and at a fixed price.When we anticipate price rise in an asset,we simply buy a Call Option.The amount paid to buy an option is called the PREMIUM.Suppose Infosys stock is trading at price of rs.3200 and we expect it to move towards 3300,we shall buy a Call Option of any strike available on the stock exchange.Let strikes of 3250 and 3300 are available,we can buy a call of 3250 or 3300.As the stock shall move towards 3300,the price of the Call shall increase,resulting in the profits.
Selling a Put Option also constitutes bullish view but the difference here is that when you sell an Option,you have unlimited risk and the limited gain.We shall read in next article why a trader sells an Option even though he is at unlimited risk.
         Put Option - Put Option is defined as the option to sell an underlying on or before the predefined time          period and on a fixed price.When we expect the market or the underlying to fall in coming days,we               simply buy a Put Option.As the price of the underlying decrease ,the price of the Option shall increase            and resulting in profits to the trader.As in above example,If we expect Infosys to fall towards 3100,we shall buy 3150 or 3100 Put Option which shall increase in price when stock falls.
Here again,selling a Call Option also constitutes the bearish view,but the risk is unlimited compared to returns which is limited.
Option Chain ( NSE )

All the strikes for a stock Options are given in the form of an Option Chain on the stock exchanges as in the following figure,we can see the Option Chain for Nifty given on the National Stock Exchange ( NSE ) of India.The middle column shows the various strike prices available,their Last Traded Prices,bid and offer prices etc.
There are some factors on which price of an Option depends and strategies to trade the Options which we shall read in the next article which shall be posted in coming  days.

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