A basic guide to Options Trading

As the market keeps on speculating and is never steady, every investor has to go through the speculation, which allows the investors to make money. If you have the skills to speculate correctly, then options trading can bring good opportunities for you to make money, so let us find out what terms you should know and how to do options trading.

First, let us start by understanding what options trading is. Options trading involves the tradable contract that can be either sold or bought at a predetermined rate in the future. To execute the contract, you have to pay a nominal price known as a premium.

You must be familiar with the terms involved in options trading to perform your best; we shall see them one by one in this section.

Strike Price: The strike price can be said as the price mentioned in the contract. The contract will be exercised at this price. The underlying asset can either be purchased or sold at the strike price. It is also known as the exercise price. The strike price is the price of the underlying asset on which two parties involved in the contract can exercise their rights.

Expiry Date: Expiry date is the date until the terms and conditions and its price are valid. In Options trading, monthly contracts expire on the last Thursday of the month, while weekly options contracts expire every Thursday. If Thursday is a holiday, they expired on the previous trading day.

Call Option: It is a contract between the buyer and seller to buy the stock (100 shares) at a prefixed price on the expiry date, the buyer has the right to purchase the shares, but at the same time, he is not obliged to buy.

Put Option: It is also a contract between the buyer and seller to sell the stock (100 shares); in this type of contract, the contract holder has the right to sell the share but, again, is not obliged to sell.

Let us see how options trading works with an example to get a clear picture of options trading.

Options trading example

Imagine the company XYZ shares are currently being traded at INR 500, and you feel that it can rise up to Rs.560. So, you can use your prediction to monetize your wealth with the help of options trading. You enter into the contract with the strike price of Rs.560 and the weekly or monthly expiration date.

The options contract offers you the right to buy the stock from the contract holder anytime before it expires. Let's say the prediction was correct, and the price went up to Rs.610.

So in this scenario, you can exercise the stock and buy them at 560, and sell them at 610, to make a profit from the difference amount.

You can make a profit of Rs.50 per share (610-560) Rs.5,000 per 100 shares of XYZ company, and Rs.10,000 for 200 shares, keep adding like this. Now, this is the scenario if the prices increase, but imagine the alternative, what if the price remains constant or decreases?

In such a case where the price either stays constant or decreases, there is not much loss incurred, but only the premium paid will be gone, as it is non-refundable.

How to start options trading?

You must now be clear with the terms used in the options trading and might be feeling curious, how can you also start doing options trading and earn huge profits? So read the below steps carefully, how you can do that.