Understanding Options

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What is an Option? Suppose you have bought an option of shares of ABC Company at a strike price of This option gives you a right to buy shares at INR before contract expiry. The seller is under an obligation to sell shares to you at INR whenever asked for.

The option seller is thus under an obligation to execute how to trade options online in share market india contract. Terminologies used in options: It is the transaction price which is decided by the exchange. A pre-defined period when the option will expire. This predefined period is last Thursday of every month for Indian stock markets. You can settle the contract even before this period. Explained in case study Exercise day: It is the day when the option is exercised. It is the price of the stock underlying asset in the cash market.

At the money ATMIn the money ITM and Out of the money OTM are the three terms which are used to describe the relationship between the options strike price and the price of the underlying asset stock. This is a scenario when the options strike price is exactly the same as the price of the stock in the cash market.

This is the break-even point i. This is a scenario when for a call option; the strike price is below the stock price and for a put option the strike price is above the stock price in the cash market. This is a profit zone for our position if the option is exercised. This is a scenario when for a call option; the strike price is above the stock price and for a put option the strike price is below the stock price in the cash market.

This is a loss making zone for our position if the option is exercised. They provide huge returns if the view proves right. It is recommended to always opt for a ITM option. In options trading, there are 3 contracts that are open at any point in time. Bullish Premium to be paid: INR 10 Strike Price: Total Investment made for one lot: Any price movement how to trade options online in share market india the spot above would yield us profit.

If at all till the expiry the spot stays belowthen the option would make a loss and the maximum loss would always be equal to the total premium paid i. If the spot rallies abovesay the premium goes up to say Since an option is a right given by the seller to the buyer, the buyer has the right to exercise that right.

In the above case we sold the option and the profit was In the above case study 1, the CALL option seller would have received the premium of from the option buyer initially. This is the maximum money that he could make.

If the spot rallies like it rallied above then the losses of the option seller are unlimited now. If the option is exercised, the losses are tremendous. Bearish Premium to be paid: Any price movement of the spot below 90 would yield us profit. If at all till the expiry the spot stays above 90, then the option would make a loss and the maximum loss would always be equal to the total premium paid i.

If the spot breaks below 90, say 70 the premium goes up to say how to trade options online in share market india In the above case study 3 the PUT option seller would have received the premium of from the option buyer initially.

If the spot falls below the break-even point as it did above, then the losses of the option seller are unlimited now. Important points to note: Please do not be creative! As the stock price moves in the cash market, the option price also moves. Hence stop loss for options should always be followed in the cash segment only. If stop loss is triggered in cash segment, exit your option position also.

If you see profits and can square-off your position, go ahead! But when it is falling, it falls very fast. There is going to be a bull market between today and Send your queries to: Understanding Options What is an Option? This option gives the buyer the right to BUY. You generally buy a CALL option when you have a bullish view on the stock. This is same as going LONG in futures.

This option gives the buyer the right to SELL. You generally buy a PUT option when you have a bearish how to trade options online in share market india on the stock. All options that can be exercised Explained ahead on or before the contract expiry are called American options.

All stock options in India are American. All options that can be exercise only how to trade options online in share market india contract expiry are called European options.

In India, options on the index i. In options trading, there are 3 contracts that are open at any point in time 1. Equities To Outperform Over Years: Weekly Market View Market View: We offer best stock market tips for beginners in hindi. You can get top share how to trade options online in share market india tips in India with us. Terms Of Service Disclaimer. Site best viewed in Google Chrome in X Resolution.

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