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What are Options Trading?
Options are a Derivative Product in NSE Market. In the derivatives market, you may want to Buy shares or Sell them at a specific price in the future. On this basis, there are two types of options available in the derivatives markets – Call options and the Put options. The right to sell a security/ stock is called a Put Option, while the right to buy the security / stock is called the Call Option.
All share market traders or investors should have a portion of their portfolio set aside for option trading in Derivative Segment. Options provide great opportunities to earn good profits with a smaller amount of capital requirements.
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Option Trading Popular Terms Explained
- Open Interest : Open Interest refers to the total number of outstanding positions on a particular options across all participants in the nse market at any given time. Open Interest becomes nil past the expiration date for a particular contract.
- Strike Price : Strike Price is also called as Excise Price, it’s a pre-decided price at which the security /stock can be bought or sold.
- Lot Size : Lot size refers to units of the underlying asset that form part of a single F&O contract. The standard lot size is different for each stock and is decided by the exchange.
- Strike Price Intervals : In Option Segment contracts are traded at different strike prices which are determined by the exchange on which those assets are traded. Normally there are 11 strike prices declared for every type of option in a given month. 5 prices above the spot price, 5 prices below the spot price and one price equivalent to the spot price.
- American & European options: The popular option terms American Option and European refer to the type of underlying asset in an options contract and when it can be executed. American options are Options that can be executed at any time on or before their expiration date. European options are Options that can only be executed on the expiration date. Indian Nse Market only European options are available for trading which are executed only on the expiry.
- Premium: The upfront payment made by the buyer to the seller to enjoy the privileges of an option contract.
- Long Position: Buyer of a Option Call segment assumes Long Position.
- Short Position: A Seller of a Option assumes in a short position once he executes Sells Call Option or Buys Puts Option.
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How to Trade in Option Segment
First you have to predict the movement of the Market. If market is going up and so is your stock, you have to buy call option of that stock. if you are predicting the market to go down you can buy put option of that stock. If you trade online, determine the exchange to which you want to submit your order. Decide on an appropriate expiration date based on the timeframe in which you expect the price to move. Compare all the strike prices available to execute after evaluating risk and reward based on the target price. If you too also Look at the open interest and volume of the stock, and then choose the call option with the highest probability of profit.
Before you execute buy order, determine your targets and stop loss and write those in your trading daily. Once your order is executed, you have to Keep tracking the underlying instrument's price movement and reaction of that on the movement of option call.
Example of Call Options Trading :
Trading call options is profitable than trading stocks, and it's a lot easier than most people think, so let's look at a simple call option trading example.
Rakesh Mehta buys 500 shares of Mahindra and Mahindra Put at a strike price of 1080 and pays Rs 30 per share as premium. His total premium paid is Rs 15,000. If the spot price for Mahindra and Mahindra falls below the Put option that Rakesh Mehta has bought, say to Rs 1030; Rakesh Mehta can now safeguard his hard earned money by choosing to sell the put option of Mahindra and Mahindra.
He will make Rs 50 per share (Rs 1080 minus Rs 1030) on the trade, making a net profit of Rs 10,000 (Rs 30 x 500 shares – Rs 15,000 paid as premium).
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