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What is Options Trading (Full Information)

What is Options Trading (Full Information)

What is Options Trading (Full Information)

Option trading is a contract that gives the right to trade the security at a particular price on a certain date. The advantage of this is that you are not obliged to buy or sell by paying a premium for that security.

Option Trading : In the stock market, you must have heard about options trading that some people earn millions of rupees in a single day by doing options trading. Even there are some big options trader experts who book profits worth millions of crores of rupees in a few minutes.

So if you are a beginner in options trading, then first of all you should know what is option trading, how option trading is done, what are calls and puts, what are the advantages and disadvantages of option trading and how to earn money from options trading?

If you want to know the answers to all these questions, then you have come to the right place. Because today we are going to give you complete information about what is option trading .

I promise that after reading this post, all the doubts you have about options trading will be cleared. All you have to do is read this article till the end so that you can get complete information about options trading.

Let's first know that -

Options trading is a contract that gives the buyer and seller the right to buy or sell the security at a strike price on a certain date by paying some premium amount. In option trading, call and put options are bought and traded.

Option trading meaning in share market–

In simple words,

  • Options trading means that you can buy or sell shares for the future by paying a certain amount of money in advance. This fixed amount is called option premium.

Most people do options trading in indexes such as Nifty and BankNifty because they have to pay less premium, but you can do option trading in any stock if you want.

So far you have known what option trading is.

Now let's understand what is the benefit of doing options trading?

If you think that the price of a stock is going to increase or decrease in the future, then through option trading you can buy or sell that stock in advance by paying only a small amount (premium).

This means that in options trading, you do not have to pay full money to buy or sell shares, but you can buy and sell shares for the future by paying a small premium amount. So even if the stock does not go up or down according to your prediction, your entire money will not be lost, just the same amount of money you paid will be lost.

Example of option trading 

Suppose the share of Reliance Company is currently at Rs 2500 and due to good news in the company, you think that the share price can go up to Rs 2600 soon.

But the problem is that you have only 10000 rupees right now, so that you will be able to buy only 2500 shares at a price of 4 rupees. So even if the share becomes Rs 2600 after some time, you will only get a profit of (2600-2500) × 4 i.e. 100×4 = 400 rupees

Whereas if you buy this share through option trading, then you would have made many times more profit from it. But how? It is mentioned below –

As per the first scenario, you think reliance's share price is going to go up from Rs 2500 to Rs 2600. Now if you have less money, then you buy its call option (CE) instead of buying shares of Reliance Company directly, for which you have to pay some premium.

The price of this premium is quite low (100 to 200 rupees), which you can see in the option chain data by going to the NSE website and searching for Reliance Company.

  • Suppose if Reliance's premium is Rs 100, then you will be able to buy 10000 shares from your Rs 100. Then if Reliance's share price increases, then your premium will also increase.
  • Now if after some time Reliance's share price increases from 2500 to 2600 rupees, that is, 100 rupees, then its premium share increases by 0.5 times than it was, that means your premium will increase by 50 rupees.

(If you are wondering why 0.5, then let me tell you how much the premium will increase against the share price is determined by Delta, which varies on ITM, ATM and OTM. I can understand that all these things can confuse you in the beginning, so we will talk about them later)

  • In this way, the value of the premium of your purchased call option will increase from Rs 100 to Rs 150 i.e. there will be a profit of Rs 50 per unit. Now because you bought 100 units at a premium of Rs 100, you will get a profit of Rs 5000, which if you buy shares in direct delivery, only Rs 400 would have been profitable.

If you see, you got a profit of Rs 10000 on Rs 5000, that means 50% profit. If you had invested Rs 1 lakh, there would have been a profit of Rs 50000,<>.

But remember – if Reliance's share price had decreased instead of increasing, you would have to suffer the same loss in options trading.

And that is why the risk in option trading is definitely high, but by learning it you can reduce your losses and increase profits.