- What Is Option Trading? (24 News Campus) Option trading, about which it is often heard that a lot of money can be earned in a very short time in this trading, so stay tuned to this article. That is why we are going to tell you in today’s article so that you can know what is option trading! And how is it different from stock trading? What are its advantages and disadvantages? How many types are there and much more like this, so stay tuned till the end of the article!
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What Is Option Trading?
It will not be a new thing for you people that money can be earned by buying shares in the stock market, but do you know that it is possible to earn money in this market even without buying shares!
I think this can be a new thing for most of you and nowadays everyone likes to earn money, so this method of trading is called option trading. It is often heard about this that in this trading a lot of money can be earned in a very short time, so in such a situation it is very important to know about this trading.
That is why in this article we will discuss with you what is option trading, how is it different from stock trading, what are its advantages and disadvantages, what is the risk in it, how many types are there?
Option Trading is a type of financial contract that gives you the right to buy or sell shares in the future.
Option Trading is a lesson of Stock Market and it is a type of derivative trading.
What Is Derivative Trading?
Derivative trading happens in both stock market and commodity market. Let me tell you that commodity market includes gold, oil and agricultural products.
And stock market includes share bound mutual funds and derivatives.
Whereas in stock trading you have to buy a part of the company, in derivative trading you bet on the price of any thing i.e. underlying asset.
The special thing in this is that you do not have that thing. In this type of trading, you can bet on the price of any thing which will increase or decrease and these are called underlying asset.
There are two types of derivative trading, futures and options and apart from these, forwards and swaps also come under derivatives.
So after the basic concept of derivative trading, now let us focus on one of its types i.e. option trading and know how trading is different from stock.
So buying stock is like you have opened a shop of any thing and you become its owner and whatever be the entire profit or loss of the shop, it is yours. Similarly, buying option in option trading is like buying goods in a shop. They keep a part of the share and tell the shopkeeper that if its price increases in the future, we should also get some percentage from it. The shopkeeper says okay but if its price decreases in the future, then the premium you have paid will be lost. This is called option trading.
Options are mainly of two types.
1. Call option
2. Second put option
Call option is a contract in which you get the right to buy a share in the future till a fixed date at a fixed price, but it is not necessary to buy it. This fixed date is called the expiry date. The fixed price is called the strike price. You pay a small amount i.e. premium to buy this right. This premium depends on many factors
such as the current price of the share, strike price, one time extra till the expiry date.
If the price of the share becomes more than the strike price before expiry, then the call option becomes available. In such a situation, you can earn money by using this right.
Let us understand this with an example! Suppose the share of the company is ₹1800, now you think that it will go up to 2000, then you buy a call option whose expiry is after one month and the strike price is ₹1900, you have paid ₹50 premium for it, now if the share of that company becomes 2000 then the price of your option will increase, you can earn a good profit by selling it.
But if the share of that company becomes ₹1600 then the price of your option will become zero and you will have a loss of ₹50, in this way you can have both profit and loss from the call option!
And now talking about Put Option, put option is a kind of contract in which you get the right to choose which thing you want to put on the market.
Like you can sell a share at a fixed price and till a fixed date but it is not compulsory to do so.
In Put Option, the strike price is the price at which you can sell the share in future.
To understand this better, let us understand it with an example. Suppose you have invested in an acid and you are afraid that its price may fall, then you can limit your loss by buying a put option. For this, you can buy a put option with a strike price of ₹ 100.
And this means that you are buying the right to sell that share after a month for ₹ 100 per share, no matter what the price of the share is at that time. For this, you have also paid a premium of ₹ 5 per share.
If after a month the price of the share becomes ₹ 80, then you can use your put option and sell the share for ₹ 100. This will give you a profit of ₹ 20 on each share.
But if after a month the price of the share becomes ₹ 120, then you will not use your put option because you can sell the share in the market for ₹ 120, but in this situation your put option will become worthless and you will not get back the premium of ₹ 5 that you paid.
So in this way the call option becomes worthless. Option gives you the right to buy shares and put option gives you the right to sell shares
If you think that the price of something will increase then you can use call option and if you think that the price of something will decrease then you can use put option
In Option Trading, there are many types of strategies in these two different options of trading!
This strategy is made on the basis of your estimation about the market, for example, if you think that a share will increase, then you will adopt one type of strategy and if you think that the share price will decrease, then you will adopt another type of strategy.
One strategy is Bullish Option Strategy and one is Bearish Option Strategy and one is Natural Option Strategy.
Bullish Option Strategy: Bullish Option Strategy means that you are assuming that the share price will increase, on this basis you buy or sell some options.
Bearis Option Strategy:- Bearish Option Strategy means that you are assuming that the share price will fall, on this basis you buy or sell some options.
Neutral Option Strategy:- Natural Option Strategy means that you are assuming that the share price will not increase much and will not fall much, that is, the price will remain almost stable, on this basis you buy or sell some options.
Among these, using the right strategy at the right time is an experience. , it is possible only on the basis of knowledge and risk
But option trading is done in India, you can do it on stock exchanges like NSE National Stock Exchange and BSE Mumbai Stock Exchange
It is also very important for you to know that there is a very high risk in option trading
Conclusion:- In this article we have explained about option trading, its advantages and disadvantages, everything has been explained in detail in this article. Thank you.