OPTION TRADING STRATEGY: WHAT IS CALL OPTION

OPTION TRADING STRATEGY: WHAT IS CALL OPTION

OPTION TRADING STRATEGY: OPTION VALUATION

OPTION TRADING STRATEGY: OPTION VALUATION

WHAT IS PUT OPTION

What is PUT OPTION

If you think a stock price is going to go down, then there are 3 trades that you can make to profit from a rising stock price: 

1. you can sell the stock
2. you can buy put options on the stock, or
3. you can write call options on the stock

Selling stock  huge capital investment i.e.your total capital is @ risk plus u need to cover it cover intraday or supply delivery

Writing call option also need huge margin and risk associated with it is unlimited

Buying put option give u unlimited profit upside and limited risk downside.

Only enemy of put option is time so u should book your profits as early as possible.

Let’s understand using an example. Suppose, today’s date is 25-APR-2012 and you BUY a RELIANCE PUT option (strike=700, EXPIRY  MAY 31) @ Rs. 10  per contract when RELIANCE stock was getting traded at 740. Let’s see what happens after options expiration.

Case I : Reliance stock price greater than the strike price  on expiry day cut-off time

Net loss = Premium paid = Rs. 10 per contract

Case II : Reliance stock price less than strike price (700) on expiry day cut-off time i.e. 640

Net profit = (current price – strike price) - premium = (700-640 ) -10= Rs. 50 per contract

So when you buy a put option you have unlimited profit potential but limited risk or downside.

OPTION CALL ROCKING!!!

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