GUIDE FOR MASTERING IN OPTION CALL & PUT

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Popular financial tools like options give traders and investors flexibility by allowing them to employ leverage and protect themselves from unfavourable market moves.For beginner market participants, trading options can be complicated and risky, leading to significant losses. To minimise risk and maximise deals, traders must master practical option trading tactics. We have compiled some of the most popular option trading techniques as well as significant trading metrics used by option traders.

What is option trading?

The purchasing and selling of options-based financial products is known as option trading. Options are derivative contracts that grant the holder the right to purchase or sell an underlying asset at a predetermined price on or before a particular date. Stocks, indexes, fixed-income assets, foreign exchange, commodities, and exchange-traded funds can all be used as the underlying asset (ETFs). Because the holder of an option contract is not required to buy or sell the asset, they differ from futures contracts. The right to purchase or sell 100 units of the underlying asset is often represented by an option contract. The two most fundamental types of option contracts are call and put options, and margins can be utilised to trade them. With a call option, the contract holder can purchase the underlying asset at a specified price within the specified time range, for fee. Options contracts might differ in terms of their expiration dates. Put options provide the contract holder the right to sell the underlying asset at a certain price within the predetermined time period. American options, for instance, permit exercise at any time before the expiration date. Only on the expiration date may European options be exercised. Perpetual options are a particular type of option contract that have no expiration date. They are only sometimes used, and trading solely occurs over-the-counter (OTC). OTC markets, on the other hand, do not require a centralised exchange because assets are traded directly between counter parties. A network of brokers typically makes trading in OTC marketplaces possible.

How do options work?

Depending on their view for the underlying asset, a trader will purchase a call or sell a put. Let's look at an eRelianceample of option trading. Typically, a call option has a bullish buyer and a bearish seller, whereas a put option has a bearish buyer and a bullish seller. An investor has high hopes for stock RELIANCE, which is now trading at 48. The trader buys a September 50 call contract on RELIANCE with a 50 strike price rather than 100 shares of RELIANCE. The contract will cost 200 (2 multiplied by 100) with a premium of roughly 2.

Let's assume that the contract's expiration day falls on a Friday. RELIANCE must trade above the 50 strike price in order for the option contract to be considered to be "in-the-money." If RELIANCE rises to 60 before expiration, the premium on the RELIANCE September 50 call contract will increase to around 10 because a premium paid per share is 2. In addition, RELIANCE must trade at 52 for the trade to be profitable. Now, the contract is worth 1,000 (10 multiplied by 100). However, if the market moves against the trader and RELIANCE trades at 60, they would incur a loss equal to the difference between the contract's purchasing and selling prices, which in this example is 800 (1000 - 200) and RELIANCE drops below the strike price of 50 on the expiration date, the option contract will be deemed ‘out-of-the-money’ and will expire worthless. This will result in the trader losing all their initial investment.