How to Trade Options – Options Trading Basics

All investors should have a portion of their portfolio set aside for option trades. Not only do options provide great opportunities for leveraged plays; they can also help you earn larger profits with a smaller amount of cash outlay.

What’s more, option strategies can help you hedge your portfolio and limit potential downside risk. No investors should be sitting on the sidelines simply because they don’t understand options. 

What is the difference between Intraday Trading and Delivery Trading?

When you buy and sell a stock within the same day, it is called Intraday Trading. When you purchase shares and hold them overnight, then you take delivery of the shares and hence, this is called Delivery Trading.

You can trade in two different ways in share markets. You can either do intraday trading or you can opt for delivery based trading (investment). Intraday trading is typically completed within a day – this means that you have to sell the shares that you have purchased on that day before the closing of markets. Even if you don’t sell the shares by yourself, they are automatically squared off before the closing. On the other hand, in delivery based investments, you are not required to buy and sell shares within a day and you can hold them for as long as you want.
Advantages

There are quite a few advantages of Intraday Trading, the biggest one being that you are allowed to buy shares without paying the full price of the shares (Paying only the margin money). The market makers allow you pay only a part of the price to hold the shares. So, you can gain more by investing less. But this means that your losses would be higher as well. Intraday trading also allows you to short sell the shares – selling shares even before buying them (but buying before market closes). This is one benefit that can give you profit even when the price of the share is sure to fall. 
The brokerage for intraday trading is always lower than that for delivery trading.

Difference between options and futures

Option Markets

Options are standardized contracts that allow investors to trade an underlying asset at a specified price before a certain date (the expiry date for the options). There are two types of options: call and put options. Call options give the buyer a right (but not the obligation) to buy the underlying asset at a pre-determined price before the expiry date, while a put option gives the option-buyer the right to sell the security.
Options are attractive to hedgers because they protect against loss in value but do not require the hedger to sacrifice potential gains. Most exchanges that trade futures also trade options on futures. 

Futures Markets

Futures contracts are agreements to trade an underlying asset at a future date at a pre-determined price. Both the buyer and the seller are obligated to transact on that date. Futures are standardized contracts traded on an exchange where they can be bought and sold by investors.

OPTION PLAIN VANILLA STRATEGY

OPTION STRATEGY: 

BUY SBIN 285 CALL @ 4.45

Total investment =5562.50

Pay off table:...

Buying Options for the Purpose of Hedging

Other than speculation, options can also be bought as a means to insure potential losses for an existing position in the underlying. To hedge a long underlying position, a protective put can be purchased. Similarly, to protect a short underlying position, a protective call strategy can be used.

In-the-money Covered Call Strategy

In-the-money covered call options are sold when the investor has a neutral to slightly bearish outlook towards the underlying security as their higher premiums provide greater downside protection.

Out-of-the-money Covered Call Strategy

This is a covered call strategy where the moderately bullish investor sells out-of-the-money calls against a holding of the underlying shares. The OTM covered call is a popular strategy as the investor gets to collect premium while being able to enjoy capital gains (albeit limited) if the underlying stock rallies.

Out-of-the-money options are cheaper to buy than in-the-money options but they are also more likely to expire worthless.

For call options, this means that the higher the strike price, the cheaper the option. Similarly, put options with lower strike prices are therefore less expensive to purchase.

However, the size of the premium alone does not tell us the whole story. In fact, at-the-money options can be considered the most expensive even though their premiums are lower than in-the-money options. This is because their time value is highest and time value is the part of the premium that will waste away as the expiration date approaches.

Call & Put Buying Combinations

RCOM STRATEGY UPDATE

RCOM STRATEGY

RCOM 65 MARCH PUT  BOOK PROFIT @ 4.5 (GIVEN & 2.4)

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NIFTY FUTURE + STOCK FUTURE 

OPTION CALL & PUT + STOCK FUTURE 

OPTION CALL & PUT + OPTION STRATEGY 

NIFTY FUTURE + OPTION CALL & PUT

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STRANGLE IN RCOM WITH NEGATIVE BIAS

RCOM OPTION STRATEGY  

BUY RCOM MAR 65 PUT @ 2.4

BUY RCOM MAR 80 CALL @ 1.3

COST=3.7

TOTAL RISK  = 7400

RETURN = UNLIMITED

UPPER BREAK GIVEN POINT=83.7

LOWER BREAK GIVEN POINT=61.3

Pay off table:

STOCKS TO BUY FOR UNION BUDGET 2015-16

In a week's time from now, Union Budget 2015-16 would be unveiled by Finance Minister, Arun Jaitley. The Union Budget is being unveiled on Saturday and while there were apprehensions on whether there would be trading on Saturday, the NSE and the BSE have announced that there would be trading on this day.

It's going to be an extremely volatile session on the day of the Budget, simply because there is so much expectations this time around. If this is not a dream budget, chances are there could be huge selling pressure in the markets.

Here are a few shares to buy ahead of Union Budget 2015-16.

Arbitrage Strategies and Price Relationships

When looking at an option chain, you see all the data for an underlying asset and its related options.  Between the various sections – the underlying, the call and put options, and the different expiration months – there are fundamental relationships that underlie their pricing. 

When these relationships get out of line, an arbitrage opportunity exists—buying an option(s) and selling the related option(s) for a (near) risk-free profit.  To illustrate these relationships we will use arbitrage strategies, and we will begin by discussing synthetics, which form the basis for all the different arbitrage strategies. 

Synthetic Relationships

There can be up to three different parts to any potential option strategy: The underlying asset; the Call options; and the Put options.  Most arbitrage strategies use the concept of synthetics, and they are a large part of the strategies we use here.  A synthetic strategy is one where you combine any two parts (calls, puts and/or the underlying) to create a position that looks like the third one. 

For example, if you buy both the stock and a put option, you will make money if the market goes up, but your loss is limited if the market falls.  That's exactly the same risk/reward you would get if you bought a call option – you make money if the market goes up but your loss is limited to the premium paid if the market falls.  Buying the stock and buying a put is therefore called a synthetic call.  In terms of risk and reward, it is exactly the same thing!

The various synthetic relationships may seem a little confusing, but with a little practice you will see how easy it is to understand.  An important rule to keep in mind is that the strikes and months of the calls and puts must be identical.  For synthetics that involve both the stock and options, the number of shares represented by the options must be equal to the number of shares of stock.  The table below lists the basic synthetic positions: