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Understanding the Option Trading

by Pankhudi Dave Head Finance Manager
Options trading is different from buying and selling stocks. An option is a contract that allows a trader to buy or sell a particular security or index at a predetermined price on a date in the future. The option gives the right to buy/sell securities, but it does not oblige to do so. It is the fundamental difference b/w option trading and future option.

Options trading is betting on the price of a stock to go up or down or to hedge your already purchased stocks. An option that allows a trader to buy a security is a Call option, and the one that helps to sell a security is a Put option.

What is a Call Option?

•    An option that allows a trader to buy a security is a Call option, and the one that helps to sell a security is a Put option.

•    A trader usually buys a call option when he expects a stock price to go up in the future. And when the price goes up, the call option gives him the right to purchase the security.


One needs to know a few basic terms to buy a call option:

•    Strike point - It's the price at which you buy a call option.

•    Premium - Premium is the money that you pay to buy a call option. It's just like a down payment.

•    Expiry date - It's the date until when you can hold your call option.
What is a Put option?
•    It is the one that gives you the right, but not the obligation to sell an asset at a predetermined price in the future date.
•    A trader buys put options when he expects the price of a stock will go down in the future. Once the price falls, the put option gives him the right to sell the stock.
•    The thing to be noted here is he's not obliged to sell the stock.

Things to learn before trading in options:

•    Put options - The profit in buying a put option is limited. Generally, the prices do not fall at a higher rate, limiting the profit expectation.

•    Strike price - The price at which you buy an option.

•    Premium - The amount you pay to the broker to buy an option. Premium is similar to down payment/advance payment.

•    Expiry date - It is the date until when you can hold your option.
Final Word

Any trader buys a call option when he wishes to take the benefits out of the bullish period in the market. It is generally the best time for trading call options. Here, the loss is minimum as even if the prices don't go up, your actual damage will be the amount you paid as the premium to buy the option.

A trader buys a put option when he is expecting the prices to go down. So, the best time to buy a put option is during the bearish period. Though there is less risk involved in options trading as you can minimize the loss, the profit in the put option is limited. Buying the put option of the index is also profitable as you are trading in a stock basket and not in a particular stock. This summarises the put option meaning.

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About Pankhudi Dave Freshman   Head Finance Manager

9 connections, 0 recommendations, 46 honor points.
Joined APSense since, July 2nd, 2019, From Mumbai, India.

Created on Apr 15th 2020 08:30. Viewed 323 times.

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