Option trading can be profitable if done correctly with minimal risk. When buying calls or puts, your maximum loss is limited to the premium paid. For example, if buying a call option on Nifty at 12,000 strike price for Rs. 50 when the index is at 11,900, your loss is capped at Rs. 3,500 paid as premium if the option expires worthless. However, if Nifty rises above 12,000, the option value increases allowing you to profit from the price movement with only a small initial investment. Selecting the right strike price is important to benefit from the trade.
Option trading can be profitable if done correctly with minimal risk. When buying calls or puts, your maximum loss is limited to the premium paid. For example, if buying a call option on Nifty at 12,000 strike price for Rs. 50 when the index is at 11,900, your loss is capped at Rs. 3,500 paid as premium if the option expires worthless. However, if Nifty rises above 12,000, the option value increases allowing you to profit from the price movement with only a small initial investment. Selecting the right strike price is important to benefit from the trade.
Option trading can be profitable if done correctly with minimal risk. When buying calls or puts, your maximum loss is limited to the premium paid. For example, if buying a call option on Nifty at 12,000 strike price for Rs. 50 when the index is at 11,900, your loss is capped at Rs. 3,500 paid as premium if the option expires worthless. However, if Nifty rises above 12,000, the option value increases allowing you to profit from the price movement with only a small initial investment. Selecting the right strike price is important to benefit from the trade.
Option trading can be profitable if done correctly with minimal risk. When buying calls or puts, your maximum loss is limited to the premium paid. For example, if buying a call option on Nifty at 12,000 strike price for Rs. 50 when the index is at 11,900, your loss is capped at Rs. 3,500 paid as premium if the option expires worthless. However, if Nifty rises above 12,000, the option value increases allowing you to profit from the price movement with only a small initial investment. Selecting the right strike price is important to benefit from the trade.
Download as DOCX, PDF, TXT or read online from Scribd
Download as docx, pdf, or txt
You are on page 1/ 3
OPTIONS 2
When you buy 1000 shares of SBI say at Rs 250 in cash/equity market, there is a possibility of the price coming down leading to a loss.
In such a case you also simultaneously sell 1000 shares in Future segment ( F & O) – opposite of the first transaction..
So when the price of SBI comes down you can buy in F & O segment and make profits. This is called Hedging technique.
While in cash/equity market you have to square off daily or take delivery, in F & O you can keep it for 3 months till you get your desired rates for which you have to pay the margin amount to the Broker/NSE.
Option is similar to the insurance premium you pay for your car. You pay a small premium and buy one call option (a right to buy at a later date at a particular value of the share- valid for 3 months) when you think that the share price of a company will go up. When it really goes up your paid premium value also goes up and the difference is your profit.
Similarly when you think a share price will come down later, buy one Put option (right to sell a share at a particular rate later) by paying a small premium and when the share price comes down your put option value will go up and the difference is your profit. Here the risk is very less and the deposit to the broker is also less. OPTIONS 3
Most people will tell you that option trading is risky, and people can go broke really quick in options trading. However, that is not completely true. Option trading is fairly easy, and can be very profitable if done correctly. I'll explain it to you with an example.
First, get a trading account with a broker like ICICI Direct, or Upstox. Load some funds in it, and you are ready.
You have 2 options, CALL (CE), and PUT (PE)
You BUY CALLS when you think stock will move up. You BUY PUTS when you think stock will fall. This is a rule, you will just have to by heart it.
If you are "selling" options, then rule is the opposite.
You SELL CALLS when you think stock will fall. You SELL PUTS when you think stock will move up. For a moment, forget the SELL part, will come to this later.
As a BUYER, suppose you want to trade in NIFTY.
Its currently at 11900.
Now suppose you think it will move up.
First things first, calculate till what level it can move up. Suppose we think it can cross 12000 level.
So for us, a "strike" price of 12000 will work, when buying a CE. Strike price is a level which you need to select at the time of starting the trade. Its very important to select proper strike price, or else even a profit making option will start giving a loss. Read this article for a brief idea: https://munafasutra.com/post/basicsOfOptionsCallAndPut
Now, we have a strike price of 12000, current price of Nifty is at 11900, and we think its going to move up. So we start the trade, we buy a CE of strike 12000, suppose at a cost of 50 rupees. LOT size of Nifty is 75, you'll be spending 75 x 50 = 3500 rupees to take this trade. You see how low your investment is?
Now suppose, in a couple of days, Nifty actually moves to 13000, that is 100 points above your strike price. So you are immediately making a profit of little more than 100 points on your trade. Your 50 rupee CE is now 150 rupees. Your profit: 75 x 150 = 10,500 rupees. You just tripled your investment in one trade! Suppose, things did not worked out your way, and Nifty started falling immediately after you took the trade. In that case, your loss is how much? Take a guess... The max amount you invested, 3500 rupees, that is all. Nothing more! And you can reduce this loss by "squaring off" your trade before expiry date. At expiry, your total investment will be lost in a bad trade. If you square off sooner, some amount will be saved...
Same is the case with PE, PUTS.
Suppose you thought Nifty will fall from current levels, and might go below 11800. In that case, you buy a PE of strike 11800, and rest is the same.
Once again, I suggest you read this article, to know how to properly select strike prices: https://munafasutra.com/post/basicsOfOptionsCallAndPut
The book on that website is also good, has some option strategies, explains options in detail, including selling options.
Trade rules are similar in option SELLING as well, but in theory, your loss can be unlimited. However, in practicality, you will be asked to put a stoploss point, and if the trade goes bad, then your broker will automatically square off your trade for you, preventing unlimited loss.
You should also read something about "Time Decay" while doing option trading. If you choose a strike price too far away, then time decay will eat up all your profits... -----------------------------------------------------------------------------------------------
