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options-tradings · 2 years

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What is options trading for beginners?

Besides stocks, there is a growing interest in options trading. Options are financial contracts that derive their values from an underlying asset, such as stocks, ETFs, bonds, etc.

Options trading involves buying or selling underlying assets at a fixed price on a future date.

Options trading can be more complex than trading stocks. When you buy stocks, you fill an order for the number of shares you want to purchase. Your broker executes the trade at the prevailing price or the price limit set by you. But options trading requires understanding advanced strategies and knowledge of asset price movement.

How does options trading work?

When traders buy or sell options, they have the right to exercise the options at any point before their expiry date. But simply obtaining an options contract doesn't require one to execute its terms at expiration. Due to this feature, options are regarded as derivative securities. It also means that, unlike shares, options don't represent ownership in a company. The market price of the options is, therefore, the proportion of the underlying asset price.

How to trade options

Open an options trading account: Brokerage firms will screen probable options traders for their experience, understanding of risks, and financial preparedness. They will note these factors in the options trading agreement. The broker will ask you for,

Investment objective

Trading experience

Financial details

Types of options you want to trade

The broker will assign you an initial trading level based on the answers.

Nowadays, you can open an options trading account online with brokers like Angel One.

Pick options you want to buy: You can select from the available options contracts in NSE. For your understanding, a call option gives you the right to buy an underlying asset at a fixed price on a future date. A put option allows the holder rights, but no obligations, to sell underlying stocks at a predetermined rate on a future date. The decision to buy a call or put option will depend on your understanding of asset price movement.

If you expect the asset price to rise, you will obtain a call option. Conversely, you'll buy a put option when you expect the asset price to fall.

Predict option strike price: An option only remains valuable if the underlying asset price finishes close to the strike price on expiry or the contract is 'in the money. It means above the strike price if it's a call option and below the strike price in case of put options. You'll want to buy options with a strike price that reflects where you expect the stock price to move during the option's lifetime.

The price you pay for an option is the premium. It has two components - time value and intrinsic value. The higher the premium, the lower your profit.

Determine the option time frame: Every option has an expiration period or the last date you can exercise your rights. The expiry date is not random. The option's expiry date in India is fixed on the last Thursday of a month. Options are not suitable for long-term investment. Options traders bet on the short-term movement of the asset price. Hence, options are available for 1-month, 2-month, and 3-month duration.

An option's time value decay as it moves close to the expiration date. If you don't monitor the movement of the asset price or don't execute the option on time, it may expire worthlessly.

Now trade options with angel One. Open an options trading account and start investing.

#options #optiontrading

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