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Decoding The Best Options To Trade In
Making money in the investment market has become rather easy today. You can create a corpus at a much quicker pace by investing or trading in the financial and commodity markets. Trading is not just limited to the stock market any more – you can trade in a wide range of commodities including hard and soft commodities. Another common investment instrument that is yet to gain popularity is derivatives. Derivatives are essentially investment instruments whose values are derived from underlying assets.
In the trading market, you can trade in two types of derivatives – options and futures. In this article, we attempt to decode the best options to trade and how you can benefit from them.
What are options?
An option is a type of derivative that gives you as the investor, the right, but not the obligation to buy certain underlying assets at a predetermined price at a fixed date in future. So, when you purchase a stock option at ₹100 and it price increases to ₹130, you can exercise the option to make a gain of ₹30. Conversely, if the stock price falls to ₹80, you can choose not to exercise your option and avoid losing ₹20 per stock.
Options are not just limited to stocks; you can get options for a variety of investment assets including stock indexes, gold, petroleum, agricultural produce etc. Yet, finding the best and the most active option to trade, is quite tricky and involves 3 main considerations. They are as under:
Your objectives for trading – As an investor, it is your responsibility to determine your objective for trading. Most people choose to trade in options for two main reasons – to hedge or to speculate. Hedging as the term suggests, allows you to hedge or ‘dodge’ the risks related to trading in options. If you prefer to make profits by betting on price movements, you can consider speculation as your investment objective. As such, the strategy you adopt should depend on your investment objective.
Choosing the call option to bet on – Your trading strategy is also affected by weather you wish to place bets on rising or falling stock prices. In case of rising prices, call options are the best options to trade in. The call option gives you the right to purchase a specific stock at a predetermined price in future, thus enabling you to book a profit, if you get your bets right and the price of the stock rises.
Choosing the put option to bet on – The put option gives you the right to sell a certain stock at a predetermined price. This can prove to be a good bet if you speculate that share prices will fall. Put options are typically used as hedging strategies. For instance, if you have a stock portfolio and are expecting prices to fall, you can invest in put options. If the stock prices fall, you can balance the losses in your stock portfolio by the profits made by exercising the put option. This proves to be the best option to trade in because, it helps avoid any losses from price falls and by not selling the stock, you can earn dividends declared by companies along with other privileges, including voting rights.
To trade in options, you will need a demat account. The account will maintain all your market investments in dematerialised or electronic form. Remember to check demat account deals offered by broking firms before opening the account. Companies like Angel Broking provide exclusive demat account offers where you are charged low brokerage fees and provided with exclusive shopping vouchers for referrals.
Maithili Pawar is a financial expert with 5 years of experience in investment banking field. In her free time, she writes on trading topics. In this, she has written on best options to trade. She has decoded the best options to trade in
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