A Beginner's Guide To Option Trading

By Author: Neha Jain
Total Articles: 6
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Options are financial derivatives that provide the buyer the right to buy or sell and does not obligate them to buy or sell any underlying asset at a previously decided price before an expiration date. There are two primary types of options - Call Options and Pull Options. Call Options are nothing but derivatives that give a trader the right to buy an underlying asset at a specified price and within a certain time limit. On the other hand, Pull Options are derivatives that fulfill the opposite function, They give a trader the right to sell an asset at a specified price within a certain limit.

Choosing Trade in Options

Options are useful in a variety of situations. They can be used for hedging, speculation, and for income generation. Trading in options allows traders a few advantages like Leverage, Flexibility and Risk Management. Options trading gives the trader a greater control in the position with a lesser amount of money. This is much safer compared to buying any asset outright. Second, Options trading allows a trader to trade and make good returns in any type of market, whether it is bullish, bearish, or ...
... neutral. And third, options can help hedge against potential losses in other investments.

Keys Concepts in Options Trading

Let us go through a few key concepts that will become the cornerstone for understanding the practicalities of options trading. The basics include Strike Price, Expiration Date, Premium, In-the-Money (ITM), Out-of-the-Money (OTM), and At-the-Money (ATM). Strike Price is basically a pre-decided price at which an underlying asset can be purchased. Expiration date is a pre-decided date before which the option asset must be bought or it becomes worthless. Premium is the price that the buyer pays to the seller for the underlying asset. ITM is a name given to a Call option when the current price of the underlying asset becomes above the Strike price of the asset. On the other hand, ITM is the name given to a Put Option when the current price of the underlying asset becomes below the Strike price of the asset. A call option is OTM if the current price is below the strike price. A put option is OTM if the current price is above the strike price. And, an option is an ATM if the current price of the underlying asset is equal to the strike price.

Basic Strategies in Options Trading for Beginners

It is important to build a strong foundation in Options Trading. Here are some strategies to help with that.

The intention behind buying a Call Option is to profit from the rise in the price of the underlying asset. The risk here is just limited to the premium of the underlying asset, while the rewards can be unlimited based on how much price rise happens.

Buying Put Options should be done with the aim of decreasing the price of the underlying asset. The risk here is again limited to the premium fixed. Here the rewards may be limited to the Strike price minus the Premium paid.

Covered Call Writing is another choice for traders where the aim is to create wealth from a stock you already own by selling call options against it. The risk here depends on a significant rise of the stock price and is limited to the premium received. The rewards can be substantial here with the premium received and any capital gains resulting from the rise of the stock prices.

Using Cash-Secured Put Writing is to be done with the aim of generating income by selling put options on a stock that you have decided to buy at a lower price. The risk is limited to the premium value but that depends on a significant fall of the stock price. And, the rewards can be substantial including the premium and the capital gains when the stock is purchased at the strike price and subsequently gains more value. These concepts are better understood through the help of Option Trading courses, which can be found all over the internet.
Conclusion

Options Trading is a great tool for all types of traders but requires a solid understanding for implementing it and achieving lasting returns.

Reference: https://www.evernote.com/shard/s703/sh/a9304a5e-beb2-0d14-5063-fd7803e14235/x8nbHCZjgdyNPCptvUwdiOAyh_Zc46oapYmnVMBHH6_OY1cM4KT9cBMClA