What Is Option Trading In India ?

                                

When people asked what is option trading in we can say it is one of many way of trading in stock market in India this can be short and simple description for the people who are new to market.

Now let us discuss in depth about option trading, we can say option is a contract in which trader can speculate on future price of asset like bonds and stock on the stock market as a whole in this buyers pays a small amount and make a contract to buy or sell a asset in pre decided price and time, but even then he is not obligated to do so, he can walk out any time at his wish. 

As it is one of the most complex way of trading on stock market as it can highly risky but on the same time highly rewarding also it all depends on your market knowledge and your risk taking capacity, in simple words we can say that option trading comes with high optional to offer higher profit margin compared to other forms of trading, option trading also provide opportunity to investor to practice complex strategies with high flexibilities so if you’re a risk taker then go for it.

Adding option in your  working strategies can be good choice to expand your portfolio and not just stocks, bonds and mutual funds,  keeping in mind that both profit and  loss can be substantial, it is said that option trading is hard and good for only for seasoned traders  but this not the truth the fact is that with right kind of knowledge any one can experiment in option trading in India so if are planning to take  a dip in this world , we will help you with the right kind of information to understand this versatile type of investing, so in next few steps we will introduce you some more important aspects of this  trade, so keep reading further I hope we are being helpful to you.

How To Start Option Trading In India

We think after the  brief introduction of option trading you must be playing with the idea to give a try to this new popular mode of investment, but  we suggest it always   acquire good knowledge and make yourself friendly with correct procedures to avoid unnecessary loss that can come without the adequate knowledge of the market,

So here in few points we will discuss all the investor need to do before starting to trade in options.

A) Think, Are you ready?

Reading and talking about option trading may look very interesting and inviting but it is you who has to take final decision that are you really ready for it as option trading is lot more complex and involves more risk than stock trading, it needs a good grasp of understanding market trends and ability to read and intercept data and market indicators, you should be clear about your risk tolerance, the amount of time you can dedicate to this activity, so think twice before starting it

b) Select a Broker And Open a Trading Account

As we talked about that option trading can be good option to develop wealth if done rightly, so to start this versatile activity, we need to select one broker keeping in mind who can support all your requirement like  fee,

Customer support etc. the good broker should offer right balance between features and cost.

Once done this   the broker may ask you to furnish certain documents to complete the contract, which can be  your financial statement ,kyc,etc. to  judge your  understanding about risk involvement ,trading experience, so he can offer you different level of option trading , from very basic like covered call to more sophisticated one like straddles and iron condor.

C) Make Your Trading Strategies

 Once you are ready to start investing you understand there are mainly two type of investment that is that is CALL and PUT options, and all the business strategies are develop are around these only. so you can decide how you plan  to develop and execute your business, plan your entry and  exit levels and how you will manage the  risk involved, paper trading and simulated trading can be good tools for testing your skill and strategies without any financial risk.

D) Understand The Taxes Also

Once you start trading in option you should always keep in mind the taxation can play a major in shaping your profit margins, it is advisable to consult a tax profession to calculate the implication on your situation, the key to success to option trading is keep yourself updated and informed through various education systems and risk management techniques to protect your capital

Common Terms  Used  In  Option Trading

Once you feel ready start trading in option it is advised to understand certain terms most commonly used in the market ,the is a long list but we  will focus on the few  most common ones,

Contact: in simple words the contract is agreement to sell or buy some asset or stocks in the future in certain price and time.

Strike Price - the strike price also known as exercise price is the price on which the investor can exercise his right to sell or buy the underlying asset.

Call Option – call option is a contract that allows the investor to buy a specific instrument at a specific price for the specific time. Works well when market is bullish

Put Option - put option is a contract that allows the investor to sell a specific instrument at a specific price for the specific time. Works well when market is bearish

Some  mores term that are little complex and need more focus to  understand are as follow

In The Money(ITM )-

  For Call Option- if the market  price of the underlying asset is above the strike price it is called in the money.

For Put Option - if the market price of the underlying asset below the strike price is called in the money.

Out Of The Money (OTM )-

Call Option – if the market price of underlying asset is below the strike price it is called out of the money.

Put Option - if the market price of the underlying asset is above the strike price it is called out of the money.

At The Money(ATM) -

Call Option – if the spot price of the underlying asset is same as strike price it is called on the money.

Put option  - if the spot price  of the underlying asset is same as strike price it is called on the money.

Expiry date - To explain better expiry date is the date when the contract expire, but in case of in the money the option contract is excised automatically meaning the holder will sell (for put ) and  buy (for call) the instrument at the strike price hence the deal is done,

But in case of out of the money  the option contract expires worthless,and the holder loses the premium paid.

Premium – the premium can be explained as the price paid  to seller for agreement to buy or sell underlying asset in certain time and price.

Underlying assets - the underlying assets is term that defines the value of the financial contract,it can be in form of stocks, bonds ,market indexes,commodities  and currencies.

Lot size – it is the term the that show the number of shares etc, in the option contract for consideration, it can effect the total cost of the trade and potential profit and loss.

Examples for option trading 

We have given a fairly good idea of what is option trading, but it will more helpful to understand the mechanics of the instrument with the  help of a example, so here it is-

Imagine you buy a long call option of X company at Rs 50/- per share for a date one month from today, and on the date of purchase the share is trading at Rs75/- per share,but because of contract you can stil buy at agreed price of Rs 50/- making profit of Rs 25 /- per share

Conclusion

As  till now we discuss  few of the terms used in option trading but there are still many more like covered call,married put, and many more but we advised all investors to make their own independent research before reaching any conclusion,as options are very flexible financial instrument and it offers ample opportunities to the investor, even though it  is risky but a trader can always choose low risk basics strategies,so trader should be patient and always make a  appropriate strategies before investing in options,

Happy trading.