What is Option Trading – In Share Market there is trading pattern called option trading. Today, In this blog we will learn what is option trading and its basic. So you can have a overall understanding of Option Trading. Till the end of the blog, you would surely have an understanding of what is option trading.
Option trading is different from futures trading. It is also a part of the derivatives market. In option trading, your risk of loss is limited. That means the premium you pay for the option is the maximum loss you can incur. There is no limit to the profit in option trading, so the potential profit can be unlimited. Another important aspect of option trading is time value. The premium you pay decreases over time, and by the expiration date, it can become zero. Option trading is mostly used for hedging.
Now will we learn what is Option Trading with an example: Lets say you are interested in buying a company’s share and you are not sure about it will go up or not. So, instead of buying the shares, you decide to use option trading.
You buy a call option for Company ABC’s stock, which is currently trading at ₹1,000 per share.
The call option gives you the right (but not the obligation) to buy 100 shares of ABC at ₹1,100 per share within the next month.
For this option, you pay a premium of ₹50 per share, totaling ₹5,000 (since 100 shares x ₹50 = ₹5,000).
Possible Outcomes:
- Stock Price Increases:
- If the stock price rises to ₹1,200, you can exercise your option and buy the shares at ₹1,100 (even though the market price is ₹1,200).
- Your profit is ₹100 per share (₹1,200 – ₹1,100), so for 100 shares, your profit is ₹100 x 100 = ₹10,000.
- After subtracting the premium you paid (₹5,000), your net profit is ₹5,000.
- Stock Price Stays the Same or Falls:
- If the stock price stays at ₹1,000 or drops below ₹1,100, your option is out of the money, and you won’t exercise it.
- Your maximum loss is limited to the premium you paid, which is ₹5,000.
Key Points:
Time decay can reduce the value of the option as the expiration date approaches.
In this example, if the stock price rises significantly, your profit can increase.
The maximum loss is limited to the premium paid, ₹5,000.
We will learn Time Decay in future articles, till now you have got an idea of what is option trading actually and how it works.
What is Option Trading in Hindi? ऑप्शन ट्रेडिंग हिंदी में
ऑप्शन ट्रेडिंग शेयर बाजार में एक डेरिवेटिव्स (Derivatives) वित्तीय साधन है, जहां निवेशक भविष्य में किसी निश्चित समय पर किसी संपत्ति (जैसे कि स्टॉक) को एक निश्चित मूल्य (स्ट्राइक प्राइस) पर खरीदने या बेचने का अधिकार खरीदते हैं, लेकिन इसकी बाध्यता नहीं होती।
Types of Option Trading | Option Trading kitne prakar ke hote hai !
Call Options: Call options are also called as CE.
- Definition: A call option gives the buyer the right, but not the obligation, to purchase a specific asset (like a stock) at a predetermined price (known as the strike price) within a specified period.
- Purpose: Investors buy call options when they expect the price of the underlying asset to rise. If the price increases above the strike price, the buyer can exercise the option to buy the asset at the lower price and potentially profit from the difference.
- Example: If you buy a call option with a strike price of ₹1,000 for ₹50 and the stock price rises to ₹1,200, you can exercise the option and buy the stock at ₹1,000, selling it at ₹1,200 for a profit.
2. Put Options: Put Options are also called as PE.
- Definition: A put option gives the buyer the right, but not the obligation, to sell a specific asset at a predetermined price (the strike price) within a specified period.
- Purpose: Investors buy put options when they expect the price of the underlying asset to fall. If the price drops below the strike price, the buyer can exercise the option to sell the asset at the higher strike price.
- Example: If you buy a put option with a strike price of ₹1,000 for ₹50 and the stock price drops to ₹800, you can exercise the option and sell the stock at ₹1,000, even though it’s trading at ₹800, thereby profiting from the difference.
Difference in Call Options and Put Options
The main differences between call and put option trading revolve around the rights they confer to the buyer and their expected market movements. Here’s a breakdown:
Call Option vs. Put Option
| Aspect | Call Option | Put Option |
|---|---|---|
| Right Conferred | Gives the buyer the right to buy an asset. | Gives the buyer the right to sell an asset. |
| Expectation | The person expects the price of the asset to rise. | The person expects the price of the asset to fall. |
| Profit Potential | Profit when the asset’s price rises above the strike price. | Profit when the asset’s price falls below the strike price. |
| Seller’s Obligation | The seller (writer) of the call must sell the asset if the buyer exercises the option. | The seller (writer) of the put must buy the asset if the buyer exercises the option. |
| Example | If a stock is trading at ₹1,000 and you buy a call option with a strike price of ₹1,100, you’ll profit if the stock price rises above ₹1,100 before expiration. | If a stock is trading at ₹1,000 and you buy a put option with a strike price of ₹900, you’ll profit if the stock price falls below ₹900 before expiration. |
| Risk | The buyer’s maximum loss is limited to the premium paid for the option. The seller’s risk can be unlimited if the asset’s price rises significantly. | The buyer’s maximum loss is limited to the premium paid for the option. The seller’s risk can be substantial if the asset’s price falls significantly. |
| Time Value | Call options tend to lose value over time if the asset’s price doesn’t rise. | Put options tend to lose value over time if the asset’s price doesn’t fall. |
Summary:
- Call Options are used when an investor believes the price of an asset will go up. The buyer can potentially purchase the asset at a lower price (the strike price) and sell it at the current higher market price for a profit.
- Put Options are used when an investor believes the price of an asset will go down. The buyer can potentially sell the asset at a higher price (the strike price) than the current lower market price, making a profit.
In both cases, the buyer’s risk is limited to the premium paid for the option, but the potential profits and losses for the sellers can vary greatly depending on market movements.
Also here is the link of Wikipedia of What is Demat Account?
Conclusion: What is Option Trading
In this blog post, we have provided information about “What is Option Trading in the Share Market?”, “Option trading kya hai? ; Call Options CE, Put Options PE“.
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