Whenever we think about options trading, there are many options available for us. Every option has some positive and negative aspects. Many trading methods offer benefits when invested for the long-term period, while many provide investment returns over the short-term due to periodic price movements.
The methods of doing such trading include option trading. Options are like derivative products whose price of securities depends on their underlying asset. In this detailed article, we will understand with the help of examples how it works and how to use it in your trading.
Simplifying option trading
Option trading is the trading of instruments that gives the right to the person to buy or sell certain securities on a certain date at a certain price. Meanwhile, we should also note that in this trading, the buyer has only the right to exercise the options but he cannot exercise this option. Whether the trader can exercise the option or not to buy or sell the securities depends on the value of market of the security.
A fixed fee or premium is charged for placing contract in this trading and this fee is non-refundable. In this option trading, the predetermined price is known as strike price and the predetermined time is known as the expiry date.
Its types
After knowing the basic information of the above mentioned topic, let us now talk about the types of options. There are two parties involved in options trading - the buyer and the seller. In this, the buyer has full right to exercise his option or not, but if the buyer decides to buy it, then the seller is obliged to sell it. Contract of option is very difficult to write and sell, but it's profitable if the right steps are taken at the right time.
Such trading can be done in two different ways:
European: In European options trading, options can be exercised only on the options expiry date, which is a predetermined time.
American: In American options trading, options can be exercised anytime between the purchase of the option and its expiry date.
But we should note that the only European way is available for options trading in India. Such traders can only buy the option to purchase or sell his/her securities. Now it depends on him/her, as this trading can be done in two ways such as Put Option and Call Option.
Call Option
A call option is a derivative agreement between two parties, where the buyer has the right to exercise his option to purchase a asset for a fixed period and at a fixed price. Here the buyer only has the right to purchase the property and is not responsible for its use.
Put Option
Here, the buyer has the every right to sell his underlying financials at a certain price during a certain time in the future. In this way, the owner of securities can protect himself against market downturns by pre-determining the sale value of his securities.
If securities price falls below the strike price before the expiry date, the trader avoids the loss by selling these securities at their strike price instead of their current market value.
Also read: What is Capital Gain Tax?
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