ABOUT OPTIONS

The simplest options trading strategy involves buying and selling options contracts in the F&O market. It involves two parties, namely the option writer and the buyer. Technically the writer assumes more risk. Hence he receives a premium, which the buyer is required to pay. It ensures that if the market is unfavourable and the options contract expires worthless, the losses for the writer doesn’t exceed the premium received.

Options are divided into ‘call’ and ‘put’. And, now that you know what options are and how they differ from futures, let’s get to know the basics of call and put options and try to understand their process flow. Basically, you know that there are call options and put options. You can buy one of each and attempt to minimize your losses if you’re unsure of where the market is heading in the near future. Or, if you have a fairly certain assumption about future market trends, you can buy a call option or a put option, depending on the market movement.

Understanding the basics of call and put options and learning how work can be useful for traders who’re new to the derivative market, so they can formulate appropriate options trading strategies. Let’s get into the details.

Call and Put Options

Call and put options are both derivative securities. This means that they derive their value from an underlying asset such as stocks or commodities. Options are basically contracts that two entities enter into, where the buyer of the contract receives a right to either buy or sell the underlying asset and the seller of the contract is obligated to do what the buyer chooses.

Call options give the buyer the right to purchase the underlying asset at a specific price on a predetermined day. The seller, meanwhile, is obligated to sell the asset at the predetermined price on the predetermined day if the buyer chooses to exercise his right.

Similarly, put options give the buyer the right to sell the underlying asset at a specific price on a predetermined day. Here, the seller is duty bound to buy the asset at the agreed price on the agreed day if the buyer of the put option chooses to exercise his right.

What is options trading?

Options trading is the practice of buying and selling options on the respective exchange. When you buy an option, you purchase the right to buy or sell the underlying asset, depending on the type of options that you’ve traded. For example, if you buy a call option, it essentially means that you are purchasing the right to buy the underlying asset. Similarly, if you buy a put option, you are essentially purchasing the right to sell the underlying asset.

So, options trading involves trading the rights to buy or sell the underlying asset. Since options are also financial instruments, they can be traded between buyers and sellers much like how other securities are. If you are a beginner to options trading, you will find that there are several options trading strategies that can help you make informed trades in the derivatives market.