Do you want to make money online from share trading? It is a myth that you need to have huge funds required to step into the stock market. With options trading, you can earn an awesome return on your investment with low capital and limited risk.
Although options trading is one of the riskiest things. However, a calculated risk can also reward you with high return.
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So, let’s unfold the key aspects of options trading and how you can make money online from it.
An option is basically a contract between a buyer and a seller having a validity or expiry date. The price of the option depends on an underlying asset at a specific price on or before the expiry date. It is also known as derivatives as its value is derived from its underlying asset.
Underlying asset could be an index or stock and normally trading options involve hedging your position to minimize losses. Index assets like benchmark Index Nifty, Sensex, and BankNifty and Stocks assets are like Reliance, Suzlon, and SBI.
Let’s unfold the key aspects of options trading and how you can make money online from it.
So, you can really make money from options trading. The only thing you need to care about is the trend of the underlying asset which you intend to trade. Focus on the trend and pattern and your system will become a money generator for you.
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Options are two types: Call Option and Put Option
Call Option
When you buy a call option contract that means you are anticipating the underlying index or stock likely to move higher. It shows you are bullish on that particular index and stock option. When you buy a Call option, the price you pay for it, called the option premium.
Call option price and its underlying asset price will move in the same direction but the percentage of return may vary. So, if the underlying asset has gone up by 1 percent, then call option may up by 10 percent or even more. In addition, if the underlying asset has gone down then call option price also go down.
Put Option
When you buy a put option contract it means you are anticipating the underlying index or stock likely to go down. It shows you are bearish on that particular index and stock option. Put option price and its underlying asset price will move in the opposite direction.
So if the underlying asset gone up by 1 percent, then put option may go down by say 8 percent or more. Furthermore, if the underlying asset price goes down, then put option price will increase.
Options Premiums
An option Premium is the price of the option which you pay to purchase the option. So, if a call option for X company having a lot size of say 100 and the price is 10 then the options premiums will be 1000. This means that this option costs you 1000. Remember options trading is done in lots size.
Strike Price
The Strike (or Exercise) Price is the price at which the underlying asset can be bought or sold as specified in the option contract. If the underlying asset is trading at 50, then 50 in X August 2017 50 CE call option will be the strike price.
So, if you believe the price of X will move up from 50 to 60, then buy call option of X having a strike price 60. Although all the call options with different strike price will also increase but strike price with 60 will give you more returns. You can expect more trading volume in this counter than any other.
You can choose a strike price in three different circumstances. Check out them below which will help you to decide which strike price to choose from.
In the money
Call option – underlying asset price is higher than the strike price.
Put option – underlying asset price is lower than the strike price.
Out of the money
Call option – underlying asset price is lower than the strike price.
Put option – underlying asset price is higher than the strike price.
At the money
The underlying asset price is equivalent to the strike price.
Expiration Date
The Expiration Date is the date on which the option will no longer valid and ceases to exist. The expiration date for all listed stock and index options in India is last Thursday of the month.
There are many other options trading strategies which I will cover in my next post. Options trading really help you to hedge your position to avoid loss.
Trading in options involves high risk but limited. As a newbie in options, please don’t try to write option as it will lead you to take the unlimited loss. You can trade options in both NSE and BSE.
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Published on: August 17, 2017
can options be closed before expiration date? same for the futures?
Yes, you can exit before the expiry date.
where i learn more about F&O in simpler terms aside from your articles? share any resources please. indian context.
The best way to learn car driving is to come out from your comfort zone and start driving. Books or internet can only help you to some extent. So, take the risk, make up your mind and start trading with a low amount. Technical and fundamental analysis are just part of your trading activity. You will be a winner in stock trading & investing depending on your decision. Believe me, learning a car driving is same as trading in stocks, commodities, and currency.
You never know what will happen in the future. However, knowing rules of trading certainly helps you to avoid unwanted things. I myself learn while trading and actually never found any kinds of stuff that help me to understand easy and simple way.
Having said that, you can ask me anything related to stock market trading. I will try to make things easier for you.