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HomeStock MarketWhat is Option Trading? Benefits & Types

What is Option Trading? Benefits & Types

Option Trading – There are multiple ways to make money from the stock market. You can make money via capital gain from the investment, intraday trading, option trading, future option, and dividend.

Most people are aware of stock market investment and intraday trading. But, option trading & future option might be a new jargon for them.

To help them, here is a guide covering – What is option trading? How to do option trading? including benefits and types.

what is option trading

What is Option Trading?

Option Trading is one type of contract that gives you the right, but not the obligation to buy or sell a security at a specific price on a specific date. 

In simple words, it is an option of trading in the underlying asset. To trade or not to trade is your discretion. You have rights to trade but not an obligation to trade.

This means options trading gives flexibility to traders to buy or not to buy the security at the specified price or date.

Also read –10 Best Mobile Trading App in India

Option Trading Types

There are two types of option trading contracts available. These contracts are based on behavioral mindset or market trends. 

Call Option  

A call option gives you the rights but not the obligation to buy an underlying asset at a specific price within a given time period. To buy an option here, you have to pay a premium amount.

The last date to exercise the call option is called the expiry date.

Use the call option, if you are thinking that the price of stock or index (underlying asset) is likely to go up. By this, you can make a profit with less capital.

Put Option  

A put option is the opposite of a call option. Here rights to sell an underlying asset within a specific price within a given period.

Use the put option, if you are thinking that the price of stock or index (underlying asset) is likely to go down.

How to do option trading?

To do option trading, you need to have an online trading account that allows this type of trading.

So first you need to open a trading account. Once your trading account is opened you can trade using the trading app provided by the stockbroker.

Once you have a trading account, you can use options trading. 

To trade, you need to select the stock in which you want to trade. After the selection of stock, you need to opt for a contract where you need to specify lot size, expiry date, strike price, and premium.

Now you need to select the put or call option. 

Call Option Example 

Suppose you select the call option for XYZ company with a lot size of 100 shares at Rs.100. Before the option expiry date, the stock price rise to Rs.125 per share. If you exercise a call option, you have the right to purchase 100 shares at Rs.125 per share by paying a premium price. 

Put Option Example 

Suppose you select the put option for XYZ company with a lot size of 100 shares at Rs.100. Before the option expiry date, the stock price fall to Rs.75 per share. If you exercise the put option, you have the right to sell the entire lot at a higher price of Rs.100 share.

Benefits

  • Less risk as it offers the option to buy or sell call up to contract expiry date.
  • Increase cost-efficiency. It gives the power to leverage. A trader can get an option position equal to a stock position at a lower margin.
  • Return potential is high. It is calculated risk based on market condition this means profitability can be comparatively higher.
  • Several strategies can be used by traders, with the combination of put and call options.
  • It gives more time to traders compared to intraday trading.

Final Words

Option Trading is a very good instrument for doing stock market trading. However, you need to use it wisely else you may end up losing money.

Shitanshu Kapadia
Shitanshu Kapadiahttps://moneyexcel.com/
Hi, I am Shitanshu Kapadia founder of moneyexcel.com. I have written 1750+ articles on this blog. I am PGDBA(marketing), engaged in blogging for 5 years. Moneyexcel blog is ranked as one of the Top 10 Personal Finance Blog in India. The purpose of this blog is to spread financial awareness and help people in managing money. Please note that the views expressed on this Blog are clarifications meant for reference and guidance of the readers to explore further on the topics. These should not be construed as investment advice or legal opinion.
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