Learning 19 Apr, 2022

What is Option Trading ?

If you are a trader or have an interest in stock market trading then you must have heard about 'option trading, also it is possible that many of you generally new traders may not have any idea about it or they do not understand the option trading clearly and if this is the case, then do not worry, after reading our today's post you will know a lot of about it and also finds out it's meant for you or not.

So, let's start with the question:

What is option trading?

To understand option trading better, let us take the help of an example, Suppose your friend works in apple company and he comes to know from somewhere that there are going to be changes in the price of iPhone -Y from next month and there is a lot of chances of increasing the price by 5,000, and the current price of iPhone-Y is 40,000. As soon as you come to know about this, you immediately go to a shop and ask for an iPhone-Y but for some reason, the shopkeeper tells you that the phone is not available yet, But he can give you the phone next month at the current price if you deposit 300 rupees as security, and you get ready to do the same. and imagine that if the price increases next month then you will be in profit of Rs 5000. But unfortunately, this does not happen next month, the price of the phone decreases by Rs 5000 and the phone of 40,000 starts selling for 35000, nowhere you have two options, first either you will buy your phone for 40,000 from the shop where you deposited the security money. Or else you will buy the phone for 35,000 taking the loss of that security money.

I'm pretty sure that you will choose the second option where you were losing only 300, while in the first option you were losing 5000. And that's exactly how options trading works. Where you can get higher returns just by risking a little amount of your money,

In option trading, you have to predict that in the coming days the market will go up or down, If you think that the price of XYZ share (which is now Rs.100) may increase next week, but you are not 100% sure whether the value of the share will increase or not And for your this concern you get an option here that, if you want, you can deposit ? 20 as security money today and buy this share next week at today's price. Now, if the next week the value of your share increases to Rs 500, you will still get that share for Rs 100, that means you have earned a profit of ? 380 (500-100 + 20rs security) And if due to any reason the value of your share goes down to ? 50 then you have the option to leave that share by taking the loss of your security money.

Also in option trading, you can take advantage of both the rise and fall of the market and can take huge profit, here you just have to predict that, in the coming few days or months the market will go up, go down or will remain stable. And then, according to your prediction, you have to invest money in it, and if the market comes into your favor then you will earn a lot of money and if not then you can lose your invested money,

However, you also have the option of setting a stop loss, which can be used smartly to minimize your losses.

And after reading this, if option trading grab your attention, then let's go further and understand it more clearly,

To enhance your understanding take a look at these points:

  1. You could do option trading on any particular stock or Nifty and Bank nifty. (most of the people choose Nifty and Bank nifty)
  2. You should have a trading or demat account for option trading.
  3. You can not do option trading in every demat account, some popular applications are Zerodha, upstox, Angel broking. but you should have to enable 'future and option segment from the options.
  4. While trading on Nifty and Bank Nifty options, you have to buy shares according to the lot size.
    • Nifty lots options are available in the multiple of -75,150, 225...
    • Bank nifty lots options are available in the multiple of- 25,50,75...
  5. There are two types of people in option trading:
    • Buyers- they buy options,( most of the people are buyers because it takes lesser capital )
    • Sellers-Sellers are those who sell in option trading (it requires too much money, investment could be of a thousand crores or more that's why very less people are sellers in option trading).

**Bank nifty lots are cheaper and could be a good choice for someone having less capital.

From here we understand option trading from the Buyers perspective.

How to do option trading?

You should have a trading or Demat account for' option trading 'but remember not every demat account provider has option of 'option trading',

Top 5 Options trading brokers in India:

  1. Upstox
  2. Zerodha
  3. Angel one
  4. Groww
  5. 5paisa

Let's understand how to do option trading by taking examples- Suppose today's Bank Nifty is running at 35000 and I think Bank Nifty can increase by 50 points by next week, so I will search it on my application by writing BANK NIFTY35050CE and the value of one share of Bank Nifty 35050CE is 100rs, then I will buy a slot which will cost me 2500(100×25). And if by the day of expiry (which can be 1 month or even 1 week) the bank nifty goes 50 points or more, then I will sell that slot immediately and take a good profit. But this will happen only when BANK NIFTY reaches my buying value of that slot and as above the nifty exceeds as much profit I will earn.

In another case, if I assume that bank nifty may drop 50 points by the next week then I will search BANKNIFTY29950PE and buy a slot at the rate of 80rs/per share(slot rate changes according to your predicted value) which costs 2000(25×80), suppose if the market falls by the next expiry date then I will make profit from that down market also.

Here in option trading, you can earn from both rising and falling markets, depending upon your prediction and strategies.

Points to keep in mind:

  1. CE : It's known as 'call', if you think the market run bullish/up then you take the call option. just by simply writing it with your slot value, for example - if Banknifty is 35,000 today and I think it increases by 200points I will search for the options by writing 'BANKNIFTY35,200CE'
  2. PE: it's known as put, just opposite to CE if we think the market goes down/bearish we use PE along with our searched slot value.
  3. You can only buy Nifty and bank nifty in slots.
  4. It is very risky the value of your slots may differ according to your predicted choice.
  5. Your investment value may go very high or very low in just a few minutes.
  6. You should also have good knowledge and strategies. we recommend you to watch its live demonstration for better understanding.

Conclusion - In this post we learned that you can earn money by both up and down of the market in options trading, here you have the option to invest in any particular stock or you can invest in NIFTY or BANK NIFTY, in nifty and bank nifty you can buy slots only in the multiple of 75 and 25 respectively, Although it is very risky you can make good profit from it, the value of your investment may go very high or low just in few minutes.

So, if you don't have
good strategies and analysis of the market or stocks then you could be at loss.

We hope this post of ours will be helpful for you. It is difficult to cover everything about options trading in just one post, but I am sure that after reading this post, you must have got a good grip on the subject.