Options trading can be a complex and daunting topic for beginners. However, it doesn’t have to be. In this article, we will break down the basics of options trading in a simple and easy-to-understand way.
What are the options?
Options are contracts that give the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date. The underlying asset can be a stock, a bond, a commodity, or even a currency. Similar is the story of the Best Trading Platform.
There are two types of options:
- Call options: Give the buyer the right to buy the underlying asset at a specific price on or before a certain date.
- Put options: Give the buyer the right to sell the underlying asset at a specific price on or before a certain date.
How do options work?
When you buy an option, you are essentially paying for the right to buy or sell the underlying asset at a specific price on or before a certain date. The price you pay for the option is called the premium.
If the price of the underlying asset moves in your favor, you can exercise your option and profit from the difference between the strike price and the market price. For example, if you buy a call option with a strike price of $100 and the stock price goes up to $120, you can exercise your option and buy the stock at $100, and then sell it at $120 for a profit of $20. However, if the price of the underlying asset moves against you, you will not be able to exercise your option and you will lose the premium that you paid for it.
How to make money with options?
There are many different ways to make money with options. Some of the most common strategies include:
Buying calls: This strategy is used to profit from rising stock prices. When you buy a call option, you are betting that the price of the underlying stock will go up above the strike price before the expiration date. If the stock price does go up, you can exercise your option and buy the stock at the strike price, and then sell it at the higher market price for a profit. Similar is the story of the nifty option chain.
Buying puts: This strategy is used to profit from falling stock prices. When you buy a put option, you are betting that the price of the underlying stock will go down below the strike price before the expiration date. If the stock price does go down, you can exercise your option and sell the stock at the strike price, and then buy it back at the lower market price for a profit.
Selling covered calls: This strategy is used to generate income from a stock position that you already own. When you sell a covered call, you are essentially selling the right to someone else to buy your stock at a specific price on or before a certain date.