Beginners in the stock market are often wary of the risks involved when it comes to trading. The fear of loss is at times more detrimental than the loss itself. Trading in options offers them protection from this fear, in addition to generating profits if done right. Let us delve into the topic through the following two perspectives:
- What are options?
Options, by definition, are a type of derivatives contract that give an investor the right but not the obligation to buy or sell the underlying asset at a pre-decided price in the future. The underlying instrument may be a stock, a commodity, an Exchange Traded Fund (ETF), or an index.
- How to learn options trading in India?
Options trading in India offers numerous advantages, despite their image of being a risk-prone investment avenue. With options, you can limit your losses, hedge your risk, and derive profits through the flexibility of alternatives. Once you familiarise yourself with the process of options trading, it might become a useful trading strategy for you.
A step-by-step guide to options trading:
- Understand the requirements and open an account: The first step is to chalk out your investment needs and map a strategy to your goal. Once you have these in place, look for a broker to assist you in opening an account.
- Decide the type of option: There may be primarily two types of options depending on an investor’s outlook about the derivative prices in the future.
- Call options: If the investor is bullish on the markets, implying they expect the market prices (‘spot price’) to rise, they may buy a call option. These are derivative contracts that give investors the right to buy, called ‘strike price’, against a premium at a predetermined price.
- Put options: These are for investors with an opposite view — ones who are bearish on the markets and expect the spot prices to fall. Put options, hence, give investors the right to sell at a strike price over a set period.
- Predict stock price movement: Depending on the investment position, you will profit when the spot prices rise in the case of a call option and fall in the case of a put option. Hence, research-based predictions are crucial to profitability.
- Determine expiration date: The final decision is to arrive at the expiration date of the options contract. The key to trading options is to understand and predict the price movement over specific timeframes. With experience and research, you will know how long to wait before letting your contracts expire.
Final words
Suppose you want to make profits with considerably less investment involved or want to protect other investment options with the right approach or diversify your investment portfolio, options trading can be a significant part of your investment strategy. Follow this step-by-step guide and utilise all the resources available online to benefit from options trading and enter the space of options trading with the right platform.
