Option Trading Basics
Option Trading Basics
Let’s see in detail about the option trading basics every option trader should be aware of.
Why Option Trading is Famous?
Where the money goes, people’s energy flows. Since 85% of all the market action and market money is concentrated on option trading, option trading is extremely famous.
Also, the capital required for buying option is too low, but profit potential is extremely high when compared to stock/futures trading.
Example:
Let’s say a stock is trading at 1000 rupees and it has futures/option lot size as 1000. Consider 50,000 rupees is your trading capital.
Based on your analysis, you expect the stock to move to 1010 in next 2 days.
If you buy the stock with your capital of 50L, you can buy 50 stocks and if price moves 10 points, you can get 500 rupees profit.
Instead if you Buy 1010 CE options at @5 with the Capital of 5k when the stock is trading is 1000 rupees and sell it around 15 rupees once price of the stok reaches 1010 rupees, you can earn 10,000 rupees profit.
This is 20X returns when compared to regular stock trading. This is power of option trading.
Strike Price
Strike price is the various price points at which option contracts are available for each stock.
For nifty, we have strike prices for every 50 rupees. For banknifty, strike price is in multiples of 100.
Underlying Price
Underlying price is the spot price of the actual stock or index from which option price is derived.
Option Premium
Option Premium is the value at which option is currently trading. It is simply the Last Traded Price (LTP) of the option contract.
If you are an option buyer, you need to pay the option premium to buy options.
If you are an option seller, you can sell options and collect the option premium.
Option Expiration
Option Expiration denotes the date in which the option contact will go void/invalid.
In India, stock options generally expires on last Thursday of each month (has monthly expiry contracts) whereas index options expires on every Thursday (has weekly expiry contracts).
Hope this post helps you to understand the basics of Option Trading.
Please feel free to ask if you have any queries.
To learn in detail, watch our video: