What is Option Trading? How to use it?


Option is the right given by the Option Seller to the Option buyer to Buy or Sell a specific asset at a specific Price on or before a specific date
Option Buyer has the right & Option Seller has the obligation
i.g
Option Buyer may or may not exercise the Option bought, but if the Option Buyer decided to Exercise the Option, Option Seller has no choice but to honor the obligation

What Is Option Contracts?

‘Option’ is the right given by the Option Seller to the Option buyer to Buy or Sell a specific asset at a specific Price on or before a specific date
1) Buyer / Holder of Option – party buying the option
2) Seller / Writer of Option – party selling the option

Types Of Option

1) Call Option
2) Put Option

TERMINOLOGIES (Option Market)

Call Option- Long Position (Teji – Bullish)
Put Option- Short Position (Mandi- Bearish)
Strike Price- Transaction Price which is written on the call or put option (decided by the exchange).
Expiration Date / Day- last Thursday of every Month.
Exercise Day- day/ date when an option is exercised.
Premium- price the buyer pays to buy a call / put option.
ATM- AT THE MONEY – Break Even Point
ITM- IN THE MONEY – Profit Zone
OTM- Out of the Money – Loss Zone

How Many Styles Of Option?

American & European Options

How Many Month Contracts Available?

3 contract are open a time.
1 st month contract – Current month
2 nd month contract- Next month
3 rd month contract – Far Month

What Is Option Buyer?

Option Buyer has to pay premium for the buying the option
Option Buyer has the right to exercise the option
Option Buyer has no obligation of buying & selling underlying assets
Risk profile is limited
Returns Profile is Unlimited

What Is Option Seller/Writer?

Option Seller receives the premium but has to pay the margin for selling the Option
Option Seller has to oblige the Option Buyer
Risk profile is Unlimited
Returns Profile is limited

PAYOFF PROFILE – OPTION BUYER

1) VIEW = TEJI / BULLISH
Buying Call Option. Example (Call Option Buyer).
Mr. Ganesh wants to Buy wipro june call Option of Strike Price 200.
premium – Rs. 10/- (to be paid).
Breakeven point for Option – 210 (Spot).
Risk – (Limited to the Premium Paid).
If Spot stays below 210 till expiry the option makes a loss & in which case the maximum Loss will be premium paid,
i.e. Rs. 10/-
Returns – (Unlimited)
If Spot rallies above 210 the Profit is Unlimited.
i.e. if spot goes to 250 the profit will be Rs.40/-
250-200=50-10 (premium paid) = Rs.40/-

2) VIEW = M&I / Bearish
Buying Put Options
Example (Put Option Buyer)
Mr. Ganesh wants to Buy wipro june Put Option of Strike Price 200
premium – Rs. 10/- (to be paid)
Breakeven point for Option – 190 (Spot)
Risk – (Limited to the Premium Paid)
If Spot stays above 190 till expiry the option makes a loss & in which case the maximum Loss will be premium paid
i.e. Rs. 10/-
Returns – (Unlimited)
If Spot falls below 190 the Profit is Unlimited.
i.e. if spot goes to 150 the profit will be Rs.40/-
200-150=50-10 (premium paid) = Rs.40/-

3) VIEW = M&I/Bearish
Selling Call Options
Example ( Call option Seller)
Mr. Ganesh wants to Sell wipro june call Option of Strike Price 200
premium – Rs. 10/- (to be received)
Break even point for Option – 210 (Spot)
Risk – (Unlimited)
If Spot stays/ moves above 210 till expiry the option makes a loss & in which case the maximum Loss is unlimited if the spot rallies.
Returns – (limited)
If Spot stays below 200 the Profit is limited ti the premium received.
i.e. if spot goes below 200 the profit will be Rs.10/-

4) View = TEJI / Bullish
Selling Put Option
Example ( Put Option Seller)
Mr. Ganesh wants to Sell wipro june Put Option of Strike Price 200
premium – Rs. 10/- (Premium received)
Break even point for Option – 190 (Spot)
Risk – (UnLimited)
If Spot stays / moves below 190 till expiry the option makes a loss & in which case the Loss is unlimited if the spot keeps falling below 190.
Returns – (limited)
If Spot stays above 200 the Profit is limited to the premium received.
i.e. if spot goes above 200 the profit will be Rs.10/-

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