• Fri. Jun 14th, 2024

How does Option trading help trade better in a share market?

Byadmin

Dec 25, 2023
trading

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Options trading allows an individual to buy or sell stocks, ETFs, and more. This trading is achieved at a specific price within a specific date. This type of trading also provides the buyers with the flexibility to not buy the security at the specified price or date. While it is more complex than stock trading, options can help anyone make comparatively larger profits if the price of the security goes up consistently. That’s because the person doesn’t have to pay the total cost of the security in an options contract. In the same way, options trading can restrict their losses if the cost of the security goes down, known as hedging.

Options can also be used as:

Leverage

Options trading can help anyone profit from changes in share prices without putting down the full price of the share. One can get control over the shares without buying them outright.

Hedging 

Hedging is used to protect the stalk marketers from fluctuations in the price of a share and let them buy or sell the shares at a pre-determined price for a specified period.

Though they have their fair share of advantages, options trading is more complex than trading in regular shares.

RELATED TERMS (options)

When someone is trading in the derivatives segment, they will come across many terms that may seem alien. Here are some Options-related terminologies one should know.

Premium

The buyer made the upfront payment to the seller to enjoy the privileges of an option contract.

Strike Price / Exercise Price

The asset is bought or sold at the pre-decided price of the asset.

Strike Price Intervals

Varieties of strike prices at which an options contract is traded in the stock market.

There are at least 11 strike prices declared for every type of option in a given month:

  1. Five prices are above the spot price
  2. Five prices are below the spot price
  3. One price is equivalent to the spot price.

EXPIRATION DATE OF AN OPTION:

  • A future date is a date on or before which the options contract can be executed. Options contracts have three different durations one can pick from:
    1. Near month (1 month)
    1. Middle Month (2 months)
    1. Far Month (3 months)

AMERICAN AND EUROPEAN OPTIONS:

The terms ‘American’ and ‘European’ refer to the different types of an underlying assets in an options contract of the stock market.

  • American options are options that are executed at any time on or before their expiration date.
  • ‘European options’ are Options that are executed on reaching the expiration date.

LOT SIZE AND OPEN INTEREST:

  • The lot size refers to a fixed number of units of the underlying asset that forms a part of a single Futures and Options contract. The standard lot size is different for each stock and is mainly decided by the exchange on which the stock is traded.
  • Open Interest refers to the total number of outstanding positions on a particular options contract across all participants in the market at any given point in time.

Conclusion

Futures and options trading is not utilized that often as an effective method of hedging by market professionals. 5paisa has the main duty to help its customers decide the derivative price beforehand. They also help in executing a contract that helps them seal the sale price if the stock price does not rise.

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