Why should I do options trading?
Do options trading –
- To be a part of the market without holding/trading huge quantities of stock
- To ensure protection of portfolio by making a small payment as premium.
Benefits of trading in Futures and Options :
- Able to transfer the risk to the person who is willing to accept them
- Incentive to make profits with minimal amount of risk capital.
- Lower transaction costs
- Provides liquidity, enables price discovery in underlying market
- Derivatives market are lead economic indicators
What is Option and its types?
Options are contracts between a option writer and a buyer that gives the buyer the right to buy/sell the underlying such as assets, other derivatives etc. at a stated price on a given date. Here, the buyer pays the option premium to the option writer i.e the seller of the option. The option writer has to oblige if the buyer decides to exercise the right given through the options contract.
Two types of options are :
The Call option gives the buyer the right but not the obligation to buy a specified quantity of the underlying at a specific time on a specific date in the future.
It is the opposite of Calls. The Put option gives the buyer the right but not the obligation to buy a specified quantity of the underlying at a specific time on a specific date in the future.
What is the difference between call and put options?
– Increasing BVPS
– With its past performance
– All Industries
|Definition||Buyer has the right, but is not required, to buy an agreed quantity by a certain date for a certain price (the strike price).||Buyer has the right, but is not required, to sell an agreed quantity by a certain date for the strike price.|
|Costs||Premium paid by buyer||Premium paid by buyer|
|Obligations||Seller (writer of the call option) obligated to sell the underlying asset to the option holder if the option is exercised.||Seller (writer of a put option) obligated to buy the underlying asset from the option holder if the option is exercised.|
|Value||Increases as value of the asset increases||Decreases as value of the underlying asset increases|
|Analogies||Security deposit – allowed to take something at a certain price if the investor chooses.||Insurance – protected against a loss in value.|