What Is Options Trading | How To Trade Options

What Is Options Trading -  Options For Beginner's

Options trading provides investors with the opportunity to speculate on the forthcoming trajectory of the broader stock market or specific securities, such as stocks or bonds. Within options contracts, you are granted the freedom—sans any obligation—to purchase or vend an underlying asset at a predetermined price within a designated timeframe.

What Are Options?

Options are tradeable agreements utilized by investors to speculate on whether the price of an asset will rise or fall by a specific date in the future, without the necessity of purchasing the actual asset in question.

Options represent a type of derivative arrangement that grants purchasers of these contracts (referred to as option holders) the privilege (though not the obligation) to either buy or sell a security at a selected price during a specified timeframe. The sellers charge a fee known as a premium to the option buyers in exchange for this privilege. In instances where market conditions are unfavorable for the option holders, they may opt to let the option expire without value, refraining from exercising this privilege. This approach ensures that potential losses do not exceed the premium paid. Conversely, if the market trends in a direction that enhances the value of this privilege, the option holders can choose to utilize it.

Options are commonly categorized into two types: "call" and "put" contracts. A call option provides the contract buyer with the right to purchase the underlying asset in the future at a predetermined price, known as the exercise price or strike price. Conversely, a put option bestows upon the buyer the right to sell the underlying asset in the future at the same predetermined price.

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Consider Nifty 50 options as an illustration, enabling traders to make predictions regarding the forthcoming trajectory of this fundamental stock index. This index is widely recognized as a representation of the entire Indian stock market.

Initially, options might appear somewhat perplexing, yet they are less intricate than they seem. To comprehend options, you merely need to familiarize yourself with a handful of essential terms:

Derivatives: 

Options belong to the category of derivatives, which means their valuation is derived from another underlying asset. For instance, in the case of stock options, the value of the option contract is influenced by the price of a specific stock.

Call Options and Put Options: 

A call option grants you the chance to acquire a security at a predetermined price within a specified timeframe, while a put option enables you to vend a security at a later date and at a designated price.

Strike Price and Expiration Date: 

The prearranged price mentioned earlier is termed as the strike price. Traders have until the expiration date of an option contract to exercise it at the strike price.

Premium: 

The cost of acquiring an option is referred to as the premium, and its computation is based on the price and values of the underlying security.

Intrinsic Value and Extrinsic Value: 

Intrinsic value denotes the discrepancy between an option contract's strike price and the present price of the underlying asset. Extrinsic value encompasses additional factors beyond those considered in intrinsic value that impact the premium, such as the duration for which the option remains viable.

In-the-Money and Out-of-the-Money: 

Depending on the current price of the underlying security and the time left until expiration, an option is classified as either in-the-money (yielding profit) or out-of-the-money (yielding no profit).

The Process of Pricing Options

To clarify these terms, let's take an example. Imagine a stock currently being traded at INR 100 per share. Now, let's delve into how premiums, essentially the prices, operate for various options depending on the chosen strike price.

Call Option Premium	Strike Price	Put Option Premium
Highest	INR 80	Lowest
	INR 90
↕	INR 100 —Current Price	↕
	INR 110
Lowest	INR 120	Highest