Understanding Options

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What is an Option? Suppose you have bought an option of shares of ABC Company at a strike price of This option gives you a right to buy shares at INR before contract expiry. The seller is under an obligation to sell shares to you at INR whenever asked for. The option seller is thus under an obligation to execute the contract.

Terminologies used in options: It is the transaction price which is decided by the exchange. A pre-defined period when the option will expire. This predefined period is last Thursday of every month for Indian stock markets. You can settle the contract even before this period. Explained in case study Exercise day: It is the day when the option is exercised.

It is the price of the stock underlying asset in the cash market. At the money ATMIn the money ITM best stock for option trading in india Out of the money Forex signal alerts reviews are the three terms which are used to describe the relationship between the options strike price and the price of the underlying asset stock. This is a scenario when the options strike price is exactly the same as the price of the stock in the cash market.

This is the break-even point i. This is a scenario when for a call option; the strike price is below the stock price and for a put option the strike price is above the stock price in the cash market. This is a profit zone for our position if the option is exercised. This is a scenario when for a call option; the strike price is above the stock price and for a put option the strike price is below the stock price in the cash market.

This is a loss making zone for our position if the option is exercised. They provide huge returns if the best stock for option trading in india proves right.

It is recommended to always opt for a ITM option. In options trading, there are 3 contracts that are open at any point in time. Bullish Premium to be best stock for option trading in india INR 10 Strike Price: Total Investment made for one lot: Any price movement of the spot above would yield us profit. If at all till the expiry the spot stays belowthen the option would make a loss and the maximum loss would always be equal to the total premium paid i.

If the spot rallies abovesay the premium goes up to say Since an option is a right given by the seller to the buyer, the buyer has the right to best stock for option trading in india that right.

In the above case we sold the option and the profit was In the above case study 1, the CALL option seller would have received the premium of from the option buyer initially. This is the maximum money that he could make. If the spot rallies like it rallied above then the losses of the option seller are unlimited now. If the option is exercised, the losses are tremendous. Bearish Premium to be paid: Any price movement of the spot below 90 would yield us profit.

If at all till the expiry the spot stays above 90, then the option would make a loss and the maximum loss would always be equal to the total premium paid i. If the spot breaks below 90, say 70 the premium goes up to say In the above case study 3 the PUT option seller would have received the premium of from the option buyer initially.

If the spot falls below the break-even point as it did above, then the losses of the option seller are unlimited now. Important points to note: Please do not be creative! As the stock price moves in the cash market, the option price also moves. Hence stop loss for options should always be followed in the cash segment only. If stop loss is triggered in cash segment, exit your option position also.

If you see profits and can square-off your position, go ahead! But when it is falling, it falls very fast. There is going to be a bull market between today and Send your queries to: Understanding Options What is an Option? This option gives the buyer the right to BUY. You generally buy best stock for option trading in india CALL option when you have a bullish view on the stock.

This is same as going LONG in futures. This option gives the buyer the right to SELL. You generally buy a PUT option when you have a bearish view on the stock. Best stock for option trading in india options that can be exercised Explained ahead on or before the contract expiry are called American options. All stock options in India are American. All options that can be exercise only on contract expiry best stock for option trading in india called European options.

In India, options on the index i. In options trading, there are 3 contracts that are open at any point in time 1. Equities To Outperform Over Years: Weekly Market View Market View: We offer best stock market tips for beginners in hindi. You can get top share trading tips in India with us. Terms Of Service Disclaimer. Site best viewed in Google Chrome in X Resolution.

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What are the important terminologies in Options? What are Call Options? What are Put Options? How are options different from futures? What are Covered and Naked Calls? What is the Intrinsic Value of an option? Explain Time Value with reference to Options? What are the factors that affect the value of an option premium? What are different pricing models for options?

Who decides on the premium paid on options and how is it calculated? What are Option Greeks? What is an Option Calculator? Who are the likely players in the Options Market? Why should I invest in options? What do options offer me? How can I use options?

What are the risks for an Options buyer? What are the risks for an Options writer? How can an option writer take care of his risk? Who can write options in the Indian Derivatives market? What are Stock Index Options? What are the uses of Index Options? Who would use Index Options? What are Options on individual stocks? Which are the stocks on which options are available?

What is the market lot size of different stock option contracts? How will introduction of options in specific stocks benefit an investor?

Whether the holders of equity options contracts have all the rights that the owners of equity shares have? What is Over the Counter Options? Where can I trade in Options and Futures contracts? What will be the new margining system in the case of Options and futures? How will the assignment of options take place? Buys the right to buy the underlying asset at the specified price.

Buys the right to sell underlying asset at the specified price. Has the obligation to sell the underlying asset to the option holder at the specified price.

Has the obligation to buy the underlying asset from the option holder at the specified price.