Options in Stock Market can be explained as a premium of the main stock. Traders should be come to option after facing the resistance of Investment and Intraday trading experience.
Hi Traders! This is a complete guide that will help you to better understand “what is option trading in stock market“.
I am going to explain the “Option Trading” something differently from others. so, if you searching for the perfect definition of Option Trading, search on Google.
I think definition is not enough to express the practical knowledge and experience about Option Trading and also the related terms.
Option Trading With Example:
I love to trading on Nifty Options, so my example is all about the same.
Here you can imagine the NIFTY as an apartment and OPTIONS are like a little premium price of flats under the apartment.
When you book a flat and give the little premium price that means after a specific time (Option exp date) you become the owner of the specific flat for which you spent the premium.
Now in the meantime, the price of flats in that apartment may be increased or maybe drop due to some good or bad news or anything. Before the expiry date, you have to decide you will buy or not the flat which was prebooked for you with the premium price.
Case No 1: If the price of the flats in that apartment going up and up, you are in huge profit, because you have the low price contract in your hand for the flat and now you can sell the flat at a high price to anybody. Actually, you can sell the flat any time when the market price is up, no need to wait for the expiry date.
Case No 2: If the market price of the flats falls before the expiry date, it is good for you to forget the premium price which you paid.
Types Of Options ?
Before you trade on Options, know it very well like your family member or best friend. Option trading are mainly two types, Call Option and PUT Option.
What Is Call Option (CE)
When the main stock price increases, the price of Call Options are increasing with respect to the main stock price. If the main stock price going down, price Call options are also going down.
So, when your technical & fundamental analysis predicts up the Nifty price, buy a Call option and enjoy the profit.
What Is Put Option (PE)
PUT options are also similar things but in opposite logic.
When the main stock price decreases, the price of Put Options are increasing with respect to the main stock price. If the main stock price going up, the price of Put options are going down.
So, when your technical & fundamental analysis predicts down the Nifty price, buy a Put option and enjoy the profit.
What Is Strike Price ?
Strike Price is just a number to indicate the price movement. As an example, NIFTY has more than one CALL OPTIONS and more than one PUT OPTIONS. As our imagination Nifty is an apartment, then strike prices indicate like this,
- Nifty 01Nov 10500 CE – Rs 25
- Nifty 01Nov 10400 CE – Rs 50
- Nifty 01Nov 10300 – Rs 75
- Nifty 01Nov 10200 CE – Rs 100
- Nifty 01Nov 10100 CE – Rs 125
- Nifty 1 flat CE – Rs 25
- Nifty 2 flat CE – Rs 50
- Nifty 3 flat CE – Rs 75
- Nifty 4 flat CE – Rs 100
- Nifty 5 flat CE – Rs 125
I think this is the simple method to understand “what is strike price in option name”.
How To select A Option To Trade ?
Now come to the main point which gives you profit. Before starting the trading on the option you should know the steps which help you to select the best option for you.
# Step 1 : Analysis the main stock before buying an option. You have the clear future prediction about where Nifty goes in the future time.
# Step 2 :If your analysis suggests you like Nifty will go high in the future, go for selecting a CALL OPTION to buy.
If your analysis suggests you like Nifty will go down in the future, go for selecting a PUT OPTION to buy.
Tips For Option Trading
Keep in mind these valuable tips while trading on Options in the stock market.
# Tips 1 : Don’t buy a penny option ( with little price ), because penny options can’t track the main stock movement. Maximum times penny options give you losses whatever main stock price up or down.
# Tips 2 : It’s always better to buy 1 lot of higher price value rather than 3 lot of lower price value.
# Tips 3 : After bought an option, don’t analyse the candlesticks chart of the option, track directly the main stock chart.
# Tips 4 : Choose NRML at the time of buying, otherwise, if you choose MIS, you can’t hold it for the next days.
If accidentally bought in MIS you have to change it to CNC/NRML. My previous blog post “How to convert MIS to CNC” may help you to do it.