In the stock market, money can be made by buying shares. This fact is not new to you. But do you know that it is also possible to make money in this market without buying a full share? I think this may be a new concept for many of you. Everyone loves interesting ways to earn money, and this method of trading is called option trading.
Basics of Option Trading
You may have heard that a lot of money can be made in this type of trading in a very short time. Therefore, this video has been created to help you understand what option trading is, how it differs from stock trading, what its benefits and risks are, how many types it has, and much more.
Let’s begin and learn about option trading in detail. Option trading is a type of financial contract that gives you the right to buy or sell shares in the future. It is a part of the stock market and is a form of derivative trading.
Derivative Trading
To understand options, it is important to first understand derivative trading. Derivative trading occurs in both the stock market and the commodity market. Commodities include gold, oil, and agricultural products, while stocks include shares, bonds, mutual funds, and derivatives assets.
In stock trading, you buy a portion of a company, whereas in derivative trading, you bet on the price of an underlying asset without actually owning it. In this type of trading, you wager on whether the price of an asset will rise or fall.
Features of Option Trading
Now let’s focus on option trading and understand how it differs from stock trading. Buying a stock is like opening your own shop. You become the owner, and all the profits and losses are yours. In contrast, buying an option is like purchasing the right to buy goods in a store. You don’t become the owner; you simply buy the right to purchase or sell goods in the future.
In this derivative trading type, you have an option to decide your course of action. Options are mainly of two types: call options and put options.
Call Option
A call option is a contract that gives you the right to buy a share at a fixed price until a specific date. However, it is not mandatory to buy. This fixed date is known as the expiration date, and the fixed price is called the strike price.
To purchase this right, you pay a small amount called the premium. This premium depends on various factors such as the current share price, strike price, and the time until expiration.
If the share price exceeds the strike price before expiration, the call option becomes valuable. In that case, you can use this right to make a profit.
Put Option
A put option is a type of contract that gives you the right to sell a share at a fixed price until a specific date. But again, it is not mandatory to do so. You pay a small premium for this right.
If the price of the asset decreases, you can use this right to earn money. In a put option, the strike price is the price at which you can sell the share in the future.
Strategies in Option Trading
There are several strategies in option trading based on your market predictions. If you believe a share will rise, you will adopt one type of strategy. If you believe a share will fall, you will adopt another.
Using the right strategy at the right time depends on experience, knowledge, and risk tolerance.
Where is Option Trading Done?
In India, option trading can be conducted on stock exchanges like the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). Any adult Indian citizen with a valid PAN card and Aadhaar card can open a demat and trading account to start option trading.
Conclusion
Option trading carries a high level of risk. It is not advisable to invest a large amount based solely on basic knowledge. Therefore, it is better to first learn and understand option trading in detail. Consult a financial advisor before making significant investments.
Option trading is more complex than trading shares. Avoid rushing into it, and enter this trading space with proper knowledge and caution.
