What is Options Trading & How Does One Get Started?

Published by Sharekhan Education | June 9, 2023

 Behzad Elavia | Sharekhan Education

Options in the trading world, is an instruments that is being derived from the parent product “Equities”. A trader enters the world of options from a perspective to generate quick income or hedge their positions against unwanted risks prevailing at any time in the market. In this article, we shall discuss the basics of Options trading as a derivative instrument to earn quick income. Also discuss the risks involved and how should a novice trader begin a journey in the world of derivatives.

What is an Option?

An option is a derivative instrument that is derived from a parent product of Equities, which has a limited life span till the end of the expiration of the contract. In India, a script expires on the last Thursday of the month, whereas, for an Index (Nifty/Bank Nifty), it every Thursday of the week. A trader who cannot afford to buy the entire worth of an equity product or doesn’t wish to stay in the scrip for many months chooses to trade a derivative to earn quick returns through a shorter span & take advantage of the volatility from the script.

What is an Options Contract? 

Any buyer/ seller can be a part of the contractual agreement subject to the expiry of the product. Meaning, either the product expires, or can exit the positions at a calculated profit/loss. Options are generally classified into the categories of American or European style of trading. In India, we use European Options as the expiry is fixed at the end of the month/week. Generally, the derivative contracts are available for the next 3 months. The present month contracts are highly liquid than the far month contracts.

To begin with…

Firstly, a scrip should be thoroughly analyzed on the concept of Core Strategy, and then to take advantage of a leveraged asset from a positional or sideways view; the option’s strike price should be selected with respect inflated/deflated premiums. Strike prices are the intervals where Call Option (bullish view) and Put Option (bearish view) premiums are available. Premiums for Calls/Puts are further bifurcated with intrinsic (real value) and time value since the premium decays with time till the expiry of the contract. To further calculate the exact amount of pay-off receivable for our targets, we take the help of Greeks which are considered advanced options trading (XLT classes). There are various Greeks that are also used while trading options namely; Delta, Vega, Gama, Theta, Rho.

How should we trade an Option contract?

THE VIEW MATTERS THE MOST…
If the trader is bullish, he has 2 options:
1. To buy a Call Option (CE)
2. To write a Put Option (PE)
If the trader is bearish, he has 2 options:
1. To buy a Put Option (PE)
2. To write a Call Option (CE)

Is it safe or pure gamble?

Options are considered as the riskiest products in the world of trading. Since, it provides High Risk, High Reward and Lowest Margin requirements, novice traders often are tempted to choose this instrument. This reflects in erratic, uncomposed style of trading which reflects in the death of the capital. As per general statistics, most novice traders lose money in Option trading, as they fail to understand the real concept of Time value, Intrinsic value and Greeks for the options.

How should a novice start to Trade Options?

Here at Sharekhan Education, we provide a trader an extra edge to comfort his learning with the concept of core strategy (Stock trader 102) followed by a 7-day options course (options edge 101). It is expected that a student understands the basics of trading options in lieu with demand & Supply. In addition, a student must know basic Directional and Nondirectional strategies to take advantage of the day-to-day (or week) movements happening in the market.

Conclusion

Best results are often viewed when a trader calculates his pay-off while choosing the proper Strike price and premiums for that scrip. If a trader understands the concept of core strategy (filled vs unfilled orders), there are higher chances to succeed in the trade as taught by us in the Option Classes. To know more about other trading strategies, visit https://sharekhaneducation.com/

Disclaimer:

Investment in securities market are subject to market risks, read all the related documents carefully before investing. For detailed disclaimer and registered office details visit link – https://www.sharekhan.com/disclaimer/Sharekhan_Education.html