All You Need To Know About Options Trading

Whenever we talk about trading, all we get to hear is “Don’t waste your time on trading, you will only lose money”. I won’t say people are wrong, but it is risky only if we don’t have proper knowledge or practice. 

If I say, you can control the price of the stock without actually buying it!! I know it sounds impossible but that’s where Options Trading comes into the picture. 

Imagine, you want to buy a ticket for a music concert but you’re not sure yet if you’ll be able to go or not, but you don’t want to lose the ticket. So you book the ticket at the current price supposedly A now. Even if the prices go up you will still get the ticket at Rs A and if the prices go down you can just cancel the booking under a certain expiration date.

In this blog, we will discuss all about Options Trading and trust me if you’re a trader you will love it.

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What is Options Trading

Options Trading is a way to bet on stock prices without actually buying the stock itself. 

Options are contracts that give the buyer the right, but not the obligation, to buy or sell an underlying asset at a predetermined price and date. The buyer pays a premium to the seller for this right. 

There are two types of options –

  • Call options give the buyer the right to buy an underlying asset at a predetermined price and date.
  • Put options give the buyer the right to sell an underlying asset at a predetermined price and date.

To speak English we need to learn the basics of it, similarly, for options trading we need to understand some basic terminologies related to it. 

Options Basics

Strike price: The predetermined price at which the underlying asset can be bought or sold.

Expiration date: The date on which the option contract expires.

Premium: The price paid by the buyer to the seller for the option contract.

Intrinsic value: The difference between the strike price and the current market price of the underlying asset.

Time value: The premium paid for the option contract, excluding the intrinsic value.

Why People Do Options Trading

I know it’s risky but trust me, it has its benefits and you will be surprised to know why people do Options Trading.

More control with less money- you might be thinking how is it even possible, but believe me it is with options. It offers greater power compared to buying stocks outright. This means you can potentially control a larger position in the underlying asset with a smaller initial investment.

Hedging- Options can be used to hedge existing stock holdings, providing a layer of protection against potential price movements.

Extra Income- Options can be used to earn extra income through strategies like selling covered calls.

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Risks Associated with Options Trading

We have learned about why people use it but it is more important to understand the risks behind using it to completely understand it.

Requires High-Level Understanding- Options trading can be complex and involve a significant amount of risk. It’s crucial to understand the mechanics and risks before diving in.

Time constraint- As the expiration date approaches, the value of an option contract typically decreases, even if the underlying asset price remains unchanged.

Unlimited Risk of Potential Loss- Unlike stocks where your maximum loss is your investment amount, options contracts can lead to unlimited potential losses if not managed carefully.

Are you made for Options Trading??

Now that we have learnt about the merits and demerits of options trading are. It’s time to understand if you’re made for options trading.

Only opt for Options Trading if you have-

High-Risk tolerance- Options Trading can be risky. If you’re not comfortable or ready to face potential losses exceeding your initial investment, options might not be the best fit for you.

Prior Investment experience- Options are definitely difficult to understand. It’s recommended to have a solid understanding of the stock market and basic investment principles before venturing into options.

Investment goals- Consider your investment goals. Ask yourself a question- “Do options align with my overall investment strategy?”. If the answer is yes, then go for it as you know yourself better!!

Now that you have made the decision!! Whether the answer is yes or no, you can still master trading with us. Join Profit Uni Trading Workshop to become a trading pro!!

Conclusion

We have learnt everything about Options Trading- its merit, demerits and whether it’s made for you or not. In the end, it’s in our hands to understand the correct way to use it.

As it is said, “Options Trading is like playing chess with money. It requires strategy, foresight, and a deep understanding of the market. If you don’t know what you’re doing, you can lose everything.”

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