Options trading is also known as derivative trading because options contracts derive their value from the underlying instruments. However, the buyer of the option is not required to perform the contract when it expires. You have the right to buy the asset if you want to. However, if you don't want to buy (in case the current price drops below the default), you will simply lose the premium paid beforehand.
Options trading allows you to buy or sell stocks, ETFs, etc. at a specific price within a specific date. This type of negotiation also gives buyers the flexibility not to buy the security at the specified price or date. While it's a bit more complex than stock trading, options can help you make relatively larger profits if the price of the security goes up.
This is because you don't have to pay the full price of the guarantee in an options contract. Similarly, options trading can restrict your losses if the price of the security falls, which is known as hedging. Options trading in India accounts for the vast majority of total trading volume on the BSE and NSE. The cost of investing in options trading is normally around 3 to 4% of the investment needed in stock trading.
This makes it extremely popular with traders. If you buy an option with a premium today, you can sell it any time, even the next second. The gain or loss you make is the difference between the premium. On the other hand, you can buy the option today and hold it until it expires.
If you do, the profit or loss will depend on the value of the option at maturity, that is, the settlement price. As a result, in the event of a negative movement in the price of options sold, the seller of a put option must deposit a larger margin on the exchange as collateral. Similarly, stock traders can take a short position on stocks that they think will go down, options traders can do the same with options contracts. If Company X's spot price falls below the put option Rajesh bought, say Rs.
1020; Rajesh can protect his money by choosing to sell the put option. The price of an option premium is controlled by two factors: the intrinsic value and the time value of the option. If you still have any questions, I will strongly recommend that you also watch the following video on how to trade options with Zerodha kite Demo. Similarly, option traders can make a profit by buying option contracts and selling them at a higher price.
That said, good research needs to be done before placing any trade and always use stop-loss while trading. If you trade on NSE, you have the option of VIX Futures that can help you quantify market volatility. Trading in the derivatives market, such as futures and options, can be a good source of income for a trader, in addition to this, the margin required to take a position is very low on the day. You may be able to buy a Reliance call option at a 1970 strike price and the call option was trading Rs.
Options are considered lower risk instruments than traditional futures contracts used in trading stocks, indices, and commodities. If none of the above options appear to be profitable, simply sell the “put” option you now own. You can know the minimum margin that needs to be deposited to trade an option contract by calling your broker or it can also be mentioned on their website.