Options Trading

677 views 2 replies

CA Manish K Dhoot

CA B. Com NCFM CPCM

5015 Points Joined February 2008

Options Trading

Introduction

The trading of stock options over an exchange is known as Option Trading/Options Trading. Since options trading is happens many a times through online option trading brokers, it is also known as Online Options Trading.

At times options trading and futures trading are clubbed into one term known as Options Futures or Futures Options or even Futures Option Trading and are believed to be the same thing. However, it must be noted that Options and Futures are two different forms of financial instruments and cannot be considered as one. Futures Options are options written on futures contract and is a distinctly different trading instrument. The options which are traded in the stock exchange are the index options or equity/stock options.

Types of Options

There are basically 2 classes of options, Call Options and Put Options.

Call Options gives the buyer the right to buy an underlying asset.
Put Options give the buyer the right the sell an underlying asset.

Creative use of both these classes leads to a limitless combination of possible option strategies. Options trading strategies are able to perform wonders like profiting from both an up or down move, or profiting even during the times when the underlying stock remains stagnant.

Replies (2)

CA Manish K Dhoot

CA B. Com NCFM CPCM

5015 Points Joined February 2008

Benefits of Options Trading

Leverage

Trading options allows one to potentially make over ten times more money in the underlying stock rather than buying the stock itself. The leverage power of options trading could be the main reason why traders having small funds choose options trading. Although option trading was originally designed for hedging purpose instead of a leverage tool, option trading still remains a great way to profit by risking a very little amount of money. The leverage in options trading is unique i.e. it's not a fixed amount but a variable amount of leverage that can be used by choosing different strike prices and expiration months. This variability makes trading in options a suitable option for investors with any risk tolerance.
Protection

Trading in options also provides protection. When a stock moves adversely, an options trader potentially loses much lesser as compared to a stock trader. This is because, incase of options, the maximum loss is limited to the price that is paid for the option which could be only 10% of the price of the stock, or may be even lesser. One can also protect one's stocks from dropping in value by way of options trading by buying the same number of put options as number of shares owned. In such a case, the put options act as an insurance policy, which protect the shares from dropping in value.
Flexibility

Trading in options allows one to profit from every possible change or move in the underlying asset. Up/Down/Stagnant, there exists an option strategy will still allow you to make profit irrespective of the move. Incase of options trading, a trader can participate in a downwards move on the stock by buying a put option without even having to risk margin calls by going short the underlying stock/futures.