Options : The trading which requires complex strategies…!!
Options are financial derivatives contracts between buyer and seller, that give an investor right, but not obligations to buy or sell any asset at a predetermined price. It can offer a great number of benefits to traders. It provides an investor to speculate on a wide variety of markets, hedges against existing positions. There are mainly two types of options:
- Call options: A call option is a derivatives contract between two parties, which gives a right to buy the underlying asset in the future at an agreed price.
- Put Options: A put option is a derivatives contract between two parties, which gives a right to sell the underlying asset in the future at a predetermined price.
- Factor determining Option Price:
An option means the premium which the buyer pays. It changes depending upon several factors. Let’s look at the top three factors determining option price:
- Level of the Underlying Market: When the underlying market is closer to the price of action, it is more likely to hit the price and carry on with movement.
- Time to Expiry: The longer option time period before it expires, the more time the underlying market has to hit the strike price. The longer time it takes to expiry will increase the option value.
- Volatility of the market: Higher the volatility of the underlying market is, the more likely it will hit strike price. In case, if the market sees a sudden uplift or down lift in the market. Option will see corresponding increase or decrease in the premiums.
Options Trading Strategies:
There are a number of option trading strategies to be implemented. But few of them are quite popular. Let’s look at some of the most popular trading strategies:
- Long Calls and Put: It is one of the simplest types of options trading. It involves buying an option which makes you the holder. An investor will make a profit if the underlying asset moves up (call) the strike price or below (put) the strike price, by more than your premium.
- Short Calls and Put: In a short call, the strategy involves the trader giving a right but not obligation to sell security. This is the simplest of these covered call positions, where a trader sells a call option on an asset that is owned by him. In case, if the price of the asset doesn’t exceed the strike price of the option which has sold, then premium can be kept as profit by the trader.
- Straddles and Strangles: A straddles is a common strategy which involves buying both put and call options on the same market, with same expiry and same strike pace. Whereas, A strangle is a similar strategy, when a trader buys a call with a certain higher price than the put.
- Spreads: In a spread option involves buying and selling of the options simultaneously. In this case, where he/she buys one call option while selling another with a higher strike price. The difference between the two strike prices is one’s maximum profit. But if anyone sells the second option, then he/she reduces initial outlay.
Advantages of option trading:
- Low Upfront Financial Commitment: Options trading requires lower upfront financial commitment than stock trading.
- Limited Loss and Unlimited Profit: When an investor buys a put or call option, he/she is not obligated to follow through the trade. In case, if your assumptions about the time frame and direction of a stock’s trajectory are incorrect, then losses will be limited to whatever one paid for the contract and trading fees.
*Disclaimer: investment in securities market are subject to market risks, read all the related documents carefully before investing