INTRODUCTION

The options buyer gets a right to buy/sell the underlying asset at a particular time and price. In simple words, An option is a derivative, a contract that gives the buyers the right, not the obligation, to buy/sell the underlying asset by a certain date at a specific price.What does Options means in the stock market?

TYPES

  1. Call Option
  2. Put Option

Call Option: It gives the buyer the right, but not the obligation to buy the underlying asset at a strike price specified in the options contract. Investors buy calls when they believe the price of the underlying asset will increase and sell calls if they believe it will decrease

For example, a stock ABC whose CMP is Rs.200 and I feel that it will go up to 220-230 and want to buy in a month, but want to buy on Rs.205 for that, I will buy a call option at a strike price of Rs.205. But for that, I would have to pay a premium which gives me a certainty that I will get stock after a month. Normally call option is bought when you know that the price would go up in the coming times.

Put Option: It gives the buyer the right, but not the obligation to sell the underlying asset at a strike price specified in the contract. For example, I have 500 shares of stock ABC whose lot size is also 500, its CMP is Rs.200 and I feel news can make its price goes down. So to hedge my selling price, I will buy a put option at a strike price of Rs.200 with a date after one month. This means I can sell my stocks at Rs.200 for which I will have to pay a premium

Now the next question comes to mind that if the price doesn’t go down and stays at Rs.205. Now you bought the put option so that you can sell it at Rs.200 after one month. Here you will not use your put option rather sell it at the open market at Rs.205 meaning put value becomes 0. To Summarize, whenever you feel a price will go up, you buy the CALL option and if you feel the price will go down, you buy a put option.

Conditions

Let’s understand that what can be the maximum loss in case you buy/sell the call option. Whenever you buy a call option, you pay a premium for it. So your profit is unlimited and your loss is limited which is the amount of premium paid.

Let’s discuss option selling, you might have heard people say that the ones who sell options make money and the people who buy options take a higher risk. When you sell an option, your profit is premium collected from the other person. and the loss can be unlimited in that case. So the profit in the option selling is the premium and the loss is unlimited. To summarize, in options buying your losses are limited and profit is unlimited and the call is bought when you think it might go up. What does Options means in the stock market?.Here you can either buy a call and short a put option or vice-versa on conditions.

From what the value of option is derived?

The first is current price. Whatever the asset may be, it can derive its value from the current price. So any fluctuation in the underlying asset price will directly affect your options price. The second id time before expiry. More the time before expiry more will the price of both call and put option. Options are like insurance. There are weekly expiries too wherein the least premium is require, the value of option increase with time. The third is volatility, the more volatile the market , the more price of options. The fourth is dividend, if the company announces dividend, the price of put option go up, their premium goes up.So anything that impact the underlying asset will affect the option prices.

Advantages

  1. Options may provide increased cost-efficiency.
  2. It may be less risky than equities.
  3. They have the potential to deliver higher percentage returns.
  4. Options offer a number of strategic alternatives

Disadvantage

  1. Taxes. Except in very rare circumstances, all gains are tax as short-term capital gains. …
  2. Commissions. Compared to stock investing, commission rates for options, particularly for the Weekly options, are horrendously high. …
  3. Wide Fluctuations in Portfolio Value. …
  4. Uncertainty of Gains

www.stcockrize.com What does Options means in the stock market?

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