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What is options trading

Option trading explained in simple terms with examples

Most people will tell you that option trading is risky, and people can go broke really quick in options trading. However, that is not completely true. Option trading is fairly easy, and can be very profitable if done correctly. I'll explain it to you with an example. First, get a trading account with a broker like ICICI Direct, or Upstox. Load some funds in it, and you are ready. You have 2 types options, CALL (CE), and PUT (PE) You BUY CALLS when you think stock will move up. You BUY PUTS when you think stock will fall. This is a rule, you will just have to by heart it. If you are "selling" options, then rule is the opposite. You SELL CALLS when you think stock will fall. You SELL PUTS when you think stock will move up. For a moment, forget the SELL part, will come to this later. As a BUYER, suppose you want to trade in NIFTY. Its currently at 11900. Now suppose you think it will move up. First things first, calculate till what level it can move up. Suppose we think it can cross 12000 level. So for us, a "strike" price of 12000 will work, when buying a CE. Strike price is a level which you need to select at the time of starting the trade. Its very important to select proper strike price, or else even a profit making option will start giving a loss. Read this article for a brief idea: https://munafasutra.com/post/basicsOfOptionsCallAndPut Now, we have a strike price of 12000, current price of Nifty is at 11900, and we think its going to move up. So we start the trade, we buy a CE of strike 12000, suppose at a cost of 50 rupees. LOT size of Nifty is 75, you'll be spending 75 x 50 = 3500 rupees to take this trade. You see how low your investment is? Now suppose, in a couple of days, Nifty actually moves to 13000, that is 100 points above your strike price. So you are immediately making a profit of little more than 100 points on your trade. Your 50 rupee CE is now 150 rupees. Your profit: 75 x 150 = 10,500 rupees. You just tripled your investment in one trade! Suppose, things did not worked out your way, and Nifty started falling immediately after you took the trade. In that case, your loss is how much? Take a guess... The max amount you invested, 3500 rupees, that is all. Nothing more! And you can reduce this loss by "squaring off" your trade before expiry date. At expiry, your total investment will be lost in a bad trade. If you square off sooner, some amount will be saved... Same is the case with PE, PUTS. Suppose you thought Nifty will fall from current levels, and might go below 11800. In that case, you buy a PE of strike 11800, and rest is the same. Once again, I suggest you read this article, to know how to properly select strike prices: https://munafasutra.com/post/basicsOfOptionsCallAndPut The book on that website is also good, has some option strategies, explains options in detail, including selling options. Trade rules are similar in option SELLING as well, but in theory, your loss can be unlimited. However, in practicality, you will be asked to put a stoploss point, and if the trade goes bad, then your broker will automatically square off your trade for you, preventing unlimited loss. You should also read something about "Time Decay" while doing option trading. If you choose a strike price too far away, then time decay will eat up all your profits...