BAJAJ BROKING
An Option is a type of derivative; therefore its value is dependent on the value of an underlying instrument.
This particular underlying instrument could be a stock, currency, an index, a commodity, or some other security. Options give a buyer the right but not the obligation for transacting an underlying asset at a predetermined price on a future date.
Some features of option contracts are:
Two types of options are explained below:
A put option grants the bearer the right to sell the underlying financial asset at a pre-fixed price before the contract expires. Based on your analysis, the underlying asset’s prices are speculated to decline before the contract expires, so you can consider a put option.
Suppose you bought a call option consisting of 100 shares ( trading at Rs. 67). The expiration date is November 1, 2022. To benefit from this call option, you must expect a rise in the stock price on or before expiration. Therefore, the strike price is Rs. 70. It means the stock price must increase more than Rs.70 before the option expires to book profits. The premium of the contract is Rs. 1000.
Before November 1, the stock price rose to Rs.78; therefore, the options contract increased in value. Now you can sell your options contract and take your profits. Alternatively, you can buy the stocks at a lower cost than their market price and gain significantly.
Opposite to your analysis, if the stock price is reduced to Rs.65, lower than the strike price of Rs.70, you are not bound to buy the stocks. If you do not want to exercise the right, you need not. You will just lose the premium you paid for the option contract.
The buyer pays a premium for the rights. Options premium is decided based on the intrinsic value (current price - strike price of the underlying asset) and time value also. Long-term expiry and market volatility increases the price of an option.
When used correctly, options contracts offer many advantages that trading stocks alone cannot, like leveraging - significant returns with the benefit of cost-effectiveness. However, it is very important to understand the Options market and how trading in options work before you choose to trade in them using a trading app.
Share this article:
Level up your stock market experience: Download the Bajaj Broking App for effortless investing and trading