WHAT IS OPTION TRADING?
The clue really is in the name. Rather than buying and selling commodities, currency, shares etc on the day itself, buying an Option quite literally secures you the Option of buying or selling a commodity, currency, shares at a specific time in the future for a price which is set at the time the option is purchased. Let us consider an example; On the 4th March 2020 you may be able to purchase an OPTION that will secure you the right to purchase a share in a company for Rs.145 (the ‘strike price’) until 8th April 2020 (the expiration date). The price to purchase the share outright today on 4th March 2020 may be Rs.146, so why not buy it outright today? Careful studying of the markets may give you reason to believe that the share value will have increased substantially by 8th April. Maybe you predict that the share price will have risen to Rs.510 in that time. When the time arrives, you will still have your option that you purchased on 4th March which allows you to buy the share for the agreed price of Rs.145, thereby making a saving for you. The most useful part of buying options is the fact that they are by their very nature, optional. Going back to the same example, imagine that after 4th March, the share prices take a slide and by 8th April they are only valued at Rs. 141, you would not be forced to purchase the share at Rs.145. You can choose to, but it is optional. Realistically you would seriously consider whether or not you wanted to buy shares in this company at all. You are at liberty to decide not to make use of your option, buy the shares outright at the going rate on 8th April, or simply decline to buy at all. Options to buy currency will state how much currency you can buy with how much of another currency, options to buy commodities will state how much quantity of a commodity you can purchase at what price. They are always time-bound, meaning that they have a date that is set in the future. When that date arrives the option can be acted upon, or not. If not then it will simply expire and cannot be brought back. If you allow an option to expire you will not be refunded the amount you actually purchased the option for, so that would be a loss. The example we have described here where the buyer of the option buys the right to buy something is called a “call option”.
In just the same way that we have seen in the first example, Options to sell also exist as the exact opposite. These kind of options where the buyer of the option buys the right to sell something are called “put options”. Let’s assume you were holding a share in a company that was currently valued at Rs.111, which you believe to be overpriced (as you anticipate it to be dropping in the future). You could buy an option to sell the share at Rs.111 with an expiration date set into the future. Once the expiration date arrives, the value of the share could have gone down, say to Rs.105, but you can exercise your right to sell it at the original agreed strike price of Rs.111. If the value of the share should have unexpected risen though, you could choose not to exercise your right to sell, choose to keep your share, let the option expire, and live with the fact that you wasted money buying the option. In this way options can be seen as way of limiting loss, as you only ever really stand to lose the cost of purchasing the option itself.
HOW TO DO OPTIONS TRADING IN INDIA
Now that you have learned the meaning of options trading, you may well be wondering how to do options trading in India. It is something that is available to everybody providing you have some funds to invest. However it would not be wise to jump straight into option trading without having learned some options trading strategies. This may not be the easiest form of trading for beginners. Even experienced traders should definitely speak to an expert in the field of options trading before deciding if they wish to try it themselves. There are any number of options trading brokers in India 2020. How do they differ, and which one is right for you? You are encouraged to speak to several and use the information they provide to help you make an informed decision as to whether you wish to engage in options trading and who you would like to use as your broker. A great starting point would be chat to the friendly and helpful staff at GOOD WILL INDIA who will be only too pleased to receive your call. For all your options trading related questions, call GOOD WILL INDIA on +91 80122 78000.