WHAT ARE CALL AND PUT OPTIONS
CALL and PUT options are two types of financial
instruments used in the stock market, commodities market, and other financial
markets. These options are basically the contracts that give the holder the
right, but not the obligation, to buy (in the case of a Call option) or
sell (in the case of a Put option) an underlying asset at a
predetermined price within a specified time period to trade in stock market.
CALL OPTIONS
A call option is basically, a financial contract that gives
the holder the right to buy an underlying asset at a predetermined price within
a specific time frame. Call options are typically used by traders who expect
that the price of the underlying asset will rise in the future. A investor can
profit from the price increase without having to actually purchase the
underlying asset. If the price of the underlying asset does increase, the
investor can exercise the call option and buy the asset at the predetermined
price, which is lower than the market price, and then sell it at the higher
market price to make a profit.
PUT OPTIONS
Similarly, a put option is a financial contract that gives
the holder the right to sell an underlying asset at a predetermined price
within a specific time frame. Put options are typically used by investors who
believe that the price of the underlying asset will decrease in the future. By
purchasing a put option, an investor can profit from the price decrease without
actually owning the underlying asset and can generate the profits.
STRIKE PRICE AND EXPIRATION DATE
The strike price is the predetermined price at which the
underlying asset can be bought or sold by the holder of the option. The
expiration date is the date on which the option contract expires. Once the
expiration date has passed, the option is no longer valid, and the holder
cannot exercise the option.
STRIKE PRICE PREMIUM
The premium is the price paid by the holder of the option to
the writer of the option (the seller) for the right to buy or sell the
underlying asset at the predetermined price. The premium is determined by
several factors, including the current price of the underlying asset, the
strike price, the time until expiration, and market volatility.
HOW TO TRADE CALL AND PUT OPTIONS
Trading call and put options can be a profitable way to invest
in the stock market, but it also comes with risks. In this blog, let me inform
you about the basics steps that will help you trade call and put options:
Learn the Basics
Before trading call and put options, it is important to
understand the strike price, expiration date, and ongoing premiums. You should
also learn about the different strategies and factors that affect option
pricing, such as implied volatility and time decay. Also, make sure they have a
user-friendly platform and offer educational resources and tools to help you
make informed trading decisions. Most importantly, consider your risk tolerance
and investment goals when choosing a strategy.
Analysis of option chain
An option chain is a list of all available options for a
particular underlying asset. Analyse the option chain to find the best option
contract for your trading strategy, considering the strike price, expiration
date, and premium. Once you have decided on a trading strategy and selected an
option contract, place your trade. Make sure to set stop-loss orders to limit
your losses in case the trade goes against you, which is one of the important
step to safeguard your profits.
TRADING CALL AND PUT OPTIONS ON INTRADAY BASIS
Most of the trader prefer to trade in Intraday and which gives
the flexibility to intraday trader to adjust their positions as well. Intraday
trading of options involves buying and selling options within the same trading
day, with the goal of making a profit from the price movements of the
underlying stock.
In this article, we will explore some examples of trading
call and put options on an intraday basis.
Example 1: Trading a Call Option
Suppose the stock of ABC Ltd. is currently trading at Rs.
100, and you expect the stock to rise in the near future. You could buy a call
option with a strike price of Rs. 105 and an expiration date of the end of the
day. The premium for this option might be Rs. 2. If the stock rises to Rs. 105
or higher by the end of the day, you can exercise the option and buy the stock
at the strike price of Rs. 105, making a profit of Rs. 3 (Rs. 105 - Rs. 102,
which is the purchase price plus the premium paid). However, if the stock does
not rise to Rs. 105, the option will expire worthless, and you will lose the
premium paid.
Example 2: Trading a Put Option
Suppose the stock of XYZ Ltd. is currently trading at Rs.
150, and you expect the stock to fall in the near future. You could buy a put
option with a strike price of Rs. 145 and an expiration date of the end of the
day. The premium for this option might be Rs. 3. If the stock falls to Rs. 145
or lower by the end of the day, you can exercise the option and sell the stock
at the strike price of Rs. 145, making a profit of Rs. 2 (Rs. 150 - Rs. 147,
which is the sale price minus the premium paid). However, if the stock does not
fall to Rs. 145, the option will expire worthless, and you will lose the
premium paid.
Example 3: Trading Both Call and Put Options
Suppose the stock of LMN Ltd. is currently trading at Rs.
200, and you expect the stock to be volatile during the day. You could buy a
call option with a strike price of Rs. 205 and an expiration date of the end of
the day, and a put option with a strike price of Rs. 195 and an expiration date
of the end of the day. The premiums for the call and put options might be Rs. 2
and Rs. 3, respectively. If the stock rises to Rs. 205 or higher during the
day, you can exercise the call option and make a profit of Rs. 3 (Rs. 205 - Rs.
202, which is the purchase price plus the premium paid). If the stock falls to
Rs. 195 or lower during the day, you can exercise the put option and make a
profit of Rs. 2 (Rs. 200 - Rs. 197, which is the sale price minus the premium
paid). However, if the stock does not move much during the day, both options
may expire worthless, and you will lose the premiums paid.
ADVANTAGES OF TRADING CALL AND PUT OPTIONS FOR INTRADAY
Most likely, the intraday trading of these call and put
options can provide traders with several advantages over other types of trading
strategies. Some advantages of trading call and put options on an intraday
basis are
Limited Risk
One of the main advantages of intraday trading of options is
that it involves limited risk. Unlike other types of trading strategies, the
maximum loss that a trader can incur is the premium paid for the option. This
means that traders can limit their losses by choosing options with lower
premiums.
High Potential Returns
Intraday trading of options also provides traders with high
potential returns. Since options are highly leveraged financial instruments,
traders can make significant profits from small price movements in the
underlying stock. Another advantage of intraday trading of options is its
flexibility. Traders can choose from a wide range of strike prices and
expiration dates, allowing them to customize their trades to their specific
needs and market conditions. This flexibility also allows traders to adjust
their positions based on changes in market conditions.
Hedging and Adjustment Opportunities
Intraday trading of options can also provide traders with
hedging opportunities. Traders can use options to hedge or adjust their
existing positions in the stock market by buying put options to protect against
a decline in the price of the underlying stock or buying call options to
protect against a rise in the price of the underlying stock. Also, intraday
trading of options can also require a lower capital requirement compared to
other types of trading strategies. Since options have lower margins compared to
stocks, traders can use their capital more efficiently to generate higher
returns.
POTENTIAL RISKS OF TRADING CALL AND PUT OPTIONS FOR INTRADAY
We have discussed about the many advantages, now let us
understand, however, it is important to note that options trading also involves
significant risks, and traders should always be aware of these risks before
investing in the stock market.
High Volatility and Time Decay Factor
One of the main risks of intraday trading of options is high
volatility. Options prices can be highly volatile, and this can lead to
significant fluctuations in the value of options on an intraday basis. Traders should
be aware of the potential for sharp price movements and should use risk
management strategies, such as stop-loss orders, to limit their losses. The another
risk of intraday trading of options is time decay. Options have a limited
lifespan, and as the expiration date approaches, the value of the option
decreases. This can lead to significant losses for traders who hold onto their
options for too long. Traders should be aware of the time decay of options and
should avoid holding onto options for too long.
Lack of Liquidity
Options trading can also be affected by lack of liquidity.
If there is not enough demand for an option, it can be difficult to sell the
option at a fair price. This can lead to significant losses for traders who are
unable to sell their options at the desired price. Traders should be aware of
the liquidity of options and should avoid trading options with low trading
volumes.
Complex Strategies
Intraday trading of options can also involve complex
strategies, such as spreads and straddles. These strategies can be difficult to
understand and execute, and they can lead to significant losses if not executed
properly. Traders should be aware of the complexity of options trading and
should avoid using complex strategies unless they fully understand them.
TO SUM IT UP
Intraday trading of call and put options can provide traders
with several advantages, including limited risk, high potential returns,
flexibility, hedging opportunities, and lower capital requirements. However, it
is important to note that trading options also involves significant risks, and
traders should always do their research and consult with a financial advisor
before investing in the stock market. Overall, options trading can be a
lucrative trading strategy for traders who are willing to take on the risks
involved.
