What is an Option Trading Strategy? What all should you know before Option Trading?

Option Trading could be another great asset for many traders. Since the terms and conditions are a little different from other portfolios like ETFs or security, many traders might get confused or get intimated by it. In this article, we will cover what “options trading” is so that you can have another great asset in your trading portfolio.

In the financial and trading world, an option is a contract that allows and not necessarily require you to buy or sell an asset like ETFs, index or a security at a predetermined price over a certain period of time. Buying and selling options are done on the options market, which trades contracts based on securities. Options trading could go both ways, that means you can either but or sell it. When you are buying an option that allows you buy a share at a later determined time is called a “call option”. A call option on a stock trading gives the option buyer the right to buy a set number of shares at a predetermined price at any time before a specified expiration date and buying an option that allows you to sell shares at a later time is called a "put option.". The option seller must sell the stock to the option buyer if the buyer exercises the option. The duration for options contracts generally has a limit of no more than nine months, give or take.

Option trading could be explained more simple giving you an example, Suppose you want to buy a leather bag. They cost 10,000 INR from any outlet near you. When you went out to the market you see and ad for the same leather bag with 20% off sales promotion going on in the outlet, so you rush right down to the outlet and as you walk in the store you find that the last piece of the leather bad is being sold to another customer. Luckily, the store manager gives you a receipt and tells you that there will be more stock in coming 20 days, and if you come within that time period, you still can get the bag with 20% off regardless of there is any hike in the price, but if you exceed the time limit, you will loose the deal. This is what would be a average options trading scenario would look like… only you have to but the particular receipt for given amount. This receipt is known as “call” or “put” option that we mentioned before.

Options could be used mainly for Leverage and hedging also. Without having to invest the full share price, options trading enables you to profit from changes in share prices. Without paying cash, you gain ownership of the shares. They can also be used to shield you against changes in share prices by enabling you to buy or sell shares for a set length of time at a predetermined price. Financial planning is a crucial component of protecting yourself from market swings.

1) Call Option: Options that allows a trader to buy not necessarily oblige to buy the assets that was predetermined at a set price and set time.

2) Put Option: Just like a call option, the put option gives the trader right to sell the particular asset at the given time and previously set amount.

3) Seller of an Option: This gives the seller some certain rights to set specification of the contracts, such as time and the place of the delivery of the particular assets that is being traded.

4) Buyer of an Option: it provides the buyers full right on the term purchasing the assets. The trader has no obligation to the underlying assets within the specific time duration.

1) Option trading are mainly for long term trader, that means they can get higher leverage with market volatility if they choose the right share or stock at the right time. This particular trading has Monthly and Weekly options, where Monthly options for current month might be less volatile while Weekly options for current week are more volatile.

2) When you buy option, you aren’t obligated to follow through on the trade. If your assumptions about the time duration and direction or market trends are incorrect, your losses are limited to whatever you paid for the contract and trading fees.

3) Option contracts let traders freeze the stock price at a certain amount for a specific period of time. Depending on the type of option used, it guarantees that investors will be able to buy or sell the stock at the strike price any time before the option contract expires.

1) The nature of options is short to mid term. Options investors are looking for returns on a near-term price movement, which must take place within days, weeks or months for the trade/contract to pay off. That requires making two correct assumptions: picking the right time to buy the option contract is very crucial and at the same time deciding exactly when to exercise is very important, sell or walk away before the option expires.

2) Some options trading strategies require investors to set up a margin account — which basically is a line of credit that serves as collateral in case the trade moves against the investor. Each brokerage firm has different minimum requirements for opening a margin account and will base the amount and interest rate on how much cash and securities are in the account. Margin loan interest rates typically can range from the low single digits to the low double digits.

3) Before you can even start trading options, you must apply for approval through your broker. After your brokers approval and decides that your portfolio and financial background meets the necessary requirements, only then you will be set up with an equivalent trading level which suites your profile. That’s why many new traders are not suitable for the options trading.

Options are one of many assets that you can use to build a successful financial portfolio, but it will require some work on your part. It is quite not suitable for beginner traders as it demands a specific requirement and experience to begin with. Sometimes, Options trading strategies are often overwhelming and demand a certain level of planning to be profitable. The best advice is have on options trading for beginners is to do the work ahead of time. Good infrastructure also makes risk control easier. It may seem trivial to have the phone number of one’s clearing firm on hand, but knowing this can easily save money in the event of technical problems. If in doubt, it is better to be overcautious when it comes to such mere administration. Learn about the stock market, research brokers and insights of the particular market you want to trade in. These small and basic steps will help you greatly as you begin trading options.