Stock Market Basics to Advance : Lecture 13 ( Option Trading)
Option Trading:
Nifty 50 – NSE derived (Top 50 Stocks)
Sensex – BSE Derived (Top 30 Stock)
Nifty 50 – Future & Option Derived (Expiry on Thursday)
Bank Nifty – Future & Option Derived (Expiry on
Wednesday)
Fin Nifty – Future & Option Derived (Expiry on Tuesday)
Sensex – Future & Option Derived (Expiry on Friday)
Mid Cap – Future & Option Derived (Expiry on Monday)
Free Float Market Cap.
= Share Price * No. of Shares
(Share excluding Promoter Holding)
= Share Price * No. of Shares readily available in market
1. Equity Trading:
- Equity trading involves the buying and selling of stocks of individual companies such as Reliance, Tata Motors, etc.
- This form of trading comes with limited risks and profits.
- It is generally less volatile compared to futures and options, making it a suitable starting point for beginners to grasp various trading concepts.
- Equity trading purely follows price action.
2. Future Trading:
- Future trading takes place in stocks with futures and options contracts.
- It operates with fixed lot sizes and fixed expiry dates, typically the last Thursday of the month.
Future trading offers several advantages:
- Leverage: Traders can take larger positions with a smaller amount of capital. For instance, if one needs 7.5 lakhs to buy a stock in equity for delivery, they might only need 2.5 lakhs for the same number of stocks in futures trading, depending on the lot size available.
- Margin and leverage: Future trading provides good margin and leverage positions.
- Delivery positions: Traders can take both buy and sell positions for delivery in futures trading.
3. Option Trading:
- Option trading is a form of derivative trading where traders buy or sell options contracts, giving them the right (but not obligation) to buy or sell an underlying asset at a predetermined price (strike price) on or before a specified date (expiration date).
- Key features of option trading include limited risk, unlimited profit potential, leverage, flexibility, time decay, and volatility.
- Various option trading strategies exist, including buying calls or puts, selling covered calls, selling cash-secured puts, and employing option spreads. However, option trading involves significant risks and requires a thorough understanding of options mechanics and market dynamics.
- It's advisable for traders to start with paper trading or small positions to gain experience and minimize potential losses
Types of options:
Call Option: Gives the holder the right to buy the
underlying asset at the strike price before the expiration date.
Put Option: Gives the holder the right to sell the underlying asset at the strike price before the expiration date.
Now, Let's discuss, some important concepts
What is Spot Price?
-Current Price of stock is called as stock price.
What is strike price?
-If we consider Nifty, for every 50 points have strike price
( refer NSE Option Chain)
Eg. If spot price of
Nifty is 21500
For option buying there are different strike price which we
have to select while trading like In the Money (ITM), Out of Money (OTM) and At
the money (ATM).
- A call option is said to be in ITM if the strike price is less than the current spot price of security.
- A call option is said to be in OTM if the strike price is more than the current spot price of the security.
- A call option is said to be in ATM if the strike price is equal to the current spot price of the security.
Let us see an example,
Suppose current TCS Stock price is 3975
a) In option buying, If you think market goes up as per your analysis then Call buying can be done.
Case 2. If strike price you bought is 4250 then the contract is OTM (Out of Money) where theta decay is maximum.
Case 3. And if strike price of contract you bought is 4000 then it is called as At the money (ATM) where theta decay is medium.
Case 2. If strike price you bought is 4250 then the contract is ITM (In the Money) where theta decay is minimum.
Case 3. And if strike price of contract you bought is 4000 then it is called as At the money (ATM) where theta decay is medium.
- Never buy OTM Strike price just because their premium price is low because delta for this strike price is less i.e. if market moves in our favor then rise in strike price is not much fast and if suppose market gives small move against our analysis then there is fast premium decay is there.
- Always buy ITM (In the money) or ATM (At the money) strike price which gives sufficient movement in strike price.
# There
are two types of option trading
1. Option
Buying ( Requires minimum 5k to 10k Capital)
2. Option
Selling (
Requires minimum 1 Lakh to start)
1.Option Buying
- Option buying is mainly done by retailers because they have less money.
- In option buying, profit is unlimited (depending movement in market) and losses are defined and limited (maximum loss is your buying price of lot size).
- In option buying winning probability is 33.33% where as in option selling, winning probability is 66.66%
- Eg. In Option Buying, if we initiate the trade then there are 3 possibilities i.e. either our target will hit, either our stop loss will hit or neither target nor loss will hit (Sideways Market) then also we have to face losses. So winning probability is only when our target hits, otherwise in other two cases we have to face losses.
- Where as in, option selling if market goes in traders direction then he will make profit, if market is sideways then also he will make profit, he will make losses only when market moves in opposite direction so that winning probability is maximum in option selling.
- There is concept of premium decay in option buying, as time passes there is decay in premium even after market is on same position.
- If our analysis says, market will rise then we buy Call and if; analysis says fall in market then we buy Put.
- If we buy options means we buy either call or put
Buy Call ( CE) – when market goes up
Buy Put ( PE) – when market goes down
|
|
If Market moves in favor |
If market moves in opposite direction |
If market is sideways |
|
Option Buyer CE Buy or PE Buy (33%) |
Profit Undefined Unlimited |
Loss Defined Limited |
Loss Defined Limited |
|
Option Selling CE Sell or PE Sell (66%) |
Profit Defined Limited |
Loss Undefined Unlimited |
Profit Defined Limited |
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