Essentials of Options Trading for beginners

Stock options trading has grown in popularity in India, as it provides traders with more opportunities to profit than other types of securities. Traders could purchase a stock and sell options contracts on it. Such a contract provides the prospect of generating profit when the price of the underlying stock increases or decreases when the underlying stock goes down. Options are considered easy, safe, and reasonable for trading as compared to other forms of investment like bonds, stocks, or real estate.

Options trading is the manner in which investors can speculate on the subsequent direction of the overall stock market or single securities such as bonds or stocks. Option contracts provide you with the choice, but not the obligation, to purchase and sell the underlying assets on a particular date at predetermined prices. The most basic options trading strategy involves the buyer and seller entering into an options contract in the futures and options market. Two parties are involved in the option contract: the option writer and the buyer. Technically, the risk has been assumed by the writer of the option, and therefore the premium has been received by them, and the buyer is needed to make payment of this.

Also Read | What Is Delta Hedging? Reduce Risk in Options Trading

Options Trading Basics

There are two types of options, such as call options and put options, and they are both derivative securities. This suggests that value is generated by them from underlying assets like stocks or commodities. In option contracts, two parties are involved: the purchaser of the contract has the right to buy or sell the underlying assets, and the seller of the contract has the responsibility to perform what the purchaser chooses.

A call option provides the right to purchase underlying assets to the buyer of an option contract at a particular price on a specific date. Meanwhile, the seller of an option contract is responsible for selling the assets at a particular price on a predetermined date if buyers want to exercise their rights. In a similar manner, a put option provides the right to sell underlying assets to the buyer of the option contract at a particular price on a specific date. In this case, the seller is obligated to purchase the assets at a specific price on a particular day if the purchaser of the put option wants to exercise their rights.

In India, option trading is a way to purchase or sell stocks, ETFs, indices or other securities that are pre-determined through market makers, who are recognized as market makers in India. Stock option trading gives the buyer the right to sell or buy stock indices, at a pre-determined price on a predetermined date.

The best stocks for options trading

Here are some of the best stocks for options trading:

In addition to stock option trading, commodity options trading is also widespread and provides options on commodities ranging from gold to oil to industrial metals.

Indicators for options trading

There are a number of technical indicators that could be utilized by traders for options trading based on their trading style and the form of security to be traded. Some of the indicators for options trading are:

Relative Strength Index (RSI)

RSI values range from 0 to 100. In this case, values greater than 70 usually indicate an overbought condition, while values less than 30 usually indicate an oversold condition.

Bollinger Bands

Price movement outside the Bollinger bands may indicate that an asset is preparing for a reversal, and a trader may enter a position as a result.

Money value index

A money flow index reading greater than 80 indicates that a security is overbought, while a reading less than 20 indicate that the securities are being oversold.

Along with the above indicators, there are a number of other technical indicators that could be applied for the purpose of trading options, such as the cumulative tick, the average true range, and many more. It is required of the trader to choose the best indicator as per their trading style, subsequent to a careful analysis of the mathematical dependencies and computations.

Options trading platform

The role of the trading platform is significant in online options trading. Option traders use online trading software on a regular basis for trading and observing market activities. Technically, a trading platform is considered a set of trading software provided by the broker and applied for online options trading such as stock, commodity, or currency trading.

Most online stock brokers in India provided a free options trading platform. Some options trading brokers may levy a monthly fee or require some maintenance margin from customers in the trading account for using a developed trading platform or certain features of the trading platform. It is suggested that, before opening an account, an options trader checks the trading platform. It is because an options trading platform must have the essential features, techniques, and options to suit your trading requirements.

Conclusion

In the recent past, options trading has achieved significant popularity in India. Indeed, it is considered an exciting and attractive form of investment. However, identifying the best options trading stocks and commodities requires expertise, knowledge, and skill. Thus, you need to know how to engage in options trading in an effective manner to make it your profit technique.

The first and most important thing to understand about options trading is that it is a derivative trading platform for retail and institutional investors, and there is always some risk involved in the overall procedure. Connect with us if you want to maximize your return while minimizing your risk. Our expert is engaged in providing the best information regarding options trading so that you can generate excellent returns.

You can learn options trading by opening a free Demat account with Bigul.