Share Market

Options are a form of derivative instrument (an instrument whose value is derived from the value of the underlying asset) in the financial world in which the holder of the option has the right but not the obligation to execute the contract.

To put forth the concept lets take the example of a person X having an understanding with Y to purchase (in case of call option)/sell (in case of put option) 100 shares of ABC Company at Rs 50 (the strike price) by the end of the month.

In case of a call option, if by the end of the month, shares of the company trades above Rs 50, say Rs 60 – then X will exercise the option and buy it from Y; else X would prefer to buy it from the market.

On the other hand in case of a put option, if by the end of the month, shares of the company trade below Rs 50, X will exercise the put option, else the option will go worthless.

While options provide an easy source of income, they are speculative and risky in nature.

Following are the few tips which one can keep in mind when trading in options:

Time frame and patience: Traders need to keep track of the date of termination of the options. This requires a lot of patience as the options expiration can take a lot of time, but not as much as the regular share or a bond.

Limit your losses, avoid greed: A speculative income always consists of a single adjective factor called greed. One mistake which each speculator/trader makes during options is to fall in the trap of greed.

Keep it simple, Silly! There are a number of complex option strategies that are way beyond a simple person`s mind. Some of these include back spread, gamma neutral and butterflies. Hence, it is always easy to know one`s way around the option strategies before indulging in the complex trading sessions.

Have a proper money allocation: Options trading being risky is not a cake walk for everyone. Therefore, one should always keep a budget allocation strategy in mind while trading in options.

Given the guidelines, the basic rule in underlying these options is to know the basics and fundamentals. Always stick to the guidelines and the strategy followed to keep a steady income flowing. Have a happy option trading time ahead!