Option trading is a great way to make money in the stock market. Money can be earned by buying and selling call and put options. Today, to know how to do option trading, how to do option trading with less money and how much money is required for option trading, read this post till the end.
The best thing about option trading is that you do not have to pay the full amount to buy or sell shares, rather you can buy and sell shares for the future by paying a small premium amount. This way, you don’t lose all your money; you only lose the premium you paid. Let’s learn how to do options trading.
Options trading offers a variety of benefits compared with trading stocks, such as access to leverage, higher potential returns.
What is Option Trading?
An option is a contract which gives the holder the right to buy or sell an asset at a set price within a specific timeframe. In options trading, call and put options are bought and sold i.e. traded.
Most people trade options in indices like Nifty and Bank Nifty because it involves lower premiums, but you can also trade stock options if you want.
If you think that the price of a share is going to increase or decrease in the future, then you can buy and sell that share first by paying only a small amount (Premium). In this way, whenever the share price increases or decreases, profit is earned.
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Main Types of Options Trading
Call Option: In this, the buyer gets the right to buy the underlying asset at a specified price.
Put Option: In this, the buyer gets the right to sell the underlying asset at a specified price.
How to do options trading?
Options trading requires trading options in Nifty and Bank Nifty indices instead of stocks. This provides excellent liquidity.
To engage in options trading, you need to have a few essential things. First, you need to open a demat or trading account with a stock market broker. After that, the Futures and Options (F&O) segment needs to be activated. You can then trade (buy and sell) call (CE) and put (PE) options.
Open a Demat Account for Options Trading
To trade options, you first need to open a demat account with a broker. There are many trusted brokers available in the market, including Upstox, Zerodha, Angel Broking, and 5paisa. You can easily open a demat account with them.
Once your demat account is opened, you will have to transfer money from your bank account into it so that you can buy and sell call and put options and earn profit.
Activate the Futures and Options (F&O) segment
Once your demat account is opened, the Futures and Options (F&O) segment needs to be activated to begin options trading. After clicking this button, your derivatives (F&O) section will be activated within 24 to 48 hours. You get the option to trade options only after activating the Futures and Options segment.
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Select stock or index options
Now you need to select the stock for which you want to buy or sell a call or put option. In addition to stocks, options trading can also be done on Nifty or Bank Nifty.
To do options trading in Nifty and Bank Nifty, you have to buy or sell options in lot size. This means that you cannot buy or sell any number of shares as per your wish, rather you have to buy shares based on the lot size which can be 25 or 50 shares.
Now choose the Call (CE) or Put (PE) option
Once you decide which type of stocks or Nifty and Bank Nifty you want to trade, then you have to choose between call or put option.
If you think the market will go up, you buy a call option, and if you think the market will go down, you buy a put option.
If you trade options on Bank Nifty and believe it will rise, you can buy a call option (CE) on Bank Nifty. If Bank Nifty rises that day, the price of the call option you purchased will increase, resulting in a profit.
Select the strike price
Now you need to select the option’s strike price. The strike price is the price at which you buy or sell a call or put option. You should choose a strike price that you believe Nifty or Bank Nifty will easily reach.
If Nifty is trading at 24000 points and you feel that it will reach 24500 in 2 to 3 days, then in such a situation you can buy OTM i.e. Out The Money call option of 24500.
If according to your prediction Nifty reaches 24500 points before the expiry of the call option, then the price of the call option purchased by you will increase, in this way you will make profit.
But if the Nifty goes down, you’ll incur a loss because the premium on the option you purchased will be reduced. Therefore, it’s important to do thorough research before trading options.
Now enter the quantity of the option and trade
After selecting a call or put option, the strike price needs to be decided, after which you just need to enter the quantity i.e. the number of options you want to buy or sell.
If you want to buy 1 lot, you need to enter 1, and if you want to buy 10 lots, you need to enter 10. Then, click the Buy button directly. This way, you can easily trade options on any stock or index.
How to do options trading in Upstox?
- To trade options on Upstox, you first need to open a demat account.
- Then activate the derivatives segment.
- Now you need to select either a stock or an index.
- Then you need to choose the call or put option you want to buy or sell, i.e., trade.
- Now all you have to do is select the strike price.
- Enter the quantity of the stock and click the buy button. This way you can easily trade options on Zerodha.
In options trading, every option expires on Thursday. While Nifty and Bank Nifty have weekly expiries, all stocks have monthly expiries, which fall on Thursdays in the last week of each month.
Conclusion
It’s very easy to get started in options trading. It’s important to do thorough research. I hope you found this article, “How to Trade Options?” helpful. If you want to make a profit, you must focus on learning. The better you learn about buying and selling options, the more profit you will earn.
FAQs
When is the expiry date in options trading?
There are two types of expiry: Weekly expiry and Monthly expiry.
Is option trading high risk?
Options trading can be riskier due to various factors like market conditions, volatility, ongoing trend lines, etc.
