As a beginner in the stock market, there are many apprehensions to handle. You have to take risk with your hard-earned money. Hence, it is important to have some risk management strategies in place. If you want to gain access to the market without significant risks, options trading are the best alternative. With the help of call put option tips, you can mitigate the risk and maintain the possibility of profits without actually buying or selling the stocks. There are two main types of options trades- put options and call options. Here is a basic guide to both of these:
The Working of Call Options
The call options give the owner a right to buy specific amount of underlying assets like stocks or bonds within a stipulated time at a specified price. The price specified for the stock is called strike price and the time when the sale can be made is call auction. They are good for tax management, speculation, and income earning.
For example, a call options gives you right to buy 100 shares of a stock at INR 100 until the date of expiry in three months. When the value of the stock goes up, the price of option trade follows the suite and vice versa. The buyer can hold the stock until the date of expiry. At this point, they may take delivery of 100 shares or sell the contract before expiration at the market price prevailing at that time. This market price is also known as premium.
If the price of underlying share is higher than strike price, the profit is calculated by subtracting premium and strike price from the current stock price. It is multiplied by the number of shares held by the buyer.
The Working of Put Options
Put is the option to sell the shares without actually owning them. It gives the privilege of selling or putting to the holder. You can put your shares to a second party before a stipulated date at a pre-stated price. In simple terms, put option is exactly the opposite of a call option. It gives you an ability to protect your investment from market volatility and minimizes the risk impact. You can use put option as a hedge for your portfolio and reduce its risks.
For example, assume that you own 100 shares of XYZ Company that you bought for INR 50 per share. If the prices rise to INR 70 per share, you can maintain your position in the company and also protect your profits against sudden price drops through a put option.
Benefits of Options Trading for Your Portfolio
Options trading prepare your portfolio for bigger opportunities with minimum risk. If you follow the right call put option tips, you can make the most of these opportunities. If you are a new trader, depend on a seasoned professional to get through it. This type of trading lowers your upfront financial investment and has minimum risks for option buyers. Stay cautious and take calculative steps before you step into this market.