An option is a derivative, meaning its price is based on an underlying asset. These underlying assets can either be stocks, Indexes or ETFs. An options trade involves giving someone the “right to buy or sell” a certain stock at a certain price by a specific time. Options help the investor to purchase stock at a lower price and to gain from a stock price’s rise or fall. If you buy an option to purchase securities, then it’s called a “call” option. If the option you buy is to sell securities, then it’s a “put” option. There is also a put and call option, whereby traders purchase both calls and puts on the same stock, with agreed prices and by an agreed date. Buying an option gives you the right, but not the obligation to purchase the asset at a specific price (called the strike price).

The hardest part of options trading is understanding all the jargon. But once you understand all the technical names, you’ll soon find out that basically what you really need to know is which way you think the stock price is going to go in the near future. Once you have an idea what’s going to happen, then all you need to do is use the right option trade to profit. For instance, if you expect a stock’s price is going to increase, then you would purchase a call option on that stock.

Options are not issued by companies like stocks are. All options that exist are “written” or sold by another trader somewhere. Therefore, you are directly betting against that person if you buy an option.

For Call options, if the price of the underlying asset is below the strike price of the option then it is “out of the money,” when the price of the asset crosses above the strike price it is called, “in the money.” This too works the opposite way for Put options. The price of the option has the greatest percentage moves when it crosses from out of the money to in the money but out of the money options also have the most risk.

So if you don’t want to risk large amounts of capital, but still want to use a smaller amount of money to gain from price variations, options trading can be the answer. There are very few risks and an option buyer cannot lose more than the price of the option, the premium.

There is much more involved with trading options, but these are just some of the most basic concepts to help you get started. The bottom line, is that options trading is something that you should only try once you’ve spent some time learning about the stock market, and if you can make decisions calmly when the pressure is on. A lot of information must be learnt before an educated trading decision can be arrived at.

One must look inward to determine which type best suits you. How high is your tolerance for risk? What are your investment objectives? Each person has different goals while at different stages of their life. A suitable strategy needs to be derived fitting your circumstances.

Many advise that the best time to take additional risks is when you are young. When a long life of earnings lay ahead, losses are easier to absorb. This is not the case as one begins to approach retirement. Advice from a financial advisor is often helpful when making these decisions.

If you end up seeking to be a long term investor this entails viewing things with a patient mind set. Buy and hold investors must ignore the everyday swings of the market and allow their portfolios to flourish over the course of years, not months. There are several methods to buy stocks if you seek this style.

One prominent such method is called dollar cost averaging. To employ this strategy one invests an equal amount of money in a given stock on a monthly basis. This investment is made no matter what the stock is doing at that time. It can be going up or down. This removes emotion and serves to reinforce discipline. It also translates to a basis equating to the stock’s average trailing trading price.

If you aren’t blessed with this level of patience then maybe trading is more for you. As opposed to investing, a trader is looking to exploit shorter term movements in a given stock. Many active traders use technical analysis to help guide their decisions. Others rely on an increasing array of automated trading programs on the market.

Some in this class hold stocks weeks to months. Others, referred to as daytraders, hold for minutes. A brokerage account with very low commissions is paramount for this class of trader. Great profits can be made, however studies have shown the majority of daytraders end up losing money in the end.

Stock market trading can be done in many different styles employing varying strategies. Some are passive investors who buy stocks for the long term. Others are hyperactive traders turning over positions several times within one day. Whichever path you choose do your research and trade intelligently.

Basically there are two groups of stocks, preferred and common stocks. Preferred stocks are comparable to bonds because their returns are fixed. Preferred shareholders get first dibs on dividends in good times and in assets if peradventure the company goes under. In other words, the risk of a preferred shareholder is limited, they are mainly interested in dividends. Very few companies issue preferred stock.

When investors talk about investing in stocks, they are referring to common stocks. The vast majority of investors are found in this class, common stockholders take on a few dimension of risk compared to preferred shareholders though common share holders command more voting power at annual general meetings.

The five kinds of stock in discussion fall under common stocks. An understanding of these stocks will greatly enhance your stock trading prospect. I don’t know your goal  when it comes to investing, one thing I know however is that you will be able to find one among the five stocks that fits your goal and temperament.

GROWTH STOCKS: Are stocks with great potentials for growth, they grow faster than the economy and sometimes than the stock market itself more often than not. The risk level is minimal; investors are attracted to it because they have good earning growth over the long run. Investors in this stock know that over the long term their portfolio is secured.

INCOME STOCKS: Investors who buy into this kind of stocks do so because it doles out a large portion of its profits. Income stocks pay as much as 60% to 80% to investors as dividends compared to other stocks. Income stocks are almost immune to changes in the market because investors are confident that they will receive dividends.

BLUE CHIP STOCKS: Derives its name from the poker game, the blue chips usually have the highest value. They are sector or industry leaders. They are big companies that have been around for a long time, they have strong fundamentals. They pay steady dividends and most times bonus scrip. Though their prices don’t grow very much, they are good options for retirement portfolios; they are best suited for the long term.

VALUE STOCKS: Are under priced stocks that has great potential for growth; look at it this way, value stocks sell below their real value which make them very attractive. If you compare the low price of value stocks to its earnings, you will understand why stock traders are attracted to it. They are good options for investors interested in growing their portfolio.

RECURRING STOCKS: These are stocks whose performances are affected by the swings of the economy. When the economy goes up or down a recurring stock responds likewise. Their performance depends on the dictates of the economy; therefore, the best time to invest in recurring stocks is when the economy is performing well.

Your investment options ultimately boils down to you knowing what your goals are in the first place, that way you can hold a combination of these stocks in your portfolio for the purpose of balance.

Under the proper conditions, options do not have to be paired with stock or another option to be an effective trading tool. To successfully trade naked options, an investor must realize that certain options will fit certain scenarios and certain options will not.

One of the major misconceptions that investors have about options stems from the fact that most do not know how to trade them properly. When they lose money trading them, they feel that there is something wrong with the option. They do not understand that options are on a higher, more sophisticated level when compared to stocks.

Stock trading has fewer variables involved and is therefore easier. No one is saying that the individual investor isnt smart enough to trade options. The problem is not intelligence; its just education and experience. Most investors have not been properly educated in the proper use of options, and even fewer have had any real experience trading them.

One of the biggest problems investors have is this: Even if you buy a call and the stock goes up, you can still lose money. Most investors tend to buy out of the money options at a cheap price. The stock trades up a little, which is the right direction, but the option still loses money and the investor wonders why.

What the investor fails to realize is that in order for the option to be profitable the options delta must out-pace its rate of decay. Implied volatility also plays a key role if the stock does trade up while implied volatility decreases, the options delta must then outperform the decrease in volatility. Remember, when volatility increases, the price of all options goes up. When volatility decreases, the price of all options goes down.

We have categorized options in several ways. One way is by the options strike price, and its distance from the stock price. We identified these options as either in-the-money, at-the-money, or out-of-the-money.

In our discussion about trading naked calls and puts, we will identify trading opportunities or situations that fit each of these types of options, for both calls and puts. But it is important to first review the definition of Delta before continuing.

Remember, delta tells you how much the option will move with a similar move in the stock and is given as a percentage. For example, a 33 delta option means that the option will move 33% of the movement of the stock and 70 delta option will move 70%. In-the-money options act like stock. The deeper in the money the calls are, the more they act like the stock. As the call moves deeper and deeper in the money, the calls delta approaches 100 which means its price movement will reflect 100% of the stocks movement.

In fact, deep-in-the-money options are sometimes even used to replace stock positions. If you look at the charts below, you can see how closely the in-the-money call mimics the upward movement of the stock (2nd quadrant).

In the money options are best used for smaller stock movements. The reason is that in-the-money options contain less extrinsic value. The extrinsic value can work against you when purchasing an option because extrinsic value is affected by time decay.

As you wait for your stock movement, the in-the-money option will decay less than either the at-the-money or out-of-the-money options because it has less extrinsic value. The amount of money you lose in time decay must then be made back by additional stock movement.

Obviously, the less you lose in decay, the less the stock has to move for you to be profitable because it has less decay loss to make up for.

This is because an in-the-money call has a high delta and a much higher percentage chance of finishing in-the-money by expiration so they follow the stock more closely.

With less extrinsic value loss to make up for, a smaller movement in the stock will produce a greater profit. For a call example, as you can see in the chart below, the in-the-money produces a profit with the least amount of stock movement. With less extrinsic value, the ITM option has a lower break-even point.

Everyday we listen  about Nifty Option price closing up or down,Call Option,Put Option, market bullish or bearish .We wonder how to trade in Nifty Option and earn profit with limited loss and unlimited profit. What are the points we have to keep in mind while trading Nifty Option, how to calculate the profit and loss.First of all we have to determine the direction of the market whether market will  be up or down.We can take the position in Nifty Option in the expected direction bullish or bearish.If we are bullish then we can buy Nifty Call Option and if bearish then we can buy Nifty Put Option.What trade we can execute and what would be our position in terms of profit and loss are explained below with examples.

If current price of Nifty is 2900 and Nifty Call Option Strike Price 3000 and Put Option Strike Price 2800 in January is 100=00 INRs and last date of expiry is on nth January. What trades we can do in Call and Put Option of Nifty and what will be our profit and loss position is as stated below.

 If bullish we can Buy Nifty Call Option

(1)Buy Nifty Call Option January Strike Price 3000@100 INRs.  Lot Size 50

Premium Paid=100*50=5000 INRs.

Maximum Loss=5000=00 INRs.

Maximum Profit=Unlimited

Break-even Price=3100

We can sell Nifty Call Option which we have bought anytime till last day of expiry i.e., nth January and can book profit or loss. If we do not sell Nifty Call Option we have bought till lasts day also then our trade will be automatically squared off at the settlement price of Nifty on last day of expiry decided by the exchange.

.Different Possibilities with our Nifty Call Option Buy position

(1) Nifty Call Option price 140 and sold before expiry then

140-100=40*50=2000.00 INRs. Profit

(2)Nifty Call Option price 60 and sold before expiry then

100-60=40*50=2000 INRs. Loss

(3)Nifty settlement price 3200 and we have not sold  Nifty Call Option till expiry then

3200-3000=200*50=10,000-5000=5000=00  INRs. Profit

(4)Nifty settlement price equals to or below 3000 and we have not sold Nifty Call Option till expiry then

5000=00  INRs Loss

This is the maximum loss we can have even if Nifty falls to any level beyond 3000.

(5)Nifty settlement price 3100 and we have not sold Nifty Call Option till expiry then

3100-3000=100*50=5000-5000=0.0 INRs. No Profit No Loss

If bearish we can Buy Nifty Put Option

(1) Buy Nifty Put Option Strike Price 2800.@100 INRs. Lot Size=50

Premium Paid=100*50=5000.00 INRs.

Maximum Loss=5000.00 INRs.

Maximum Profit=Unlimited

Break-even Price=2700

We can sell  Nifty Put Option bought anytime  till last day of expiry i.e., nth January and can book profit or loss.If we do not sell Nifty Put Option we have bought till lasts day also then  our trade will be automatically squared off at the settlement price of Nifty on last day of expiry decided by the exchange.

Different Possibilities with our Nifty Put Option Buy position

(1) Nifty Put Option  price 140 and sold before expiry then

140-100=40*50=2000.00 INRs. Profit

(2)Nifty Put Option price 60 and sold before expiry then

100-60=40*50=2000 INRs. Loss

(3)Nifty settlement price 2600 and we have not sold  Nifty Put Option till expiry then

2800-2600=200*50=10,000-5000=5000=00  INRs. Profit

(4)Nifty settlement price equals to or above 2800 and we have not sold Nifty Put Option till expiry then

5000=00  INRs Loss

This is the maximum loss we can have even  if Nifty rises to any level beyond  2800.

(5)Nifty settlement price 2700 and we have not sold  Nifty Put Option till expiry then

2800-2700=100*50=5000-5000=0.0 INRs. No Profit No Loss.

What is the advantage of buying Option compared to Future.Maximum loss is fixed and predefined.We cannot lose more then the premium paid to buy the Option under any circumstances and it is known to us before we trade.We can square up the Option  position anytime after buying just like Future.We have to pay only amount of premium and not the margin which is required for buying future.