Updated: Apr 8, 2021
We have welcomed you in the brand-new article in the future and options for the beginner. In the previous article, we had discussed the types of contracts. What are the different types of assignments, how the settlement happens?
We know that opening the futures & options account with a broker is just the first step towards the derivative market. Futures and options are a lot harder than equity investing and you need to understand the variation better.
You do not need a Demat account to assign in futures and options as they are only valid till their expiry date. That’s why they are more like contracts rather than assets. We had understood what is F&O trading in the share market. Before takeoff on your F&O journey further, you need to first know how to trade in futures and options.
Over the last few articles, we have focused on two basic option types. One option type is the ‘Call Option’ and the second option type is the ‘Put Option’. Moving on, we noticed four different variants deriving from these 2 options trading -
Buying a Put Option
Selling a Put Option
Buying a Call Option
Selling a Call Option
With these 4 variants, a trader can create many different combinations and proceed into some efficient strategies, generally known as the Options Strategies. Think of it this way – if you give a good artist a colour shade, he can create some enchanting paintings, similarly, a good trader can use these four option variants to produce some unbelievable trades.
Imagination and understanding are the only requirements for creating these option trades. Hence, before we dig into options more extensively, it is important to have a strong base on these four variants of options.
It would help if you recalled that when you buy an option, it is also called a ‘Long’ position. If you go further, buying a call option and buying a put option are called Long Call position and Long Put position respectively.
Besides, at any moment you sell an option, it is called a ‘Short’ position. If you dig further, selling a call option and selling a put option is also called Short Call position and Short Put position respectively.
Now here is another main thing to note, you can buy an option under two situations -
You buy to generate a new option position.
You buy with planning to close an existing short position.
The position is called the Long Option only if you are making a new buy position. If you are buying intending to close an existing short position, then it is simply called a square off position. You must have heard about this position. Normally, the square-off position is referred to by the intraday trader.
Likewise, you can sell an option under 2 situations -
You sell intending to make a new short position.
You sell aiming to close an existing long position.
The position is called the Short Option only if you are making a new sell (also known as writing an option) position. If you are selling with and planning of closing an existing long position, then it is simply called a square off position.
To be precise, with this I wish you have grown a strong foundation on how a Call and Put option behaves. To give you a caution, the focus going forward in the coming will be on the moneyness of an option, option premiums, option pricing, Implied Volatility in options trading, option Greeks, and strike selection. Once we learn these topics, we will reconsider the call and put the option all over again. When we do so, I am sure that you will see the calls and puts them in a new light, and perhaps grow a vision to trade options efficiently.
You might be intended to know that a return of 100% while trading options is not a thing of shock. But please don’t just get raptured with what we have learned so far; to enjoy such type of returns continuously, you need to develop a deep point of view into options. The type of questions and therefore, the answers to that form the essence of options trading. If you can learn these aspects of an option, let me promise you that you would set yourself on a professional path to trade options.