What is an option trade?

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An options trade means buying or selling a Call or Put option. You can trade in equity, commodity and currency options. You pay a premium for buying an Option while receiving a premium for selling an Option. Options can be traded in exchanges as well as in OTC markets.

Example of Option Trade:

Suppose you want to buy a Call Option of TCS currently trading at 3495. Options have 3 contract cycles: 1, 2 and 3 months. So you have to choose which contract cycle you want to buy. Contract cycles expire on the last Thursday of their month. Then there are various strike prices of the contract to choose. The strike prices are like goals which you expect an Option to reach on expiry. It can be higher or lower than the current price of the contract. The next step is to choose the lot size. A lot size is the number of shares of the underlying, in this case, TCS, you want to buy. The lot size is decided by the exchange. For TCS, it is 250.

You have to pay a premium for buying an Option. The premium is decided by the exchange and is expressed per share. The boxed column in the below image shows the premium prices for various strike prices, as on May 18, 2018, for Call options expiring on May 31st.

Options Trade

So if you want to buy a Call option with strike price of 3600 then your premium would be ₹20.45 per share. As the lot size for TCS is 250 shares, you have to pay ₹ 20.45 X 250= ₹5112.50.

If the TCS goes above 3600 you will make a net profit. In case the TCS stays at or falls below 3100, you will make a loss of the premium paid. In between, you can settle the Option by squaring off by selling a Call Option of 3600 strike price for the same month and depending on the situation earn a profit or limit your loss.

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More Options Trading Basics Questions...

  1. How do options work?
  2. What are the different types of options?
  3. What is the strike price of an option?
  4. What is the Expiration Day of Options?
  5. How do I trade options?
  6. What is the difference between futures and options?
  7. How is Nifty traded?
  8. What happens if an option expires out of the money?
  9. Is there any Margin payable in Options?
  10. How are the Options contracts settled?
  11. What are Covered Options?
  12. What are Naked Options?
  13. What is an American Option?
  14. What is an European Option?
  15. What is In-The-Money (ITM), At-the-money-option (ATM) and Out-of-the-money-option (OTM) in Options?
  16. How to decide on whether should I buy or sell Call or Put options?
  17. Can I trade on options of any stock or Index?
  18. What is the difference between square off and exercise an Option?
  19. What is intrinsic value of the option? How to calculate intrinsic value of an option?
  20. What is time value of an Option?
  21. What are moving averages in options trading?
  22. What is Assignment in Options?
  23. How are options different from futures?
  24. What are the factors that affect the value of the premium of an Option?
  25. What are different pricing models for options?
  26. How the premium paid on options is calculated?
  27. What are Option Greeks and its use in Option trading?
  28. What is shorting/writing/selling in Options trading?
  29. I have bought an option & paid the premium for it, how to settle it?
  30. Do Option buyers have the same rights that as stock buyers?
  31. What is the contract cycle for Options in India?
  32. How does the probability of price movement affects the price of an option?
  33. What is the difference between trading stocks versus options?
  34. What is open interest and volume in options?
  35. What is the options market?
  36. What is nifty futures and options?
  37. What is an option trade?
  38. Is binary options trading legal in India?
  39. What are different types of exotic options?
  40. How to trade nifty Options intraday?
  41. Can I trade in US options from India?
  42. What are options trading hours in India?
  43. What is NSE option expiry time?
  44. Can I buy/sell Options in pre-market trading session?
  45. What is call & put option in bank nifty?
  46. What is the difference between selling a call option and buying a put option?
  47. What is NSE F&O lot size?
  48. What are options trading advantages?
  49. What is options trading after hours?
  50. What are options trading charges?
  51. What are options trading exchanges in India?
  52. What is the difference between options trading and Forex trading?
  53. What is the difference between options trading and stocks trading?
  54. What is the minimum amount required for Options trading?
  55. What are Index Options?
  56. What are weekly Options?
  57. What are Long Dated Options?
  58. How to identify if a particular option contract is American or European style?
  59. What are Option contract adjustments?
  60. Why The Intrinsic Value Of Options Contracts Can Never Be Negative?

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