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What is Stock Options? How to trade in Stock Call and Put?

As Exchange allow trading in equity and in future, same stock options trading also there. In Simple word we can say Call means up and Put means down. When stock goes up call option prices move up and when stock coming down call options prices coming down. Same in reverse case, when stock comes down, put option prices goes up and when stock going up, put option prices comes down. But stock options trading is not as simple as we have written here. Generally, options price is a probability for this thing that stock will reach near to that price before expiry. In starting of expiry option prices are higher and day by day option premium came down if stock is stable at same price. We will understand stock options trading with an example now.

Tata Motors is one of the best stock for intraday trading, positional trading and for delivery also. Tata Motors lot size 1500 for Stock Future trading. Tata Motors Lot size 1500 means we are going to buy 1500 share of this stock in future trading. As we know that it require some margin to buy Tata Motor Future in stock future trading but if we are going to buy Tata Motors options it will ask for full amount. For Tata Motors stock options trading, lot size is 1500. Now suppose its 14 September 2018 today and Tata Motors closed at around 260 in cash. Every month all the future and options contract expires on last thursday means on Expiry. So this month expiry date is 26th September 2018 i.e. last thursday of September month. Right now call and put prices are available at good prices cause only 10 trading session left for expiry and after that there will be no value of these options. Now we think that Tata Motor will go up from 260, then we will buy Tata Motor Sepmteber 270 call options. Let us suppose it is available at Rs. 5.00. So it will require ( Rs. 5 x Lot size 1500) = Rs. 7500.00 to buy Tata Motors call options of 270 strike price. Now if Tata Motor started to move up then we will see some movement in Tata Motor 270 call also. If Tata Motor move to 270 within 10 minutes then call option may become double also means your return will 100% within 10 minutes. If Tata motor move up slowly slowly then call option price will not move too fast. We can hold this call option till last thursday means till expiry day. If Tata Motor given closing at 270 on 26th September 2012, then call option will be zero, means you will loose all your investment that is Rs. 7500 will be zero. As expiry will come closure option prices come down like if trader will think that Tata Motors will not cross 270 by expiry, call option prices will come down to 1.80 rs then 1.50 then 1.20 then 80 paisa then 50 paisa then 20 paisa and at last you will see seller at 0.05 paisa.

Tatamotor Sep 270 Call = [ 10 ( Sell price ) - 6 (Buy Price) ] x 1500 = Rs. 6000 (Profit)

Now we will take another example to understand call option. In this example we are assuming that it is the first day of expiry today or we are going to enter in next month expiry contract i.e. Oct 2018. We will pick same stock Tata Motor to learn more.

Now suppose Tata Motor currently trading at 260 and Tata Motor Oct 2018 , 280 call running at 8 rs. See when there are more than 30 days left for expiry, Tata Motor at 260, then its Oct 2018, 280 call option trading at around Rs. 8.00 and Sep 2018 month 280 call 2 rs. But in this case call movement in Oct 280 will be little bit slow, when stock will move 3 to 4 rs then call option will move around 1.5 to 2 rs.

If Tata Motor move up to 300 till Oct 2018 , then Tata Motor Oct 260 call option will move to 22-23 rs.. At 300, actual value for Tata Motor Oct 280 call should be Rs. 20 ( 300-280=20 ). So call option price should be Rs. 20,, but since there are more days left for expiry and if trader expecting more upside in this stock then still you will see some premium of 2 to 3 points in this call options. So if entered at Rs. 8 and call move to Rs. 35 , just think about profit. Your profit will be

Tatamotor Oct 280 Call = [ 35 ( Sell price ) - 8 (Buy Price) ] x 1500 = Rs. 40,500 (Profit)

more than three times of our investment. So options trading make your investment double or triple or ten to 100 times also. It depends on stock movement. Suppose you bought Tata Motor Sep 280 call at 2 and some good news come for this stock and Tata Motor move to 300 before expiry, then call price will be minimum Rs. 20. Means you are getting 10 times returns.

Tatamotor Sep 280 Call = [ 20 ( Sell price ) - 2 (Buy Price) ] x 1500 = Rs. 27,000 (Profit)

In reverse case, suppose bad news came for Tata Motors and stock started to go down and came down to 260 level suppose, then Sep 270 call option price will also come down, may be possible it will come down to 50 paisa. So if call option price came down to . 50 paisa means currently our loss is Rs. 8250 and if till expiry stock not moved this call option will be zero. Means we can loose full amount, so stop loss is very important for stock option trading.

Let us understand put options. As we said that Tata Motor will go up call option prices will jump and same if stock will go down call option prices will go down but put option prices will go up. Suppose Tata Motor currently trading at 260 and Sep 260 put option available at Rs. 7, if Tata Motors started to fall this put option price will go up. If Tata Motor came down to 250, this 260 put option price will be 11-12 Rs. Means our Rs. 10500 will become Rs. 18000.

Tatamotor Sep 260 Put = [ 12 ( Sell price ) - 7 (Buy Price) ] x 1500 = Rs. 7500 (Profit)

But if till expiry Tata Motor sustaining above Rs. 260 then we will see day be day put option price will come down.

Tatamotor Sep 260 Put = [ 1 ( Sell price ) - 7 (Buy Price) ] x 1500 = Rs. 9000 (Loss)

Now I hope that Stock Options trading concept is clear to you. If you want to share your view with us or having any kind of query and want to ask any question then you can post it here, as soon as possible, you will get the reply.You can directly write to us to email id "stocknifty@yahoo.com" or call at +919981722011.

 

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