What Are The Best Options To Trade?

What Are The Best Options To Trade?

What is the best option?

There are many ways to make or lose money in the financial or commodity markets, either through trade or investment. You can either trade or invest in stocks, commodities like gold and wheat, fixed income instruments, real estate, etc., but there is an option that many people are unaware of, ie derivatives. Derivatives are instruments whose value derives from an underlying asset. There are two types of derivatives - futures and options.

In this article, we will look at options and ways of benefiting them. The option is a type of derivative that gives you the right, but not the obligation, to buy certain assets at a fixed price at a future date. When you buy a stock option for Rs 100, and the price goes up to Rs 120, you can use your option, and earn a profit of Rs 20. If the stock price falls to Rs 90, you cannot select the option, and avoid losing Rs 10. Of course, the options are not available for stocks only; You can get them for a wide variety of assets, including gold, stock index, wheat, petroleum, etc.

How is it known to find the best option for a trade-in? When trading, and what parameters do you have to look at to find the top option for you? Do you find the most active options for placing bets in the market? let's take a look.

Trading objective

Okay, the first thing you should look for, while the best option for you to trade is the objective. There are some reasons why people trade-in options. A risk is a risk. Getting profit by betting on prices or betting on betting is another. The strategy you adopt will depend on your objective.

Call option

Another thing that affects your trading strategy is whether you want to place bets on the rise or fall in share prices. If prices are going up, the best option is to trade call options. The call option gives you the right to buy a certain stock at a specific price in the future. If you get your bets right, and prices go up, it will enable you to make profits.

Within the call options, there are two types. There is a naked call option. It is a strategy that involves selling call options without owning the underlying security like stock. This is a risky strategy because the potential for loss is unlimited; It is not stated how much the stock price can rise. But it is possible to buy back option contracts when prices start above the strike price or at the price at which the contract is ended.

Another type is the covered call option. This can be among the top choices if your risk appetite is on the low side. This is a strategy used by those who already own certain shares, and want to make any profit from any price increase. Here the investor buys a cover call equal to the shares in his portfolio. So if the price rises, the investor can make a profit without selling the shares. This is a conservative strategy, and may not be very suitable for a bull market because if share prices move above the strike price, investors stand to lose on the gains from that increase.

Put option

Another type is the put option, which gives you the right to sell a particular stock at a fixed price. This is a good option if you expect a fall in share prices. If you expect the share price of Company XX to fall from the current Rs 100 to Rs 90, then you can buy options of Rs 1,000 at the strike price of Rs 1,000 of Company XX. So when the share prices of Company XX fall to Rs 90, you can exercise your right to sell options and earn a profit of Rs 10,000. If the prices go up to Rs 110, then you have the option not to use your option, and avoid losses of Rs 10,000. In that case, your only loss will be the premium you paid to enter into the option contract. So, this is, in short, a recessionary option.

The put option can also be used as a hedging strategy. If, for example, you have a stock portfolio and prices are expected to fall, you can buy a put option. So if stock prices fall, you can use the put option to compensate for the loss in your portfolio. This has two advantages. There is a clear advantage of avoiding any loss of value. Another advantage is that by not selling your stock, you get the benefit of any dividends that companies may declare and other privileges such as voting rights. This type of option is called 'married put'.

Premium consideration

Another thing that you should know while searching for the best option for trading is the premium you will have to pay when entering into an option contract. Premium is determined by various factors such as share price, volatility, expiration time and so on. An important factor is `money '- if the option is sold at the moment it will make money or not.

Premium is a percentage of the transaction and affects the returns you make and the profit you can get. Leverage is the range from which you can buy options and is a part of the premium. For example, if the premium is 10 percent, then you pay a premium of Rs 1 lakh and buy an option of Rs 10 lakh.

Arrive on time

When you trade-in options, you get different types of options at different strike prices and different time periods. The premium increases when the option contract contains money. This is when the option contract is currently expected to generate profits. In a call option, this will happen when the stock price is above the strike price. In a put option, this will happen when the strike price is above the market price. Out-of-the-money is when a profit cannot be made on an option contract.

When the options are in-money, premiums will increase. The reverse occurs when they are out-of-the-money. In that case, the premium will fall. Therefore it is important to keep the time right when purchasing options. If you buy the option while in-money, you do not get a chance to earn a lot of money.

There is another factor that can affect premiums, and they are events occurring worldwide. For example, government policy announcements can cause major changes in stock prices. This will increase volatility with an increase in premiums. In that case, selling or `writing 'an option may be a better option than buying one. So the best option to buy today may be different from yesterday or tomorrow.

Risk appetite

The top option for you will also depend on your risk appetite. If you are prone to risks, then you should not go into deep options of wealth. Certainly, the premium is low and you can earn good money if you get in the money, but it is also a risky proposition. You should also avoid going to naked call options as the chances of loss are also very large.

The conclusion

Options trading can be rewarding for those who are ready to venture into relatively unknown waters. However, this dip involves less risk than trading directly in stocks or even buying futures. If you trade in shares, the downside is unlimited. If the share prices go to freefall, you lose the maximum limit. This is also true for futures contracts, which, unlike options, do not give you away if prices do not go your way. However, in the case of options, the downside is low, restricted to the premium you will have to pay.

There is a small downside to an option contract that you should consider. Unlike shares, you have no ownership of the company, so you will not get any profit like dividends. The option is a purely speculative tool where you place bets on falling and rising prices. It is also a zero-sum game. There is no win-win situation. If you win, someone else loses, and vice versa.

But the downside of the options is quite small and gives great benefits. You can get exposure to many more shares with options through leverage, and increase your chances of making a profit. When your humps are proven wrong, you don't lose too much.

All you need is patience, and keep up with the latest developments to make money from option trading. This would be a good start to study the most active options so that you get an idea of ​​what is most popular with investors.