basics of option trading stock online option trading futures options trading

Option - Option is a financial product whose price is based on its underlying instrument (or product) underlying instrument can be Index (Nifty, Jr.Nifty, Bank Nifty etc or stock).

Underlying - The underlying may be any financial instruments like equity stocks/ stock index/ and commodities etc.

Call option - Traders Language - The Call option is bought when then underlying index or stock is expected to go up.
In options language - A Call option gives the buyer the right to buy specified quantity of the underlying asset at the strike price on or before expiration date.
Short selling of Call options is done whenever the underlying is expected to go down.

In the money call/put
1. For a call option, when the option's strike price is below the market price of the underlying asset.
    Example If the current value of the Nifty Index is at 3000 and if you are planning to buy the call whose strike price is 2900 then it is called
    as In the money call.

2. For a put option, when the strike price is above the market price of the underlying asset.
    Example If the current value of Nifty Index at 2650 and if you are planning to buy the put whose strike price is 2850 then it is called as
    In the money put.

Out of money call/put
1. For a call, when an option's strike price is higher than the market price of the underlying asset.
    Example If the current price if the Nifty Index is at 2500 and if you are planning to buy the Call whose strike price is 2650 then it is called
    as Out of money call

2. For a put, when the strike price is below the market price of the underlying asset.
    Example If the current price of the Nifty Index is at 2900 and if you are planning to buy the put whose strike price is 2800 then it is called
    as Out of money put.

First Scenario - If Nifty index rises to 3050.
Your profit is Rs 2500 ( Rs 50 x 50 qty) for one lot of Nifty Index.

Second Scenario - If Nifty index falls to 2950.
Your loss is Rs 2500 (Rs 50 x 50 Qty) for one lot of Nifty Index.
This is the maximum loss the trader has to pay.

Third Scenario - If Nifty Index falls below 2950 then no need to square off your call option.
No need to do anything, your option gets automatically expires at the end of the month and your maximum loss is RS 2500 which is your premium paid while buying the call.

Forth Scenario - Hedging your Call option
From above example you came to know that your maximum loss is Rs 2500 but if you want to reduce this loss, further, then you can hedge your call.
At the time of buying call you can buy one Nifty Put of strike price 2950.
So if Nifty starts falling below 3000, your call value starts decreasing while your Put value starts increasing.

Put option - Traders Language - The Put option is bought when then underlying index or stock is expected to go down.
In options language - A Put option gives the buyer the right to sell specified quantity of the underlying asset at the strike price on or before expiration date.
Short selling of Put options is done when the underlying is expected to go up.

Strike price - The price at which the owner of an option can purchase (call) or sell (put) the underlying stock or index is called as strike price. It is also called as exercise price.

Expiry date - The date at which options get expired. In India last Thursday of every month is the expiry day for options and for future contracts.

Premium - It is also called as intrinsic value. This is the value that any given option would have if it were exercised today. It is defined as the difference between the option's strike price (suppose 250) and the stock's actual current price (suppose 300).
In the case of a call option, you can calculate the premium value by taking (300-250). If the result is greater than zero (in other words, if the stock's current price is greater than the option's strike price), then the amount left over after subtracting (300-250) is the option's intrinsic value.
If the strike price is greater than the current stock price, then the intrinsic value of the option is zero and it would not be worth anything if it were to be exercised today (please note that an option's intrinsic value can never be below zero). To determine the intrinsic value of a put option, simply reverse the calculation to (250-300).

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Open Interest
1. The total number of options and/or futures contracts that are not closed or delivered on a particular day.
2. The number of buy market orders before the stock market opens.

Implied Volatility - The estimated volatility of a security's price. In general, implied volatility increases when the market is bearish and decreases when the market is bullish. This is due to the common belief that bearish markets are more risky than bullish markets.

At the money call/put - An option is at-the-money if the strike price of the option equals the market price of the underlying security.
For example If Nifty Index is trading at 3000 and if you are planning to buy either call or put whose strike price is 3000 then it is called as At the money call or put.

Bull spread - An option strategy in which maximum profit is gained if the underlying security rises in price. Either calls or puts can be used. The lower strike price is purchased and the higher strike price is sold. The options have the same expiration date.
The meaning of spread is difference.

Bear spread
An option strategy seeking maximum profit when the price of the underlying security declines. The strategy involves the simultaneous purchase and sale of options; puts or calls can be used. A higher strike price is purchased and a lower strike price is sold. The options should have the same expiration date.
The meaning of spread is difference.

Covered call - An option strategy whereby an investor holds a long position in a stock/future contract and writes (sells) call options on that same asset in an attempt to generate increased income from the asset. This is often employed when an investor has a short-term neutral view on the asset and for this reason hold the asset long and simultaneously have a short position via the option to generate income from the option premium.

Naked call - An option strategy in which an investor writes (sells) call options on the open market without owning the underlying security. This strategy is opposite to a covered call strategy.

Naked put - A put option whose writer does not have a short position in the stock on which he or she has bought the put. Sometimes called as an "uncovered put."

Deep in the money call/put - An option with an exercise price, or strike price, significantly below (for a call option) or above (for a put option) the market price of the underlying asset.

Deep out the money call/put - An option with a strike price that is significantly above (for a call option) or below (for a put option) the market price of the underlying asset.

Straddle Strategy - An options strategy in which the investor holds a position in both a call and put with the same strike price and expiration date.

Strangle Strategy- An options strategy where the investor holds a position in both a call and put with different strike prices but with the same expiration and underlying asset.
This option strategy is profitable only if there are large movements in the price of the underlying asset.