November 25, 2020

What to remember while trading call options?

There are different kinds of stocks, commodities, and derivatives available for trade on the Indian stock market. People have other investment goals and strategies which suit their financial status and help them earn returns from them. It is not necessary for all to follow a common strategy, as what may work for one may not suit the other. Keeping an investment strategy is vital to earn maximum profit from the stock market and avoiding risks that could affect the rate of returns significantly.

All stock trading depends on two terms. Investors could either be bullish or bearish. Depending on the trading position for the underlying stock, they can purchase either a call option or a put option. When they buy call options, they hold the right to buy a fixed quantity of the underlying stock on or before the date of expiry at a strike price. If they are bullish on a stock, they could purchase the option at a predetermined or strike price lower than the appreciation.

If the stock price does not cross the strike price and they pay the premium on or before the contract expires, they can exercise their option to buy the stock at the strike price and sell it in the cash market to book the profit.

If the stock price in the cash market does not rise beyond the strike price and premium, they can let the contract lapse. They do not buy the underline stock at the strike price. Their loss in such a case would be the premium they paid. However, equity options and futures in India are currently cash-settled and not settled by delivery. Timing is of essence in the stock market.

To maximise profits, they buy at lows and sell at highs. They can fix the buying price while trading call options. It indicates that they are expecting a possible rise in the price of the underlying assets.

The buyer pays the seller of the option an amount known as premium. The seller must pay margin money to create a position. In addition to this, they must maintain a minimum amount in the account to meet exchange requirements. Margin requirements are a percentage of the total value of the open positions. When they sell or purchase options, individuals either exit the position before the expiry date or hold the position open until the option expires.

A stock market index consists of stocks that indicate the general movement of stock prices. Those that form an index must fulfil certain conditions like adequate liquidity, high market capitalisation, and so on. Index futures enable traders to cash in on the general movements in stock prices. They are of different types such as BSE Sensex, Nifty 50, Nifty IT, etc. Stock futures enable buyers and sellers to buy or sell a specific stock of a certain quantity at a predetermined price in the future. In 2000, India saw its first index-based stock futures contracts traded on BSE and NSE.