Options trading involves buying or selling contracts that provide the right, but not the obligation, to trade an underlying asset (like stocks or indices) at a set price within a specific timeframe. It functions similarly to a non-refundable deposit or coupon, where you pay a fee called a premium.
Core Concepts and Types
- Call Options: Used when expecting the asset price to rise.
- Put Options: Used when expecting the asset price to fall.
- Key Terms: Includes the strike price (set price), premium (upfront cost), expiry date (contract end date, often the last Thursday of the month in India), and lot size (fixed trading quantity).
Benefits and Risks
Options offer leverage (controlling assets with less capital) and hedging (portfolio protection). However, they carry significant risks:
- Limited Risk (Buyers): Loss is limited to the premium paid.
- Unlimited Risk (Sellers): Potential for unlimited losses if writing options without owning the underlying asset.
- Time Decay: Options lose value daily as they approach expiration.
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