Written by Team IndiBlogHub » Updated on: September 25th, 2024
Traders continually seek ways to diversify their portfolios and hedge against potential losses. One popular financial instrument for this purpose is options trading. An options contract provides buyers with the right, but not the obligation, to buy an underlying asset at a specified price on a future date.
Since these underlying assets can include stocks, bonds, ETFs, and commodities, options contracts offer a way to diversify and potentially profit. In this article, we will cover different types of option contracts.
A call option is an options contract that grants the holder the right, but not the obligation, to purchase a specified underlying asset at the strike price before or on the expiration date.
Traders purchase call options in underlying stocks when they anticipate that the price of the underlying stock will rise before the option expires.
Suppose you buy a call option for Stock XYZ with a strike price of ₹100 and an expiration date one month away. The cost of the option (premium) is ₹5 per share.
In this way, call options can offer significant profit potential with limited upfront cost, but they also come with the risk of losing the premium paid if the asset doesn’t rise above the strike price.
Basically, there are two types of call options:
To effectively navigate this complex market, it's crucial to learn option trading.
Put options are financial contracts that give the holder the right, but not the obligation, to sell a specified underlying asset at a predetermined price (the strike price) before or at the expiration date.
Traders buy put options when they anticipate a decline in the price of the underlying asset.
Suppose you purchase a put option for a stock of Company XYZ with a strike price of ₹500, and the option premium (cost) is ₹20 per share.
This strategy is useful for hedging against potential declines in asset prices or speculating on downward movements.
Understanding the different types of options contracts can significantly enhance your trading strategy. Each type offers unique benefits depending on your strategy and market outlook. For those new to options trading, learning the basics can significantly boost your confidence and success. Upsurge.club offers several courses on option trading for beginners, providing a great starting point to develop your skills and knowledge.
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