What is Options Trading ? Different Types Of Options Trading

What is Options Trading ? Exploring the Different Types Of Options Trading.

What Is Options Trading

Option trading is a contract written by a seller that gives the buyer the right to buy (for a call option) or sell (for a call option) a specific asset at a specific price (strike price/exercise price) in the future. for a put option). In exchange for granting the option, the seller collects a payment (in the form of a premium) from the buyer.

 

Usefulness of Exchange Traded Options :
Exchange traded options are an important class of options that have standardized contract features and are traded on public exchanges providing convenience to investors. These instruments provide guaranteed settlement by the clearing corporation thereby reducing counterparty risk. Options are used to hedge, predict the future direction of the market, arbitrage, or implement strategies that generate income for traders.

What are index options?

These are options that have an index as their underlying. In India, regulators have authorized European style of settlement. Examples of such options include Nifty options, Bank Nifty options, etc.

What are stock options?

These are options on individual stocks. The contract gives the holder the right to buy or sell underlying shares at a specific price. Regulators have also authorized the American style of settlement for such options.

How many types of options are there (Types of options Trading)
There are two types of options;

1. Call Option 

2. Put Option.

Call option is called CE and Put option is called PE. The full name of CE is Call European and the full name of PE is Put European.

When the stock market is bullish, call option is bought and when it is bearish, put option is bought.
Meaning, when you think the market will go up, you should buy a Call option and when you think the market will go down, you should buy a Put option.
Thus, the buyer of a call option makes profit when the market goes up and the buyer of a put option makes profit when the market goes down.
When you do option trading, you have to trade options with different strike prices which are as follows –

1.In the Money Option (ITM)
2.At the Money Option (ATM)
3.Out the Money Option (OTM)