What is option trading | option trading books pdf download free

What is option trading?

Option trading is a type of investment strategy that involves buying and selling options contracts. Options are financial derivatives that give the buyer the right to buy (call option) or sell (put option) an underlying asset, such as commodities, stocks or currencies, at a predetermined price (strike price).

Options trading provides investors with the opportunity to profit from changes in the price of an underlying asset without actually owning it. Traders can take advantage of a variety of market conditions, including bullish (rising prices), bearish (falling prices) and even neutral or range-bound markets.

There are two primary types of options: calls and puts. The call option gives the holder the right to buy the underlying asset at the strike price, while the put option gives the holder the right to sell the underlying asset at the strike price. Traders can buy or sell these options based on their expectations of the future price movement of the underlying asset.

Options trading offers several strategies, including buying options (long positions) and selling options (short positions). Long positions involve buying call or put options to speculate on price movements or to hedge existing positions. Short positions involve selling options to generate income and take advantage of time decay and volatility.

It is important to note that options trading carries risks, and investors should thoroughly understand the potential risks and rewards before engaging in this type of trading. It is advised to educate yourself, consider risk management strategies and consult a financial advisor or professional before entering the options market.

What is Lot in option trading ?

While trading in option we have to buy many shares together like a bundle of a packet and this bundle is called a lot in option trading.

Bank nifty lot size

(NSE) National Stock Exchange has reduced the lot size of Bank Nifty futures and options to 15. This applies to contracts with monthly expiry from July 2023. Earlier the lot size was 25 but it has been reduced to 15. NSE has not made any other market changes.

Call and put option

1. Call Option: A call option gives the buyer (also known as the holder) the right, but not the obligation, to buy the underlying asset at a specified price (strike price) within a predetermined time period. By purchasing a call option, the buyer believes that the price of the underlying asset will rise above the strike price before the option’s expiration date. If the price increases as expected, the buyer can exercise the call option, buying the asset at the strike price and potentially profiting from the price difference.
2. Put Option: A put option, on the other hand, provides the buyer with the right, but not the obligation, to sell the underlying asset at the strike price within a specific time frame. Put options are typically purchased by traders who anticipate that the price of the underlying asset will fall below the strike price. If the price drops as predicted, the buyer can exercise the put option, selling the asset at the higher strike price and potentially making a profit.

Both call and put options have a limited lifetime, which is known as the expiration date. They also have a cost associated with them, known as the premium, which is the price paid by the buyer to obtain the options contract.

It is important to note that while call and put options provide the right to buy or sell an underlying asset, the buyer is not obligated to do so. If it is not profitable or profitable, they may choose not to exercise the option. Additionally, options can be bought and sold on the open market before expiration, allowing traders to close out their positions or profit from changes in the options’ value without actually exercising them.

Difference between call and put option

The main difference between a call option and a put option lies in the rights it confers on the holder and the market expectations associated with each. Here are the major differences:

• Right to Buy/Sell: A call option grants the holder the right to buy the underlying asset at the strike price, while a put option gives the holder the right to sell the underlying asset at the strike price.
• Market Expectation: Call options are typically purchased by traders who expect the price of the underlying asset to rise. By holding a call option, the investor can potentially profit from the price increase because they have the right to buy the asset at a predetermined price (strike price), even if the market price exceeds the strike price. On the other hand, put options are often purchased by traders who anticipate that the price of the underlying asset will fall. With a put option, the investor has the right to sell the asset at the strike price, which can lead to potential profits if the market price is lower than the strike price.
• Payoff Profiles: The payoff profiles of call and put options also differ. A call option’s payoff increases as the price of the underlying asset rises above the strike price, allowing the holder to benefit from the price appreciation. Conversely, the put option’s payoff increases as the price of the underlying asset falls below the strike price, enabling the holder to profit from the price decline.
• Risk and Premium: Both call and put options have a cost associated with them, known as the premium. The premium is the price paid by the option buyer to acquire the contract. The risk for option buyers is limited to the premium paid, as they have the right but not the obligation to exercise the option. Option sellers, on the other hand, face potentially unlimited risks if the market moves against their position.

When prices are expected to increase, call options are used while put options are used when prices are expected to decrease. Traders use these options to profit from market movements and manage risk within their investment strategies.

What is call and put option with example

Let us explore Call and Put options with an example:

1. Example of Call Option: Suppose you believe that the share price of company Trident, which is currently trading at ₹50 per share, will increase in the next three months. You decide to buy a call option on Trident stock with a strike price of ₹55, expiring in three months, and a premium of ₹3 per share.

If the stock price of Trident rises above ₹55 within a period of three months, you can exercise your call option. Suppose the share price goes up to ₹60 per share. By exercising the call option, you have the right to buy the stock at the strike price of ₹55, even if the market price is higher. So, you will make a profit of ₹60 – ₹55 = ₹5 per share, less the premium paid (₹3), resulting in a net profit of ₹2 per share.

However, if the stock price does not rise above the strike price of ₹55 before the option expires, you can choose not to exercise the call option. In this case, you will lose the premium paid (₹3) but there is no further obligation.

2. Example of put option: Suppose you expect that the share price of company ABC, currently trading at ₹70 per share, will decline over the next two months. You decide to buy a put option on abc stock with a strike price of ₹65, expiring in two months, and a premium of ₹2.50 per share.

If the share price of ABC falls below ₹65 within a period of two months, you can exercise your put option. Suppose the share price falls to ₹60 per share. By exercising the put option, you have the right to sell the stock at the strike price of ₹65, even if the market price is lower. So, you will make a profit of ₹65 – ₹60 = ₹5 per share, less the premium paid (₹2.50), resulting in a net profit of ₹2.50 per share.

Conversely, if the stock price remains above the strike price of ₹65 or rises during the validity of the option, you can choose not to exercise the put option. In this case, you will lose the premium paid (₹2.50) but there is no further obligation

Trading Risks

1. Time Decay: Options have an expiration date, and as time passes, their value tends to decline. This is known as time decay or theta decay. If the underlying asset doesn’t move in the anticipated direction or with sufficient magnitude before the option expires, the option’s value may erode, leading to losses.
2. Limited Duration: Options have a limited lifespan. If the anticipated price move doesn’t occur within the option’s lifespan, the option may expire worthless, resulting in a total loss of the premium paid.
3. Counterparty Risk: Option contracts are typically traded on exchanges, which act as intermediaries. However, there is still a counterparty risk associated with options. If the counterparty fails to honor their obligations or defaults, it can lead to losses for the other party involved in the trade.
4. Market Risk: Options are derived from underlying assets such as stocks, indexes, or commodities. The value of options is influenced by changes in the price of these underlying assets. If the market moves against your position, the value of your options may decrease, resulting in potential losses.
5. Volatility Risk: Options are sensitive to changes in volatility. An increase in volatility can raise the value of options, while a decrease in volatility can decrease their value. If the volatility of the underlying asset doesn’t align with your expectations, it can affect the profitability of your options.
6. Limited Profit Potential: Depending on the type of option strategy employed, the profit potential of options can be limited. For example, buying a call option caps your potential profit at the strike price plus the premium paid. Selling options, such as covered calls, limits your potential gains to the premium received.
7. Complexities and Misunderstandings: Options can be complex financial instruments, and understanding their intricacies is crucial. Inexperienced traders may misunderstand or misinterpret the risks and mechanics of options, leading to unexpected losses.

It is important to note that options trading can be highly speculative and involves a significant level of risk. Traders should carefully assess their risk tolerance, educate themselves about options, and consider employing risk management strategies such as setting stop-loss orders and diversifying their portfolios. Seeking advice from a qualified financial professional can also be beneficial.

Risk management is an important aspect of trading aimed at protecting capital and minimizing potential losses. Here are some key principles and strategies for effective risk management in trading:

Full information about Trident share click here:

Trading risk management

1. Set Stop Loss Orders: A stop loss order is an instruction to sell a security when it reaches a specific price level. By setting a stop loss order, you limit potential losses by exiting a trade if the market moves against your position beyond a predetermined point. It is important to place stop loss orders at a level that allows for normal market fluctuations while still protecting your capital.
2. Diversify Your Portfolio: Spreading your capital across different asset classes, sectors, or instruments can help mitigate risk. Diversification allows you to reduce exposure to a single investment and potentially offset losses in one area with gains in another. However, diversification does not guarantee profits or protect against all losses.
3. Use Risk Management Tools: Various risk management tools are available, such as trailing stops, which allow you to adjust the stop loss level as the trade moves in your favor, locking in profits while still protecting against reversals. Additionally, options like buying protective puts or using hedging strategies can provide downside protection.
4. Emotional Discipline: Emotional discipline is vital in risk management. Avoid making impulsive decisions based on fear or greed. Stick to your predetermined risk parameters and trading plan, even in volatile or uncertain market conditions.
5. Determine Risk Tolerance: Assess your risk tolerance level by considering factors such as your financial situation, investment goals, and emotional ability to handle market fluctuations. Understanding your risk tolerance will help you establish appropriate risk parameters for your trades.
6. Position Sizing: Determine the appropriate position size for each trade based on your risk tolerance and the specific characteristics of the trade. Consider factors such as the stop loss level, account size, and the percentage of capital you are willing to risk on a single trade. Proper position sizing helps manage risk by limiting the impact of potential losses.
7. Risk-Reward Ratio: Evaluate the potential risk-reward ratio of each trade before entering. Ideally, the potential reward should outweigh the potential risk. A favorable risk-reward ratio means that even if you have losing trades, the winners should, on average, generate greater profits, leading to a positive overall outcome.
8. Continuous Monitoring: Keep a close eye on your trades and the overall market conditions. Regularly review and adjust your stop loss levels based on market developments. Stay informed about news, economic events, and other factors that may impact your trades.

If you want to reduce your risk in option trading, then you must keep these points in mind while trading, it reduces your risk score.

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option trading books pdf

Books Name	Download Here	Buy now
Options, Futures, and Other Derivatives (by – John C. Hull)	Download Here	Buy link
Option Volatility and Pricing: Advanced Trading Strategies and Techniques (by – Sheldon Natenberg)	Download Here	Buy link
The Options Playbook (by – Brian Overby)	Download Here	Buy link
Trading Options Greeks: How Time, Volatility, and Other Pricing Factors Drive Profits (by – Dan Passarelli)	Download Here	Buy link

best option trading books for beginners

This book is recommended for those who want to start options trading from beginner level.

1. Trading Chart Pattern book | Breakout Pattern, Candlestick Pattern & other Patterns | Trading Book for Beginners | Useful for Share Market, Forex Trading, Commodity Market, Intraday, Option Chain, Stocks etc

2. Options Trading For Beginners: 2 Books in 1: The Number One Guide For Beginners To Learn How To Trade Easily. Discover The Best Strategies And Use … Analysis To Finally Achieve A Passive.

3. How to Make Money in Intraday Trading: A Master Class By One of India’s Most Famous Traders: A Master Class By One of India’s Most Famous Traders.

4. Don’t Trade Before Learning These 14 Candlestick Patterns.

5. Option Volatility and Pricing: Advanced Trading Strategies and Techniques.

6. Options as a Strategic Investment.

Option trading pros and cons

Option trading offers several advantages and disadvantages that traders should consider before engaging in this type of trading. Here are some pros and cons of option trading.

Pros

• Flexibility: Options provide flexibility in terms of trading strategies. Traders can employ various options strategies, such as buying or selling calls and puts, spreads, straddles, or combinations, to take advantage of different market conditions and profit potential.
• Leverage: Options trading allows traders to control a larger amount of the underlying asset with a smaller upfront investment compared to directly buying or selling the asset. This leverage can amplify potential returns if the trade moves in the anticipated direction.
• Income Generation: Selling options can be a way to generate income. By selling covered calls or cash-secured puts, traders can receive premium income and potentially profit from the time decay of options.
• Limited Risk: Buying options provides limited risk exposure. The maximum loss is typically limited to the premium paid for the option contract. This can be beneficial for traders who want to define their risk and protect their capital.
• Hedging: Options can be used as hedging tools to manage risk in other positions or portfolios. By buying protective put options or employing other hedging strategies, traders can mitigate potential losses in their existing holdings.

Cons

• Time Decay: Options have an expiration date, and their value is subject to time decay. As time passes, the value of options may erode, especially if the underlying asset doesn’t move in the anticipated direction. This time decay can lead to losses if the market doesn’t behave as expected within the option’s lifespan.

• Volatility Risk: Options are influenced by changes in market volatility. If the volatility of the underlying asset doesn’t align with the trader’s expectations, it can impact the value of options and potentially result in losses.

• Potential Losses: While the risk is limited when buying options, the potential loss is still the premium paid. If the trade doesn’t work out as anticipated, the premium paid for the option may be lost.

• Complexity: Options can be complex financial instruments that require a good understanding of their mechanics and various strategies. Inexperienced traders may find it challenging to grasp the intricacies of options, potentially leading to costly mistakes or misinterpretations of risk.

• Limited Duration: Options have a limited lifespan. If the anticipated price move doesn’t occur within the option’s lifespan, the option may expire worthless, resulting in a total loss of the premium paid.

Conclusion

Today we have come to know what is option trading, what is lot, what is lot size. Option trading is not easy, it takes a lot of time and effort to learn it, so we have suggested some option trading books for you, you can learn option trading by reading them.