Making money out of Option Derivatives is an easy yet risky way to get some quick cash while working with the market. But before you jump into this alluring game that is profitable on one side and tricky on the other, you should have a clear idea about Option Derivatives. So here in very few words we have compiled the basics that you will come handy in the finance market.
What are option derivatives?
In the stock market, an option is a type of derivatives that has only one sided financial contracts.
In simple terms, an option is a term used for a contract that grants the owner or buyer of the option the right to buy or sell an asset or instrument at a particular price which is decided earlier on or before the expiry date of the option, depending upon the type and form of options.
The best part about option derivatives is that it provides the owner of the option with a right to buy or sell without any obligations.
How can you make money by options trading?
Buying and selling options is a convenient way to make money in the stock market. If you do your homework in the right way, then options provide an enormous advantage in the form of possible profits regardless of the direction of the financial market. The loss of money in options is minimal and only limited to the premium amount that the trader paid during the purchase of the contract or option. While due to no obligations, the range of profit in options trading is unlimited.
Earning by Call
A Call in financial universe refers to the option that provides the holder to buy at a specified amount. Call options are the best and most used tactic applied by the trader to earn a bonus by the use of option derivatives.
If you expect an elevation in the stock market’s price, then you can secure a call option and purchase the stock later before the expiry date as you have no obligation to trade it straight away.
Earning by Put
A put option grants the buyers of the option the right to sell at a defined price. In cases of the put option, the person exercising option trading will purchase a put option, if he/she anticipates a fall in the market prices. The put option can be sold by the owner at a later date when the stock price is below the exercise price and gain profits.
Disadvantages of buying a naked option
A naked call option is a condition when a person is trading the option without any position in the stock. Selling naked calls can lead to massive losses as you will not be the owner and thus you will be left with a short position in the stock. Naked calls can put new and average traders into enormous losses, and all your hard earned money can go in vain.
So, before risking your hard earned money in the stock market, you should carefully judge and understand every aspect of the market to ensure your profits and outwit the losses.