Do you want to learn options trading for free which helps you become a successful professional trader? good! It is quite possible for beginners in the era of Google and YouTube to learn option trading for free.
You just need to be a bit serious about option trading and some reliable learning resources like SubhMantra.
Many of us find it difficult in the early days. But in the world of stock trading, it is option trading that has gained the most popularity. This trading is habit-forming in nature.
Despite knowing that option trading is the most risky trade in which even entire capital can be lost, option traders are crazy about this derivative.
I, myself, am a big fan of option trading. But I limit my trading to only index option trading like Nifty 50 and Bank Nifty index.
Let’s know the easiest ways which is important for a beginner to learn options trading for free.
6 Easy Steps to Learn Options Trading Free
Step 1. Learn Options Trading Basics
There is no doubt, the first important step for beginners is to learn the basics of option trading.
However, I have already explained in a post about options trading with examples. Despite this, I would like to give you an overview in the form of a questionnaire to easily learn options trading.
What are options?
The first thing you should know is that Options are contracts of securities (underlying assets) that we can buy or sell in options trading.
Options contracts are generally available for-
- all derivatives stocks (the stock which are included in Futures & Options by stock exchanges),
- index such as Nifty 50, Bank Nifty, and Nifty Fin Service, etc. and
- commodities such as Crude oil, Copper, Gold, Silver, Zinc, etc.
What are the two types of options?
There are basically two types of option contracts. These are call option and put option. Both options are based on price trend. In order of trading, these options are also given other names like ITM, European options etc.
i) Call Option – which are considered positive by nature. If the price is expected to rise, we buy the call option and sell it if the price is expected to go down.
ii) Put option – Which are considered negative by nature. If the price is expected to go down, we buy a put option and sell it if the price is expected to go up.
And thus option traders have more options to buy and / or sell call options or put options or both simultaneously. This freedom of choice for traders leads to positioning in more option contracts for a fruitful outcome. Which is called option trading strategy.
What is expiry date or expiration date in options trading?
All option contacts (derivative contracts) that we buy or sell are valid for a limited period called the expiration date. These contracts may be valid for one week or may expire in one, two or three months etc.
You should keep in mind the validity of the contract at the time of purchase. These contracts usually end on Thursday (the last Thursday of the week or month).
What is the American and European option in options trading?
There are two types of options depending on the expiration date –
i) European Options – In such options, the option buyer can exercise his right to buy or sell only on the day of expiry of the contract.
In India, all options are European option types. This does not mean that you cannot square-off your position before the expiration of the contract. This is valid only if you want to exercise your position.
CE stands for European call option while PE stands for European put option.
ii) American Options – In such options, the option buyer can exercise his right to buy or sell at any time before the day of expiry of the contract.
what is strike price or exercise price in option trading?
All option contracts are available at different fixed prices known as the strike price or the exercise price. The availability of the strike price depends on the spot price of the underlying security.
All call and put option contracts are named separately based on the strike price –
- ITM (In the Money) Option Contract – For a call option, when the strike price is less than the spot price of the underlying security, it is called in the money option contract. But for a put option, Strike Price> Spot Price.
Remember, ITM has a high intrinsic value and therefore has a very high cost. You have to pay a higher premium to buy an ITM contract. But it is beneficial to exercise the ITM option contract on the expiry day.
- ATM (At the Money) Option Contract – An option (call or put) contract is called at the money, when the strike price is equal to or nearly equal to the spot price.
The price of an ATM contract is relatively low compared to ITM.
- OTM (Out of the Money) Option Contract – For call options, when the strike price exceeds the spot price of the underlying security, it is called an out of money option contract. But for a put option, Strike price
OTM option contracts are relatively very cheap but if the price trends are not favorable and it remains OTM on the expiry day, it becomes worthless and cannot be exercised by the option buyer.
What is spot price in options trading?
Spot price is the current market price of an underlying asset at which it can be bought or sold immediately. The strike prices of the option contract are calculated based on the spot price.
The spot price serves as the standard. Strike prices are available both above and below the spot price.
What is option holder and option writer?
If we buy a call or put option, we are usually called an option buyer or option holder. With greater accuracy, the buyer of the call option is called the call buyer and the buyer of the put option is called the put buyer.
But if we sell call or put options, we are usually called option writers or option sellers. With greater accuracy, the seller of the call option is called the call writer and the seller of the put option is called the put writer.
An option buyer has the right to exercise his option position if he wishes in the event of a profit. But he is not obliged to do so.
But for an option writer the situation is exactly the opposite. If the option buyer wishes to exercise his option contract, the option writer is obliged to buy or sell shares accordingly.
What is lot size in options trading?
Option contracts are always traded in lots (bunches). Lot size refers to the minimum number of shares or units of a financial instrument that need to be purchased in a transaction.
The lot size is decided in advance by the stock exchange. For example, the lot size of a Nifty 50 option contract is 75, while the Bank Nifty option contract has a lot size of 20 only.
What is option premium?
An option premium is the actual amount an option buyer has to pay when purchasing a call option or a put option. Interestingly, this is the maximum loss an option buyer may have to bear in an adverse situation.
But if you want to write (sell) a call option or a put option, then you have to pay margin money which is very high. Margin money is levied by stock exchanges for all short positions.
Since the option writer is clearly exposed to a high level of risk. Therefore, it is a good intention to put margin money by the stock exchange to protect small investors or traders from large losses.
You should check the required margin money before writing an option contract. You can use this margin calculator for option trading in India.
What is option price?
Options price is the price of an option contract (call or put) that can be seen on the screen during online option trading at the time of buying or selling. The option price is not just its intrinsic value, but also includes the time value.
Option price = intrinsic value + time value
What are Option Greeks?
Options Greeks are symbolic indicators in the Greek alphabet used to measure some of the parameters of the option price such as option’s sensitivity to the changes in the price of underlying stock, market volatility and time to expiration.
These option Greeks are Delta (δ), Gamma (γ), Vega (ν), Theta (θ) and Rho (ρ). We will get to know these in detail later.
Step 2. Learn Options Trading Strategies
As the price of an option contract decreases over time. Therefore, just being correct in trend prediction or stock market prediction is not enough to make money in option trading.
If you buy only one or more lots of a call option or a put option, it is called creating a naked trading position in option trading. However this may be the best strategy if the price of the underlying security is in line with what you have thought at the time of purchase.
But it should be within a short time. Otherwise you will eventually have to take a loss in this strategy.
This is why it is advised by option trading experts not to create naked option positions.
To avoid naked trading conditions and still make money, options traders combine long and short calls and put options as basic building blocks in many different ways. And this is known as profitable combination option trading strategies.
There are many popular option trading strategies. Some of them are – Straddle, Strangle, Bull spread, Beer spread, Butterfly spread, Calendar spread etc. We will know all these in detail in the next post.
Learning options trading strategies increases your chances of a successful start in the long run as an option trader.
Step 3. Learn Technical Analysis for Options Trading
Technical analysis has a large impact on short-term trading. It is also a very effective tool in the analysis of option trading. Try to find out what a technical chart is and how it is used. Find out the best technical indicators behavior on the price-chart.
Step 4. Learn Options Trading through Paper Trading
After learning the basics of option trading, option trading strategies and technical analysis, you are now in a position to start paper trading. Paper trading is the easiest way to learn options trading for free.
When the stock market opens, apply your strategy and write down the price of the option contract you want to trade on paper. Just watch the price fluctuations and exit the trade when you feel it is appropriate. Calculate your apparent profit or loss.
Thus trade for at least one month which will give you a real experience of option trading without any loss or gain of your real money. Also back-test the option trading strategies and technical charts you have learned using the best technical indicators.
Many beginners ignore paper trading but then have to pay for it during actual trading.
Step 4*. Learn Options Trading through Virtual Trading Apps
The virtual option trading app is also a very good alternative to paper trading for beginners to practically validate their theoretical knowledge. Many brokers offer such a free option trading app to learn options trading. Some reliable virtual trading apps are-
Step 5. Make Your Own Learning based Principles & Strategies
Now, with the help of the knowledge and experiences you have gained, create your own option trading principles and strategies. If possible, do all this in writing.
Step 6. Select Best Options Trading Platform For Real Trading
This is another important step to start option trading. Choose the best option trading platform that charges as little as a brokerage. If the brokerage fee is minimal then it can help you make some other options strategy and even earn a penny of profit.
I think these 6 steps are enough to learn options trading. In the coming days, we will discuss the benefits of options trading related books and the use of stock market calculator in option trading as a strategy. Happy Options Trading!!
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