I remember several years ago when I asked one of my brokers to explain what 'Options' was, he told me so many things which made no sense at all to me at that time. Talks about option premiums, calls and puts can be extremely confusing for somebody who has no idea at all about all these things. I will now try explaining it to you using the simple principles of learning things the Happionaire way.
In the past as soon as I learnt about options, I got tempted and traded in them. Since the returns possible are quite high, a lot of us get tempted very easily. Sometimes we made huge profits trading in options and sometimes we made losses. In the end I don’t think I made any substantial amount of money trading in options. Luckily I didn’t risk too large an amount and learnt a lot from the mistakes I made.
'Options' explained in a very simple way by sharing a small story below.
Let us say you want to buy an apartment. After searching a lot you find a nice apartment that costs Rs 10 lakh. (I know many of you might be wondering where we can get Rs 10 lakh apartments.
Since you like the flat so much, you speak to the builder and tell him to block the flat for you. You want to consult with your family and will tell him for sure in one month. The builder tells you that you will have to give him Rs 10,000 to block the apartment. You can either pay him the entire Rs 10 lakh after one month and take the property or alternatively in case your family doesn’t like it you can let it go but you will lose your Rs 10,000.
You think about it, and decide Rs 10,000 is not too big an amount to pay for the flat. You pay the amount and the builder blocks the apartment in your name for a period of one month. Anytime you can pay him Rs 10 lakh and the apartment is yours.
In fact you have fans offering you Rs 15 lakh for the same apartment. You have blocked the flat for yourself at a price of Rs 10 lakh. This means if you sell the flat you will make a profit of Rs 5 lakh. However you have not invested Rs 10 lakh but only Rs 10,000 to block the flat in your name.
You decide to sell the flat at Rs 15 lakh. From that you give the builder Rs 10 lakh and keep the remaining Rs 5 lakh for yourself. This means you have invested Rs 10,000 and in return got Rs 5 lakh in a period of less than a month.
This is a very simple example which tries to help you understand how options work. Your maximum risk in the above case was Rs 10,000 but maximum profit potential was unlimited unlike Futures where the risk can be more than the capital invested.
The above example can be called a Call Option? This type of option increases in value when things go in the positive direction. If you buy a call option for the NIFTY, it will rise as the NIFTY rises. In the stock market, options can be used as tools to minimize risks as well as trading tools.
Options can be traded in a similar way like stocks. For instance you can tell your broker to buy a call option if you are bullish or alternatively you can tell him to buy a put option if you are bearish.
Options need you to be more aware and alert about things happening in the short term. Very few people can do both trading and investing together.
In the past as soon as I learnt about options, I got tempted and traded in them. Since the returns possible are quite high, a lot of us get tempted very easily. Sometimes we made huge profits trading in options and sometimes we made losses. In the end I don’t think I made any substantial amount of money trading in options. Luckily I didn’t risk too large an amount and learnt a lot from the mistakes I made.
'Options' explained in a very simple way by sharing a small story below.
Let us say you want to buy an apartment. After searching a lot you find a nice apartment that costs Rs 10 lakh. (I know many of you might be wondering where we can get Rs 10 lakh apartments.
Since you like the flat so much, you speak to the builder and tell him to block the flat for you. You want to consult with your family and will tell him for sure in one month. The builder tells you that you will have to give him Rs 10,000 to block the apartment. You can either pay him the entire Rs 10 lakh after one month and take the property or alternatively in case your family doesn’t like it you can let it go but you will lose your Rs 10,000.
You think about it, and decide Rs 10,000 is not too big an amount to pay for the flat. You pay the amount and the builder blocks the apartment in your name for a period of one month. Anytime you can pay him Rs 10 lakh and the apartment is yours.
In fact you have fans offering you Rs 15 lakh for the same apartment. You have blocked the flat for yourself at a price of Rs 10 lakh. This means if you sell the flat you will make a profit of Rs 5 lakh. However you have not invested Rs 10 lakh but only Rs 10,000 to block the flat in your name.
You decide to sell the flat at Rs 15 lakh. From that you give the builder Rs 10 lakh and keep the remaining Rs 5 lakh for yourself. This means you have invested Rs 10,000 and in return got Rs 5 lakh in a period of less than a month.
This is a very simple example which tries to help you understand how options work. Your maximum risk in the above case was Rs 10,000 but maximum profit potential was unlimited unlike Futures where the risk can be more than the capital invested.
The above example can be called a Call Option? This type of option increases in value when things go in the positive direction. If you buy a call option for the NIFTY, it will rise as the NIFTY rises. In the stock market, options can be used as tools to minimize risks as well as trading tools.
Options can be traded in a similar way like stocks. For instance you can tell your broker to buy a call option if you are bullish or alternatively you can tell him to buy a put option if you are bearish.
Options need you to be more aware and alert about things happening in the short term. Very few people can do both trading and investing together.
