What is an Option ?

I have started getting lot of mails so let me first tell you few things :-

1) It will take time for you to learn options. It will take few months. So dont think that you can learn option in a day and start trading them :)

2) Have patience, Dont just start looking for tips to buy options. All those tips are useless. No one will give you free tips ;) You have to use your own intelligence.

3) Options are risky, Yes they are but then investing in equity is also risky. So you have to learn them , practice with some dummy transactions for some time. If you think you can handle them after that you can start trading them.

4) The successful use of options requires a willingness to learn what they are, how they work, and what risks are associated with particular options strategies. Individuals seeking expanded investment opportunities in today's markets will find options trading challenging, often fast moving, and potentially rewarding.

5) Lastly i will not be liable if you lose money in options ;). Its your money so use it wisely




If you buy an option it gives you the right to buy the underlying asset at a specified time for a specific price.

Eg :- Suppose you want to buy 1000 BHEL shares ( at 2000 / share ) you need to shell out 1000 * 2000 Rs = 20,00,000 ie 20 lac Rs. But you dont have such huge amount of money.
You make a contract with exchange that you will buy 2000 Shares of BHEL in 6 months time.

Exchange says that after evaluating BHEL price will increase to 2500 after 6 months so we will sell at that price if you want to buy it now. So you agree and say ok we can have a contract worth 25,000,000

But as a promise you need to do a down paymemt ( aka premium ) of 5000 rs for the contract ( as you can run away ;).

So you spend 5000 Rs and earn a right to buy 1000 BHEL shares in 6 months time.

So after 6 months no matter what the market value of BHEL share is you have the right to buy BHEL share @ 2500 rs / share.

Now two things can happen.

1) BHEL bags some BIG projects and its profitability increases and revenue increases and the share price shoots up to 3000 Rs after 6 months so 1000 shares are worth 30,00,000 rs now.
But you already have right to buy 1000 Shares for 25 lac Rs . So you can ''exercise'' your option and earn 5 Lacs profit

2) BHEL profits drop and it dosen't bag any new projects and the price drops to 1500 Rs. So if you ''exercise'' the option now you may lose money. So Instead you dont use the option and let it expire. So you only lose only 5000Rs you paid for the option.

So This is a simple example how options works. Next article will explain you the terms used in options trading

Happy Investing...