What is Option Trading?
If you are a beginner and trading in the stock market, you often wonder what option trading is. It’s basically a way to profit from the movement of stock price or Index price by buying or selling contracts at a set price. For example, an options trading for beginners scenario might be buying a call option on Reliance Industries at Rs. 1,400 if you believe its price will rise. If Reliance climbs to Rs. 1,500 before expiry, that call option becomes valuable and you make a profit. This strategy lets you gain from upward price moves with limited risk (the most you lose is the premium paid).
A Few Things You Need To Know Before Diving Into Options
Calls vs. Puts: It is good to know the basics before proceeding with the strategy. In option puts and calls, you would have a call option to purchase a stock at a set price (in case you think the stock will increase), and a put option to sell a stock at a set price (in case you think the stock will decrease). When the terms put option and call options are used, consider calls as the bullish side and puts as the bearish side.
Some traders even use a call and a put together, which they sometimes call an options call put strategy (like a straddle); but for now, we'll focus on straightforward bullish strategies.
When markets are rising, traders use bullish option trading strategies to capitalize on gains. These strategies let you potentially earn money when stocks like Infosys or TCS climb higher. We will look at five common strategies: buying a call (Long Call), Bull Call Spread, Covered Call, Cash-Secured Put, and Protective Put.
Each one uses calls and puts in different ways to aim for profit. We’ll use real examples with Indian stocks and rupees to illustrate how each option trading strategy works.
Bullish Strategies For The Indian Market
Long Call: This is the simplest bullish strategy. You pay a premium to buy a call option, which gives you the right to buy shares at a strike price. For example, if Reliance is trading at Rs. 1,400, you could buy a Rs. 1,500 strike call option for, say, Rs. 50. This costs you Rs. 50 per share (the premium). If Reliance moves up to Rs. 1,600 by expiry, your call option (which lets you buy at 1,500) is worth at least Rs. 100, so you make a net profit of Rs. 50 per share. The most you risk is the premium paid, and option trading for beginners love this strategy for its simplicity and unlimited upside.
Bull Call Spread: This strategy uses two call options to reduce cost. You buy a call at a lower strike and sell another call at a higher strike. For instance, imagine Infosys is at Rs. 1,400. You buy a Rs. 1,400 call for Rs. 100 and sell a Rs. 1,500 call for Rs. 50. Net, you pay Rs. 50 in premium. If Infosys rises to Rs. 1,500 by expiry, the 1,400 call is worth Rs. 100 and the 1,500 call expires worthless, giving you Rs. 50 profit (Rs. 100 value minus Rs. 50 cost). This caps both your profit and loss but is a popular option trading strategy to boost gains when the stock rises moderately.
Covered Call: If you have shares of a company, then you can sell a call on the stock to earn.For example, you hold 100 shares of TCS at Rs. 3,000. You sell a Rs. 3,200 strike call and collect about Rs. 60 per share in premium (Rs. 6,000 total). If TCS stays below Rs. 3,200 by expiry, you keep the premium and still own your shares. If TCS rises above Rs. 3,200, you must sell your shares at that price, but you still keep the premium. This option trading strategy gives you income in a rising market, though it limits extra gains beyond the strike.
Cash-Secured Put: This strategy is selling a put option on stock while having enough cash to buy the stocks later. For example, if Infosys trades at Rs. 1,400 and you believe it won’t drop below Rs. 1,300, you could sell the Rs. 1,300 put option for Rs. 40 premium. If Infosys stays above Rs. 1,300 by expiry, you keep the Rs. 40 per share premium as profit. If Infosys falls to Rs. 1,200, you must buy 100 shares at Rs. 1,300 (using your cash), but your effective cost is Rs. 1,260 (Rs. 1,300 strike minus Rs. 40 premium).
Protective Put: If you have a stock and you think it will drop then you should buy a Put for the insurance.For example, say you own 100 shares of Reliance at Rs. 1,400. You buy a Rs. 1,300 put for Rs. 30. If Reliance stays above Rs. 1,300, you lose the Rs. 30 premium but still profit from any higher stock price. If Reliance crashes to Rs. 1,200, you can sell at Rs. 1,300 using the put, capping your loss. Protective puts cost a premium but give peace of mind, letting you stay bullish in trading in stock market with limited downside.
Read more here: https://bigul.co/blog/option-trading/how-to-make-a-profit-using-bullish-option-trading-strategies
