“Share Market”. All of us heard about it and we know that if you have the knowledge of it, you can make lot of money from it. In share market, there are lots of ways to earn money. I also want to discuss with you a major money making idea. It is OPTIONS. I show you how you make a profit from stock, either its price increase or decrease.
Options are hedging/investment instruments, which allow the buyer the right but not the obligation to buy/sell the underlying stock/ index. The buyer of the option incurs a charge for this right, which is referred to as the “Premium”. The option writer or seller is the other party to such a contract who earns the premium.
We play it by two ways:-
1) Call Option.
2) Put Option.
Call Option: - It is a right but not obligation to buy a particular asset at a pre-specified price. Let’s take an example:
Mr. X buys a stock call option at Rs.1000 strike price at end month by paying a premium of Rs.10. Now he has a right but not obligation to buy stock at the end of month at a price of Rs1000.
Suppose the stock at the end of month is:-
Ø Rs.1100 then Mr. X buys it at Rs.1000 as he has a right to buy it at Rs.1000 and makes a Profit: -Rs. (1100-1000-10) = Rs.90.
Ø Rs.900 then Mr. X does not but it and book a Loss: - Rs.10 (premium amount).
This is how Mr. X makes a profit. In case of Call Option, his loss is limited but profit is unlimited, if price of share increase. In case stock price is below Rs.1000, he buys stock from market and book a loss of premium amount. But, if stock price is more than Rs.1000, he can buy it for Rs.1000 and book a profit of amount which is more than Rs.1000.
Put Option: - It is a right but not obligation to sell a particular asset at pre-specified price. Again let’s take example of Mr. X:
This time Mr. X buys a stock put option at Rs.1000 strike price at the end month by paying a premium of Rs.10. Now he has a right but not obligation to sell stock at the end of month at a price of Rs.1000.
Suppose the stock after one week is:-
Rs.1100 then Mr. X doesn’t sell it and book a Loss: - Rs.10 (premium amount)
Rs.900 then Mr. X sells it at Rs.1000 and book a Profit: -Rs. (1000-900-10) = Rs.90
This is again how Mr. X makes a profit. In case of Put Option, loss is limited but profit is unlimited, if price of share fall. As if stock price is more than Rs.1000, then Mr. X sells stock in market at a price more than Rs.1000 and book a loss of premium amount. But, if stock price is less than Rs.1000, he can sell it for Rs.1000 and book a profit.
Note: - As you see, it is very easy to make money with the help of “OPTIONS”. There is equal chance of losing money in “Options Trading”. So, before going to make money out of it; please do some research regarding how it works in your favor?
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