There is an ocean of instruments that you can trade in financial markets. Option trading is one of them. Options are derivative instruments that derive their value from underlying instruments like stocks, bonds, interest rates, commodities, etc.
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Options give you the choice but not the obligation to buy or sell the asset. You can trade options using an option trading platform. In today’s blog, we will answer the question of what is option trading and explore ways to trade it efficiently.
What is Options Trading?
Trading options have several motives like hedging your portfolio, expressing a view, taking leverage, and rebalancing your portfolio, among many others.
It depends on the trader and the purpose for which he/she is trading options. Options are generally of two types, call and put.
The call option gives the buyer the right to purchase the underlying asset at a predetermined price called a strike price and with the put option the buyer has the right to sell the underlying.
Sellers take the opposite view. Now, traders trade options online depending on whether they are bullish or bearish.
There are many strategies in options trading and traders must consider the payoffs and risks of each strategy.
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How to Trade Options Efficiently?
Trading options is a doubt edge sword. If options have the potential to magnify the returns, they also magnify the risks if not traded efficiently. Trading efficiently means trading within limits and having a proper risk management system.
One should always have a view of the underlying assets and form a strategy based on the view. Options are highly levered instruments, hence leverage needs to be in check.
There are many strategies that are available to express a view, using option trading platform one can zero in on a strategy.
Deciding the strategy is just the tip of the iceberg, handling option trade in a live market is the challenge. One can efficiently trade options using stop loss and target prices. This way one can limit the losses and lock in the profits as they come.
Apart from this, one can have an eye on how option Greeks determine the option price evolve. Volatility is the main component that drives option prices.
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Choose the Right Options Trading Platform
Trading options is like a glass half filled. Choosing the right platform is equally important. Choosing a robust option trading platform is important for your long-term trading journey. Dhan has an efficient options trading platform that provides services like:
- Custom strategy builder
- Pre-built strategies
- Pledge margin benefit & many more
These facilities add up great value to one’s options trading. Analyzing a trade with the strategy builder will let you know the potential profit and the risk as well as the margin that is required for the trade.
We have discussed the motive of options trading as well as how to trade them efficiently. There are tools at our disposal to aid us in our trading journey, however, one must give the right inputs in order to express the view efficiently.
Source: Cosmo Politian
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