Options Trading for Beginners Guide in Stock Market| Espresso

What Are The Best Options To Trade For Beginners?

Options are derivatives in the trading strategy that are amongst the most popular tools for traders in the stock markets. This is because the price of the options can move very fast, thereby making the investors lose or make a lot of money quickly. Options strategies can range from complex ones to simple ones, with several payoffs, and at times with odd names.

Published on 24 January 2022

There are some best options to trade for beginners in the stock market. Regardless of the complexity of the options, these strategies are based on two different kinds; the put options and the call options. While these option strategies are pretty straightforward, they aren’t usually risk-free. In this article, we will talk about trading it right in the stock market as a beginner in investment.

Things to Consider When Trading in Options

1.Consider your objective

First off, you need to be well aware of your trading objective. Then, when searching for the best options to trade, you need to understand your needs. There are different reasons why people go forward with trading in options. One of them is risk hedging. Another very popular one is profit by betting on price movements or speculations.

2.Consider the premiums payable

The next thing you need to know when searching for the best options to trade is the premium amount. Your payable premium would depend upon factors like market volatility, stock prices, stock expiration time, etc. Another thing you need to pay attention to is whether you will be able to make profits while investing in an option at the moment or not. Premiums will affect the returns that you would make and will offer you the leverage of purchasing options to an extent.

3.Consider your risk appetite

Everybody’s risk appetite is different. If you are worried about risks from the beginning, you need to stay away from out-of-the-money options. The premiums are indeed low in this case, and you can earn profits, but it’s quite risky to deal with. Also, the potential for loss is higher in the naked call options. So, it’s better to avoid them as well.

4.Consider the Timing

When you trade-in options that are in-the-money, your premiums payable is higher, it’s exactly the opposite in the case of the out-of-the-money options. So, it would help if you considered the timing when purchasing options. Simply put, when you buy in-the-money options, you will not be able to make much profit out of it.
Also Read: Call Put Options

What are the Best Options to Trade for Beginners?

The best options to trade for beginners are the ones that come with high liquidity and stock volume. Options trading is less risky if done carefully.

What are Call Options?

As a beginner, you should focus on stock prices. If it’s rising, you should trade on the call options. This will give you the right to buy an underlying asset or stock at a specified price in the future. Also, you will be able to make profits if you get your price bets right and if the prices go up.

Again, there are two different types: the naked call option and the covered call option. The former is the strategy that involves the selling of the call options with retaining the underlying assets, like stocks. This strategy is often risky, and the potential for loss could be unlimited.

The latter is amongst the top options if your risk-taking appetite is low. You can go for the covered call option if you already own some stocks. You can buy covered call options equal to the stocks in your investment portfolio.

So, when the prices go up, you can make profits without selling off the stocks. This conservative strategy might not work well for a bullish market as with the share prices moving above the fixed price; you will lose out on the profits from the increase.

What are Put options?

The second type of option is the put option. This will give you the right to sell stock at a certain price. If you expect the share prices to fall, trade could be a good choice. For instance, if you think that a company's stock prices will fall from its current price of ₹100 to ₹90, you can buy 1,000 put options of the company at a strike (fixed) price of ₹100. So, when the company's stock prices fall to ₹90, you will be able to exercise your right to sell the put options and make a gain of ₹10,000.
Also Read: How to Buy & Sell Stocks

If the stock prices rise to ₹110, you will choose not to use your put option and avoid a loss of ₹10,000. So, in this case, you will only lose out on the premiums you have paid for entering the options contract. Simply put, the put options are bearish.

Conclusion

Trading in options could be rewarding for investors prepared to venture into an unknown division in the stock markets. However, taking this plunge could involve risks that are lesser than trading directly in stocks or shares or even during buying futures.

 

Chandresh Khona
Team Espresso

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