20:35
Options Trading Course | Free Trading Course - Lecture 1
Trade with Purab
Overview
This video introduces the fundamentals of options trading, designed for beginners. It explains the concept of derivatives, using relatable examples like milk products and real estate. The core of the lecture focuses on understanding options contracts, specifically calls (CE) and puts (PE), and how they relate to market direction predictions. The video also demonstrates how to find and interpret options on a trading platform, covering key elements like strike prices and expiry dates, and introduces the concepts of 'at the money,' 'in the money,' and 'out of the money' options. Finally, it touches upon the risks and benefits of options trading, particularly for buyers, and highlights the role of lot sizes in trading.
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Chapters
- Options trading is a complex subject often sold in expensive courses, but this series offers a free masterclass for beginners.
- A derivative is a financial instrument whose value is derived from an underlying asset.
- Examples like paneer (derived from milk) or a house's value (derived from its location and amenities) illustrate how derivatives work.
- In options trading, the value of an option contract is directly linked to the price movement of its underlying asset (e.g., Nifty or Bank Nifty).
Understanding what a derivative is provides the foundational context for grasping how options contracts derive their value, which is crucial before diving into trading strategies.
The value of paneer, butter, or ghee changes based on the price of milk because they are derived from milk.
- An options contract gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price.
- A token payment, similar to an advance for a house, is paid for this right, and this payment is called the 'premium'.
- If the market moves against the buyer's prediction, they can choose to let the option expire, limiting their loss to the premium paid.
- This limited risk is a key advantage for option buyers, as their maximum loss is capped at the premium.
This chapter clarifies the core benefit for option buyers: the ability to control a larger asset with a smaller investment while limiting potential losses to the initial premium.
Paying a 1 lakh rupee token for a 50 lakh rupee house. If the house price drops significantly, you can choose to forfeit the 1 lakh, rather than buying the house at a loss.
- CE stands for Call European (or simply Call), and PE stands for Put European (or simply Put).
- Buying a Call option (CE) is a bet that the underlying asset's price will go UP.
- Buying a Put option (PE) is a bet that the underlying asset's price will go DOWN.
- The premium paid for a Call or Put option represents the maximum potential loss for the buyer if the trade goes wrong.
Distinguishing between Call and Put options is fundamental to executing trades based on your market outlook (bullish or bearish).
If you believe Tata Motors' stock price will rise above Rs. 1040, you would buy a Call option. If you believe it will fall below Rs. 1010, you would buy a Put option.
- When looking for options, you first identify the underlying asset (e.g., Tata Motors) and its current price.
- You then decide on a target price (strike price) and whether you expect the price to go up (Call) or down (Put).
- Options contracts have an expiry date (weekly or monthly), after which they become void.
- Premiums for options further away from the current price (out-of-the-money) are generally cheaper because they are less likely to be profitable.
This section provides practical guidance on how to locate and select specific option contracts on a trading platform, including understanding strike prices and expiry dates.
Searching for 'Tata Motors 1040 Call' on July 25th expiry, with Tata Motors currently trading at Rs. 1024, to bet on the price rising above Rs. 1040.
- Options are categorized as 'At the Money' (ATM), 'In the Money' (ITM), or 'Out of the Money' (OTM) relative to the current asset price.
- For a Call option, ITM are strike prices below the current market price, ATM is the closest strike price, and OTM are strike prices above.
- For a Put option, ITM are strike prices above the current market price, ATM is the closest strike price, and OTM are strike prices below.
- ITM options are generally more expensive because they have intrinsic value already, while OTM options are cheaper but rely solely on future price movement.
Knowing these terms helps in understanding the relative cost and probability of success for different option contracts, influencing trading decisions.
If Nifty is at 44,000, a 44,000 Call is ATM, a 43,900 Call is ITM, and a 44,100 Call is OTM. For a Put, a 44,100 Put would be ITM, and a 43,900 Put would be OTM.
- Options trading is highly risky, with potential for significant losses, and is not suitable for everyone.
- The primary benefit for buyers is limited risk (premium paid) versus potentially high rewards.
- However, profits for option buyers can be slightly less than direct stock ownership due to the premium cost.
- The high promotion of options trading is partly driven by brokers earning substantial brokerage fees from frequent options and futures trading.
This section provides a crucial reality check on the risks involved and the reasons behind the widespread promotion of options trading, encouraging a more informed approach.
Buying a stock at Rs. 100 that goes to Rs. 200 yields Rs. 100 profit. Buying an option for Rs. 20 that allows you to profit from the same move might yield Rs. 80 profit after accounting for the premium and potential complexities.
Key takeaways
- Options are derivatives, meaning their value is tied to an underlying asset.
- Option buyers have the right, but not the obligation, to buy or sell, with their maximum loss limited to the premium paid.
- Call options are bought when you expect prices to rise, and Put options are bought when you expect prices to fall.
- Understanding strike prices, expiry dates, and the 'in the money,' 'at the money,' and 'out of the money' classifications is key to selecting options.
- Options trading carries significant risk, and the profitability percentage for buyers is generally low.
- Brokers heavily promote options trading due to higher brokerage earnings compared to equity trading.
- Trading in lots (a fixed number of units) is mandatory for options, not single units.
Key terms
DerivativeOptions ContractPremiumCall Option (CE)Put Option (PE)Strike PriceExpiry DateAt the Money (ATM)In the Money (ITM)Out of the Money (OTM)Lot Size
Test your understanding
- What is the fundamental difference between a derivative and its underlying asset?
- How does the concept of a 'premium' in options trading limit the buyer's risk?
- Explain the conditions under which you would buy a Call option versus a Put option.
- What does it mean for an option to be 'out of the money,' and why are these options typically cheaper?
- Why is it important to understand the risk involved in options trading before participating?