Benchmark equity indices BSE Sensex and NSE Nifty extended their losses for the second straight session on 27th January amid heavy selling in index heavyweights including Reliance Industries, Adani Enterprises and Adani Ports among others. The 30-share index Sensex traded over 1,800 points down at 59,108 against the 60,978.75 mark on January 24, 2023. Likewise, the 50-share NSE Nifty index retreated more than 550 points to 17,566 from 18,118 during the same period.
Selloff in Adani Group companies’ stocks, that was triggered by the Hindenburg Research report, which disclosed that the company was short on Adani Group companies could be factor behind the market crash. Sentiments came under pressure after the United Nations on 25th January cut down India’s growth forecast by 20 basis points to 5.8 per cent for the ongoing calendar year due to higher interest rates and risks of recession in the developed world weighing on investment and exports.
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What is options trading?
An investor’s portfolio consists of various financial instruments like stocks, exchange traded funds (ETFs), mutual funds and bonds. However, the Options are altogether different. Options are used in different ways depending upon investors’ goals and how they plan to use them. Investors often use options to reduce the risk associated with the stock they have in their portfolio. Similarly, others may use options to earn additional income. Most importantly, options provide an opportunity to traders or investors to benefit from the price movement without paying the full price of a security or taking delivery.
In India, the National Stock Exchange (NSE) launched index options on 4 June 2001, and stock options were launched on 4 July 2001. In the year 2020, NSE also surpassed America’s Chicago Mercantile Exchange to become the world’s largest derivatives market exchange by volume.
What are options?
Options are defined as derivatives instruments that enable the buyer (holder or owner) of the instrument to buy or sell the underlying asset. The right to buy or sell is without any obligation. The seller of the option is, however, obligated to buy or sell, should the buyer exercise his or her right.
Simply put, option trading includes:
- A right to buy or sell, but not an obligation
- Buy or sell at predetermined price
- Buy or sell on or before predetermined date
Types of options
There are two types of options: Call and Put. A call option gives the buyer the right to “buy” the underlying security but not the obligation to do so at a predetermined price and date. A put option gives the buyer the right to “sell” the underlying security but not the obligation to do so at a predetermined price and date.
How does options trading work?
Before we come to the options trading guide, a beginner must understand the two essential derivativesconcepts — long and short. When a trader goes long on an index or a stock, it means he or she believes that the price of the underlying will increase. On the contrary, if the trader goes short on any index or a stock, it means he or she believes that the price of the underlying will fall.
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