Basics of Options -2

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Understanding Options (Call & puts).
The prices of these options are derived from their underlying securities. Hence options are also called as derivatives.
Are these Options leveraged instruments?
Big YES.
These are leveraged instruments. 
Then, is it Okey to go with high leveraged derivative instruments? Which are simply betting on movement of prices of stock or index that too expire with in specified time period.
The Answer is Yes & also No.
Yes- for people, 
1. who understand the nature of these instruments. Means, knowing how options prices are reacting to the price movements of corresponding underlying security as time passes.
2. Keep their betting size very limited.
3. Have patience to enter a trade or exit.
4. Ready to accept, if their view is wrong & get out of their bet quickly.
5. Knows how these bets are settled at the end of expiry? If not squared off by the end of expiry.

Very Big NO - for people, who don't have above qualities or don't know above information.

After knowing the nature of Options, they can be used to

1. Income- ( By selling OTM calls ) of existing stock in portfolio, regularly.
2. Invest    ( By buying DITM Call option ) in desired stock.
3. Insure    ( Hedge, by buying put option ) their portfolio.
 
What are these DITM* & OTM calls?
Based on the strike price of options, all options ( both puts & calls ) are further divided as follows.
ITM- In the money.
ATM- At the money.
OTM- Out of the money.

For Call Options.

If strike price is higher than spot price of underlying, all those strikes are OTM Call options.

If strike price is equal to spot price of underlying, that  strike is called  ATM Call option.

If strike price is lower than spot price of underlying, all those strikes are ITM Call options.

For PUT Options.

If strike price is lower than spot price of underlying, all those strikes are OTM Put options.

If strike price is equal to spot price of underlying, that  strike is called  ATM Put option.

If strike price is higher than spot price of underlying, all those strikes are ITM Put options.

*DITM is nothing but Deep In the money options.

-In next blog I will tell, the nature of these options( OTM/ATM/ITM).
- What is moneyness?
- intrinsic & extrinsic values of options.
- Greeks of options.

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All the best.

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