Basics of Options - 4

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How to do an option trade?

First let me discuss about CALL Option trade.

We know that, whenever your view is, underlying going to raise, we buy Call Option.( This is simple bet).

But, which strike you need to select? ITM, ATM or OTM?


See, if your underlying is trading at $40/-. your view is, this underlying will rise very soon. you want to take advantage of high leveraged options trade.

Simply Buy ATM Call Option.

The reward is pretty similar to that of buying underlying but only after it crosses your bought strike of call option.

But, remember this is ultimately a bet, which will forfeit your amount if you are wrong & keep this position till end of expiry.( If spot does't cross your bought call).



By observing the above table. If you bought a 40 CALL at 2/-. Then, at expiry, even though underlying closes at 40, still the value of your bought call will become ZERO.

So remember to win with CALL buying option, your underlying need to cross the strike atleast by the value of option you have put on table.

Hope, you have understood something about buying call option in hoping that underlying moves higher, there by making money in buying call option and close the trade by selling the same at a higher price.

I will explain this concept with few more examples in next blog.  

Happy Learning Guys,
Sandeep Tummuti.

follow me on twitter @Sandeeptummuti


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