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Option Buying & Writing

What is Option buying & Option writing?

Ever had trouble keeping up with conversations about options and shares? Don't fret. You can simplify these terms and think like a professional in no time. A basic concept is that of options. An option is the right to buy or sell a particular trading instrument a specified price. There is no obligation, but there are defined terms. When you sell an option within the expiration rate, you are said to be "writing" the option.There are generally two types of writing: covered and naked. In a covered call, the writer owns the property in question and sells the option on the expectation that the price will move in a certain direction. The buyer has to pay a premium in exchange for the writing. If the option writer does not own the trading instrument, this is called "naked writing". This follows the same principle but is risky because then the writer has to produce the number of shares without already owning them.

Why buy options?

Many people, while investing, use options to buy/sell stocks, hedge positions, or act as speculators. The last group, spectators, do not hope to buy/sell but hope to make gains by capturing any movements in the stock, although options trading is a far more efficient way to make profits. While purchasing an option, the movement of the stocks price is important. If you are a call buyer, you will need the stock to rise, while a put buyer would want the opposite.This can be explained with an example. When you buy an option, you aren't buying the property itself, just the contract rights for a certain price.

 If, at a certain point, the value of the property is much more than what you negotiated to pay, you make a profit, because the writer has to give it to you at the negotiated price. If the stock price of the property in the share market goes down, you don't have to buy it, and you only stand to lose the price of the option. You can look at various online trading options and information about nifty options from brokerage firms.

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