Options Trading - The Basics

Options trading is one of the instruments of investing that gives an investor a choice when it comes to making maximum profits with minimum risk.

They can be used for a variety of reasons depending on your trading goals and styles, it may be a better trading choice than owing a stock.

An option is defined as a contract that gives the buyer the right to buy or sell an asset at a specific price on or before a certain date.

Option is one of the most diversified trading instruments available and can be traded with various financial instruments like stocks, stock indexes, currencies, futures, exchange traded fund, commodities and bonds.

It is a derivative as its value is derived from something else and in the case of an index option, its value is based on the index.

It is a security and constitutes a binding contract with strictly defined terms and properties and is a valid trading instrument, whereby the holder has the right, but no obligation to buy or sell the stock or financial instrument.

The buyer will pay some price to get this right called premium and the seller will have to buy or sell the underlying stock, if the owner of option decides to exercise their right.

- Option type as CALL or PUTStrike priceOption type as call or put Expiry date An option that gives you the RIGHT  to BUY the underlying stock/instrument at agreed price called strike price, before agreed date called expiry date.

The person who is selling you the call option carries the obligation to deliver you the instrument, if you decide to exercise your right.

An option allows you to sell the stock at agreed price called strike price, before agreed date called the expiry date.

The person who is selling you the put option carries the obligation to take the delivery from you of the stock, if you decide to exercise your right.

When you trade with stock options is more than simple stock is the leverage involved as options enable you to control the shares of a specific stock without tying a large amount of capital in your trading account.

The amount of capital that you are paying is a comparatively small amount comparing to the cost of buying the same amount of stocks.

It gives one the ability to invest a smaller amount of capital and control the stock and give the option trader the flexibility.

You can magnify profit when the stock moves in your favor.

One can make money based on a relatively small movement in the stock.

Certain income producing option strategies enable you to generate a monthly passive source of income and one of the most used strategies to generate passive income is to write covered calls.

The trader who wrote the covered calls may be forced to sell his stock when the options is exercised so use this only if you are willing to depart with the stock that you own.

There are various options strategies that give the options trader the ability to make money from all market directions with limited risk exposure and potentially unlimited profit.

One can buy call options when the market is bullish, buying put options when the market is bearish and entering into various credit spread strategies to earn profit when the market is range bound.


Stock options can be used as an instrument to hedge against various risk exposure of a stock holder and as insurance to protect your stock portfolio from any adverse move in the market.

Unlike stock where you can hold on to it for many years or even passes on to your children, all options have an expiration date and there is nothing you can do to stop the options from expiring.

 The rate of time value increases over time when the options get closer to the expiration dates so be sure to watch over your open options position and not to let it expired worthless.

If you hold onto a trade and are out of money at expiration date, then you may lose that what you invested in the options.


Leverage works both ways as it can help you earn profit in shorter time frame and can break your account in half that time just as quickly.

The risks of leverage is present when one is involved with calls or puts or entering into any unlimited risk option strategies.

Options trading is a risky venture and it has substantial risk and reward involved and you need to trust your instincts and do what you feel is the best for you so that you achieve your financial goals without any losses.

Unit Link Insurance Plans - Why Invest

A Unit Linked Insurance Plan or ULIP, is a financial product that is acts both a an investment as well as insurance.

It is one of the best investment options in India and is more reliable when it comes to wealth creation as it invests in debt and equities markets with the fluctuation is counted by the net asset value (NAV).

In such a plan the premium amount, after deduction of charges, is invested into funds of your choice and the fund could be equity based, debt based etc.

The performance of the fund depend on the market although you can switch between the funds.

They are similar to those of mutual funds except that unit linked insurance plans are investment products that comes with insurance benefits.

It can be viewed as a long term investment plan, which provides risk cover for the policy holder along with investment options to invest in any number of qualified investments such as stocks, bonds or mutual funds.
 
 You pay the premium just like for an insurance policy unlike the insurance policy the premium is not just for insurance but also for investment.

After deducting some charges some in beginning, some during the policy term and for insurance ,the amount left gets invested into mutual fund of your choice. have different funds with different risk-return profile.

One may have an allocation of 80-20 to equity and debt ratio and you can switch between the funds 4 free switches in most of the cases , there after some nominal fees.

 These charges are deducted from the premium paid by the client and they account for the initial expenses incurred by the company in issuing the policy.

 These charges are deducted on a monthly basis to recover the expenses incurred by the insurer on servicing and maintaining the life insurance policy like paperwork and it could be throughout the policy term or vary at a pre determined rate.

 A part of the premium from the selected fund , is invested either in equities or debt, bonds, money market instruments etc or a combination of these and managing these investments incurs a fund management charge (FMC).

The FMC varies from fund to fund even within the same insurance company depending on the assets, a fund with higher equity component will have a higher FMC.

 These charges are deducted for managing the funds before arriving at the Net Asset Value (NAV) and the fee is charged as a percentage of funds under management.

 Mortality expenses are charged for providing a life cover to the individual and are deducted on a monthly basis.

The expenses vary with the age and either the sum assured or the sum at risk which is the difference between sum assured and fund value of the insurance policy of an individual.

It is done by including your age, mortality tables used by the industry and also the company’s claim experience though the mortality charges should be the same, some insurers levy differential rates.

 These charges are deducted for premature withdrawal partial or full with guidelines on the maximum surrender charges that can be levied by life companies.

The charges when you switch between funds ex  from Equity to debt with a limited number of switches typically 4 are allowed without any charge.

 In ULIP which offer minimum guaranteed amount or NAV, there is cost of guarantee which is deducted from the total units.

 There are online plans with no charges for premium allocation, policy administration and discontinuance except a percentage of fund management charge per annum and mortality charge from the fund value of customer in order to provide the life cover.

This makes them lower in terms of cost than equity mutual funds and make them attractive with the tax efficient transfer from debt to equity, and vice versa.

The  mortality charges go down as the fund value goes up and in case of death in the initial years of the policy, when the fund value is less than the sum assured, the insurer will pay the agreed sum to the nominee.

When the time the fund’s value goes higher than the sum assured, the death benefit will be the accumulated amount in the fund.

The mortality charge keeps reducing year after year as the sum at risk reduces which is the difference between the accumulated fund value and sum assured under the policy.

There are many nit-linked insurance products to suit your goals for your retirement planning, for your health and marriage or for investment purposes.

These plans are wealth plans that are usually of shorter time frame and focus on getting higher returns to create a good maturity amount.

Child plans are for securing child’s financial future as the money is invested to ensure that the child’s future financial goals like education are secured. Along with it, death benefit in most child plan is very comprehensive so that child’s future is not compromised.

Pension plans focus on the creating of a corpus amount so that the life insured gets regular pension after retirement.

Financial Markets - An Overview

A financial market or a capital market is a part of the financial sector where people trade shares, bonds, derivatives, securities, commodities, and other items of value at low transaction costs and at prices that reflect supply and demand. 

 Securities include stocks and bonds, equities and commodities include precious metals or agricultural products.

These markets are the place where businesses go to raise cash to grow, enabling companies reduce risks, and giving investors and shareholders an opportunity to make money. 

It is the true economic center of the country, where major financial transactions are carried out and millions of people are affected by the trading that goes out on the trading floor.

Everyday, stocks, futures, options, and bonds are traded and one will find both domestic and international corporations that are traded on a stock exchange daily and the money involved in these trades does not go directly to the trading companies listed.

A share or stock is defined as a portion of ownership in a given company and most stock holders do not own major stakes in a company to play a role in the management of the company.

Stockholders can purchase stocks, so that their investments rise in price, and those stocks can be sold at a profit at the right time.

Futures trading can be defined as a trading instrument that can be used for trading grains and other agricultural products.

It is a financial contract where you have to predict the future value of a commodity that must be delivered at a specific time in the future.

Commodities include oil, silver, natural gas, cotton and minerals that are bought and sold on a commodity exchange.

Futures contracts have a seller and a buyer and one can also can speculate on the contract depending on which side you are on and the contract states the price at which you agree to pay for or sell a certain amount of this future product when it is delivered at a specific future date.

 Most futures contracts are based on a physical commodity, but some futures contracts also are sold based on the future value of stock indexes.

You cannot take delivery or actually provide the commodity for which you are trading a futures contract but you can sell the futures contract you bought before you actually have to accept the commodity from a commercial customer.

Futures contracts are the contracts that can be used as financial instruments by producers, consumers, and speculators.

Bonds are loan instruments that allow companies sell bonds to borrow cash.

If you buy a bond, you are holding a company’s debt or the debt of a governmental entity and the company that sells the bond agrees to pay you a certain amount of interest for a specific period of time in exchange for the use of your money.

The difference between stocks and bonds is that bonds are debt obligations and stocks are equity wherein stockholders actually own a share of the corporation.

Bondholders lend money to the company with no right of ownership however bonds are considered safer, because if a company files bankruptcy, bondholders are paid before stockholders.

 Bonds act as a precaution and not actually a part of the trading world for position traders, day traders, and swing traders.

An option is a contract that gives the buyer the right, but not the option, either to buy or to sell the asset upon which it is based at a price specified in the contract on or before a date that is specified in the contract.

Before the options period expires, a purchaser of an option must decide whether to exercise the option and buy the asset at the target price.

 If the options buyer decides not to buy the asset, his or her initial investment in the option is lost. Options also are called derivatives.

Mutual Funds - An Investment Option

Mutual funds are a means of investment and can be viewed as a financial trust in which many investors pool their funds keeping in mind a predetermined objective of investment.

 The funds are pooled together and they are invested in various instruments of the capital market like securities,bonds, shares and debentures and other money market instruments.

These funds are managed and watched over by a financial expert who studies the market conditions and invests the money accordingly.

The profits earned on the investments are shared between the investors according to the number of units of shares held by them.

Types of Mutual Fund Schemes

Open - ended schemes are all about liquidity and are generally available throughout the year, they are bought and sold on demand at their net asset value, or NAV, which is based on the value of the funds securities and is generally calculated at the close of every trading day. 

Investors buy shares directly from a fund. they do not have a fixed date of maturity and can be bought and sold as per their requirements.

Close - ended schemes is a fund with a pre-determined maturity period and investors can directly invest the open ended scheme during the initial issue.
There are two types of exit options in this kind of schemes depending on the type of the scheme and it raises a fixed amount of capital through an initial public offering (IPO). 
The fund is then structured, listed and traded like a stock on a stock exchange.

Interval Schemes are a combination of both open-ended and close-ended schemes and one can trade the units directly or redeem them at the NAV related rates.

Currently investing in mutual funds is considered to be one of the most beneficial forms of investments available in comparison to the other investments instruments. 

Mutual funds are comparatively cost efficient and also carry a low level of risk.

The biggest advantage of investing in mutual funds is that they are managed by qualified and professional expertise.

Investing in diverse group of mutual funds does not require the investor to buy individual bonds and stocks he purchases units of different mutual funds thereby distributing the amount of risk. 

When investing in different assets the investor it reduces the risk factor and he is sure that if he incurs losses in any particular fund then he might gain from another investment and you can liquidate your investment as and when you like.

Investing in mutual funds is very easy and simple to understand and does not require large amounts of money to invest.

One must be careful while investing as mutual fund managers are not experienced enough and do not research all the available opportunities in the market.

When you purchase a unit of a mutual fund there is an entry load charge which is an extra cost and when exiting from the mutual fund you are again charged extra as an exit cost.

Since investors have their money spread across different assets the high returns earned can be diluted due to diversification and as result do not have an impact on your earnings.

Tax is something that is often ignored as the mutual fund manager sells a particular security it triggers the tax of the individual thereby making it useless as a tax savings investment.