Options in stock market are a powerful financial instrument that can be used to generate income, reduce risk, or speculate on future price movements. Seasoned options traders can use options to unlock a variety of advanced strategies that can help them achieve their investment goals.

Income generation

One of the most common uses of options is to generate income. This can be done by selling covered calls or cash-secured puts.

A covered call is an options strategy in which the trader sells a call option on a stock that they own. The call option gives the buyer the right, but not the obligation, to buy the stock at a certain price on or before a certain date. The seller of the call option receives a premium for selling the option, which is the price that the buyer pays for the right to buy the stock. Check more on SIP Calculator.

If the stock price rises above the strike price of the call option, the buyer will exercise the options traders to sell and buy the stock from the seller. The seller will then be obligated to sell the stock to the buyer at the strike price, even if the stock is trading for a higher price on the open market. This can result in a loss for the seller, but it also locks in a profit on the stock that they own.

A cash-secured put is an options strategy in which the trader sells a put option and simultaneously deposits enough cash in their account to cover the strike price of the option. The put option gives the buyer the right, but not the obligation, to sell the stock to the seller at a certain price on or before a certain date. The seller of the put option receives a premium for selling the option, which is the price that the buyer pays for the right to sell the stock to the seller. Check more on SIP Calculator.

If the stock price falls below the strike price of the put options traders, the buyer will exercise the option and sell the stock to the seller at the strike price. The seller will then be obligated to buy the stock from the buyer at the strike price, even if the stock is trading for a lower price on the open market. This can result in a profit for the seller, but it also locks in a loss on the stock that they are obligated to buy.

Risk reduction

Options Traders should know that options can also be used to reduce risk. One way to do this is to buy a protective put. A protective put is a put option that is bought on a stock that the investor already owns. The put option gives the investor the right, but not the obligation, to sell the stock at a certain price on or before a certain date. This can protect the investor from losses if the stock price falls below the strike price of the put option in the stock market.