Background

Options trading in the stock market means you do not own the shares until you exercise the option. An option is a financial contract that provides an investor or trader with the right to buy or sell a stock, ETF, commodity, currency, or benchmark at a specified price for a specified period. Options contracts come with a fixed expiry date, usually the last Thursday of a calendar month. When the specified date of expiry arrives, the contract expires, and its value becomes zero. Unlike futures, options do not obligate the buyer or seller to honour the contract. There are two types of options – calls and put. Using these options, traders formulate different strategies for trading. These strategies range from being relatively simple to quite complex. Each strategy has a specific payoff and sometimes odd names.

Derivatives are financial instruments that derive value from an underlying asset. A call option is a derivative contract that gives the buyer the right to purchase an underlying asset at a predetermined price on or before the contract's expiry. Conversely, a put option confers the right to sell an underlying asset at a predetermined price till the contract's maturity.

Long call refers to purchasing a call option and is a purely directional bet. Traders typically use long calls if there are bullish or confident about a particular stock, an exchange-traded fund, or an index fund. A long call is ideal if the trader wants to limit risk and use leverage for maximum profit.

A covered call is a strategy that involves an existing position in the underlying asset or an asset similar to the underlying asset. Essentially, the trader writes a call option and simultaneously purchases the underlying asset to offset the associated risk. The primary advantage of a covered call is hedging, which is relatively easy to set up. Covered calls generate regular income. Traders may reestablish the position multiple times.

Similar to a long call, a long put involves the purchase of a put option and is a purely directional call. Long put is the opposite of a long call. Long put allows the trader to use leverage and benefit from falling prices. Capital commitment for significantly low, and ease of transaction is high.

Short put or "Going Short" is an options strategy wherein the trader sells or writes a put option. Short put allows you to benefit from time decay and profit from a rising or range-bound market scenario.

A married put is a modification of a long put. In addition to purchasing a put, the trader owns the underlying stock. Traders use married puts as insurance for protection against price falls. There is no limit to the maximum profit potential from a married put. The downside of a married put is the premium paid. With a decrease in the underlying asset's price, the value of the put increases. Therefore, the trader only loses the cost of the option rather than any investment value.

Leverage - The primary advantage of trading options is leverage. Options require traders to pay the premium amount, not the entire transaction value. Thus, traders can undertake high-value positions with low capital requirements.