We hope that this course has given you a gentle introduction to the world of options trading. Out of this entire course, the biggest take-away should be that options require traders to understand and make trade-offs.
When you invest and trade in stocks, you only need to decide on the company and the price at which you are interested in buying and/or selling. With options, you need to consider the underlying, the option type (call or put), strike price, and expiration date. Investing or trading stocks requires you to have an idea about the direction that the stock will move in the future. Options require you to have an idea about the direction of the underlying, or lack thereof, as well as the timing of the direction.
Due to these additional considerations with options trading, you can “‘choose your own adventure’”. As a trader, you can decide if you want to accept a potential higher loss in exchange for greater upside or maybe accept a reduced max gain to increase your odds of making a profit.
Illustration 1 shows three example bull call spreads along with a corresponding single leg call. If you look at the three call spreads on the left, you can see the trade-offs of selecting a lower max loss but a low max gain as compared to a call spread with a higher max loss but higher max gain. Alternatively, you can choose to trade a long call which will have a higher max loss but your gains aren’t capped by a short call.
As you get started on your trader journey, always remember that options allow you to decide on the
- Amount you can gain,
- Amount you are risking (or could lose)
- The likelihood of your trade ending in a profit.
It may take a while to intuitively understand how this works together but practice can help. In addition, we have built a product – Ready-made Options – that makes these trade-offs front and centre. In the Upstox app, traders can use this product to view a list of strategies based on their trade-offs.
To learn more about this product, you can visit the Ready-made Options page here.
Stay Safe. Trade Smart.