Option Trading : Put & Call

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Put and Call are the term used in Option trading. Option trading is the buying and selling of stock options of  a company.

Options trading is trading of option contracts of underlying stock or index. An option contract gives the trader the right (not obligation) to buy or sell a stock or index at a specific price on or before a specific date.
After the specified date, this contract will not exist.

Put Option
Put Option is a type of contract which allows a trader the right to sell a stock or index at a particular price also known as the Strike Price on or before the expiry date.

Buying a Put Option
A put option is bought when the trader is expecting a fall in the stock price. 


Call Option
Call Option is a type of contract which allows a trader the right to buy a stock or index at a particular price also known as the Strike Price on or before the expiry date.

Buying a Call Option
A Call option is bought when the trader is expecting a rise in the stock price. 

Option Trading Example  :

Lets say that the value of Nifty is 4500
If a trader feels that the Nifty may go up to 4800. He may buy the "Call Option" with strike price of 4600 at a value of Rs. 30/- for one. Currently the lot size of Nifty is 50, so the buyer has to buy a contract of 50 numbers. Means, he has to spend Rs 30 x 50 = Rs. 1,500/- for this contract.

If the market moves as anticipated and Nifty has a value of 4900 on the expiry date.
This contract gives him a profit of Rs. 300 per share.
The whole contract gives him profit of : Rs. 300 x 50 shares = Rs. 15,000
So his final profit value will be : Rs. 15,000 - Rs. 1,500 = Rs. 13,500/-

In the above example this trader risked Rs. 1,500 and made Rs. 13,500/-

Now if the market falls and the value of Nifty is Rs. 4300 on expiry date. Then he will only loose the contract value only (Rs. 1,500).

Caution : Proper knowledge about Options trading is must before you actually start to trade options. The risk of loosing money is very high in derivatives trading.

Share Trading & Bonus Shares

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Share Trading is the buying and selling of shares through stock markets. Through Stock Exchanges, shares can be bought and sold. People see it as an investment platform to earn huge profit with short span of time even though there is risk involved in it. Some companies offer bonus shares to the shareholders which is free of cost.

Bonus Shares:

Bonus shares are issued by the profitable companies to the shareholders free of charge. Shareholders can make benefit out of these shares and which will also create trust on those companies. 

Ratio of Bonus Shares

Ratio of bonus shares given by the companies to the shareholders may vary from company to company. Bonus shares are issued in definite proportion to the existing holding. If a company offers a 2:1 ratio of bonus shares which means that the share holder will get 2 additional shares for free for every one share he holds. Let's say one is holding 100 shares of a company and the company issued a 2:1 bonus share ratio then the share holder will get 200 shares for free, so finally he will be having 300 shares instead of 100.

Issue of Bonus Shares

Companies accumulate reserves by retaining a part of profit, which is not paid out as dividend. Over the years the reserves accumulates and the companies issue this free reserves as Bonus shares to the existing shareholders. When company issue bonus shares the reserves will be converted to capital. The advantage for shareholders is that they are not paying for the bonus shares and company's profit is also not affected.

Bonus Shares and the Stock Price

When a company issues a bonus shares this will add up the total number of shares in the market. lets say that a company has 1 Lakh shares in the market and that comapny issued a 2:1 ratio of bonus shares then there will be 2 lakh share issues, so total no of shares in the market will be 3 Lakh shares. Earnings per share is calculates as follows:

Earnings per Share = Net Profit / No .of Shares

here the net profit remains same and the no. of shares increases as a result value of EPS will go down.

In fact, the stock price should also go down proportionately to the number of new shares. But sometimes, in reality, the share prices may not go down, which gives more advantage to the share holder.

Bonus Share - Good or Bad??

A bonus issue indicates that the company is booming and it is in a position to service its larger equity. Bonus share issue is considered as a positive sign for the company.
Whenever a bonus issue is announced, the company also announces a record date for the issue. Record date is the date on which the bonus shares takes effect, and shareholders are entitled to the bonus shares on that date.

Whenever Bonus shares are issued the stock becomes more liquid. And this make it easier to buy and sell.

Tips to Make Money from Stock Market

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This post throws light on some of the tricks tips and advice's for how to make money from stock market investments:

Here are the Stock Market Investment

• Buy Strength, Sell Weakness

You don't make money from bargains. Cheap stocks often appear to be bargains after a large drop...but they continue to fall.

Buy break outs and sell them higher.

Sell shares that are breaking down.

• Trade active stocks

There are thousands of stocks, but most dont move much. Look at the daily volume and often nothing is traded.

Always trade shares and sectors with volume, that are trending well.

Spreads are the tightest on the most active shares.

Using online resources filter shares that are active.

Observe companies 20 days or less from all time lows or highs.

• Look at shares as if they are people

Stocks often act like people. Each has its own personality. A stock can change from one to another quickly.

• Trade the trend

Don't try to be smart and pick the top or bottoms, jsut trade with the trend.

Using a trailing stop you can lock in profits along the way.

• Add to winning trades. Never add to a losing trade.

Dont listen to experts who advocate averaging down.

Never add to a losing trade, instead add to a winning trade.

if you buy $1 and the stock goes to $1.5, buy some more...

Never average down shorter term trades.

• If the trade is wrong, cut it!

Your first loss is normally the smallest.

If you are expecting something to happen to it and if a share is heading towards your stop, dont move your stop unless there's very good reason.

• If you cant see a trend then don't trade.

Markets and shares don't always trend! If something is not trending, walk away

• Let the winners run

Holding a winning trade is as painful as holding a losing one

To survive, you must let winners run more than losers.

Dont kill off your healthy trade.

10 Reasons for Investing in Stock Market

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You have plans to invest money in stock market but stuck with why and how...Then here are the 10 Reasons why you should invest money in Stock Market.

• Good Return – Stock market Investments can fetch you huge returns, no other investments can make you this rich in short span of time provided that you have invested in right stocks. There are many success stories about people got rich by investing in stock market.

• Regular income with long term return – You can even earn regularly by trading in stocks while investing in that for long term. You can earn buy a stock at a lower price and then sell the stock at a higher price and then again buy that stock when the price reduces and hold the stock for longer period.

• No lock in period – This is one of the advantage of share trading, as there is no lock in period you can buy and sell your shares any time you want. Most of the investment methods have lock in period which makes your investment hold for particular no of years.

• Earn from dividends – There are certain companies that offer dividends at regular intervals. This is done by the companies to distribute the profit among its investors. You can earn regularly from these dividend stocks by investing in them at a point of time.

• Bonus shares – Bonus shares, are offered by companies when they plan for expansion, which are offered to the existing investors for lower stock value than the market price. When a company merges with other price goes up manifold this can be utilized by the investor to sell the stock at a higher price and earn good returns.

• Take your own decisions – When investing in the stock market you can actually take your own decisions regarding the extent and type of investment. So unlike other forms of investment you can control your investment more actively.

• Invest with little fund – Investing in stock market is not limited to any fixed amount. even with little amount can invest  in stock market and get huge returns if invested in right stocks.

• Wide options – In stock market investments one has the opportunity to do derivative trading, margin trading or use the delivery based trading.

• Simple & Transparent Trading process – Nowadays with the online trading facility, trading became simple and transparent process, any one with minimal skills can invest in stock market and earn money.

• Take part in the growth – with stock trading one can directly take part in the growth of a company which is eventually is the economic growth of the country.

"Investments are subjected to market risks invest wisely to gain profit"