5 Mantras for Trading in Options
1. Buy unlimited profit potential and limited downside potential: If the stock moves in the desired direction, then you stand the chance of making unlimited profit. If it moves in the opposite direction, then you only lose the premium that you paid.
2.Sell (Write) limited profit potential and unlimited downside potential: If the stock moves in the desired direction, your gain equals the premium amount you received when you sold the option. In that sense, your upside is limited. If it moves in the opposite direction, your losses can be unlimited.
3.Options give you rights: When you buy a Call option, you buy the right to purchase the stock at a particular price (strike price). When you buy a Put option, you buy the right to sell the stock at a particular price (strike price).
4.Spreads: You can create option strategies, call spreads, that can limit both the upside and downside. These strategies entail buying / selling multiple options (Call or Put) at different strike prices. By spreading them across price levels, you ensure that both your upside and downside are limited.
5.Expiry: Every option contract is valid only for a particular period of time, after which it ceases to exist or expires. For index options, expiry will be as follows:
Last Thursday of the expiry month for the monthly, quarterly, and half-yearly contracts
Thursday of the expiring week for weekly expiry contracts
For stock options, expiry will be as follows:
Last Thursday of the month
For both, if the last Thursday is a trading holiday, then the previous day becomes the expiry day.
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