To carry on commerce Options one should have a trading plan. A trading plan, rudimentary of all includes technical analysis of trend of the underlying whose election is to be traded. It is very important to decide the direction of the underlying – upside, downside or sideways. Once we have clear on this trend it becomes easier to choose an option tactics and move forward with the trading plan. For trading any option strategy like trading any underlying stock we need to have a obstruction loss so that if the market moves against us we can minimize our losses by exiting our position at that point. Along with deciding the trend of the underlying and the stop loss we privation to choose a scrip or stock which has high trading volumes, on this account that trade are possible in only those options where there are to a great height trading liquidity in their underlying.

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Even though option prices are determined through market demand and supply, their prices are influenced by the following factors: the underlying reward, the strike price, the time to expiration, the underlying asset’s cheerfulness, and the risk free interest rate. Each of the five parameters has a divergent impact on the pricing of a Call and a Put. We receive already discussed above the importance of knowing the trend of the underlying loggerhead’s price, which can further explain the importance of choosing the options by the right strike prices for the chosen strategy.

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While buying or selling a single one option we must calculate time remaining to the option’s end, as the time remaining in an option’s life moves constantly towards cipher. Even if the underlying price is constant, the option price leave still change since time to exercise it reduces. The time equivalent of both call as well as put option decreases to cipher as the time to expiration approaches zero. Therefore we should try to purchase and sale in options which have sufficient time remaining to expiration. As far volatility is concerned, it can be defined as the movement of returns. The additional volatile the underlying stock higher is the price of the option on the underlying stock. Whether it is a call or a lay, this relationship remains the same.

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With all the above factors we too need to calculate the break even points of our strategies, and danger-reward ratios, the brokerage or the commission to be paid to the factor and margins to be paid to the exchange. As we be aware of that in the spot market, the buyer of a stock has to pay the unimpaired transaction amount (for purchasing the stock) to the seller and the liquidation take place on T+2 basis; which means two days in the rear of the transaction date, but in a derivative contract, if some one enters into a trade today the settlement happens on a that will be date. Because of this, there is some possibility of default by any of the parties. Option contracts are traded through exchanges and the contrariwise party risk is taken care of by the clearing corporation. In instruct to prevent parties from defaulting, the corporation levies a margin put ~ buyers and sellers. This margin is a percentage (approximately 20%) of the draw in value.

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Finally we need to know how the option trades are in conclusion settled in the exchange. There are basically three types of reconciliation in stock option contracts at NSE: daily premium settlement, exercise arrangement and interim exercise settlement. In index options, there is no intermediate time exercise settlement as index options cannot be exercised before expiry. In Daily Premium Settlement buyer of every option is obligated to pay the premium towards the options purchased through him and the seller of an option is entitled to admit the premium for the options sold by him. The premium payable and the premium receivable are netted to compute the net premium payable or receivable for each client for each options contract at the time of reconciliation. As for Final Settlement on the day of expiry, all in the standard of value options are exercised by default. An investor who has a throughout position in an in-the-money option on the expiry fix the ~ of will receive the exercise settlement value which is the difference between the settlement price and the strike price. Similarly, an investor who has a curt position in an in-the money option will have to pay the employment settlement value.

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So keeping all the above factors in mind we should draw near up with a set strategy – a trading plan, where we should manage our relation according to predefined rules (like stop loss, breakeven points, Hedging techniques time of expiry etc.) defined in the trading plan. Greed tends to take a grip of most investors in the emporium, especially in F&O space. Hence, it is advisable that traders transact not get too greedy and book profits when their target return is achieved.

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