How much money do you need for options trading: Guide

Options trading is the new system of trading to gain huge profit with very little capital. So in this post, I will discuss what is options and how much money do you need for options trading. I will write a complete guide to know all about it.

What are Option Trading?

Options are basically underlying contract made between buyers and sellers at a certain amount for a definite period of the time. If I take an example then Apple Options are being Sold at 1.5$ for 200 shares for the month with expiry at Strike Price of $200 May. So this means that the total price to buy that options are $1.5×200 which is equal to $60.

And hence you are paying seller $60 to keep the share till Month May until it expires. Now the important aspect to understand here are four things:

  1. Strike Price: The Price at which you want the Stock of particular company to trade above or low for expiry moth.
  2. Option Price: So as per the above example the option price is $1.5 for Strike Price of $200 for 200 shares.
  3. Expiry Date: So all options come with expiry date at which final profit or loss will be determined for your options to sell or buy.
  4. Shares: Total number of shares you are getting to hold at a certain price.
Options Trading
Option Trading

A stock option contract typically represents 100 shares of the underlying stock, but options may be written on any sort of underlying asset from bonds to currencies to commodities.

Types of Options Trading

Call Options:

Call Options at a particular strike price tells that if it is above that strike price on expiry day then the buyer of the option will reap the profit. And if the share price is below the strike price of the call option on expiry day then Seller of the Option will reap the profit and Buyer will lose the money.

For Example, Apple Shares are currently at $100. And now I am thinking that Apple Share will be above $110 by this month-end and I will buy Call Option at Strike Price of $110 which may be around $0.5 for 200 shares. Then I will pay around $0.5 and buy 200 shares of Apple waiting till expiry and hoping Apple Breaches $110.

But There is Catch now since you have bought Call Option at $0.5 you need to wait that Apple Shares expires above $110 + $0.5 which is above $110.5 to make any profit. So if Apple Share breaches $110 and Closes at expiry at $115 then you gained $5 on your options trade. Hence total profit will be $4.5 per share which equals to $900 in a few days or month depends till the time you are holding the underlying options.

Tough if Apple Share closes below $110 on expiry month then the buyer of Option will lose $100. So here the risk rewards ratio is very high. And once you are buying Call Options your Profit potential becomes unlimited and loss is limited.

Put Options:

Put Options at particular strike price tells that if the share price is below the strike price on expiry then you will make a profit if you bought the options and you will make money on it.

For Example, Apple Shares are currently at $100. And now I am thinking that Apple Share will be below $95 by this month-end and I will buy Put Option at Strike Price of $95 which maybe around $0.5 for 200 shares. Then I will pay around $0.25 and buy 200 shares of Apple waiting till expiry and hoping Apple Breaches $95.

But There is Catch now since you have bought Put Option at $0.25 you need to wait that Apple Shares expires above $95 – $0.25 which is below $94.75 to make any profit. So if Apple Share breaches $95 and Closes at expiry at $90 then you gained $5 on your options trade. Hence total profit will be $4.75 per share which equals to $950 in a few days or month depends till the time you are holding the underlying options.

Tough if Apple Share closes above $95 on expiry month then the buyer of Option will lose $50. So here the risk rewards ratio is very high. And once you are buying Put Options your Profit potential becomes unlimited and loss is limited.

Now, How Much Money Do You Need for Options Trading:

If you read the above example you can see that to Trade Option for buying it will hardly take $50 for Put and $100 for Call depending upon the Option Price on Particular Strike price. But It will be too low in comparison to buying an actual share.

To Sell Options you need way more money which depends upon various factors like Margins provided by your Broker, SPAN Margin Provided by your Broker. So it’s better to contact your broker for Selling the Call Options or Put Options and Maintain the required capital in your account.

So I think by now you would have understood how much money do you need for options trading. Now if you want to read more about trading options you may consider reading my post on Swing Trading.

If you have any suggestions please feel free to comments and provide your feedback. I will be writing a lot of blog post on Options Trading hence keep a check. And once I am finished about options trading I will giveaway free E-Book for definite profit by Selling Options in Market. So Keep Key on this blog.

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2 thoughts on “How much money do you need for options trading: Guide

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