Part 2 Candle Stick Pattern

1. Key Components of Options

Strike Price – The pre-decided price at which the underlying asset can be bought (call) or sold (put).

Premium – The price paid by the buyer to the seller for acquiring the option.

Expiration Date – The date on which the option contract expires.

Intrinsic Value – The difference between the stock price and strike price if the option is in profit.

Time Value – The portion of the premium that reflects the time left before expiration.

2. Option Styles

American Options – Can be exercised at any time before expiration.

European Options – Can only be exercised on the expiration date.

Exotic Options – Customized contracts with complex features (used by institutions).

Most stock options in the U.S. are American-style, while index options are often European-style. In India, stock and index options are European-style.

3. Why Trade Options?

Options trading is popular because it offers:

Leverage – Control large stock positions with small capital.

Hedging – Protect portfolios against market declines.

Income Generation – By selling (writing) options and collecting premiums.

Speculation – Betting on price movements without owning the stock.

Flexibility – Strategies can be bullish, bearish, neutral, or even profit from volatility.

4. Risks in Option Trading

While options provide benefits, they also come with risks:

Limited life span – Options expire; if your prediction is wrong, you lose the premium.

Leverage risk – Small movements can cause large percentage losses.

Complexity – Strategies can be difficult for beginners.

Unlimited losses – Selling (writing) naked options can lead to unlimited loss potential.

5. Basic Option Strategies
a) Buying Calls

Suitable when expecting strong upward movement.

Limited risk (premium), unlimited reward.

b) Buying Puts

Suitable when expecting strong downward movement.

Limited risk, high reward potential.

c) Covered Call

Own the stock and sell a call option against it.

Generates income but caps upside potential.

d) Protective Put

Own the stock and buy a put as insurance.

Protects against downside risk.

e) Straddle

Buy both a call and put at the same strike and expiration.

Profits from large movements in either direction.

f) Strangle

Similar to straddle but with different strike prices.

Cheaper but requires bigger move.

g) Iron Condor

Sell one call and one put (out of the money) and buy further out-of-the-money options for protection.

Profits from low volatility.