Part 2 Support and Resistance

1. Time Decay (Theta) in Action

Time decay erodes option premiums daily, faster near expiry. Example: An option priced ₹50 with 10 days left may lose ₹5 daily if underlying doesn’t move. This favors option sellers (who benefit from decay) and hurts option buyers (who need timely moves).

2. Volatility’s Influence on Options

Volatility is the heartbeat of option trading:

Implied Volatility (IV): Future expected volatility, priced into options.

Historical Volatility (HV): Past realized volatility.
If IV is high, premiums rise (good for sellers). Sudden IV drops after events (e.g., budget, results) can crush option buyers despite correct direction.

3. Advantages of Options Trading

Limited risk for buyers.

Lower capital requirement vs. buying stock.

Leverage enhances returns.

Hedging against market risk.

Multiple strategies for bullish, bearish, and neutral views.
This flexibility attracts both traders and investors.

4. Risks of Options Trading

Sellers face unlimited loss risk.

Buyers suffer time decay.

Sudden volatility crush (IV crash).

Complexity of Greeks.

Low liquidity in some stock options.
New traders often underestimate these risks.

5. Option Trading vs Futures Trading

Futures = Obligation to buy/sell at a fixed price.

Options = Right, not obligation.

Futures have linear P/L; options have asymmetric P/L.

Options require deeper risk management (Greeks, IV).
Both can be used together for hedging and speculation.

6. Single-Leg Option Strategies

Long Call: Bullish with limited risk.

Long Put: Bearish with limited risk.

Covered Call: Holding stock + selling call for income.

Protective Put: Holding stock + buying put for downside hedge.
These are basic building blocks.

7. Multi-Leg Option Strategies

Advanced traders combine options for defined outcomes:

Straddle: Buy call + put ATM → volatile move expected.

Strangle: Buy OTM call + OTM put → cheaper volatility bet.

Butterfly Spread: Limited risk, limited reward, range-bound outlook.

Iron Condor: Sell strangle + buy protection → income from low volatility.

8. Hedging with Options

Options allow investors to protect portfolios. Example: A mutual fund holding Nifty stocks can buy Nifty Puts to protect against a sudden crash. Farmers hedge crop prices with commodity options. Hedging reduces risk but costs premium.

9. Options in Intraday Trading

In India, options are heavily used for intraday speculation, especially in Nifty & Bank Nifty weekly contracts. Traders scalp premium moves, delta-neutral setups, or expiry-day theta decay. However, intraday option trading requires discipline due to extreme volatility.

10. Options in Swing and Positional Trading

Swing traders use options to play earnings results, events, or trends. Positional traders might use debit spreads (low risk) or credit spreads (income). Longer-dated options (LEAPS) are used for investment-style plays.