Part 2 Support and Resistance

1. Introduction to Options

Financial markets have always revolved around two broad purposes—hedging risk and creating opportunity. Among the tools available, options stand out because they combine flexibility, leverage, and adaptability in a way few instruments can match. Unlike simply buying a stock or bond, an option lets you control exposure to price movements without outright ownership. This makes options both fascinating and complex.

Option trading today has exploded globally, with millions of retail and institutional traders participating daily. But to appreciate their role, we need to peel back the layers—what exactly is an option, how does it work, and why do traders and investors use them?

2. What Are Options? (Call & Put Basics)

An option is a financial derivative—meaning its value is derived from an underlying asset like a stock, index, commodity, or currency.

There are two main types:

Call Option – Gives the holder the right (not obligation) to buy the underlying at a set price (strike) before or on expiration.

Put Option – Gives the holder the right (not obligation) to sell the underlying at a set price before or on expiration.

Example: Suppose Reliance stock trades at ₹2,500. If you buy a call option with a strike price of ₹2,600 expiring in one month, you’re betting the stock will rise above ₹2,600. Conversely, if you buy a put option with a strike price of ₹2,400, you’re betting the stock will fall below ₹2,400.

The beauty lies in asymmetry: you can lose only the premium you pay, but your potential profit can be much larger.

3. Key Terminologies in Option Trading

Options trading comes with its own dictionary. Some must-know terms include:

Strike Price – Predetermined price to buy/sell underlying.

Expiration Date – Last date the option is valid.

Premium – Price paid to buy the option.

In the Money (ITM) – Option has intrinsic value (profitable if exercised immediately).

Out of the Money (OTM) – Option has no intrinsic value, only time value.

At the Money (ATM) – Strike price equals current market price.

Lot Size – Standardized quantity of underlying in each option contract.

Open Interest (OI) – Number of outstanding option contracts in the market.

Understanding these is critical before trading.

4. How Options Work in Practice

Let’s say you buy an Infosys call option with strike ₹1,500, paying ₹30 premium.

If Infosys rises to ₹1,600, your option has intrinsic value of ₹100. Profit = ₹100 – ₹30 = ₹70 per share.

If Infosys stays below ₹1,500, the option expires worthless. Loss = Premium (₹30).

Notice how a small move in stock can create a large percentage return on option, thanks to leverage.

5. Intrinsic Value vs. Time Value

Option price = Intrinsic Value + Time Value.

Intrinsic Value – Actual in-the-money amount.

Time Value – Extra premium traders pay for the possibility of future favorable movement before expiry.

Time value decreases with theta decay as expiration approaches.