Option Trading

Risks of Options Trading

High Risk for Sellers: Unlimited losses possible.

Complexity: Requires deep understanding.

Time Decay: Options lose value as expiry approaches.

Liquidity Issues: Some contracts may not have enough buyers/sellers.

Over-leverage: Small mistakes can wipe out capital.

Options Pricing

An option’s premium depends on:

Intrinsic Value (IV): Actual profit if exercised now.

Time Value (TV): Extra value due to time left till expiry.

Formula:
Premium = Intrinsic Value + Time Value

Example: Nifty at 20,000

Call @ 19,800 = Intrinsic value 200.

If premium is 250 → Time value = 50.

The Greeks (Advanced Concept)

Options pricing is also affected by "Greeks":

Delta: Sensitivity to price change.

Theta: Time decay effect.

Vega: Impact of volatility.

Gamma: Acceleration of delta.

These help traders understand risks better.