Part 3 Learn Institutional Trading

Key Terms You Must Know

Before diving deeper, let’s define some must-know option trading terminology:

Strike Price: The fixed price at which you can buy/sell the asset.

Premium: The cost of the option contract.

Expiry Date: The last day on which the option is valid.

In the Money (ITM): An option that already has intrinsic value.

Out of the Money (OTM): An option with no intrinsic value, only time value.

At the Money (ATM): When the asset’s price is equal to the strike price.

Lot Size: Options are traded in lots, not single shares. Example: Nifty option lots usually contain 50 units.

Writer/Seller: The person who sells the option and receives the premium.

Buyer/Holder: The person who buys the option and pays the premium.

Why Trade Options?

Beginners often ask: “Why not just buy stocks directly?”

Here’s why many traders prefer options:

Leverage: With a small premium, you can control a large quantity of shares.

Limited Risk (for Buyers): Your maximum loss is the premium paid.

Profit from Any Direction: Options let you benefit from rising, falling, or even stagnant markets.

Hedging: Protect your portfolio from adverse price moves. For example, buying puts on Nifty can protect your stock portfolio during market crashes.

Income Generation: By selling options, traders collect premiums regularly (popular among professionals).