1. Introduction to Options Trading
Options are like a financial “contract” that gives you rights but not obligations.
When you buy an option, you are buying the right to buy or sell an asset at a specific price before a certain date.
They’re mainly used in stocks, commodities, indexes, and currencies.
Two main types of options:
Call Option – Right to buy an asset at a set price.
Put Option – Right to sell an asset at a set price.
Key terms:
Strike Price – The price at which you can buy/sell the asset.
Expiration Date – The last day you can use the option.
Premium – Price paid to buy the option.
In the Money (ITM) – Option has intrinsic value.
Out of the Money (OTM) – Option has no intrinsic value yet.
At the Money (ATM) – Strike price equals current market price.
Options give traders flexibility, leverage, and hedging power. But with great power comes great “margin calls” if you misuse them.
2. Why Traders Use Options
Options aren’t just for speculation — they have multiple uses:
Speculation – Betting on price moves.
Hedging – Protecting an existing investment from loss.
Income Generation – Selling options for premium income.
Risk Management – Limiting losses through defined-risk trades.
3. Basic Options Strategies (Beginner Level)
3.1 Buying Calls
When to Use: You expect the price to go up.
How It Works: You buy a call option to lock in a lower purchase price.
Risk: Limited to the premium paid.
Reward: Unlimited upside.
Example: Stock at ₹100, buy a call at ₹105 strike for ₹3 premium. If stock rises to ₹120, your profit = ₹12 – ₹3 = ₹9 per share.
3.2 Buying Puts
When to Use: You expect the price to go down.
How It Works: You buy a put option to sell at a higher price later.
Risk: Limited to the premium.
Reward: Significant (but capped at the strike price minus premium).
Example: Stock at ₹100, buy a put at ₹95 for ₹2 premium. If stock drops to ₹80, profit = ₹15 – ₹2 = ₹13.
3.3 Covered Call
When to Use: You own the stock but expect it to stay flat or slightly rise.
How It Works: Sell a call option against your owned stock to collect premium.
Risk: You must sell the stock if price exceeds strike.
Reward: Stock appreciation + premium income.
Example: Own stock at ₹100, sell call at ₹105 for ₹2. If stock stays below ₹105, you keep the ₹2.
3.4 Protective Put
When to Use: You own a stock and want downside protection.
How It Works: Buy a put to protect against price drops.
Risk: Premium cost.
Reward: Security against big losses.
Example: Own stock at ₹100, buy put at ₹95 for ₹2. Even if stock crashes to ₹50, you can still sell at ₹95.
4. Intermediate Options Strategies
4.1 Bull Call Spread
When to Use: Expect moderate price rise.
How It Works: Buy a call at a lower strike, sell a call at higher strike.
Risk: Limited to net premium paid.
Reward: Limited to strike difference minus premium.
Example: Buy call at ₹100 (₹5), sell call at ₹110 (₹2). Net cost ₹3. Max profit ₹7.
4.2 Bear Put Spread
When to Use: Expect moderate decline.
How It Works: Buy put at higher strike, sell put at lower strike.
Risk: Limited to net premium paid.
Reward: Limited but cheaper than buying a single put.
Example: Buy put ₹105 (₹6), sell put ₹95 (₹3). Net cost ₹3. Max profit ₹7.
4.3 Straddle
When to Use: Expect big move but unsure direction.
How It Works: Buy call and put at same strike & expiry.
Risk: High premium cost.
Reward: Big if price moves sharply up or down.
Example: Stock at ₹100, buy call ₹100 (₹4) and put ₹100 (₹4). Cost ₹8. Needs a big move to profit.
4.4 Strangle
When to Use: Expect big move but want cheaper entry than straddle.
How It Works: Buy OTM call and put.
Risk: Cheaper than straddle but needs larger move.
Example: Stock at ₹100, buy call ₹105 (₹3) and put ₹95 (₹3). Cost ₹6.
4.5 Iron Condor
When to Use: Expect low volatility.
How It Works: Sell an OTM call spread + sell an OTM put spread.
Risk: Limited by spread width.
Reward: Limited to premium collected.
Example: Stock at ₹100, sell call ₹110, buy call ₹115; sell put ₹90, buy put ₹85.
5. Advanced Options Strategies
5.1 Butterfly Spread
When to Use: Expect stock to stay near a specific price.
How It Works: Buy 1 ITM option, sell 2 ATM options, buy 1 OTM option.
Risk: Limited.
Reward: Highest if stock ends at middle strike.
Example: Stock ₹100, buy call ₹95, sell 2 calls ₹100, buy call ₹105.
5.2 Calendar Spread
When to Use: Expect low short-term volatility but possible long-term move.
How It Works: Sell short-term option, buy long-term option at same strike.
Risk: Limited to net premium.
Reward: Comes from time decay of short option.
5.3 Ratio Spread
When to Use: Expect limited move in one direction.
How It Works: Buy 1 option, sell multiple options at different strikes.
Risk: Unlimited on one side if not hedged.
5.4 Diagonal Spread
When to Use: Expect gradual move over time.
How It Works: Buy long-term option at one strike, sell short-term option at different strike.
6. Risk Management in Options
Even though options can limit loss, traders often misuse them and blow accounts.
Key risk tips:
Never risk more than 2–3% of capital on one trade.
Understand implied volatility — high IV inflates premiums.
Avoid selling naked options without sufficient margin.
Always set stop-loss rules.
7. Understanding Greeks (The DNA of Options Pricing)
Delta – How much the option price changes per ₹1 move in stock.
Gamma – How fast delta changes.
Theta – Time decay rate.
Vega – Sensitivity to volatility changes.
Rho – Interest rate sensitivity.
Mastering the Greeks means you understand why your option is moving, not just that it’s moving.
8. Common Mistakes to Avoid
Holding OTM options too close to expiry hoping for a miracle.
Selling naked calls without understanding unlimited risk.
Over-leveraging with too many contracts.
Ignoring commissions and slippage.
Not adjusting positions when market changes.
9. Practical Tips for Success
Backtest strategies on historical data.
Start with paper trading before using real money.
Track your trades in a journal.
Combine technical analysis with options knowledge.
Trade liquid options with tight bid-ask spreads.
10. Final Thoughts
Options are like a Swiss Army knife in trading — versatile, powerful, and potentially dangerous if misused. The right strategy depends on:
Market view (up, down, sideways, volatile, stable)
Risk tolerance
Timeframe
Experience level
By starting with basic strategies like covered calls or protective puts, then moving into spreads, straddles, and condors, you can build a strong foundation. With practice, risk management, and discipline, options trading can be a valuable tool in your investment journey.
Options are like a financial “contract” that gives you rights but not obligations.
When you buy an option, you are buying the right to buy or sell an asset at a specific price before a certain date.
They’re mainly used in stocks, commodities, indexes, and currencies.
Two main types of options:
Call Option – Right to buy an asset at a set price.
Put Option – Right to sell an asset at a set price.
Key terms:
Strike Price – The price at which you can buy/sell the asset.
Expiration Date – The last day you can use the option.
Premium – Price paid to buy the option.
In the Money (ITM) – Option has intrinsic value.
Out of the Money (OTM) – Option has no intrinsic value yet.
At the Money (ATM) – Strike price equals current market price.
Options give traders flexibility, leverage, and hedging power. But with great power comes great “margin calls” if you misuse them.
2. Why Traders Use Options
Options aren’t just for speculation — they have multiple uses:
Speculation – Betting on price moves.
Hedging – Protecting an existing investment from loss.
Income Generation – Selling options for premium income.
Risk Management – Limiting losses through defined-risk trades.
3. Basic Options Strategies (Beginner Level)
3.1 Buying Calls
When to Use: You expect the price to go up.
How It Works: You buy a call option to lock in a lower purchase price.
Risk: Limited to the premium paid.
Reward: Unlimited upside.
Example: Stock at ₹100, buy a call at ₹105 strike for ₹3 premium. If stock rises to ₹120, your profit = ₹12 – ₹3 = ₹9 per share.
3.2 Buying Puts
When to Use: You expect the price to go down.
How It Works: You buy a put option to sell at a higher price later.
Risk: Limited to the premium.
Reward: Significant (but capped at the strike price minus premium).
Example: Stock at ₹100, buy a put at ₹95 for ₹2 premium. If stock drops to ₹80, profit = ₹15 – ₹2 = ₹13.
3.3 Covered Call
When to Use: You own the stock but expect it to stay flat or slightly rise.
How It Works: Sell a call option against your owned stock to collect premium.
Risk: You must sell the stock if price exceeds strike.
Reward: Stock appreciation + premium income.
Example: Own stock at ₹100, sell call at ₹105 for ₹2. If stock stays below ₹105, you keep the ₹2.
3.4 Protective Put
When to Use: You own a stock and want downside protection.
How It Works: Buy a put to protect against price drops.
Risk: Premium cost.
Reward: Security against big losses.
Example: Own stock at ₹100, buy put at ₹95 for ₹2. Even if stock crashes to ₹50, you can still sell at ₹95.
4. Intermediate Options Strategies
4.1 Bull Call Spread
When to Use: Expect moderate price rise.
How It Works: Buy a call at a lower strike, sell a call at higher strike.
Risk: Limited to net premium paid.
Reward: Limited to strike difference minus premium.
Example: Buy call at ₹100 (₹5), sell call at ₹110 (₹2). Net cost ₹3. Max profit ₹7.
4.2 Bear Put Spread
When to Use: Expect moderate decline.
How It Works: Buy put at higher strike, sell put at lower strike.
Risk: Limited to net premium paid.
Reward: Limited but cheaper than buying a single put.
Example: Buy put ₹105 (₹6), sell put ₹95 (₹3). Net cost ₹3. Max profit ₹7.
4.3 Straddle
When to Use: Expect big move but unsure direction.
How It Works: Buy call and put at same strike & expiry.
Risk: High premium cost.
Reward: Big if price moves sharply up or down.
Example: Stock at ₹100, buy call ₹100 (₹4) and put ₹100 (₹4). Cost ₹8. Needs a big move to profit.
4.4 Strangle
When to Use: Expect big move but want cheaper entry than straddle.
How It Works: Buy OTM call and put.
Risk: Cheaper than straddle but needs larger move.
Example: Stock at ₹100, buy call ₹105 (₹3) and put ₹95 (₹3). Cost ₹6.
4.5 Iron Condor
When to Use: Expect low volatility.
How It Works: Sell an OTM call spread + sell an OTM put spread.
Risk: Limited by spread width.
Reward: Limited to premium collected.
Example: Stock at ₹100, sell call ₹110, buy call ₹115; sell put ₹90, buy put ₹85.
5. Advanced Options Strategies
5.1 Butterfly Spread
When to Use: Expect stock to stay near a specific price.
How It Works: Buy 1 ITM option, sell 2 ATM options, buy 1 OTM option.
Risk: Limited.
Reward: Highest if stock ends at middle strike.
Example: Stock ₹100, buy call ₹95, sell 2 calls ₹100, buy call ₹105.
5.2 Calendar Spread
When to Use: Expect low short-term volatility but possible long-term move.
How It Works: Sell short-term option, buy long-term option at same strike.
Risk: Limited to net premium.
Reward: Comes from time decay of short option.
5.3 Ratio Spread
When to Use: Expect limited move in one direction.
How It Works: Buy 1 option, sell multiple options at different strikes.
Risk: Unlimited on one side if not hedged.
5.4 Diagonal Spread
When to Use: Expect gradual move over time.
How It Works: Buy long-term option at one strike, sell short-term option at different strike.
6. Risk Management in Options
Even though options can limit loss, traders often misuse them and blow accounts.
Key risk tips:
Never risk more than 2–3% of capital on one trade.
Understand implied volatility — high IV inflates premiums.
Avoid selling naked options without sufficient margin.
Always set stop-loss rules.
7. Understanding Greeks (The DNA of Options Pricing)
Delta – How much the option price changes per ₹1 move in stock.
Gamma – How fast delta changes.
Theta – Time decay rate.
Vega – Sensitivity to volatility changes.
Rho – Interest rate sensitivity.
Mastering the Greeks means you understand why your option is moving, not just that it’s moving.
8. Common Mistakes to Avoid
Holding OTM options too close to expiry hoping for a miracle.
Selling naked calls without understanding unlimited risk.
Over-leveraging with too many contracts.
Ignoring commissions and slippage.
Not adjusting positions when market changes.
9. Practical Tips for Success
Backtest strategies on historical data.
Start with paper trading before using real money.
Track your trades in a journal.
Combine technical analysis with options knowledge.
Trade liquid options with tight bid-ask spreads.
10. Final Thoughts
Options are like a Swiss Army knife in trading — versatile, powerful, and potentially dangerous if misused. The right strategy depends on:
Market view (up, down, sideways, volatile, stable)
Risk tolerance
Timeframe
Experience level
By starting with basic strategies like covered calls or protective puts, then moving into spreads, straddles, and condors, you can build a strong foundation. With practice, risk management, and discipline, options trading can be a valuable tool in your investment journey.
I built a Buy & Sell Signal Indicator with 85% accuracy.
📈 Get access via DM or
WhatsApp: wa.link/d997q0
| Email: techncialexpress@gmail.com
| Script Coder | Trader | Investor | From India
📈 Get access via DM or
WhatsApp: wa.link/d997q0
| Email: techncialexpress@gmail.com
| Script Coder | Trader | Investor | From India
Related publications
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.
I built a Buy & Sell Signal Indicator with 85% accuracy.
📈 Get access via DM or
WhatsApp: wa.link/d997q0
| Email: techncialexpress@gmail.com
| Script Coder | Trader | Investor | From India
📈 Get access via DM or
WhatsApp: wa.link/d997q0
| Email: techncialexpress@gmail.com
| Script Coder | Trader | Investor | From India
Related publications
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.