Part 6 Learn Institutional Trading

1. Advantages of Options Trading

Leverage: Control larger positions with smaller capital.

Flexibility: Numerous strategies to profit in rising, falling, or stagnant markets.

Hedging: Reduce risk of adverse price movements.

Income Generation: Selling options can generate additional income.

Defined Risk for Buyers: Buyers can only lose the premium paid.

2. Risks and Challenges in Options Trading

Complexity: Options require deep understanding; mistakes can be costly.

Time Decay (Theta): Options lose value as expiration approaches.

Market Volatility: Sudden moves can amplify losses for sellers.

Liquidity Risk: Some options have low trading volumes, making entry and exit difficult.

Leverage Risk: While leverage amplifies profits, it also magnifies losses.

3. Practical Steps to Start Options Trading

Open a Trading Account: With a SEBI-registered broker.

Understand Margin Requirements: Options may require initial margins for writing strategies.

Learn Option Greeks: Delta, Gamma, Theta, Vega, and Rho affect pricing and risk.

Practice with Simulations: Use paper trading before committing real capital.

Develop a Trading Plan: Define goals, strategies, risk tolerance, and exit rules.

Continuous Learning: Markets evolve, so staying updated is crucial.

4. The Greeks: Understanding Option Sensitivities

Option Greeks measure how the option price responds to changes in various factors:

Delta: Sensitivity to the underlying asset’s price change.

Gamma: Rate of change of delta.

Theta: Time decay impact on the option’s price.

Vega: Sensitivity to volatility changes.

Rho: Sensitivity to interest rate changes.

Greeks help traders manage risk and optimize strategies.

5. Real-World Examples of Options Trading
Example 1: Hedging with Puts

Investor holds 100 shares of a stock at ₹2,000 each.

Buys 1 put option at strike price ₹1,950 for ₹50.

If stock falls to ₹1,800, the put option gains ₹150, limiting overall loss.

Example 2: Speculation with Calls

Trader expects stock to rise from ₹1,000.

Buys a call at strike price ₹1,050 for ₹20.

Stock rises to ₹1,100, call’s intrinsic value becomes ₹50.

Profit = ₹30 per share minus premium paid.