Part 3 Learn Institutional Trading

1. Introduction to Option Trading

Option trading is one of the most fascinating areas of financial markets. Unlike buying shares of a company, where you directly own a piece of the business, option trading gives you the right but not the obligation to buy or sell an underlying asset (like stocks, indices, currencies, or commodities) at a specific price within a specific period.

This flexibility makes options powerful tools for hedging, speculation, and income generation. However, the same flexibility also makes them risky if not handled with proper knowledge. Many beginners are drawn to the huge profit potential in options, but without understanding the risks, they often lose money quickly.

2. What Are Options? Basic Concepts

An option is a financial derivative contract.

It derives its value from an underlying asset (like Reliance shares, Nifty index, gold, crude oil, or even USD/INR).

When you buy an option, you’re not buying the asset itself; you’re buying the right to transact in that asset at a pre-decided price, called the strike price.

Example:

Suppose you buy a Call Option for Reliance at ₹2500 strike price, valid for 1 month.

If Reliance’s stock rises to ₹2600, you can exercise your right to buy at ₹2500 (cheaper than market).

If Reliance falls to ₹2400, you can simply let the option expire worthless (you don’t have to buy).

This right-without-obligation feature is what makes options unique.

3. Key Terms in Option Trading

Before diving deeper, let’s decode the important terminology:

Strike Price – The fixed price at which you may buy/sell the underlying.

Expiry Date – The date when the option contract ends.

Premium – The cost you pay to buy the option.

Lot Size – Options are traded in fixed quantities (e.g., Nifty option = 50 units per lot).

Underlying Asset – The stock, index, or commodity on which the option is based.

Exercise – The act of using your right to buy or sell at strike price.

Settlement – How the trade is closed (cash settlement or physical delivery).

4. Types of Options (Call & Put)
Call Option

A Call Option gives you the right (not obligation) to buy the underlying at a fixed strike price before expiry.

Buyers of Calls = Bullish (expect price to rise).

Sellers of Calls = Bearish/Neutral (expect price to stay same or fall).

Put Option

A Put Option gives you the right (not obligation) to sell the underlying at a fixed strike price before expiry.

Buyers of Puts = Bearish (expect price to fall).

Sellers of Puts = Bullish/Neutral (expect price to stay same or rise).