Part 1 Support and Resistance1. Introduction to Options
In the world of financial markets, traders and investors use various tools to manage risk, speculate on price movements, or generate additional income. One of the most powerful and flexible tools is options trading.
An option is a financial derivative, which means its value is derived from another underlying asset. This underlying asset could be a stock, an index, a commodity, or even a currency. Unlike stocks, where you own a piece of the company, an option is a contract that gives you certain rights related to buying or selling the underlying asset at a specific price and within a specified time.
Options are incredibly versatile. Traders use them for hedging (protection against loss), speculation (betting on future price moves), or income generation (selling options for premiums). But with great flexibility comes complexity, and that’s why understanding option trading deeply is essential before jumping in.
2. Basic Terminology in Option Trading
Before diving deep, let’s clear some essential terms:
Call Option: A contract giving the right (not obligation) to buy an asset at a predetermined price (strike price) before expiration.
Put Option: A contract giving the right (not obligation) to sell an asset at a predetermined price before expiration.
Strike Price: The fixed price at which the option holder can buy (for calls) or sell (for puts) the underlying.
Premium: The cost of purchasing an option contract. This is the price paid upfront by the buyer to the seller (writer).
Expiration Date: The date when the option contract expires. After this, the option becomes worthless if not exercised.
In the Money (ITM): An option that has intrinsic value. For calls, when the stock price > strike price. For puts, when stock price < strike price.
Out of the Money (OTM): An option with no intrinsic value (only time value). For calls, stock price < strike price. For puts, stock price > strike price.
At the Money (ATM): When the stock price and strike price are roughly equal.
Option Writer: The seller of the option contract. They receive the premium but take on obligation.
Lot Size: Options are traded in fixed quantities called lots (e.g., 50 or 100 shares per contract depending on the market).
Understanding these terms is like learning the alphabet before writing sentences—you need them to progress.
