Part 7 Trading Master Class Why Traders Use Options
Hedging – Protect portfolio against price swings.
Speculation – Bet on future price movements with smaller capital.
Income Generation – Sell options and earn premiums.
Arbitrage – Exploit mispricing between spot and derivatives.
Options Pricing Models
Two main models:
Black-Scholes Model: Uses volatility, strike, expiry, and interest rates to price options.
Binomial Model: Breaks time into steps, considering probability of price moves.
Factors affecting option prices:
Spot price of underlying
Strike price
Time to expiry
Volatility
Interest rates
Dividends
Strategies in Option Trading
Options allow creation of custom payoff structures. Strategies are classified as:
A. Protective Strategies
Protective Put – Holding stock + buying put (like insurance).
Covered Call – Holding stock + selling call.
B. Income Strategies
Iron Condor – Selling OTM call & put, buying further OTM options.
Strangle/Straddle Selling – Profit from time decay when market is range-bound.
C. Speculative Strategies
Long Straddle – Buy ATM call + put, profit from big moves.
Bull Call Spread – Buy lower strike call, sell higher strike call.
Bear Put Spread – Buy higher strike put, sell lower strike put.
📊 Each strategy has its risk/reward profile. Professional traders combine them depending on market conditions.
