Part 8 Trading Master ClassIntroduction to Options
Financial markets provide several instruments to trade and invest. Among equities, futures, commodities, and currencies, options trading has gained significant popularity worldwide, including India. Options are not just speculative tools; they are also powerful instruments for hedging, income generation, and risk management.
An option is essentially a derivative contract—its value is derived from an underlying asset like a stock, index, commodity, or currency. Unlike direct stock ownership, an option gives the buyer rights but not obligations. This unique feature makes them versatile but also complex for beginners.
To truly master options, one must understand not only the basic definitions but also pricing, market psychology, and strategies.
Basic Terminology
Before diving deeper, let’s go through the essential terms:
Option Contract: Agreement between buyer and seller based on an underlying asset.
Underlying Asset: Stock, index, commodity, or currency.
Strike Price: Pre-decided price at which the option can be exercised.
Expiry Date: The last date on which the option can be exercised.
Premium: Price paid by the buyer to acquire the option.
Lot Size: Minimum quantity for which an option can be traded.
European vs. American Options: European can be exercised only on expiry; American anytime before expiry.
Call & Put Options Explained
At the heart of option trading are two instruments: Calls and Puts.
Call Option: Gives the buyer the right (not obligation) to buy the asset at the strike price.
Buyers expect prices to rise.
Sellers (writers) expect prices to stay flat or fall.
Put Option: Gives the buyer the right (not obligation) to sell the asset at the strike price.
Buyers expect prices to fall.
Sellers expect prices to stay flat or rise.
📌 Example:
If Reliance stock trades at ₹2500:
A ₹2600 call may cost ₹50 premium. If the stock rises to ₹2700, profit = (2700-2600-50) = ₹50 per share.
A ₹2400 put may cost ₹40. If stock falls to ₹2200, profit = (2400-2200-40) = ₹160 per share.
Chart Patterns
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.
Part 4 Learn Institutional Trading Introduction to Options
Financial markets provide several instruments to trade and invest. Among equities, futures, commodities, and currencies, options trading has gained significant popularity worldwide, including India. Options are not just speculative tools; they are also powerful instruments for hedging, income generation, and risk management.
An option is essentially a derivative contract—its value is derived from an underlying asset like a stock, index, commodity, or currency. Unlike direct stock ownership, an option gives the buyer rights but not obligations. This unique feature makes them versatile but also complex for beginners.
To truly master options, one must understand not only the basic definitions but also pricing, market psychology, and strategies.
Basic Terminology
Before diving deeper, let’s go through the essential terms:
Option Contract: Agreement between buyer and seller based on an underlying asset.
Underlying Asset: Stock, index, commodity, or currency.
Strike Price: Pre-decided price at which the option can be exercised.
Expiry Date: The last date on which the option can be exercised.
Premium: Price paid by the buyer to acquire the option.
Lot Size: Minimum quantity for which an option can be traded.
European vs. American Options: European can be exercised only on expiry; American anytime before expiry.
How Options Work in Practice
Option buyers have limited risk (premium paid) but unlimited profit potential (in calls if stock rises, in puts if stock falls).
Option sellers have limited profit (premium received) but potentially unlimited risk.
This asymmetric payoff structure creates a market where traders, hedgers, and institutions interact.
Part 3 Learn Institutional Trading Understanding Options
An option is a financial contract that gives the holder the right, but not the obligation, to buy or sell an underlying asset at a specified price, called the strike price, before or on a specific date known as the expiry date. Options are derivatives, meaning their value is derived from an underlying asset like stocks, indices, commodities, or currencies.
Types of Options
Call Option
A call option gives the buyer the right to buy the underlying asset at the strike price. Buyers expect the price to rise.
Example: If Infosys stock trades at ₹1500 and a trader buys a call with a strike price of ₹1550 for ₹30, they can purchase the stock at ₹1550, even if it rises to ₹1600.
Put Option
A put option gives the buyer the right to sell the underlying asset at the strike price. Buyers expect the price to fall.
Example: If Infosys stock trades at ₹1500 and a trader buys a put with a strike price of ₹1450 for ₹25, they can sell the stock at ₹1450, even if it drops to ₹1400.
Option Pricing and Factors Affecting Value
Option pricing is influenced by several variables, known as the Option Greeks:
Delta (Δ): Measures how much the option price moves with a ₹1 change in the underlying asset.
Call options have positive delta; put options have negative delta.
Gamma (Γ): Measures how delta changes as the underlying asset moves.
Theta (Θ): Represents time decay – the rate at which an option loses value as expiry approaches.
Vega (V): Sensitivity to volatility in the underlying asset. High volatility increases option premiums.
Rho (ρ): Sensitivity to interest rate changes.
Other factors include:
Underlying asset price
Strike price relative to market price
Time to expiry
Market volatility
Understanding these factors is crucial for effective trading and risk management.
Part 2 Ride The Big MovesBasic Option Strategies
For Beginners
Long Call – Buy call, profit if price rises.
Long Put – Buy put, profit if price falls.
Covered Call – Own stock and sell call, earn premium.
Protective Put – Own stock and buy put to protect against downside.
Intermediate Strategies
Straddle – Buy call + put at same strike, profit from volatility.
Strangle – Buy OTM call + put, cheaper than straddle.
Bull Call Spread – Buy lower strike call, sell higher strike call.
Bear Put Spread – Buy higher strike put, sell lower strike put.
Advanced Strategies
Iron Condor, Butterfly Spread, Calendar Spread – mainly for experienced traders looking for defined risk/reward.
Advantages of Option Trading
Leverage: Small investment controls large position.
Hedging: Protect stock portfolios.
Flexibility: Profit in rising, falling, or sideways markets.
Limited Loss: Buyers lose only the premium paid.
Risks in Option Trading
Premium Loss: 100% loss if option expires worthless.
Time Decay: OTM options lose value fast near expiry.
Complexity: Advanced strategies require precise planning.
Unlimited Risk: Selling naked calls can be disastrous.
Part 1 Ride The Big MovesWhat is an Option?
An option is a financial contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a predetermined price (called the strike price) on or before a specific date (called the expiry date).
There are two main types of options:
Call Option – Gives the buyer the right to buy the underlying asset.
Put Option – Gives the buyer the right to sell the underlying asset.
Example:
If you buy a call option on stock XYZ with a strike price of ₹500, you can buy the stock at ₹500 even if the market price rises to ₹600.
If you buy a put option on stock XYZ at ₹500, you can sell it at ₹500 even if the market price falls to ₹400.
How Options Work
Call Option Buyer: Expects the price to rise. Pays a premium upfront. Profit = Unlimited (price can rise indefinitely) – Premium paid. Loss = Premium paid (if price falls below strike).
Put Option Buyer: Expects the price to fall. Pays a premium upfront. Profit = Strike – Price (max is strike – 0) – Premium paid. Loss = Premium paid.
Option Seller (Writer): Receives the premium. Takes obligation to buy/sell if the buyer exercises. Risk = Can be unlimited for call sellers.
Factors Affecting Option Prices (Option Greeks)
Option price is influenced by:
Delta (Δ) – How much the option price moves with a 1-point move in underlying.
Gamma (Γ) – How fast delta changes with underlying price.
Theta (Θ) – Time decay; how much value the option loses each day.
Vega (V) – Sensitivity to volatility in the underlying asset.
Rho (ρ) – Sensitivity to interest rates.
Tip: Time decay is crucial – options lose value as expiry approaches if the underlying doesn’t move favorably.
Discussion Tolins Tyres LimitedDisclaimer
Disclosure :
I, Vinay Kumar Taparia, am a SEBI Registered Research Analyst.
Registration No. INH000018276
BSE Enlistment No. 6369
Research Analyst or his associates or his dependent family members may hold financial interest or actual/ beneficial ownership in the financial products/ securities advised herein.
Statutory Disclaimers:
“Investment in securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BSE and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors”
Trading in BTC Ideas for profitsThe "90% rule" in trading is a general observation, often called the 90/90/90 rule, which states that 90% of new traders lose 90% of their initial capital within the first 90 days of trading. This rule serves as a cautionary concept, highlighting the high failure rate among novice traders due to a lack of proper education, poor risk management, and emotional decision-making, rather than being a precise statistic
Part 4 Institutional TradingAdvantages of Option Trading
Leverage: Small premium controls large exposure.
Flexibility: Can profit in any market—up, down, or sideways.
Risk Management: Limited risk for buyers.
Income Generation: Option writing provides steady cash flow.
Risks of Option Trading
Despite advantages, options carry risks:
Time Decay: Options lose value as expiry approaches.
Volatility Risk: Changes in implied volatility can hurt positions.
Liquidity Risk: Some options may not have enough buyers/sellers.
Unlimited Risk for Writers: Option sellers face theoretically unlimited losses.
Options vs Futures
Many confuse options with futures. Key differences:
Futures: Obligation to buy/sell at expiry.
Options: Right, not obligation.
Futures: Unlimited risk both ways.
Options: Buyers’ risk limited to premium.
Part 4 Trading Master ClassParticipants in Option Markets
There are four key participants in option trading:
Buyers of Calls – Bullish traders.
Sellers of Calls (Writers) – Bearish or neutral traders, earning premium.
Buyers of Puts – Bearish traders.
Sellers of Puts (Writers) – Bullish or neutral traders, earning premium.
Each of these participants plays a role in keeping the options market liquid.
Option Pricing: The Greeks
Option pricing is not random—it is influenced by multiple factors, commonly represented by the Greeks:
Delta: Measures how much the option price changes when the underlying asset moves ₹1.
Gamma: Measures how much Delta itself changes when the underlying moves.
Theta: Measures time decay—how much the option loses value daily as expiration approaches.
Vega: Measures sensitivity to volatility changes.
Rho: Sensitivity to interest rate changes.
For traders, Theta and Vega are the most crucial, since time decay and volatility play massive roles in profits and losses.
Part 2 Trading Master ClassKey Terms in Option Trading
Before diving deeper, let’s understand the language of option traders.
Premium: The price paid to buy an option.
Strike Price: The price at which the option holder can buy (call) or sell (put) the asset.
Expiration Date: The last date on which the option can be exercised.
In-the-Money (ITM): When exercising the option would be profitable.
Out-of-the-Money (OTM): When exercising the option would not be profitable.
At-the-Money (ATM): When the underlying price equals the strike price.
Intrinsic Value: The amount of profit if the option were exercised immediately.
Time Value: The portion of the option premium that reflects the time left until expiration.
Example: If a stock is trading at ₹100 and you buy a call option with a strike price of ₹90 for ₹15 premium, the intrinsic value is ₹10 (100 – 90), and the remaining ₹5 is time value.
How Option Trading Works
Let’s look at a simple example:
Stock XYZ is trading at ₹200.
You buy a call option with a strike price of ₹210 for ₹5 premium.
The option expires in one month.
Scenario 1: Stock rises to ₹230
Intrinsic Value = ₹20 (230 – 210).
Profit = ₹20 – ₹5 (premium) = ₹15 per share.
Scenario 2: Stock stays at ₹200
Intrinsic Value = 0.
Loss = ₹5 (premium paid).
This shows the beauty of options: limited risk (premium paid) but unlimited upside in case of calls.
Part 1 Trading Master ClassIntroduction
In the world of financial markets, traders and investors have many instruments to express their views, manage risks, or speculate on price movements. One of the most fascinating and versatile instruments is the option contract. Options trading, when understood deeply, opens the door to countless strategies—ranging from conservative income generation to high-risk speculative plays with massive upside.
Unlike traditional stock trading, which is relatively straightforward (buy low, sell high), option trading introduces multiple layers of complexity: time decay, volatility, strike prices, premiums, and Greeks. Because of this, beginners often feel intimidated, while experienced traders consider options an art form—something that requires both science and psychology.
This guide will take you step by step into the world of option trading, covering what options are, how they work, key terminology, strategies, risks, advantages, and real-life use cases. By the end, you’ll have a full 360-degree view of this powerful trading instrument.
What Are Options?
An option is a type of financial derivative contract. Its value is derived from an underlying asset such as a stock, index, currency, or commodity.
An option gives the buyer the right, but not the obligation, to buy or sell the underlying asset at a predetermined price (called the strike price) before or on a specified date (called the expiration date).
There are two basic types of options:
Call Option – Gives the buyer the right to buy the underlying asset at the strike price.
Put Option – Gives the buyer the right to sell the underlying asset at the strike price.
So, if you think the price of a stock will rise, you might buy a call option. If you think it will fall, you might buy a put option.
How to Buy Stock from Bottom and sell on top How to Buy Stock from Bottom and sell on top
How to Buy Stock from Bottom and sell on top How to Buy Stock from Bottom and sell on top
How to Buy Stock from Bottom and sell on top How to Buy Stock from Bottom and sell on top
How to Buy Stock from Bottom and sell on top How to Buy Stock from Bottom and sell on top
How to Buy Stock from Bottom and sell on top
Part 3 Institutional Trading Option Styles and Formats
Options come in various forms to suit different strategies:
Vanilla Options: Standard call and put options traded on exchanges.
Exotic Options: Options with complex structures, including barrier, digital, and Asian options.
LEAPS: Long-term options with expiration dates up to three years.
Participants in Option Trading
Option markets attract a range of participants:
Hedgers: Protect existing positions from adverse price movements.
Speculators: Seek to profit from directional price changes or volatility.
Arbitrageurs: Exploit price differences between markets or instruments.
Market Makers: Provide liquidity by quoting buy and sell prices for options.
Advantages of Option Trading
Option trading offers several benefits over traditional trading:
Leverage: Control large positions with smaller capital.
Flexibility: Wide range of strategies for bullish, bearish, and neutral markets.
Risk Management: Ability to hedge stock portfolios and limit losses.
Income Generation: Selling options (writing) generates premium income.
Speculation Opportunities: Capitalize on volatility without owning the underlying asset.
Part 1 Ride The Big Moves Introduction to Option Trading
Option trading is a segment of the financial market that allows investors to buy and sell options—financial contracts that grant the right, but not the obligation, to buy or sell an underlying asset at a predetermined price before or on a specified date. Unlike stocks or commodities where ownership is transferred, options are derivatives, meaning their value derives from an underlying asset such as equities, indices, commodities, or currencies.
Options are widely used for hedging, speculation, and income generation. Traders use options to manage risk, enhance returns, and capitalize on market volatility. Global financial markets, including India’s NSE and BSE, have witnessed exponential growth in options trading due to their flexibility and strategic possibilities.
Types of Options
Options are primarily classified into two types: Call Options and Put Options.
Call Options
A call option gives the buyer the right to purchase the underlying asset at a specified price, called the strike price, before or on the option's expiration date. Investors buy calls if they anticipate the price of the underlying asset will rise.
Example: Suppose a stock is trading at ₹100, and an investor buys a call option with a strike price of ₹110. If the stock rises to ₹120, the investor can exercise the option, buy at ₹110, and sell at ₹120, gaining ₹10 minus the premium paid.
Put Options
A put option gives the buyer the right to sell the underlying asset at a specified strike price within a certain timeframe. Investors buy puts if they expect the price of the underlying asset to fall.
Example: A stock trades at ₹150. An investor buys a put option with a strike price of ₹140. If the stock drops to ₹130, the investor can sell it at ₹140, securing a ₹10 profit minus the premium.
Nifty Technical View 10.09.2024Disclosure :
I, Vinay Kumar Taparia, am a SEBI Registered Research Analyst.
Registration No. INH000018276
BSE Enlistment No. 6369
Research Analyst or his associates or his dependent family members may hold financial interest or actual/ beneficial ownership in the financial products/ securities advised herein.
Statutory Disclaimers:
“Investment in securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BSE and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors”
Trading Master Class With ExpertsHistory & Evolution of Options
Options are not a modern invention. Their roots go back thousands of years.
Ancient Greece: The earliest recorded use of options was by Thales, a philosopher who secured the right to use olive presses before harvest. When olive yields turned out abundant, he profited by leasing the presses at higher prices.
17th Century Netherlands: Options became popular in the Dutch tulip mania, where people speculated on tulip bulb prices.
Modern Options: Organized option trading as we know it started in 1973 with the creation of the Chicago Board Options Exchange (CBOE). Alongside, the Black-Scholes model for option pricing was introduced, which gave traders a scientific framework to value options.
Today, options are traded globally — from U.S. exchanges like CBOE, CME, and NASDAQ to Indian platforms like NSE’s Options Market. They’ve also expanded into forex, commodities, and even cryptocurrencies like Bitcoin.
Why Traders Use Options
Options serve different purposes:
Investors: Hedge portfolios (e.g., protective puts).
Traders: Speculate on price moves (buying calls/puts).
Institutions: Manage risk exposure across assets.
Market Makers: Provide liquidity and earn spreads.
Risk Management in Options Trading
Options can wipe out capital if not managed properly. Key practices include:
Position Sizing: Never risk more than a fixed % of capital.
Stop Loss & Exit Rules: Define risk before entering.
Diversification: Avoid concentrating all trades on one asset.
Understanding Margin: Selling options requires large margin because risks are unlimited.
Hedging: Use spreads to limit risk.
PCR Trading StrategiesCommon Mistakes & Myths about Options
Myth: Options are only for experts. (Truth: Beginners can use basic strategies safely.)
Mistake: Treating options like lottery tickets.
Mistake: Ignoring time decay and volatility.
Mistake: Over-trading due to low cost of buying options.
Future of Option Trading
Algo & Quant Trading: Algorithms dominate global options volume.
Retail Boom: Platforms like Zerodha, Robinhood, and Binance bring retail investors into options.
AI & Machine Learning: Predictive models for volatility and pricing.
Global Expansion: Options on new assets like carbon credits, crypto, and ETFs.
Conclusion
Option trading is a powerful tool — a double-edged sword. It can be used for risk management, speculation, or income generation. To master options, one must:
Learn the basics (calls, puts, pricing).
Understand strategies (spreads, straddles, condors).
Respect risk management and psychology.
Stay updated with market trends and regulations.
With proper discipline, options can transform how you interact with markets, offering opportunities that stocks and bonds alone cannot.