Part 1 Candle Stick Pattern Introduction
In the world of financial markets, traders and investors are constantly searching for tools that can provide flexibility, leverage, and protection. Among the many financial instruments available, options stand out as one of the most versatile. Options trading is not only a way to speculate on the future direction of stock prices but also a method to hedge risks, generate income, and enhance portfolio performance.
Unlike regular stock trading, where buying shares means owning a portion of a company, options give you rights without ownership. They allow traders to control large positions with relatively small amounts of capital. However, with this power comes complexity and risk. Understanding how options work is essential before venturing into this space.
This guide will take you through everything you need to know about option trading—from the basics to strategies, real-world uses, and risk management.
1. What is an Option?
An option is a financial contract between two parties—the buyer and the seller—that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a predetermined price within a specific time period.
The buyer of the option pays a premium to the seller (also called the writer).
The seller is obligated to fulfill the terms of the contract if the buyer chooses to exercise the option.
The underlying asset could be:
Stocks (most common)
Indexes (e.g., Nifty, S&P 500)
Commodities (e.g., gold, oil)
Currencies (e.g., USD/INR, EUR/USD)
Futures contracts
This flexibility makes options widely used in different markets across the world.
2. Types of Options
There are two main types of options:
a) Call Option
A call option gives the buyer the right (but not the obligation) to buy the underlying asset at a specified price (called the strike price) before or on the expiration date.
Call buyers are bullish—they expect prices to rise.
Call sellers (writers) are bearish or neutral.
Example:
Suppose a stock is trading at ₹100. You buy a call option with a strike price of ₹105 expiring in one month, paying a premium of ₹3.
If the stock rises to ₹120, you can buy it at ₹105 (making ₹15 profit minus ₹3 premium = ₹12 net).
If the stock stays below ₹105, you let the option expire, losing only the premium (₹3).
b) Put Option
A put option gives the buyer the right (but not the obligation) to sell the underlying asset at the strike price before or on expiration.
Put buyers are bearish—they expect prices to fall.
Put sellers are bullish or neutral.
Example:
Stock is trading at ₹100. You buy a put option with a strike price of ₹95, paying ₹2 premium.
If the stock falls to ₹80, you can sell it at ₹95 (profit ₹15 minus ₹2 = ₹13).
If the stock stays above ₹95, you lose only the premium.
