Part 2 Candle Stick Pattern Types of Options
There are two primary types of options:
a) Call Options
Gives the holder the right to buy an underlying asset at a specified strike price.
Investors buy calls when they expect the underlying asset price to rise.
Example: If stock ABC is trading at ₹100 and you buy a call with a strike price of ₹110, you profit if ABC rises above ₹110 plus the premium paid.
b) Put Options
Gives the holder the right to sell an underlying asset at a specified strike price.
Investors buy puts when they expect the underlying asset price to fall.
Example: If stock XYZ is trading at ₹200 and you buy a put with a strike price of ₹190, you profit if XYZ falls below ₹190 minus the premium paid.
Option Pricing and Valuation
Option pricing is crucial in determining potential profits and risks. Two main components influence the price of an option:
a) Intrinsic Value
For a call option: Current Price – Strike Price
For a put option: Strike Price – Current Price
Intrinsic value is zero if the option is out-of-the-money.
b) Time Value
Time value depends on:
Time to Expiry: Longer time increases the premium.
Volatility: Higher volatility increases the likelihood of profitable movements.
Interest Rates: Small effect on option premiums.
Dividends: Impact options on dividend-paying stocks.
c) Black-Scholes Model
Widely used for European-style options pricing.
Formula incorporates current stock price, strike price, time to expiration, volatility, and risk-free rate.
d) Greeks
Measures the sensitivity of option prices to various factors:
Delta: Sensitivity to the underlying asset price.
Gamma: Rate of change of delta.
Theta: Time decay effect.
Vega: Sensitivity to volatility.
Rho: Sensitivity to interest rate changes.
