Part 6 Learn Institutional Trading1. Advantages of Options Trading
Leverage: Control larger positions with smaller capital.
Flexibility: Numerous strategies to profit in rising, falling, or stagnant markets.
Hedging: Reduce risk of adverse price movements.
Income Generation: Selling options can generate additional income.
Defined Risk for Buyers: Buyers can only lose the premium paid.
2. Risks and Challenges in Options Trading
Complexity: Options require deep understanding; mistakes can be costly.
Time Decay (Theta): Options lose value as expiration approaches.
Market Volatility: Sudden moves can amplify losses for sellers.
Liquidity Risk: Some options have low trading volumes, making entry and exit difficult.
Leverage Risk: While leverage amplifies profits, it also magnifies losses.
3. Practical Steps to Start Options Trading
Open a Trading Account: With a SEBI-registered broker.
Understand Margin Requirements: Options may require initial margins for writing strategies.
Learn Option Greeks: Delta, Gamma, Theta, Vega, and Rho affect pricing and risk.
Practice with Simulations: Use paper trading before committing real capital.
Develop a Trading Plan: Define goals, strategies, risk tolerance, and exit rules.
Continuous Learning: Markets evolve, so staying updated is crucial.
4. The Greeks: Understanding Option Sensitivities
Option Greeks measure how the option price responds to changes in various factors:
Delta: Sensitivity to the underlying asset’s price change.
Gamma: Rate of change of delta.
Theta: Time decay impact on the option’s price.
Vega: Sensitivity to volatility changes.
Rho: Sensitivity to interest rate changes.
Greeks help traders manage risk and optimize strategies.
5. Real-World Examples of Options Trading
Example 1: Hedging with Puts
Investor holds 100 shares of a stock at ₹2,000 each.
Buys 1 put option at strike price ₹1,950 for ₹50.
If stock falls to ₹1,800, the put option gains ₹150, limiting overall loss.
Example 2: Speculation with Calls
Trader expects stock to rise from ₹1,000.
Buys a call at strike price ₹1,050 for ₹20.
Stock rises to ₹1,100, call’s intrinsic value becomes ₹50.
Profit = ₹30 per share minus premium paid.
