Part 4 Learn Institutional Trading

Basics of Options (Calls & Puts)

There are two main types of options:

Call Option: Gives the holder the right to buy the underlying asset at a fixed price (called the strike price) before or on the expiry date.

Example: You buy a Reliance call option with a strike price of ₹2500. If Reliance rises to ₹2700, you can buy at ₹2500 and gain from the difference.

Put Option: Gives the holder the right to sell the underlying asset at the strike price before expiry.

Example: You buy a Nifty put option with a strike price of 22,000. If Nifty falls to 21,500, your put gains in value since you can sell higher (22,000) while the market trades lower.

In simple terms:

Calls = Right to Buy

Puts = Right to Sell

How Options Work (Premiums, Strike Price, Expiry, Moneyness)

Every option has certain key components:

Premium: The price you pay to buy the option. This is determined by demand, supply, volatility, and time to expiry.

Strike Price: The fixed price at which the option holder can buy/sell the asset.

Expiry Date: Options are valid only for a certain period. In India, index options have weekly and monthly expiries, while stock options usually expire monthly.

Moneyness: This defines whether an option has intrinsic value.

In the Money (ITM): Already profitable if exercised.

At the Money (ATM): Strike price equals the current market price.

Out of the Money (OTM): Not profitable if exercised immediately.