Part 6 Learn Institutional Trading

Factors Affecting Option Prices

Option premiums are influenced by multiple factors:

Underlying Price: Moves directly impact intrinsic value.

Time to Expiry: Longer duration = higher premium (more time value).

Volatility: Higher volatility = higher premium (more uncertainty).

Interest Rates & Dividends: Minor factors but can influence pricing.

The famous Black-Scholes Model is often used to calculate theoretical option prices.

Basic Option Strategies for Beginners

Here are some simple strategies you can start with:

1. Buying Calls

Use when you expect the stock/index to rise.

Risk: Premium loss.

Reward: Unlimited upside.

2. Buying Puts

Use when you expect the stock/index to fall.

Risk: Premium loss.

Reward: Significant downside profits.

3. Covered Call

Own a stock + Sell a call option on it.

Generates income but caps upside.

4. Protective Put

Buy stock + Buy a put option.

Acts like insurance for your stock portfolio.

5. Straddle (Advanced Beginner)

Buy a call and put with the same strike and expiry.

Profits from big moves in either direction.

Risk: Both premiums lost if market stays flat.