Part 2 Candlestick Pattern

Basics of Options Contracts

To truly understand options, let’s break down the core components.

What is an Option?

An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a predetermined price (strike price) on or before a specified date (expiry date).

The buyer of the option pays a price called the premium.

The seller (or writer) of the option receives this premium and takes on the obligation.

Types of Options

Call Option – Gives the buyer the right to buy the underlying asset at the strike price.

Example: You buy a call on Reliance at ₹2500 strike price. If Reliance moves to ₹2700 before expiry, you can buy at ₹2500 and profit.

Put Option – Gives the buyer the right to sell the underlying asset at the strike price.

Example: You buy a put on Infosys at ₹1500. If Infosys falls to ₹1400, you can sell at ₹1500 and profit.

Key Terms in Options

Strike Price: The price at which the option can be exercised.

Premium: The cost of the option (paid by buyer, received by seller).

Expiry Date: The date when the option contract ends.

Lot Size: Options are traded in lots, not single units. For example, one NIFTY option lot = 50 units.

Moneyness:

In the Money (ITM): Option has intrinsic value.

At the Money (ATM): Strike price = current price.

Out of the Money (OTM): Option has no intrinsic value.

American vs European Options

American Options: Can be exercised any time before expiry.

European Options: Can be exercised only on expiry.
(India primarily uses European-style options.)