Part 7 Trading Master Class

Why Traders Use Options

Hedging – Protect portfolio against price swings.

Speculation – Bet on future price movements with smaller capital.

Income Generation – Sell options and earn premiums.

Arbitrage – Exploit mispricing between spot and derivatives.

Options Pricing Models

Two main models:

Black-Scholes Model: Uses volatility, strike, expiry, and interest rates to price options.

Binomial Model: Breaks time into steps, considering probability of price moves.

Factors affecting option prices:

Spot price of underlying

Strike price

Time to expiry

Volatility

Interest rates

Dividends

Strategies in Option Trading

Options allow creation of custom payoff structures. Strategies are classified as:

A. Protective Strategies

Protective Put – Holding stock + buying put (like insurance).

Covered Call – Holding stock + selling call.

B. Income Strategies

Iron Condor – Selling OTM call & put, buying further OTM options.

Strangle/Straddle Selling – Profit from time decay when market is range-bound.

C. Speculative Strategies

Long Straddle – Buy ATM call + put, profit from big moves.

Bull Call Spread – Buy lower strike call, sell higher strike call.

Bear Put Spread – Buy higher strike put, sell lower strike put.

📊 Each strategy has its risk/reward profile. Professional traders combine them depending on market conditions.