Part 2 Candle Stick Pattern

1. Types of Options

Options are classified based on the right they provide and the market they trade in.

1. Based on Rights

Call Option: Right to buy.

Put Option: Right to sell.

2. Based on Market

American Options: Can be exercised anytime before expiry.

European Options: Can only be exercised on the expiry date.

3. Based on Underlying Asset

Equity Options: Based on individual stocks.

Index Options: Based on stock indices like Nifty 50.

Commodity Options: Based on commodities like gold, oil, or wheat.

Currency Options: Based on forex pairs.

2. Options Pricing

Option prices (premium) are determined using complex models like the Black-Scholes model, but in simple terms, two main components matter:

Intrinsic Value: Profit potential if exercised now.

Time Value: Extra cost reflecting time until expiry and market volatility.

Example:
If a stock trades at ₹120 and a call option strike is ₹100, intrinsic value = ₹20. Premium may be ₹25, meaning time value = ₹5.

3. Options Trading Strategies

Options allow traders to adopt different strategies depending on market outlook:

A. Basic Strategies

Long Call: Buy call, bet on rising prices.

Long Put: Buy put, bet on falling prices.

Covered Call: Own the stock and sell call to earn premium.

Protective Put: Own the stock and buy a put for protection.

B. Advanced Strategies

Straddle: Buy call and put at the same strike price—profit from high volatility.

Strangle: Buy call and put with different strike prices—cheaper than straddle.

Spread: Combine buying and selling options to reduce risk.

Bull Call Spread

Bear Put Spread

Iron Condor: Sell OTM call and put, buy further OTM options—profit in sideways markets.

4. Risks in Options Trading

Options can be profitable, but they carry risks:

Time Decay (Theta): Options lose value as expiry approaches.

Volatility Risk (Vega): Lower volatility can reduce option premiums.

Unlimited Losses: Writing naked calls can be very risky.

Complexity Risk: Advanced strategies require careful understanding.

Liquidity Risk: Some options may be hard to sell before expiry.

5. Tips for Beginners

Start Small: Trade with a small portion of capital.

Understand the Greeks: Learn Delta, Theta, Vega, and Gamma for managing risk.

Paper Trading: Practice in simulation before using real money.

Stick to Simple Strategies: Start with basic calls and puts.

Manage Risk: Always define maximum loss and use stop-loss if needed.

Focus on Education: Read, attend webinars, and follow market news.