Part 3 Institutional Trading

Why Traders Use Options

Options are powerful because they can serve three main purposes:

Hedging – Protecting an existing portfolio from adverse price moves.

Example: A long-term investor holding Infosys shares may buy a Put option to protect against a fall.

Speculation – Betting on market direction with limited capital.

Example: Buying a Call if you expect bullish momentum.

Income Generation – Selling options to collect premium regularly.

Example: Writing Covered Calls on stocks you own.

The same instrument (options) can be used very differently by traders with different goals. That’s why strategies matter.

Types of Option Strategies

Here’s the heart of the discussion: strategies.

Single-Leg Strategies (Simple & Beginner-Friendly)
a) Long Call (Buying a Call)

View: Bullish

Risk: Limited to premium paid

Reward: Unlimited (theoretically)

Example: Buy Reliance 2800 CE @ ₹50 → If Reliance goes to 2900, profit = ₹50.

b) Long Put (Buying a Put)

View: Bearish

Risk: Limited to premium paid

Reward: Large downside profit potential

Example: Buy Nifty 22,000 PE → If Nifty falls, profit rises.

c) Covered Call

View: Neutral to mildly bullish

How it works: Hold stock + Sell a Call option

Goal: Earn income from option premium

Risk: Stock falls significantly.

d) Cash-Secured Put

View: Neutral to bullish

How it works: Sell a Put with enough cash to buy stock if assigned.

Goal: Collect premium or buy stock cheaper.