Option trading

1. What Are Options?

Options are financial contracts that give you the right, but not the obligation, to buy or sell an underlying asset (like a stock, index, or commodity) at a fixed price (strike price) within a certain time period.

Call Option → Right to buy the asset.

Put Option → Right to sell the asset.

👉 You pay a premium to purchase the option.

2. Key Terms in Options

Strike Price: The fixed price at which you can buy/sell the asset.

Premium: The cost of buying the option (like an entry fee).

Expiry Date: Last date the option can be exercised.

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

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

Lot Size: Options are traded in fixed quantities, not single shares.

3. How Options Work (Example)

Imagine Reliance stock = ₹2,500.

You buy a Call Option with strike = ₹2,600, expiry in 1 month, premium = ₹50.

If Reliance rises to ₹2,700 before expiry:

You can buy at ₹2,600, sell at ₹2,700 → Profit = ₹100 – ₹50 premium = ₹50.

If Reliance stays below ₹2,600, you don’t exercise → Loss = Premium ₹50.

This way, risk is limited to the premium, but potential profit can be much larger.

4. Types of Option Trading

Buying Calls/Puts → Simple strategy, limited risk.

Writing (Selling) Options → You receive premium but face higher risk.

Spreads & Strategies → Combining multiple options to control risk/reward. Examples:

Bull Call Spread

Bear Put Spread

Straddle

Iron Condor

5. Why Traders Use Options?

Hedging → To protect against losses in existing positions.

Speculation → To bet on price movements with limited capital.

Leverage → Small premium controls large value of stock.

Income → Option sellers earn premium regularly.

6. Pros & Cons of Options

✅ Advantages:

Limited risk (for buyers).

Lower capital needed than buying stocks directly.

Flexible strategies in rising, falling, or sideways markets.

❌ Risks/Challenges:

Complex compared to stock trading.

Sellers have unlimited risk.

Time decay → Options lose value as expiry nears.

👉 In short: Option trading is a flexible and powerful tool, but it requires solid knowledge of risk, pricing, and strategies. Beginners usually start by buying simple calls or puts before moving to advanced spreads and hedging techniques.