Part 2 Master Candle Stick Pattern

1. Option Writing – Risks and Rewards

Option writing (selling) is when traders collect premium by selling calls or puts.

Advantage: Time decay works in your favor.

Risk: Unlimited (naked call writing is extremely risky).

Best Use: Done with hedges, spreads, or adequate margin.

2. Options vs. Futures

While both are derivatives, they differ:

Futures: Obligation to buy/sell at a future date.

Options: Right but not obligation.

Risk/Reward: Futures = unlimited risk/reward. Options = asymmetric risk/reward.

Use Case: Futures for directional moves, options for hedging or volatility plays.

3. Option Trading Psychology

Option trading is not just numbers—it’s also psychology.

Fear of missing out (FOMO) leads traders to buy expensive options in high IV.

Greed causes holding onto losing trades too long.

Discipline is key in cutting losses quickly and following position sizing rules.

4. Risk Management in Option Trading

Without proper risk management, options can blow up accounts. Key principles:

Never risk more than 1–2% of capital per trade.

Avoid naked option selling without hedge.

Use stop-loss orders or mental stop levels.

Diversify across strategies.

5. Option Trading in India – NSE Context

In India, options on Nifty 50, Bank Nifty, FinNifty, and individual stocks dominate volumes.

Weekly Expiries: Bank Nifty & Nifty weekly expiries have huge liquidity.

Retail Participation: Has grown massively due to low margin requirements.

Risks: SEBI has warned about high losses in retail options trading.

6. Real-World Applications of Options

Options are not just speculation tools—they serve critical functions:

Hedging portfolios of mutual funds, FIIs, DIIs.

Insurance companies use options to balance risks.

Commodity traders hedge against price swings.

Global corporations hedge forex exposures.

7. Conclusion – The Power and Danger of Options

Options are double-edged swords. They allow traders to:

Leverage capital effectively.

Hedge risks in uncertain markets.

Create income through systematic strategies.

But they also carry dangers:

Time decay eats away value.

Over-leveraging leads to account blow-ups.

Misjudging volatility can destroy trades.

Thus, option trading should be approached with education, discipline, and respect for risk. A beginner should start small, learn spreads, and focus on risk control rather than chasing quick profits.