Part 1 Ride The Big Moves

1. Introduction

Option trading is one of the most exciting parts of the stock market. It allows traders and investors to speculate, hedge risk, and generate income in ways that simple stock buying and selling cannot. But because options involve contracts with specific rights and obligations, they can seem complicated at first glance.

In this explanation, we’ll go step by step — covering what options are, how they work, the different types, common strategies, risks, and benefits.

2. What Are Options?

An option is a financial contract that gives the buyer the right, but not the obligation, to buy or sell an asset at a pre-decided price within a fixed time frame.

The asset could be a stock, index, commodity, or currency.

The price is called the strike price.

The time frame is the contract’s expiry date.

Think of an option like a reservation. For example, if you pay a small deposit to lock in the price of a phone that you might buy next month, you have an “option.” If the phone price goes up, you’re happy because you can still buy it at the old locked price. If the price goes down, you can choose not to buy — but you lose the deposit.

That’s exactly how options work in financial markets.

3. Types of Options

There are two main types:

Call Option – This gives the holder the right to buy the asset at the strike price.

Traders buy calls if they expect prices to go up.

Put Option – This gives the holder the right to sell the asset at the strike price.

Traders buy puts if they expect prices to go down.

Example:

Stock ABC is trading at ₹100.

A call option with strike price ₹105 gives you the right to buy at ₹105 before expiry.

If the stock rises to ₹120, your call becomes valuable.

If it stays below ₹105, the option may expire worthless.

4. Key Terms in Options Trading

Before going deeper, let’s understand the basic terminology:

Premium: The price paid by the option buyer to the seller.

Strike Price: The pre-decided price at which the asset can be bought/sold.

Expiry Date: The last day the option is valid.

In the Money (ITM): When exercising the option would lead to profit.

Out of the Money (OTM): When exercising would not make sense.

At the Money (ATM): When the stock price equals the strike price.