Learn option trading basic to advance

**Option trading** can be both exciting and complex, offering various strategies and techniques to make profits from price movements in underlying assets. Here's a **comprehensive guide** on **option trading**, covering everything from **basic to advanced strategies**:

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### **1. Basics of Option Trading**

#### **What are Options?**

An **option** is a financial contract that gives you the **right**, but not the **obligation**, to buy or sell an underlying asset (like stocks, indices, commodities, etc.) at a predetermined price (called the **strike price**) on or before a specific expiration date.

There are **two main types** of options:

1. **Call Option**: This gives the buyer the right to **buy** the underlying asset at the strike price.
2. **Put Option**: This gives the buyer the right to **sell** the underlying asset at the strike price.

#### **Key Terminology in Options**

- **Strike Price**: The price at which the underlying asset can be bought or sold.
- **Expiration Date**: The date when the option contract expires.
- **Premium**: The price paid by the buyer to the seller for the option.
- **In-the-Money (ITM)**: For a call, the asset's price is above the strike price; for a put, the asset's price is below the strike price.
- **Out-of-the-Money (OTM)**: For a call, the asset's price is below the strike price; for a put, the asset's price is above the strike price.
- **At-the-Money (ATM)**: The asset's price is equal to the strike price.

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### **2. Option Pricing Basics**

The price of an option, known as the **premium**, is determined by several factors:

1. **Intrinsic Value**: The actual value of the option if it were exercised right now.
- For a call: **Intrinsic Value = Current Price - Strike Price** (if positive)
- For a put: **Intrinsic Value = Strike Price - Current Price** (if positive)

2. **Time Value**: The extra value based on the time left until the expiration date. The more time there is, the higher the premium.

3. **Volatility**: The higher the price volatility of the underlying asset, the higher the premium. This is because volatility increases the chances of the option becoming profitable.

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### **3. Basic Option Strategies**

#### **Buying Call Options (Long Call)**

- **Objective**: Buy a call option if you expect the price of the asset to **increase**.
- **Profit Potential**: Unlimited (since the price of the asset can rise indefinitely).
- **Risk**: Limited to the premium paid for the option.
- **Example**: You buy a call option on a stock at a strike price of ₹2,000. If the stock rises to ₹2,500, you can buy it at ₹2,000 and sell at ₹2,500, making a profit.

#### **Buying Put Options (Long Put)**

- **Objective**: Buy a put option if you expect the price of the asset to **decrease**.
- **Profit Potential**: The price can fall to zero, so the profit is significant.
- **Risk**: Limited to the premium paid for the option.
- **Example**: You buy a put option on a stock at a strike price of ₹2,000. If the stock falls to ₹1,500, you can sell it at ₹2,000 and buy it back at ₹1,500, making a profit.

#### **Selling Call Options (Covered Call)**

- **Objective**: You own the underlying asset and sell a call option to generate income through premiums.
- **Profit**: Limited to the premium received for selling the call.
- **Risk**: Potentially unlimited if the asset's price rises significantly.
- **Example**: You own 100 shares of stock at ₹2,000 and sell a call option with a strike price of ₹2,200. If the stock stays below ₹2,200, you keep the stock and the premium. If it rises above ₹2,200, the stock gets called away at ₹2,200.

#### **Selling Put Options (Cash-Secured Put)**

- **Objective**: You sell a put option when you're willing to buy the underlying asset at a lower price.
- **Profit**: Limited to the premium received for selling the put.
- **Risk**: Potentially significant if the asset's price falls below the strike price.
- **Example**: You sell a put option on a stock at ₹1,800. If the stock stays above ₹1,800, you keep the premium. If it falls below ₹1,800, you’ll be required to buy the stock at ₹1,800.

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### **4. Intermediate Option Strategies**

#### **Covered Call Strategy**

- **Objective**: If you're neutral to mildly bullish on the asset, you can own the stock and sell a call option to generate income.
- **Risk**: The risk is that the stock price may rise significantly, and you will have to sell the stock at the strike price, missing out on the potential upside.

#### **Protective Put Strategy**

- **Objective**: You own the stock and buy a put option to protect against a price drop.
- **Risk**: The only risk is the premium paid for the put option.
- **When to Use**: If you're bullish on the stock but want to limit potential losses.

#### **Straddle Strategy**

- **Objective**: Buy both a call and a put option at the same strike price and expiration date.
- **Profit Potential**: Unlimited, if the price moves significantly in either direction.
- **Risk**: Limited to the total premium paid for both the call and put.
- **When to Use**: If you expect a large move in the underlying asset but are unsure of the direction (e.g., during earnings announcements).

#### **Strangle Strategy**

- **Objective**: Buy both a call and a put option with different strike prices (the call has a higher strike than the put).
- **Profit Potential**: Unlimited, if the price moves significantly in either direction.
- **Risk**: Limited to the total premium paid for both the call and put.
- **When to Use**: If you expect high volatility but don’t know the direction of price movement.

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### **5. Advanced Option Strategies**

#### **Iron Condor**

- **Objective**: Involves selling a call and put option at different strike prices (one higher and one lower), while simultaneously buying further out-of-the-money options for protection.
- **Profit Potential**: Limited to the net premium received.
- **Risk**: Limited to the difference between the strike prices minus the premium received.
- **When to Use**: When you expect the price of the underlying asset to stay within a specific range.

#### **Butterfly Spread**

- **Objective**: A neutral strategy involving three strike prices: a lower, middle, and higher strike. Buy one call/put at the lower strike, sell two calls/puts at the middle strike, and buy one call/put at the higher strike.
- **Profit Potential**: Limited to the maximum premium received.
- **Risk**: Limited to the net premium paid.
- **When to Use**: When you expect the asset to stay near the middle strike price and have low volatility.

#### **Calendar Spread (Time Spread)**

- **Objective**: Buy a longer-term option and sell a shorter-term option at the same strike price.
- **Profit Potential**: Profit from the decay of the shorter-term option's time value.
- **Risk**: Limited to the net premium paid.
- **When to Use**: When you expect volatility to rise and want to profit from the time decay of the short position.

#### **Diagonal Spread**

- **Objective**: A combination of a vertical spread (same strike price) and a time spread (different expiration dates).
- **Profit Potential**: Profit from both time decay and price movement.
- **Risk**: Limited to the net premium paid.

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### **6. Risk Management in Options Trading**

Options trading involves substantial risk. Here are some risk management techniques:

- **Position Sizing**: Limit the size of each position based on your risk tolerance.
- **Stop Loss**: Set exit points to limit potential losses.
- **Diversification**: Use different strategies and trade different assets to spread risk.
- **Hedging**: Use options to hedge existing positions and reduce risk exposure.

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### **7. Calculating Option Cost in INR**

To calculate the **cost of an option** in **INR**, you can follow these steps:

1. **Find the Option Premium**: This is typically quoted in the currency of the exchange (e.g., USD or INR).
2. **Convert to INR**: If the premium is quoted in USD, convert the price to INR using the current exchange rate.
- Example: If an option premium is ₹100 and the exchange rate is 1 USD = ₹80, the price in USD would be **₹100 / 80 = $1.25**.

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### **Conclusion**

Option trading is a versatile tool in financial markets. Starting with the basics like **buying calls and puts**, and progressing to more advanced strategies like **butterfly spreads** or **iron condors**, can help you adapt to different market conditions. However, always remember that options involve substantial risk, and using proper **risk management strategies** is crucial for long-term success.

Start by paper trading to practice your strategies risk-free, and once you feel confident, move to live trading. With time, you'll gain expertise and develop a trading style that works for you.