Part 8 Trading Master Class

1. Introduction to Option Trading

Financial markets are constantly evolving, offering traders and investors a wide variety of tools to manage risk, speculate on price movements, or generate income. One of the most fascinating and versatile financial instruments is the option.

Unlike buying a share of a company directly, which gives you ownership, an option gives you rights, not obligations. This small distinction makes options powerful. They can amplify profits, reduce risks, and allow traders to play multiple angles of the market.

Option trading might sound complicated at first, but once you understand the foundation, it’s like learning a new language – everything starts connecting.

2. The Basics: What Are Options?

An option is a contract between two parties – a buyer and a seller – that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a predetermined price within a set time frame.

The underlying asset could be a stock, an index, a commodity (like gold or crude oil), or even currencies.

The predetermined price is called the strike price.

The time frame is defined by the expiry date.

In simple words:
Options are like a reservation ticket. You pay a small amount now (premium) to lock in the ability to buy/sell later, but you don’t have to use it if you don’t want to.

3. Types of Options: Call and Put

There are two main types:

Call Option: Gives the buyer the right to buy the underlying asset at the strike price.

Example: You buy a call option for Reliance at ₹2500. If Reliance goes to ₹2700, you can still buy it at ₹2500, making profit.

Put Option: Gives the buyer the right to sell the underlying asset at the strike price.

Example: You buy a put option for Infosys at ₹1500. If Infosys falls to ₹1300, you can still sell it at ₹1500.

Think of calls as a bet on prices going up, and puts as a bet on prices going down.

4. Key Terminologies in Options

To understand option trading, you must master its unique vocabulary:

Strike Price: The pre-agreed price at which you can buy/sell the underlying.

Expiry Date: The date on which the option contract expires.

Premium: The price you pay to buy the option.

In-the-Money (ITM): Option has intrinsic value. (E.g., stock is above strike for calls, below strike for puts).

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

At-the-Money (ATM): Stock price and strike price are nearly the same.

Option Writer: The seller of the option, who takes the opposite side.

Lot Size: The minimum quantity you can trade in an option contract.