Part 2 Candle Stick Pattern

Types of Options

There are two primary types of options:

a) Call Options

Gives the holder the right to buy an underlying asset at a specified strike price.

Investors buy calls when they expect the underlying asset price to rise.

Example: If stock ABC is trading at ₹100 and you buy a call with a strike price of ₹110, you profit if ABC rises above ₹110 plus the premium paid.

b) Put Options

Gives the holder the right to sell an underlying asset at a specified strike price.

Investors buy puts when they expect the underlying asset price to fall.

Example: If stock XYZ is trading at ₹200 and you buy a put with a strike price of ₹190, you profit if XYZ falls below ₹190 minus the premium paid.

Option Pricing and Valuation

Option pricing is crucial in determining potential profits and risks. Two main components influence the price of an option:

a) Intrinsic Value

For a call option: Current Price – Strike Price

For a put option: Strike Price – Current Price

Intrinsic value is zero if the option is out-of-the-money.

b) Time Value

Time value depends on:

Time to Expiry: Longer time increases the premium.

Volatility: Higher volatility increases the likelihood of profitable movements.

Interest Rates: Small effect on option premiums.

Dividends: Impact options on dividend-paying stocks.

c) Black-Scholes Model

Widely used for European-style options pricing.

Formula incorporates current stock price, strike price, time to expiration, volatility, and risk-free rate.

d) Greeks

Measures the sensitivity of option prices to various factors:

Delta: Sensitivity to the underlying asset price.

Gamma: Rate of change of delta.

Theta: Time decay effect.

Vega: Sensitivity to volatility.

Rho: Sensitivity to interest rate changes.