Part 2 Candle Stick Pattern

Key Terminologies in Option Trading

To understand options, you must master the vocabulary:

Strike Price → Pre-decided price where option can be exercised.

Premium → Price paid by the option buyer to the seller.

Expiry Date → Last day the option can be exercised.

In-the-Money (ITM) → Option already has intrinsic value.

At-the-Money (ATM) → Strike price is equal to current market price.

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

Lot Size → Options are traded in lots, not single shares. For example, Nifty lot = 50 units.

How Option Pricing Works

Options are not priced arbitrarily. The premium has two parts:

Intrinsic Value (IV)

The real value if exercised now.

Example: Nifty at 20,200, call strike 20,100 → IV = 100 points.

Time Value (TV)

Extra value due to remaining time before expiry.

Longer expiry = higher premium because of greater uncertainty.

Option pricing is influenced by:

Spot price of underlying

Strike price

Time to expiry

Volatility

Interest rates

Dividends

The famous Black-Scholes Model and Binomial Model are widely used to calculate theoretical prices.

Greeks and Risk Management

Every option trader must understand Greeks, the risk measures that show sensitivity of option price to different factors:

Delta → Measures how much the option price changes if underlying moves 1 unit.

Gamma → Measures how delta itself changes with price movement.

Theta → Time decay; how much premium falls as expiry nears.

Vega → Sensitivity to volatility. Higher volatility increases premium.

Rho → Sensitivity to interest rates.

Greeks allow traders to hedge portfolios and adjust positions dynamically.

Strategies in Option Trading

Options shine because you can combine calls, puts, and different strikes to create unique strategies.

Directional Strategies

Buying Call → Bullish play.

Buying Put → Bearish play.

Covered Call → Own stock + sell call → generates income.

Protective Put → Own stock + buy put → insurance.

Neutral Market Strategies

Straddle → Buy call + put at same strike → profit from big moves either way.

Strangle → Buy OTM call + OTM put → cheaper version of straddle.

Iron Condor → Sell OTM call and put spreads → profit if market stays in range.

Advanced Plays

Butterfly spread, calendar spread, ratio spreads – for experienced traders.