Part 2 Support and Resistance

1. Who Participates in Option Markets?

There are two main participants in options trading:

Option Buyers:

Pay premium upfront.

Limited risk, unlimited profit potential (in calls).

They speculate on price movement.

Option Sellers (Writers):

Receive premium from buyers.

Limited profit (only premium collected), but potentially large risk.

Often institutions or experienced traders who use hedging.

2. Why Trade Options?

Options are not just for gambling on price. They are multipurpose:

Leverage: You control more value with less money. A small premium can give exposure to big stock moves.

Hedging: Protect your stock portfolio from market crashes.

Flexibility: You can profit whether the market goes up, down, or even stays flat.

Income: Selling options regularly earns premiums, like rental income.

3. Option Pricing (The Premium)

The premium of an option has two parts:

Intrinsic Value: The real value if exercised today.

Example: Stock price ₹1,500, Call strike ₹1,450 → Intrinsic value = ₹50.

Time Value: Extra amount based on time left until expiration and market volatility.

The longer the time, the higher the premium.

Higher volatility also increases premium because big moves are more likely.

So, Option Price = Intrinsic Value + Time Value.

4. Types of Option Trading Strategies

Options are flexible because you can combine calls, puts, buying, and selling to create different strategies. Here are some important ones:

A. Basic Strategies

Buying Calls – Bullish view. Cheap way to bet on rising prices.

Buying Puts – Bearish view. Cheap way to bet on falling prices.

Covered Call – Hold stock + sell call to earn extra income.

Protective Put – Hold stock + buy put to protect against fall.

B. Intermediate Strategies

Straddle – Buy one call and one put at the same strike. Profits from big moves in either direction.

Strangle – Similar to straddle, but with different strikes. Cheaper but needs bigger move.

Spread Strategies – Combining buying and selling options of different strikes to limit risk.

Bull Call Spread

Bear Put Spread

Iron Condor

C. Advanced Strategies

Butterfly Spread – Limited risk and reward, used when expecting no big movement.

Calendar Spread – Exploits time decay by selling short-term and buying long-term options.