Part 7 Trading master Class

Introduction to Options Trading

Financial markets offer countless opportunities for investors and traders to grow wealth. Among them, options trading stands out as one of the most versatile, powerful, and misunderstood tools. Options can help protect a portfolio from risk, generate extra income, or allow a trader to speculate on price movements with limited upfront capital.

At its core, options trading is about making calculated decisions on probabilities — the probability of a stock rising, falling, or staying stable. While stocks represent ownership in a company, options are contracts that give special rights tied to those stocks (or other assets).

Before diving deep, remember this: options are not inherently risky. Misuse of options is risky. With the right understanding, options can be a trader’s best friend.

Basics of Options
What is an Option?

An option is a financial contract that gives the buyer the right (but not the obligation) to buy or sell an underlying asset (like a stock, index, or commodity) at a predetermined price (strike price) before or on a certain date (expiry date).

Two main types exist:

Call Option → Right to buy the underlying at strike price.

Put Option → Right to sell the underlying at strike price.

The buyer pays a fee, known as the premium, to acquire this right.

Example:

Stock: Reliance Industries trading at ₹2,500

You buy a Call Option with strike ₹2,600, expiring in 1 month, premium ₹50.

If Reliance rises to ₹2,700 before expiry:

You can buy at ₹2,600, sell at ₹2,700, and profit (₹100 – ₹50 = ₹50 per share).

If Reliance stays below ₹2,600:

The option expires worthless, and you lose only the premium (₹50).

Key Terms

Strike Price → Fixed price at which option can be exercised.

Expiry Date → Last date to exercise the option.

Premium → Cost of buying the option.

Lot Size → Minimum quantity per option contract.

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

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

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