Part 3 Learn Institutional Trading

Types of Options
Call Options

A call option gives the holder the right to buy the underlying asset at the strike price before or on the expiration date. Investors buy calls when they anticipate the price of the underlying asset will rise.

Example: You buy a call option for a stock at ₹100 strike price. If the stock price rises to ₹120, you can exercise your option, buy the stock at ₹100, and make a profit.

Put Options

A put option gives the holder the right to sell the underlying asset at the strike price. Investors buy puts when they expect the price of the asset to fall.

Example: You buy a put option for a stock at ₹100. If the stock falls to ₹80, you can sell it at ₹100, making a profit.

Option Pricing: How Options Are Valued

The price of an option is called the premium, and it consists of two components:

Intrinsic Value

Intrinsic value represents the real, tangible value of the option if it were exercised today.

Call Option Intrinsic Value = Current Stock Price − Strike Price

Put Option Intrinsic Value = Strike Price − Current Stock Price

Time Value

Time value is the extra cost investors are willing to pay for the potential of future gains. It decreases as the option approaches expiration, a process known as time decay.

Factors Affecting Option Prices (The Greeks)

Options are affected by multiple factors called the Greeks:

Delta: Measures how much the option price changes with the underlying asset price.

Gamma: Measures the rate of change of delta.

Theta: Measures the effect of time decay on the option.

Vega: Measures sensitivity to volatility.

Rho: Measures sensitivity to interest rates.