Part 7 Trading Master Class

1. Introduction to Options Trading

Options are one of the most fascinating financial instruments in the market because they allow traders to speculate, hedge, and manage risks in creative ways. Unlike buying and selling shares directly, options give you the right but not the obligation to buy or sell an asset at a predetermined price within a specified period. This flexibility makes options extremely powerful.

However, with power comes responsibility. Options trading is not as straightforward as buying a stock and waiting for its price to go up. Options involve multiple variables—time decay, implied volatility, strike prices, and premiums—that all influence profit and loss. For this reason, traders develop strategies that balance risk and reward depending on their market outlook.

Option trading strategies range from simple ones—like buying a call when you expect a stock to rise—to very advanced ones—like iron condors or butterflies, where you combine multiple contracts to profit from stable or volatile markets.

In this guide, we’ll explore the most widely used option trading strategies, explaining how they work, when to use them, and their advantages and risks.

2. Understanding Options Basics

Before diving into strategies, let’s understand the core building blocks of options:

Call Option

A call option gives the buyer the right to buy an asset at a fixed strike price within a given time frame.

Example: You buy a call option on Reliance at ₹2,500 strike for a premium of ₹50. If Reliance rises to ₹2,600, you can exercise the option and profit.

Put Option

A put option gives the buyer the right to sell an asset at a fixed strike price within a given time frame.

Example: You buy a put option on Infosys at ₹1,500 strike for a premium of ₹40. If Infosys falls to ₹1,400, you can sell it at ₹1,500, earning profit.

Key Terms in Options

Strike Price: The fixed price at which you can buy/sell the asset.

Premium: The cost you pay to buy the option.

Expiry Date: The last date the option is valid.

In the Money (ITM): When exercising the option is profitable.

At the Money (ATM): When strike price ≈ current price.

Out of the Money (OTM): When exercising the option is not profitable.

3. Why Use Options?

Options are not just for speculation—they serve multiple purposes:

Hedging – Investors use options to protect against unfavorable price moves. Example: Buying puts to protect a stock portfolio against a market crash.

Income Generation – By writing (selling) options like covered calls or cash-secured puts, traders collect premiums and generate consistent income.

Leverage – Options allow control of large stock positions with small capital. For example, buying one call contract is cheaper than buying 100 shares of the stock outright.

Speculation – Traders can take directional bets with limited risk. Example: If you expect volatility, you might use straddle or strangle strategies.

Flexibility – Unlike stocks, options allow you to profit in bullish, bearish, or even sideways markets, depending on the strategy.