Part 2 Support And Resistance

Why Options Exist?

Options exist to manage risk and to create trading opportunities. Think of them as financial insurance. Just like you pay a premium for car insurance to protect against damage, in options trading, investors pay a premium to protect themselves against adverse price moves.

For Hedgers: Options act as insurance. A stock investor can buy a put option to protect his portfolio if the market falls.

For Speculators: Options provide leverage. With small capital, traders can take large directional bets.

For Arbitrageurs: Options open opportunities to exploit price inefficiencies between the spot, futures, and options markets.

Key Terminologies in Option Trading

Before diving deep, let’s understand some essential terms:

Call Option: A contract that gives the buyer the right (but not the obligation) to buy an asset at the strike price before expiry.

Example: Buying a Reliance ₹2500 Call Option means you can buy Reliance shares at ₹2500 even if the market price rises to ₹2700.

Put Option: A contract that gives the buyer the right (but not the obligation) to sell an asset at the strike price before expiry.

Example: Buying a Nifty 19000 Put Option means you can sell Nifty at 19000 even if the market falls to 18500.

Premium: The price paid to buy the option contract.

Example: If a Nifty 20000 Call is trading at ₹150, that ₹150 is the premium.

Strike Price: The pre-decided price at which the option can be exercised.

Expiry Date: The last date on which the option contract is valid.

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

Example: Nifty at 20000 → 19500 Call is ITM.

Out-of-the-Money (OTM): Option that has no intrinsic value (only time value).

Example: Nifty at 20000 → 21000 Call is OTM.

At-the-Money (ATM): Option strike price is closest to current market price.

Lot Size: Options are traded in predefined lot sizes, not single shares.

Example: Bank Nifty option lot size = 15 units (as per 2025 rules).

Option Chain: A tabular representation showing available strikes, premiums, open interest, etc. for calls and puts.