Part 9 Trading Master Class

1. How Option Trading Works

Let’s take a practical example.

Stock: TCS trading at ₹3600

You think it will rise.

You buy a call option with strike price ₹3700, paying ₹50 premium.

Two scenarios:

If TCS goes to ₹3900 → You can buy at ₹3700, sell at ₹3900, profit = ₹200 – ₹50 = ₹150.

If TCS stays at ₹3600 → Option expires worthless, you lose only the premium ₹50.

That’s the beauty: limited loss, unlimited profit (for buyers).

For sellers (writers), it’s the opposite: limited profit (premium collected), unlimited risk.

2. Options vs Stocks

Stocks: Ownership of company shares.

Options: Rights to trade shares at fixed prices.

Differences:

Options expire, stocks don’t.

Options require less money upfront (leverage).

Options can hedge risks, stocks cannot.

3. Why Traders Use Options

Options are versatile. Traders use them for three main reasons:

Hedging – Protecting portfolios from losses.

Example: If you own Nifty stocks but fear a market fall, buy a Nifty put option. Losses in shares will be offset by gains in the put.

Speculation – Betting on price moves with limited risk.

Example: Buy a call if you think price will go up.

Income Generation – Selling (writing) options to collect premiums.

Example: Covered calls strategy.

4. Option Pricing: The Greeks & Premium

An option’s price (premium) depends on several factors:

Intrinsic Value: The real value (difference between stock price & strike price).

Time Value: Extra cost due to time left until expiry.

Volatility: Higher volatility = higher premium (more chances of big moves).

The Option Greeks measure sensitivity:

Delta: How much option moves with stock.

Theta: Time decay (options lose value as expiry nears).

Vega: Impact of volatility changes.

Gamma: Rate of change of delta.

5. Strategies in Option Trading

This is where options shine. Traders can design strategies based on market outlook.

Bullish Strategies:

Buying Calls

Bull Call Spread

Bearish Strategies:

Buying Puts

Bear Put Spread

Neutral Strategies:

Iron Condor

Butterfly Spread

Income Strategies:

Covered Calls

Cash-Secured Puts

Options allow creativity – you can profit in rising, falling, or even stagnant markets.