Part 1 Support and Resistance

Introduction

Options trading is one of the most fascinating and versatile aspects of the financial markets. Unlike stocks, which give ownership in a company, or bonds, which provide fixed income, options are derivative instruments whose value is derived from an underlying asset such as stocks, indices, commodities, or currencies. They give traders the right, but not the obligation, to buy or sell the underlying asset at a predetermined price before a specific expiration date.

Because of this unique characteristic, options allow traders and investors to design strategies that suit a wide range of market conditions—whether bullish, bearish, or neutral. Through careful strategy selection, one can aim for limited risk with unlimited upside, hedge existing positions, or even profit from sideways markets where prices don’t move much.

This article explores options trading strategies in detail. We’ll cover the building blocks of options, common strategies, advanced combinations, and risk management. By the end, you’ll have a strong foundation to understand how professional traders use options to manage portfolios and generate returns.

1. Basics of Options

Before diving into strategies, it’s important to review some fundamental concepts.

1.1 What is an Option?

Call Option: Gives the holder the right (not obligation) to buy the underlying asset at a predetermined price (strike price) before or on expiration.

Put Option: Gives the holder the right (not obligation) to sell the underlying asset at a predetermined price before or on expiration.

1.2 Key Terms

Premium: The price paid to buy an option.

Strike Price: The agreed price to buy or sell the underlying.

Expiration Date: The last day the option can be exercised.

Intrinsic Value: Difference between underlying price and strike (if favorable).

Time Value: Portion of the premium that reflects time until expiration.

1.3 Options Styles

European Options: Exercisable only at expiration.

American Options: Exercisable any time before expiration.