PCR Trading Strategy

1. What is Option Trading?

Option trading is a type of financial trading where instead of directly buying or selling an asset (like stocks, commodities, or currencies), you buy a contract that gives you the right (but not the obligation) to buy or sell that asset at a specific price within a certain period.

Think of it like this:

You pay a small fee (called premium) for the “option” to make a deal in the future.

If the deal becomes profitable, you exercise your option.

If not, you simply let the option expire.

This way, your maximum loss is limited to the premium you paid.

2. Types of Options

There are two main types of options:

Call Option – Right to buy an asset at a fixed price.

Example: You buy a call option on Reliance at ₹2,500. If the stock goes to ₹2,700, you can still buy at ₹2,500, making profit.

Put Option – Right to sell an asset at a fixed price.

Example: You buy a put option on Infosys at ₹1,500. If the stock falls to ₹1,300, you can still sell at ₹1,500, protecting yourself.

3. Key Terms in Option Trading

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

Premium – The cost of buying the option contract.

Expiry Date – The last day when the option can be exercised.

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

Out of the Money (OTM) – When exercising gives no profit.

Lot Size – Options are traded in lots, not single shares. For example, 1 Nifty option lot = 50 units.

4. Why Do People Trade Options?

Hedging (Risk Protection): Investors use options to protect their portfolio against sudden price moves.

Speculation (Profit Seeking): Traders use options to bet on market direction with small capital.

Income Generation: Selling options can generate steady income, though with higher risk.

5. Example for Simplicity

Suppose you think Nifty (index) will rise from 20,000 to 20,200 in one week.

You buy a Call Option with strike price 20,000 at a premium of ₹100.

If Nifty goes to 20,200, your profit = (200 × lot size) – (100 × lot size).

If Nifty stays below 20,000, you lose only the premium.

6. Advantages of Option Trading

✔ Limited risk (for buyers).
✔ Requires less money compared to buying shares.
✔ Flexible – you can profit in rising, falling, or even sideways markets.

7. Risks of Option Trading

❌ Sellers of options face unlimited risk.
❌ Time decay – options lose value as expiry nears.
❌ Requires knowledge of volatility, pricing, and strategies.

8. Strategies in Option Trading

Some popular strategies include:

Covered Call – Selling call against stocks you own.

Protective Put – Buying a put to protect your portfolio.

Straddle & Strangle – Betting on high volatility.

Iron Condor – Earning from sideways markets.