Option Trading

Pros and Cons of Option Trading
Advantages

Limited risk (for buyers).

Leverage: control large positions with small capital.

Flexibility: profit in all market conditions.

Hedging tool.

Disadvantages

Complexity: requires deep understanding.

Option sellers face unlimited risk.

Time decay works against option buyers.

Requires good volatility forecasting.

Practical Examples of Option Trading

Example 1: Buying Call on Reliance

Reliance at ₹2,500. Buy 2600 CE for ₹50.

Expiry day: Reliance at ₹2,700.

Profit = (2700–2600) – 50 = ₹50 per share × lot size.

Example 2: Protective Put for Portfolio Hedge

You hold Nifty ETF at 20,000.

Buy 19,800 PE. If market crashes to 19,000, your put limits loss.

Psychology and Risk Control

Option trading is not just about math; it’s about discipline:

Avoid over-leveraging.

Always define stop-loss.

Respect time decay (theta).

Manage emotions – fear of missing out (FOMO) and greed are costly.