Part 1 Ride The Big Moves

Introduction to Options Trading

Options trading is a sophisticated financial practice that allows investors to speculate on the future price movements of underlying assets or to hedge existing positions. Unlike direct stock trading, options provide the right—but not the obligation—to buy or sell an asset at a predetermined price within a specified time frame. This flexibility makes options a powerful tool in modern financial markets, used by retail traders, institutional investors, and hedge funds alike.

Options fall under the category of derivatives, financial instruments whose value is derived from an underlying asset, which can be stocks, indices, commodities, currencies, or ETFs. The two fundamental types of options are call options and put options.

1. Call and Put Options

Call Option: A call option gives the buyer the right to buy the underlying asset at a specific price (known as the strike price) before or on the option’s expiration date. Traders purchase calls when they expect the asset’s price to rise. For example, if a stock is trading at ₹100, and you buy a call option with a strike price of ₹105, you will profit if the stock price exceeds ₹105 plus the premium paid.

Put Option: A put option gives the buyer the right to sell the underlying asset at the strike price. Traders buy puts when they anticipate a decline in the asset’s price. For instance, if the same stock is at ₹100, a put option with a strike price of ₹95 becomes valuable if the stock price falls below ₹95 minus the premium paid.

The option seller (writer), on the other hand, assumes the obligation to fulfill the contract if the buyer exercises the option. Sellers earn the option premium upfront but take on potentially unlimited risk, especially in the case of uncovered calls.

2. Key Terms in Options Trading

Understanding options requires familiarity with several technical terms:

Strike Price: The predetermined price at which the underlying asset can be bought (call) or sold (put).

Expiration Date: The last date on which the option can be exercised. Options lose value after this date.

Premium: The price paid to purchase the option, influenced by intrinsic value and time value.

Intrinsic Value: The difference between the underlying asset’s price and the strike price if favorable to the option holder.

Time Value: The portion of the premium reflecting the probability of the option becoming profitable before expiration.

In-the-Money (ITM): A call is ITM if the underlying price > strike price; a put is ITM if the underlying price < strike price.

Out-of-the-Money (OTM): A call is OTM if the underlying price < strike price; a put is OTM if the underlying price > strike price.

At-the-Money (ATM): When the underlying price ≈ strike price.