PCR Trading Strategies

Introduction

Options are among the most fascinating tools in the financial markets. Unlike regular stock trading, where you simply buy or sell shares, options allow you to control risk, leverage your money, and design strategies that profit in multiple market conditions—whether the market goes up, down, or even stays flat.

But here’s the catch: options can be confusing at first. Many beginners look at terms like strike price, premium, Greeks, spreads, and quickly feel overwhelmed. That’s why the key to mastering options is not memorizing definitions but understanding how strategies work in different situations.

This guide takes you step by step, from the basics to advanced strategies, with real-world logic and human-friendly explanations. By the end, you’ll not only know the common option strategies but also when and why traders use them.

1. The Foundations of Options Trading
1.1 What is an Option?

An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an asset at a certain price within a certain time frame.

Call Option: Right to buy an asset at a set price (strike price).

Put Option: Right to sell an asset at a set price.

Example: Suppose Reliance stock is at ₹2,500. You buy a call option with strike price ₹2,600 expiring in one month. If Reliance goes to ₹2,700, your option becomes valuable, because you can buy at ₹2,600 when the market price is ₹2,700.

1.2 Key Terms

Strike Price: The price at which you can buy/sell.

Premium: The cost of the option.

Expiration Date: The last date the option is valid.

In the Money (ITM): Option already has value.

Out of the Money (OTM): Option has no intrinsic value yet.

1.3 Why Use Options?

Hedging: Protect your portfolio from risk.

Speculation: Bet on market direction with less money.

Income: Earn regular premiums by selling options.

2. The Core Building Blocks

Before strategies, let’s understand what influences an option’s price:

2.1 Intrinsic vs. Extrinsic Value

Intrinsic Value: The real value if exercised now.

Extrinsic Value: The time and volatility premium.

Example: Nifty at 20,000. A call with strike 19,800 has intrinsic value = 200. If premium is 250, then 200 is intrinsic, 50 is extrinsic.

2.2 Time Decay (Theta)

Options lose value as they approach expiry. This is why sellers often make money if the stock doesn’t move much.

2.3 Volatility (Vega)

Higher volatility increases option premiums. Ahead of big events like earnings, option prices rise. After the event, prices usually drop (called volatility crush).