Part 8 Trading Master Class

Introduction to Options

Financial markets provide several instruments to trade and invest. Among equities, futures, commodities, and currencies, options trading has gained significant popularity worldwide, including India. Options are not just speculative tools; they are also powerful instruments for hedging, income generation, and risk management.

An option is essentially a derivative contract—its value is derived from an underlying asset like a stock, index, commodity, or currency. Unlike direct stock ownership, an option gives the buyer rights but not obligations. This unique feature makes them versatile but also complex for beginners.

To truly master options, one must understand not only the basic definitions but also pricing, market psychology, and strategies.

Basic Terminology

Before diving deeper, let’s go through the essential terms:

Option Contract: Agreement between buyer and seller based on an underlying asset.

Underlying Asset: Stock, index, commodity, or currency.

Strike Price: Pre-decided price at which the option can be exercised.

Expiry Date: The last date on which the option can be exercised.

Premium: Price paid by the buyer to acquire the option.

Lot Size: Minimum quantity for which an option can be traded.

European vs. American Options: European can be exercised only on expiry; American anytime before expiry.

Call & Put Options Explained

At the heart of option trading are two instruments: Calls and Puts.

Call Option: Gives the buyer the right (not obligation) to buy the asset at the strike price.

Buyers expect prices to rise.

Sellers (writers) expect prices to stay flat or fall.

Put Option: Gives the buyer the right (not obligation) to sell the asset at the strike price.

Buyers expect prices to fall.

Sellers expect prices to stay flat or rise.

📌 Example:
If Reliance stock trades at ₹2500:

A ₹2600 call may cost ₹50 premium. If the stock rises to ₹2700, profit = (2700-2600-50) = ₹50 per share.

A ₹2400 put may cost ₹40. If stock falls to ₹2200, profit = (2400-2200-40) = ₹160 per share.