Part 1 Ride The Big Moves

Introduction to Option Trading

Option trading is a segment of the financial market that allows investors to buy and sell options—financial contracts that grant the right, but not the obligation, to buy or sell an underlying asset at a predetermined price before or on a specified date. Unlike stocks or commodities where ownership is transferred, options are derivatives, meaning their value derives from an underlying asset such as equities, indices, commodities, or currencies.

Options are widely used for hedging, speculation, and income generation. Traders use options to manage risk, enhance returns, and capitalize on market volatility. Global financial markets, including India’s NSE and BSE, have witnessed exponential growth in options trading due to their flexibility and strategic possibilities.

Types of Options

Options are primarily classified into two types: Call Options and Put Options.

Call Options

A call option gives the buyer the right to purchase the underlying asset at a specified price, called the strike price, before or on the option's expiration date. Investors buy calls if they anticipate the price of the underlying asset will rise.

Example: Suppose a stock is trading at ₹100, and an investor buys a call option with a strike price of ₹110. If the stock rises to ₹120, the investor can exercise the option, buy at ₹110, and sell at ₹120, gaining ₹10 minus the premium paid.

Put Options

A put option gives the buyer the right to sell the underlying asset at a specified strike price within a certain timeframe. Investors buy puts if they expect the price of the underlying asset to fall.

Example: A stock trades at ₹150. An investor buys a put option with a strike price of ₹140. If the stock drops to ₹130, the investor can sell it at ₹140, securing a ₹10 profit minus the premium.