Part 2 Trading Master Class

Key Terms in Option Trading

Before diving deeper, let’s understand the language of option traders.

Premium: The price paid to buy an option.

Strike Price: The price at which the option holder can buy (call) or sell (put) the asset.

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

In-the-Money (ITM): When exercising the option would be profitable.

Out-of-the-Money (OTM): When exercising the option would not be profitable.

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

Intrinsic Value: The amount of profit if the option were exercised immediately.

Time Value: The portion of the option premium that reflects the time left until expiration.

Example: If a stock is trading at ₹100 and you buy a call option with a strike price of ₹90 for ₹15 premium, the intrinsic value is ₹10 (100 – 90), and the remaining ₹5 is time value.

How Option Trading Works

Let’s look at a simple example:

Stock XYZ is trading at ₹200.

You buy a call option with a strike price of ₹210 for ₹5 premium.

The option expires in one month.

Scenario 1: Stock rises to ₹230

Intrinsic Value = ₹20 (230 – 210).

Profit = ₹20 – ₹5 (premium) = ₹15 per share.

Scenario 2: Stock stays at ₹200

Intrinsic Value = 0.

Loss = ₹5 (premium paid).

This shows the beauty of options: limited risk (premium paid) but unlimited upside in case of calls.