Part 8 Trading Master Class

Part 1: Introduction to Option Trading

Options are financial derivatives that derive their value from an underlying asset such as stocks, indices, commodities, or currencies. Unlike shares, buying an option doesn’t mean you own the asset—it gives you the right but not the obligation to buy or sell the asset at a pre-agreed price within a set period. This flexibility makes options a powerful tool for hedging, speculation, and income generation.

Part 2: What is a Derivative?

A derivative is a financial contract whose value depends on another asset. Futures and options are the two most popular derivatives. While futures require you to buy/sell at expiry, options give you the choice. This “choice” is what makes them unique—and sometimes tricky.

Part 3: The Two Types of Options

Call Option – Gives the buyer the right to buy an asset at a fixed price (strike price).

Example: If you buy a call option of Reliance at ₹2500, and the stock moves to ₹2600, you can still buy it at ₹2500.

Put Option – Gives the buyer the right to sell an asset at a fixed price.

Example: If you buy a put option at ₹2500 and the stock falls to ₹2400, you can still sell it at ₹2500.

Part 4: Key Terminologies

Strike Price – The pre-decided price of buying/selling.

Premium – The cost paid to buy the option.

Expiry Date – The last date till which the option is valid.

In-the-Money (ITM) – Option has intrinsic value.

Out-of-the-Money (OTM) – Option has no intrinsic value.

At-the-Money (ATM) – Strike price is close to market price.

Part 5: Call Option in Detail

A call option is ideal if you expect the price of an asset to rise. Buyers risk only the premium paid, while sellers (writers) can face unlimited losses if prices rise sharply. Traders often buy calls for bullish bets and sell calls to earn premium income.

Part 6: Put Option in Detail

A put option is profitable when asset prices fall. Buyers of puts use them for protection against a market crash, while sellers hope prices won’t fall so they can pocket the premium. Investors holding stocks often buy puts as insurance against downside risk.

Part 7: How Option Premium is Priced

Option premium = Intrinsic Value + Time Value

Intrinsic Value: Actual value (e.g., if Reliance is ₹2600 and strike is ₹2500, intrinsic = ₹100).

Time Value: Extra cost traders pay for the possibility of favorable movement before expiry.
Pricing is also influenced by volatility, interest rates, and dividends.

Part 8: The Greeks in Options

The Greeks measure option sensitivity:

Delta – Measures how much option price moves for a ₹1 move in stock.

Gamma – Measures how delta changes with stock movement.

Theta – Measures time decay (options lose value as expiry approaches).

Vega – Measures sensitivity to volatility.

Rho – Measures sensitivity to interest rates.

Part 9: Why Traders Use Options

Options are versatile. Traders use them to:

Speculate on price movements with limited risk.

Hedge against adverse market moves.

Generate Income by selling options (collecting premiums).

Leverage positions with less capital compared to buying shares directly.

Part 10: Buying vs Selling Options

Buying Options: Limited risk (premium), unlimited profit potential.

Selling Options: Limited profit (premium), unlimited risk.
Example: Selling a naked call when markets rise aggressively can cause heavy losses.