Part 1 Candle Stick Pattern

1. What Are Options?

An option is a financial contract that gives the buyer the right—but not the obligation—to buy or sell an asset at a predetermined price on or before a specific date.

Think of it as a ticket to make a transaction in the future. You can choose to use the ticket if it benefits you, or ignore it if it doesn’t.

Call Option: Gives the right to buy an asset.

Put Option: Gives the right to sell an asset.

Example:
Imagine a stock of ABC Ltd. is trading at ₹100. You buy a call option with a strike price of ₹110, expiring in one month. If the stock rises to ₹120, you can exercise your option and buy at ₹110, making a profit. If it doesn’t rise above ₹110, you simply let the option expire.

2. Key Terms in Options Trading

Understanding the terminology is crucial in options trading. Here are the main terms:

Strike Price (Exercise Price): The price at which the underlying asset can be bought (call) or sold (put).

Premium: The price paid to buy the option. Think of it as the cost of the “ticket.”

Expiry Date: The last day 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 strike price is equal to the current market price.

Underlying Asset: The stock, index, commodity, or currency the option is based on.

Example:
If you buy a call option for XYZ stock at a strike price of ₹50, and the stock rises to ₹60, the option is ITM. If the stock stays at ₹45, the option is OTM.

3. How Options Work

Options can be exercised, sold, or allowed to expire, giving traders flexibility:

Buying a Call Option: You expect the asset’s price to rise. Profit is theoretically unlimited; loss is limited to the premium paid.

Buying a Put Option: You expect the asset’s price to fall. Profit increases as the asset price decreases; loss is limited to the premium paid.

Selling (Writing) Options: You collect the premium but take on greater risk. For example, selling a naked call has unlimited potential loss.

Options trading is derivative-based, meaning its value is derived from an underlying asset. The price of an option depends on several factors:

Intrinsic Value: Difference between current price and strike price.

Time Value: Value based on time left to expiry.

Volatility: How much the underlying asset moves affects the premium.

Interest Rates & Dividends: Can slightly impact options pricing.

4. Why Trade Options?

Options are popular for several reasons:

1. Leverage

Options allow you to control a large number of shares with a small investment (premium). This magnifies potential gains—but also potential losses.

Example:
You pay ₹5 per option for the right to buy 100 shares. If the stock moves favorably by ₹10, your profit is much higher than if you bought the shares directly.

2. Hedging

Options act as insurance. Investors use options to protect portfolios from market declines.

Example:
You own 100 shares of a stock at ₹200. Buying a put option at ₹190 ensures you can sell at ₹190, limiting potential loss.

3. Flexibility

Options allow you to profit in any market condition—up, down, or sideways. Various strategies can capture gains depending on market movements.

4. Speculation

Traders use options to bet on short-term price movements. Small changes in the underlying asset can generate significant returns due to leverage.