Part 2 Support And Resistance

Types of Options: Calls and Puts

There are only two fundamental types of options:

Call Option – Gives the right to buy the underlying asset at the strike price.

Example: Nifty is at 20,000. You buy a call option with a strike of 20,100. If Nifty rises to 20,400, you can buy at 20,100 and profit.

Put Option – Gives the right to sell the underlying asset at the strike price.

Example: Infosys is at ₹1,500. You buy a put option with a strike of ₹1,480. If Infosys falls to ₹1,400, you can sell at ₹1,480 and profit.

So, calls = bullish bets; puts = bearish bets.

Key Terminologies in Option Trading

To understand options, you must master the vocabulary:

Strike Price → Pre-decided price where option can be exercised.

Premium → Price paid by the option buyer to the seller.

Expiry Date → Last day the option can be exercised.

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

At-the-Money (ATM) → Strike price is equal to current market price.

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

Lot Size → Options are traded in lots, not single shares. For example, Nifty lot = 50 units.

How Option Pricing Works

Options are not priced arbitrarily. The premium has two parts:

Intrinsic Value (IV)

The real value if exercised now.

Example: Nifty at 20,200, call strike 20,100 → IV = 100 points.

Time Value (TV)

Extra value due to remaining time before expiry.

Longer expiry = higher premium because of greater uncertainty.

Option pricing is influenced by:

Spot price of underlying

Strike price

Time to expiry

Volatility

Interest rates

Dividends

The famous Black-Scholes Model and Binomial Model are widely used to calculate theoretical prices.