Part 4 Learn Institutional Trading

Risks of Options Trading

Options can be powerful but come with risks:

Time Decay (Theta): Options lose value as expiry nears.

High Volatility: Premiums can fluctuate wildly.

Leverage Trap: While leverage amplifies profits, it also magnifies losses.

Unlimited Risk (for Sellers): If you sell options, your risk can be theoretically unlimited.

Complex Strategies: Advanced option strategies require deep knowledge.

How Options Work in Practice

Let’s take a step-by-step breakdown using a Nifty Call Option Example:

Nifty Spot: 20,000

You buy a Call Option with Strike = 20,000, Premium = 150, Expiry = 1 month.

Scenario A: Nifty goes to 20,500

Option intrinsic value = 500 (20,500 - 20,000)

Profit = 500 - 150 = 350 per unit × Lot size (say 50) = ₹17,500 profit.

Scenario B: Nifty falls to 19,800

Option expires worthless.

Loss = Premium × Lot size = ₹150 × 50 = ₹7,500 loss.

This shows both the leverage and limited risk nature of options.