Part 8 Trading master Class

Why Trade Options?

Options are popular because of their flexibility. They can serve multiple purposes:

Hedging (Insurance)

Just like insurance, options protect against downside risk.

Example: Buying a put option to protect your stock holdings.

Speculation (Profit from Price Movements)

Traders use options to bet on direction, volatility, or even stability of prices.

Income Generation

Selling covered calls or cash-secured puts generates steady premium income.

Leverage

Options allow large exposure with smaller capital compared to stocks.

How Options Work: Pricing

Option pricing is complex, but two main values exist:

Intrinsic Value → Difference between stock price and strike (if favorable).

Time Value → Extra value based on time left till expiry and expected volatility.

Example:

Stock = ₹1,000

Call strike = ₹950, Premium = ₹70

Intrinsic = ₹1,000 – ₹950 = ₹50

Time Value = ₹20

Options Market Structure

The options market involves:

Buyers of Options – Limited risk (premium), unlimited potential reward.

Sellers (Writers) of Options – Limited reward (premium), potentially high risk.

Exchanges (like NSE in India, CBOE in US) – Standardized contracts.

Clearing Corporations – Ensure smooth settlement, reduce counterparty risk.