📘 Options Trading Basics

Options trading can seem complex at first, but with the right foundation, anyone can learn to use it as a powerful tool for investing, hedging, or generating income. This section will walk you through the essentials.

🔹 What Are Options?

Options are financial contracts that give the buyer the right, but not the obligation, to buy or sell an underlying asset (like a stock) at a specified price (strike price) before or on a certain date (expiration date).

  • Call Option: Gives the right to buy the asset.
  • Put Option: Gives the right to sell the asset.

🔹 Key Terms to Know

  • Strike Price: The price at which the option can be exercised.
  • Premium: The cost of purchasing the option.
  • Expiration Date: The last date on which the option can be exercised.
  • In the Money (ITM): The option has intrinsic value.
  • Out of the Money (OTM): The option has no intrinsic value.

🔹 Why Trade Options?

  • Speculation: Profiting from price movements with limited risk.
  • Hedging: Protecting your stock portfolio from downside risk.
  • Generating Income: Through strategies like covered calls or cash-secured puts.

🔹 How Options Differ from Stocks

Feature Stocks Options
Ownership You own part of a company You own a contract, not the asset itself
Risk Unlimited loss (long positions) Limited to the premium paid
Expiration None Yes, all options expire
Versatility Less flexible Highly versatile (many strategies)

🔹 Basic Option Example

Let’s say a stock is trading at ₹100. You buy a Call Option with a ₹110 strike, expiring in 1 month, paying a ₹5 premium.

If the stock goes to ₹120, your option is now worth ₹10 (₹120 - ₹110), giving you a ₹5 profit (₹10 - ₹5).

🔹 Common Mistakes to Avoid

  • Jumping in without understanding risks
  • Ignoring time decay (theta)
  • Over-leveraging
  • Not having a proper exit strategy

🔹 Tips for Beginners

  • Start with paper trading (no real money).
  • Learn one strategy at a time.
  • Use options to enhance your portfolio—not replace it.
  • Study the Greeks (Delta, Theta, Vega, Gamma).

🔹 Final Thought

Options trading isn't gambling—it's strategy-driven and skill-based. With discipline, risk control, and ongoing learning, it can be a valuable addition to your financial toolkit.