OPTION TRADING –
1) WHAT ARE OPTIONS?
An Option is a derivative contract.
Its value comes from an underlying asset
NIFTY
BANKNIFTY
Stocks (Reliance, TCS, etc.)
Option gives a RIGHT, not an obligation
2) TYPES OF OPTIONS
🔹 CALL OPTION (CE)
Right to BUY
You buy Call if you expect price to go UP
Example:
NIFTY at 22,000
Buy 22,200 CE
You expect NIFTY > 22,200
🔹 PUT OPTION (PE)
Right to SELL
You buy Put if you expect price to go DOWN
Example:
NIFTY at 22,000
Buy 21,800 PE
You expect NIFTY < 21,800
3) OPTION BUYER vs OPTION SELLER
🟢 OPTION BUYER
Pays Premium
Limited Loss
Unlimited Profit (theoretically)
🔴 OPTION SELLER (Writer)
Receives Premium
Limited Profit
Unlimited Loss ⚠️
📌 Truth bomb:
90% retail traders lose money because they buy options blindly.
4) OPTION PREMIUM – WHAT MAKES THE PRICE?
Option Premium =
Intrinsic Value + Time Value
🔹 Intrinsic Value
Actual value if exercised today
Example:
NIFTY = 22,000
21,900 CE → Intrinsic = 100
22,100 CE → Intrinsic = 0
🔹 Time Value
Value of remaining time till expiry
More time = more premium
📌 On expiry day, Time Value = ZERO
5) OPTION MONEYNESSES
🔹 ITM (In The Money)
CE: Strike < Spot
PE: Strike > Spot
🔹 ATM (At The Money)
Strike ≈ Spot
🔹 OTM (Out of The Money)
CE: Strike > Spot
PE: Strike < Spot
6) EXPIRY CYCLE
Weekly expiry (NIFTY, BANKNIFTY)
Monthly expiry (Stocks)
📌 Closer to expiry = faster premium decay
7) LOT SIZE (VERY IMPORTANT)
You cannot buy 1 option
Example:
NIFTY lot = 50
Premium = ₹100
Cost = 100 × 50 = ₹5,000
8) OPTION GREEKS (CORE CONCEPT)
🔹 DELTA – Direction
CE Delta: 0 to +1
PE Delta: 0 to -1
Meaning:
Delta 0.5 → Option moves ₹5 for ₹10 move in index
🔹 THETA – Time Decay 💀
Loss per day due to time passing
Worst for Option Buyers
📌 Biggest killer of retail traders
🔹 GAMMA – Speed of Delta
High near expiry
Dangerous for sellers
🔹 VEGA – Volatility
High volatility = High premium
IV crush after events (Budget, Results)
9) IMPLIED VOLATILITY (IV)
Market’s expectation of movement
High IV → Options expensive
Low IV → Options cheap
📌 Buy options in low IV, sell in high IV
10) PAYOFF CONCEPT (EXAM FAVORITE)
🔹 Call Buyer
Max Loss = Premium paid
Max Profit = Unlimited
🔹 Put Buyer
Max Loss = Premium paid
Max Profit = Strike − Premium
🔹 Call Seller / Put Seller
Opposite payoff
11) BREAK EVEN POINT (BEP)
Call Option BEP
Strike Price + Premium
Put Option BEP
Strike Price − Premium
12) COMMON OPTION STRATEGIES
🔹 1. Long Call
Bullish
High risk, high reward
🔹 2. Long Put
Bearish
🔹 3. Covered Call
Safe strategy
Stock + Sell Call
🔹 4. Bull Call Spread
Buy lower CE, Sell higher CE
Limited risk, limited profit
🔹 5. Bear Put Spread
Buy higher PE, Sell lower PE
🔹 6. Short Straddle ⚠️
Sell ATM CE + PE
Works only in sideways market
Very risky
13) Common Mistakes 👇
❌ Buy weekly OTM options
❌ Trade without stop loss
❌ Ignore Theta
❌ Over-trading
❌ Treat options as lottery
❌ No capital management
14) BASIC RISK MANAGEMENT RULES
Never risk > 2% capital per trade
Avoid expiry-day naked buying
Prefer spreads over naked options
Trade only 1–2 strategies
Stop trading after 2 consecutive losses
15) OPTION TRADING vs INVESTING
Aspec Option
Investing
t Trading
Natur Wealth
Speculative
e creation
Risk Very high Moderate
Time Short term Long term
Skill Mandatory Optional
16) FOR EXAMS (COMMERCE / MBA / CA)
You should remember:
Definitions
Formulae (BEP, Premium)
Payoff diagrams
Difference between Buyer & Seller
Greeks (at least names + meaning)