Part 1 Support and Resistance

1. Introduction to Option Trading

Option trading is a type of derivatives trading where traders buy and sell options contracts rather than the underlying asset itself. An option is a financial contract that gives the holder the right, but not the obligation, to buy or sell an underlying asset at a specified price, called the strike price, on or before a specific date (expiration date). Options are widely used in equity, commodity, index, and currency markets.

Unlike traditional stock trading, option trading allows traders to leverage small amounts of capital to potentially earn higher returns. However, with this potential comes higher risk, especially in speculative strategies.

2. Key Terms in Option Trading

Before diving deeper, it’s essential to understand the terminology:

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

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

Strike Price (Exercise Price) – The price at which the underlying asset can be bought or sold.

Expiration Date – The date on which the option expires and becomes worthless if not exercised.

Premium – The price paid to buy the option.

Intrinsic Value – The difference between the underlying asset price and the strike price.

Time Value – The portion of the premium reflecting the remaining time until expiration.

In the Money (ITM) – A call option is ITM when the underlying price > strike price; a put option is ITM when the underlying price < strike price.

Out of the Money (OTM) – A call option is OTM when the underlying price < strike price; a put option is OTM when underlying price > strike price.

At the Money (ATM) – When the underlying price = strike price.

3. How Options Work
3.1 Call Options Example

Suppose a stock is trading at ₹100, and you buy a call option with a strike price of ₹105 for a premium of ₹2. If the stock rises to ₹115:

Intrinsic Value = 115 – 105 = ₹10

Profit = 10 – 2 (premium paid) = ₹8

If the stock stays below ₹105, the option expires worthless, and the loss is limited to the premium.

3.2 Put Options Example

Suppose the stock is at ₹100, and you buy a put option with a strike price of ₹95 for a premium of ₹3. If the stock falls to ₹85:

Intrinsic Value = 95 – 85 = ₹10

Profit = 10 – 3 (premium paid) = ₹7

If the stock stays above ₹95, the put expires worthless, and the loss is limited to the premium.

4. Types of Option Trading Participants

Buyers (Holders)

Pay a premium to gain the right to buy or sell.

Risk is limited to premium paid.

Sellers (Writers)

Receive a premium in exchange for obligation to buy or sell if exercised.

Risk can be unlimited in case of naked options, limited if covered.

5. Why Trade Options?

Option trading offers several advantages:

Leverage – Control a larger position with less capital.

Hedging – Protect against price movements in underlying assets.

Income Generation – Sell options to earn premiums (covered calls).

Flexibility – Apply strategies for bullish, bearish, or neutral markets.

Risk Management – Limit losses while maximizing profit potential.