Part 2 Ride The Big Moves

What Are Options?
The Definition

An option is a financial contract that gives you the right, but not the obligation, to buy or sell an underlying asset (like a stock, index, or commodity) at a specific price within a specific time.

There are two main types of options:

Call Option – Gives the right to buy the asset at a fixed price (called the strike price).

Put Option – Gives the right to sell the asset at a fixed price.

Think of options like insurance policies. Just as you pay a premium for car insurance to protect against accidents, in options trading you pay a premium to gain control over an asset’s future without actually owning it upfront.

A Simple Example

Imagine you want to buy 100 shares of Reliance Industries at ₹2,500 per share, but you don’t want to spend ₹2,50,000 immediately. Instead, you buy a call option for ₹100 per share with a strike price of ₹2,500, expiring in one month.

If Reliance rises to ₹2,700, you can exercise your option and buy at ₹2,500, instantly profiting ₹200 per share (minus the premium).

If Reliance falls to ₹2,300, you don’t exercise. You only lose the premium you paid (₹100 per share).

This flexibility is the power of options.