Part 2 Trading Master Class With Experts

How Option Trading Works

Let’s walk through a simple example.

Suppose NIFTY is trading at 20,000. You expect it to rise.

You buy a NIFTY 20,100 Call Option by paying a premium of ₹100.

If NIFTY goes up to 20,500, your call is worth 400 (20,500 – 20,100). Profit = 400 – 100 = 300 points.

If NIFTY stays below 20,100, your option expires worthless. Loss = Premium (₹100).

Here’s the beauty: as a buyer, your loss is limited to the premium paid, but profit potential is theoretically unlimited. For sellers (writers), it’s the reverse—limited profit (premium received) but unlimited risk.

Why People Trade Options

Options are not just for speculation. They serve multiple purposes:

Hedging: Investors use options to protect their portfolio against losses. For example, buying puts on NIFTY acts as insurance during market crashes.

Speculation: Traders take directional bets on stocks or indices with limited capital.

Income Generation: Sellers of options earn premium income regularly.

Arbitrage: Exploiting price differences in related instruments.

This versatility is what makes options attractive to both professionals and retail traders.

Risks in Option Trading

While options are powerful, they are also risky:

Time Decay (Theta): Options lose value as expiry approaches, especially if they are OTM.

Leverage Risk: Small market moves can lead to large percentage losses.

Complexity: Beginners may struggle with pricing models, strategies, and margin requirements.

Unlimited Loss for Sellers: Writing naked options can lead to huge losses if the market moves strongly against the position.

Thus, understanding risk management is critical before trading options seriously.

Option Pricing & The Greeks

Option prices are influenced by several factors. To understand them, traders use Option Greeks:

Delta: Measures how much the option price moves with a ₹1 move in the underlying asset.

Gamma: Measures how Delta changes with the underlying’s price.

Theta: Measures time decay. Shows how much value an option loses daily as expiry nears.

Vega: Measures sensitivity of option price to volatility changes.

Rho: Measures sensitivity to interest rate changes (less important in short-term trading).

The Greeks help traders design strategies, manage risks, and predict option price movements.