Part 1 Support and Resistance

1. Introduction: What Are Options?

In financial markets, traders and investors use different instruments to make profits or manage risks. Among these, options are one of the most powerful yet misunderstood tools. Unlike stocks, where you directly own a share in a company, or bonds, where you lend money, options are derivative contracts — meaning their value comes from an underlying asset (like a stock, index, commodity, or currency).

An option gives its buyer a right, but not an obligation, to buy or sell the underlying asset at a fixed price within a certain period. This ability to choose, without being forced, is why it’s called an option.

Options are widely used for three reasons:

Speculation – Traders use them to bet on price movements.

Hedging – Investors use them to protect against losses in their portfolios.

Income Generation – Some traders sell options to collect premium income.

Now, let’s break it down step by step.

2. Key Terms in Option Trading

Before going deeper, you need to know the language of options:

Call Option: A contract that gives the buyer the right to buy an asset at a set price within a specific time.

Put Option: A contract that gives the buyer the right to sell an asset at a set price within a specific time.

Strike Price (Exercise Price): The price at which the option buyer can buy (call) or sell (put) the underlying.

Premium: The price you pay to buy an option. This is like a ticket fee for getting the right.

Expiration Date: The date when the option expires. After this, the contract becomes worthless if not exercised.

In the Money (ITM): An option that already has value if exercised.

Out of the Money (OTM): An option that would not make money if exercised now.

At the Money (ATM): When the stock price and strike price are nearly equal.

Example: Suppose Infosys is trading at ₹1,500.

A Call option with a strike of ₹1,450 is ITM because you can buy lower than market.

A Put option with a strike of ₹1,550 is ITM because you can sell higher than market.

3. How Options Work

Think of options like an insurance policy.

When you buy a call option, it’s like booking a movie ticket in advance. You pay a small fee (premium) to reserve the seat (stock at a certain price). If the stock rises, you use your ticket. If not, you just lose the fee, not more.

When you buy a put option, it’s like buying insurance for your car. If something bad happens (stock falls), you can still sell at a higher strike price. If nothing happens, your premium is the cost of insurance.

This is the beauty of options: limited risk (only the premium), but potentially unlimited reward (especially for calls).