August 07, 2022
7 mins read
I remember the first time I came across the phrase “options trading.” It sounded complex, almost like something reserved for professional traders. Over time, I realised it is simply a contract that connects to another asset, such as a share, a currency, or even gold.
The way I think of it is like reserving a seat at your favourite café. You make the booking today, but actually use it later. Options work in a similar way. They give you the right, although not always the obligation, to buy or sell an asset at a set price on a future date. When explained this way, it feels less intimidating and more like a tool you can learn to use with practice.
When I first tried options trading, it reminded me of browsing an online store with far too many choices. You open a trading account, select an index or stock, and a list appears that contains strike prices paired with their premiums.
Hold until the end, and the settlement is carried out between both parties on the expiry date. It sounds straightforward, yet the rush of anticipation makes it anything but ordinary.
When I first stepped into options strategies, I pictured complicated charts, endless formulas, and traders staring at glowing monitors all day. In truth, strategies are simply ways to manage risk and work with market movements. Once the jargon fades, the names feel less daunting — like learning new tricks in a game you already know.
Covered Call – Selling calls while still owning the stock.
Protective Put – Buying puts to protect the shares you hold.
Straddle – Buying both call and put at the same strike.
Strangle – Buying call and put but with different strikes.
Iron Condor – Combining spreads to profit in a narrow range.
Even now, I sometimes mix them up or hesitate. But here’s the truth — the only way to master them is by trying. Strategies aren’t magic spells; they’re tools. And like any tool, it’s not just having one, but knowing when and how to use it that matters.
When I began with options, I’ll admit that the terminology nearly scared me away. It felt like stepping into a conversation where everyone spoke a language I didn’t know. But once you break down these terms, they stop feeling like barriers and start acting like guideposts. They point you toward your risks, goals, and potential outcomes.
Call Option – Right to buy an asset at a set price.
Put Option – Right to sell an asset at a set price.
Strike Price – Fixed price for buying or selling an asset.
Premium – Amount paid to purchase the option contract.
Expiry Date – The date when the option contract becomes void.
In the Money – Option with intrinsic value right now.
Out of the Money – Option with no current intrinsic value.
Open Interest – Number of active outstanding option contracts.
Understanding these terms felt like assembling puzzle pieces. At first, nothing connected, but eventually, the bigger picture appeared. And once it did, trading shifted from random guesses to calculated moves.
One of my first lessons in options trading was that profit isn’t always as straightforward as “price rises, you win.” Sometimes, even when the market moves your way, you might still end up losing — premiums, timing, and hidden costs can change everything. I once saw a “profitable” trade turn into a loss just because of the premium I’d paid.
In the Money – Option has intrinsic value right now.
At the Money – Strike price equals the current market price.
Out of the Money – No current intrinsic value in the option.
These terms may sound like they belong in a game show, but they decide your results. “In the Money” can be rewarding, but your exit timing matters. “At the Money” is balanced but can tip either way quickly. “Out of the Money” often means a loss — unless the market surprises you before expiry.
There are days when I think of options trading like a Swiss Army knife for the markets — small in appearance, but capable of far more than you’d expect, provided you know which blade to unfold and when. It’s not about having a flashy tool in your pocket; it’s about knowing exactly how and why you’re going to use it.
Capital Efficiency – One of the first things that drew me in was how you can control a position far larger than your actual capital outlay. It’s like reserving the better seats in a theatre without paying for the whole row. You get the exposure, the potential gains, without tying up every last rupee in the underlying asset.
Hedging Opportunity – I’ll admit, this was a revelation. Buying puts to protect a portfolio from sudden price drops isn’t glamorous — it’s just sensible. If markets turn south without warning (and they often do), a hedge can soften the blow and help you sleep a little easier.
Multiple Strategy Choices – There’s a certain freedom in being able to switch stance — bullish, bearish, or even neutral — without having to uproot your entire position. Strategies like spreads, straddles, and strangles aren’t just technical jargon; they’re different gears for different roads, letting you adapt as the market shifts under your feet.
Defined Risk Profiles – This might be my favourite feature. With options, you can decide your maximum possible loss before you even place the trade. That clarity changes the way you think — you’re no longer wondering what the worst-case scenario might be; you’ve already accounted for it.
Income Generation – In quieter markets, selling options for premiums can feel like earning rent on capital you’re not otherwise using. If prices stay comfortably within your expected range, that’s money in your account without much fuss.
The real charm of options trading lies in its flexibility — something ordinary share dealing can rarely match. But this isn’t a game of guesswork; it’s a discipline. Whether your aim is to shield your investments, test new market plays, or fold options neatly into a broader portfolio, your results will hinge on one thing above all else: knowing exactly why you’re making the trade in the first place. In my experience, that “why” will matter far more than the “how”.
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You need to open a trading and demat account with a registered broker and complete a risk profile or KYC. Once approved for derivatives trading, you can place buy or sell orders on call or put options via the broker’s trading platform based on your strategy and risk tolerance.
Option trading involves buying or selling contracts that give you the right, but not the obligation, to buy or sell an asset at a specific price before a given expiry date. You can trade call or put options depending on whether you expect prices to rise or fall.
Like any financial product, options come with risk. Some strategies carry limited risk while others can involve unlimited losses. It depends on your trade type, experience level, and how well you understand the mechanics involved. Learning and discipline are essential in managing these risks effectively.
Let us say a stock trades at ₹500. You expect it to rise and buy a call option with a ₹520 strike price at ₹10 premium. If the stock rises above ₹530 (strike + premium), you can make a profit. If it stays below ₹520, your loss is limited to the ₹10 paid.
Options trading is different from stock trading, not necessarily better or worse. It depends on your financial goals, experience, and risk appetite. Options provide leverage and flexibility, while stock trading offers direct ownership. Each has its place depending on how you want to participate in the market.
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