Part 11 Trading Master Class With Experts

I. Option Trading Strategies

Buying Calls and Puts

Buying a Call: Profitable if asset price rises above strike + premium.

Buying a Put: Profitable if asset price falls below strike - premium.

Covered Call Strategy

Involves holding the underlying stock and selling a call option.

Generates premium income but limits upside profit.

Protective Put

Buying a put while holding the underlying asset as insurance against a price drop.

Spreads

Combine buying and selling options to reduce risk and cost:

Bull Call Spread: Buy lower strike call, sell higher strike call.

Bear Put Spread: Buy higher strike put, sell lower strike put

Straddles and Strangles

Straddle: Buy ATM call and put; profitable if price moves significantly either way.

Strangle: Buy OTM call and put; cheaper than straddle, requires larger movement.

Iron Condor

Advanced strategy combining bull and bear spreads.

Generates income with limited risk in low-volatility markets.

Calendar and Diagonal Spreads

Utilize different expiration dates and strikes to profit from time decay and volatility.

II. Risk Management in Options

Leverage and Risk
Options offer high leverage: small price moves in underlying asset can lead to large gains or losses. Proper position sizing is crucial.

Maximum Loss and Gain

Buyer: Max loss = premium paid; Max gain = theoretically unlimited for calls, limited for puts.

Seller: Max gain = premium received; Max loss = potentially unlimited for naked calls.

Diversification Across Strategies
Mixing spreads, covered calls, and protective puts helps reduce single-position risk.

Stop-Loss and Exit Strategies
Plan exit points: cut losses, take partial profits, or roll positions to new strikes or expirations.

III. Market Mechanics and Trading
Exchanges and Option Contracts
Options trade on regulated exchanges (e.g., NSE, BSE, CBOE). Each contract represents a fixed quantity of the underlying (e.g., 100 shares per contract).

Liquidity and Open Interest

Liquidity: Ease of buying/selling options at fair prices.

Open Interest: Number of outstanding contracts; higher OI often means better liquidity.

Implied Volatility and Market Sentiment

IV: Market’s forecast of future volatility.

Rising IV generally increases option premiums, signaling uncertainty.

Hedging vs. Speculation

Options can hedge existing positions or speculate on market movements. Hedging reduces risk, speculation increases risk but offers leverage.