Options trading has seen an exponential rise in popularity over the past few years, particularly among retail investors in India. From WhatsApp groups to YouTube tutorials, conversations about “CEs,” “PEs,” and “option chains” have become mainstream. But what exactly is options trading, why is it attracting so many people, and what are the real risks involved? Let’s break it all down in this educational post.
What Are Options?
Options are financial contracts that give the buyer the right, but not the obligation, to buy or sell an underlying asset (like a stock or an index) at a predetermined price, known as the strike price, on or before a specified expiry date.
There are two types of options:
- Call Option (CE): Gives the right to BUY
- Put Option (PE): Gives the right to SELL
Example:
Suppose Nifty is trading at 22,000.
- You buy a Nifty 22,100 Call Option (CE) expiring this Thursday. If Nifty goes to 22,300 before expiry, your CE becomes profitable.
- You buy a Nifty 21,900 Put Option (PE). If Nifty drops to 21,600, your PE becomes valuable.
Understanding ATM, ITM, and OTM
These terms tell us how far an option’s strike price is from the current market price:
- ATM (At the Money): Strike price is equal or very close to the current price
- ITM (In the Money): Already profitable if exercised now
- OTM (Out of the Money): Not yet profitable
Example:
If Nifty is at 22,000:
- 22,000 CE or PE = ATM
- 21,800 CE = ITM (because you can buy at 21,800 when Nifty is at 22,000)
- 22,200 CE = OTM (not profitable yet)
These labels help traders decide on their entry and exit based on probability and cost.
Buying vs. Selling Options
Option Buying:
- Lower capital required
- Unlimited profit potential
- Risk is limited to the premium paid
- Most popular among beginners
But here’s the reality: More than 90% of option buyers lose money, mostly due to time decay (theta) and wrong direction prediction.
Option Selling:
- Higher margin needed
- Limited profit (premium collected)
- Risk can be high if trade goes wrong
- Better probability of success since mostly sellers exercise OTM selling
Real Example:
You buy a Nifty 22,100 CE for Rs. 50. If Nifty expires below 22,100, it becomes worthless. You lose the Rs. 50 premium. The option seller gains it.
The Concept of Hedging
Hedging means reducing your risk. Options are great tools for this.
Example:
You hold HDFC Bank shares. You fear a short-term fall. You buy a Put Option (PE). If the stock drops, the PE gains, offsetting your stock loss.
Another example: You sell a naked CE and hedge it by buying a higher strike CE: this forms a credit spread and limits your risk.
Option Chain: The Real Playground
An option chain shows the available strike prices, premiums, Open Interest (OI), and Greeks for both Calls and Puts.
Traders use it to:
- Find support/resistance zones based on OI
- Decide which strikes are actively traded
- Plan entries/exits and hedging
Example:
If the 22,000 CE has huge OI, that might act as a resistance. Similarly, heavy OI on 21,800 PE might indicate support.
Popular Option Strategies
1. Iron Condor
- Sell OTM CE and PE
- Buy further OTM CE and PE to hedge
- Range-bound strategy with limited risk and reward
2. Straddle
- Buy ATM CE and ATM PE together
- Profits if market moves significantly in either direction
3. Strangle
- Buy OTM CE and OTM PE
- Cheaper than straddle; needs bigger move to be profitable
4. Naked Buying
- Buy a single CE or PE without hedging
- Low cost but high risk of losing 100% premium
5. Naked Selling
- Sell CE or PE without hedge
- High margin required; risky but better win rate
So, Why Is Options Trading So Popular?
- Low capital entry for buyers
- High leverage potential
- Platforms like Zerodha, Upstox, etc., make it accessible
- Social media hype and easy-to-understand visuals
- The thrill of quick profits
But the reality is:
Most new traders lose money because they focus on profits, not risk. Buying cheap options may look tempting, but theta decay eats away value quickly if the market doesn’t move.
Final Thoughts
Options trading is a powerful tool, not a shortcut to riches. Yes, it allows low capital participation and high leverage, but that comes with high risk. Learning about option chains, strike selection, hedging, and strategy planning is vital before you trade.
If you must begin, start with understanding the basics, and always respect the market. Because in options, not understanding the rules can be costlier than not playing at all.
Stay tuned to Vipulam Financial Services for more such educational content to empower your financial journey. Happy learning!