Introduction

Options offer very high returns on very low investments, as you probably know. Options trading has grown significantly. It doubled last year and has more than tripled over the last two years. The value of option contracts traded on the Nifty now equals that of the S&P500 in the US.

As an investor, you also probably know that high returns come with high risks. And an understanding of the ins and outs of options trading before getting into it could minimise your risk.

What Are Options?

Options are a tradable financial instrument like stocks and mutual funds. Stocks represent ownership in a company. When the company performs well, its stock price tends to rise. As a trader or investor, you hope that the stocks you buy will rise in value. Once you are no longer interested in owning the stock, you can simply sell it. A Mutual Fund can be thought of as a collection of stocks or a pre-built portfolio.

While options are tradable financial instruments, they don’t provide ownership interest. Rather, they are legal contracts that give a trader the “right to buy” or “right to sell” a stock or index at a certain price. In exchange for not having an ownership interest, the price you pay for an option is substantially smaller. Here’s a simple example to give you an idea of the flexibility of options:

You believe that a company’s stock will rise over the next few days following a major economic announcement. But you don’t want to commit a large amount of capital to purchase shares of the stock. A few days later, you see that you were correct and this company’s stock price has risen from ₹100 to ₹110, a 10% rise. You’ve missed an opportunity! If you had bought an option on this company’s equity, you could have committed only a small amount of capital. The option could give you the “right to buy the stock at ₹100” and you could have sold it at ₹110. Sounds interesting?

Are Options for You?

Well, some investors have made losses in options trading and resign to the fact that options trading is not for everyone. So, are options for you?

The answer to this question is a personal one. There are several benefits associated with trading options. It offers a more tactical approach to reaching your financial goals, managing the downside risk of the stocks you own, and potentially earning a higher yield on your cash or stocks than you are currently getting in bonds or dividends.

There are also drawbacks to trading options.

• You need to be comfortable with possibly needing to be more hands-on to manage trades.
• With stocks, exchange-traded funds (ETFs), and mutual funds, you can buy, hold, and review performance every few weeks or months. With options, you will need to track performance far more regularly.
• You also need to be comfortable with larger swings in profit and loss. For example, in a week, a stock may go up or down by two per cent, while an option could go up by 50 per cent in the same period or lose 100 per cent of its value.

If you’re OK with at least one benefit and one drawback, that is a good start.

Let’s Get Started

Our goal of this course is to make you a more successful options trader. Whether you are just starting out or have been trading for many years, we hope there is value for everyone in it.

Commonly, options trading courses take one of the two approaches: trader-centric or academic-centric. The trader-centric approach quickly provides the bare minimum necessary to begin trading. While this can be good, it can leave you with a false sense of confidence. You could also be confused over the large quantities of jargon that is quickly introduced in order to get you up to speed. The academic-centric approach starts by explaining how options are constructed theoretically, which helps in understanding how options are priced and traded practically. It introduces nice to know concepts like replicating portfolios, binary trees, and put-call parity. But we believe these are better introduced in a later course.

This introductory course is structured in a way that you don’t feel overwhelmed upfront and at the same time, feel like you are making great progress on your options trading journey. This is how we have divided the major sections:

• Basics of Options: This is the overview of initial concepts like ‘Going Long’ and ‘What are Call Options’.
• Options Terminology: This is where we will introduce option-specific terms like Strike Prices and Moneyness.
• Beginner Option Strategies: In this section, we explore the four basic option strategies.

Our intent is not to sell the idea that you should start trading options. We want to provide you with facts necessary to understand what options are, how to trade them, and how best to win with them. We structured this course so that it is practical, pragmatic, and approachable. We will give you objective guidance using real historical data where available. Lastly, we aim to make this course approachable.