Sep-22-2025
by Agssl
An option is a derivative instrument giving the buyer the right, but not the obligation, to buy or sell an underlying asset at a pre-agreed price (the strike price) on or before a certain time (expiry).
Options can be on stocks, stock indices, commodities (gold, oil, etc.), and more.
Before picking which option to trade, be clear about why you are trading:
Speculation / Profit Seeking — betting on price movements (up or down).
Hedging / Protection — reducing risk in other positions (e.g. owning a stock and buying options to protect against downside).
Your strategy depends on which of these is your goal.
Call Options
Gives you the right to buy the underlying asset at the strike price.
Suitable if you expect the price will rise.
Strategies:
Naked call: selling call options without owning the asset — higher risk because losses can be large if price shoots up.
Covered call: owning the underlying asset and selling call options on it — more conservative.
Put Options
Gives you the right to sell the underlying asset at the strike price.
Suitable if you expect the price will fall.
Can be used for protection: e.g. if you own a stock and fear its price may drop, buying puts helps offset possible losses.
Premium = the cost to buy the option. It depends on several factors:
Current price of the underlying
Strike price relative to current price (this is “moneyness”)
Time until expiry
Volatility
Moneyness:
In-the-money (ITM): option already has intrinsic value.
Out-of-the-money (OTM): currently no intrinsic value.
At-the-money (ATM): strike price ≈ current price.
Time: Longer expiry generally increases premium (more time for price movement).
Volatility: Higher volatility = higher premium, because more chance of big movement.
If risk-averse, you might prefer:
Covered calls rather than naked ones.
Options closer to ATM or shallow OTM rather than deep OTM.
If you can tolerate higher risk (and potential loss), deeper OTM options might yield higher returns (if the move happens).
To find good options to trade at any time, consider:
Your objective (speculation vs hedging)
Direction you expect the market to move (up/down)
Your risk tolerance
Premiums (can you afford the cost?)
Moneyness & time to expiry
Volatility & external events (announcements, policy changes etc.)
Options trading offers potential for high returns with relatively limited downside (you can lose the premium, but not more, in many options strategies).
But that doesn’t mean no risk — many factors influence value, and wrong moves (or being too aggressive) can lead to losses.
A good start is to track most active options in the market — those with high volumes/open interest — to see what strikes and expiries are popular. That gives insight into where other traders believe movement is likely.
