5.1 – Reasons based on which to buy and sell an Option
Over the last few chapters, we have looked at two basic option types, i.e. the ‘Call Option’ and the ‘Put Option’. In this video, we will learn the reasons based on which you can buy and sell an Option.
We recommend reading this chapter on Varsity to learn more and understand the concepts in-depth.
Key takeaways from this chapter
- Buy a call option or sell a put option only when you expect the market to go up.
- Buy a put option or sell a call option only when you expect the market to go down
- The buyer of an option has unlimited profit potential and limited risk (to the extent of the premium paid)
- The seller of an option has an unlimited risk potential and limited reward (to the extent of the premium received)
- Majority of options traders prefer to trade options only to capture the variation in premiums
- Option premiums tend to gyrate drastically – as an options trader, and you can expect this to happen quite frequently.
- Premiums vary as a function of 4 forces called the Option Greeks
- Black & Sholes option pricing formula employs four forces as inputs to give out a price for the premium
- Markets control the Option Greeks and the Greek’s variation itself