Part 1 Master Candlestick Pattern

Introduction to Options (The Foundation)

Options are one of the most powerful financial instruments in modern markets. They provide flexibility, leverage, and protection. At their core, options are derivative contracts, meaning their value is derived from an underlying asset—like a stock, index, currency, or commodity.

Unlike buying stocks directly, which gives you ownership in a company, options give you the right (but not the obligation) to buy or sell an asset at a pre-decided price within a specific timeframe. This is what makes options both unique and versatile.

1.1 What is an Option?

An option is a contract between two parties:

Buyer of the option: Pays a premium for rights.

Seller (or writer) of the option: Receives the premium but takes on obligations.

Options come in two types:

Call Option – The right to buy an asset at a set price.

Put Option – The right to sell an asset at a set price.

1.2 Key Terminology

Strike Price (Exercise Price): The pre-agreed price at which the underlying can be bought/sold.

Expiration Date: The last day the option can be exercised.

Premium: The price paid by the buyer to acquire the option.

Underlying Asset: The instrument on which the option is based (stock, index, etc.).

Lot Size: Standardized number of units covered by one option contract.

1.3 Example of an Option Contract

Imagine Reliance Industries is trading at ₹2,500. You believe it will rise. You buy a Call Option with a strike price of ₹2,600, expiring in one month, for a premium of ₹50.

If Reliance rises to ₹2,700, your profit = (₹100 intrinsic value – ₹50 premium) × lot size.

If Reliance falls to ₹2,400, you lose only the ₹50 premium.

This limited risk and high reward potential make options attractive.