Learn Institution Trading Part -6

Introduction to Institutional Option Trading
Institutional option trading refers to the sophisticated strategies used by hedge funds, mutual funds, insurance companies, proprietary trading firms, and foreign institutional investors (FIIs) to manage portfolios, hedge risks, and generate consistent alpha from the derivatives market. Unlike retail traders, institutions operate with large capital, access to advanced technology, and deep market insights, allowing them to structure complex trades.

2. Why Institutions Trade Options
Institutions don’t usually trade options for quick profits. Their trades are designed to meet broader objectives:

Hedging Equity Portfolios

Volatility Trading

Generating Yield on Holdings

Market Making and Arbitrage

Directional or Non-directional Speculation

3. Core Institutional Option Strategies
Let’s explore the most popular strategies that institutions use with real-world logic behind them.

A. Covered Call (Buy-Write)
Use: Income generation from long-term stock holdings
Structure: Buy stock + Sell Call Option (OTM or ATM)
Institutional Use Case:
A mutual fund holding Reliance shares might sell monthly call options against its holdings to generate monthly income (premium), enhancing total returns.