An option is a contract that gives its buyer the right, but not the obligation, to buy or sell something at a fixed price on or before a fixed date. The "something" is called the underlying: an index such as NIFTY, a stock such as Reliance Industries, or a commodity such as gold on MCX. The fixed price is the strike price, and the fixed date is the expiry.
There are only two kinds of option:
- A call option is the right to buy at the strike. It becomes more valuable when the price rises.
- A put option is the right to sell at the strike. It becomes more valuable when the price falls.
Every option has a buyer and a seller. The buyer pays a price, called the premium, and receives the right. The seller (also called the writer) receives the premium and takes on the obligation to honour that right if the buyer uses it.
An everyday comparison
Imagine you want to buy a flat for ₹80 lakh but are not sure yet. You pay the builder ₹1 lakh to hold that price for three months. If prices in the area jump to ₹90 lakh, you use your right and buy at ₹80 lakh: your right was worth a lot. If prices fall to ₹75 lakh, you simply walk away and lose only the ₹1 lakh. That token amount is like an option premium, ₹80 lakh is the strike, and three months is the expiry. This is a call option.
A put works like insurance. You pay a small premium so that, if your car's value is wrecked, you can still claim a fixed amount. If nothing goes wrong, the premium is gone, but you were protected.
The five words you need
| Term | Meaning | NIFTY example |
|---|---|---|
| Underlying | What the option is based on | NIFTY 50 index |
| Strike price | The fixed price in the contract | 25,000 |
| Expiry | The last day the contract exists | The current weekly expiry |
| Premium | The price of the option, per unit | ₹140 |
| Lot size | How many units one contract covers | Set by NSE; check the current figure |
A worked example with NIFTY
NIFTY is at 25,000. You expect it to rise this week, so you buy the 25,000 call at ₹140. Assume a lot of 75 units (lot sizes change; check the current figure on NSE). Your cost is 140 × 75 = ₹10,500, plus brokerage and taxes.
- NIFTY ends the expiry at 25,300. The call is worth 25,300 − 25,000 = ₹300. Your profit is (300 − 140) × 75 = ₹12,000.
- NIFTY ends at 25,140. The call is worth ₹140, exactly what you paid. You break even before costs.
- NIFTY ends at 24,800. The call is worth nothing. You lose the ₹10,500 premium, and no more.
Now the put. You expect a fall, so you buy the 25,000 put at ₹130 (₹9,750 for one lot). If NIFTY ends at 24,700, the put is worth ₹300 and you make (300 − 130) × 75 = ₹12,750. If NIFTY ends above 25,000, the put expires worthless and you lose ₹9,750.
Notice the shape: the buyer's loss is capped at the premium, while the gain grows with the move. The seller has the opposite: the gain is capped at the premium, and the loss grows with the move. The buyer vs seller guide looks at that trade-off.
See real calls and puts on the option chain
All available calls and puts for one expiry are listed together in the option chain. Here is today's NIFTY chain around the current price, calls on the left and puts on the right:
Go down the call column and the prices fall: a higher strike is a harder target, so the right to buy there is worth less. Go down the put column and prices rise: the right to sell at a higher price is worth more. The shaded prices already have value if exercised now. The option chain guide explains every column.
How options work in India
- Exchanges. Index and stock options trade on NSE and BSE; commodity options trade on MCX. The exchange's clearing corporation stands between buyer and seller, so you do not depend on the other side paying you.
- European style. NSE index and stock options can be exercised only at expiry, not before. You can still sell your option to someone else at any time during market hours, which is what most traders do.
- Settlement. Index options settle in cash: you receive the difference, not the index. Stock options that end in the money are physically settled: you may have to take or give delivery of the shares. Read the rules and your broker's policy before holding stock options into expiry.
- Lots. You cannot buy one unit; you trade whole lots, and the lot size is set by the exchange.
- Market hours. NSE equity derivatives trade from 09:15 to 15:30; MCX commodity options trade into the evening, up to 23:30 or 23:55 depending on the season.
Why people use options
- To take a view with limited risk. A call buyer can lose only the premium, unlike someone buying NIFTY futures.
- To protect a portfolio. An investor holding shares can buy NIFTY puts as insurance against a fall.
- To earn premium. Sellers collect premium in exchange for taking risk, often expecting the price to stay in a range.
- To trade volatility. Strategies such as the straddle profit from how much the price moves, not which way.
Options are also building blocks. A call and a put at the same strike make a straddle; a bought call and a sold higher call make a spread with limited risk on both sides. Once you understand one call and one put, every strategy on the strategy builder is just a combination of them, and its payoff can be drawn by adding the pieces together.
One more point that confuses beginners: when you "sell" an option you do not need to own it first. Selling opens a new short position, and you close it later by buying it back. Your profit is the price you sold at minus the price you bought back at.
The risks to know before starting
Options are leveraged, fast-moving and decay with time. SEBI studies have found that most individual traders in equity F&O lose money over a year. An option buyer can be right about direction and still lose if the move comes too late or is too small to cover the premium. An option seller can lose many times the premium on one large move. Start by learning on paper trading, size positions small, and treat everything here as education, not advice.