What are Options?
An option is a financial contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset (like a stock or index) at a specific price, on or before a specific date.
Think of it like booking a movie ticket. You reserve the right to watch a movie at a particular time and seat. But if you don’t go, it’s your choice. You lose the ticket price (premium), but you're not forced to go. Options work similarly.
Options are of two basic types:
Call Option
Put Option
Let’s break both down in detail.
1. What is a Call Option?
A Call Option gives the buyer the right (but not the obligation) to buy the underlying asset at a pre-decided price (called the strike price) on or before a certain date (called the expiry date).
When do traders buy a Call Option?
When they believe the price of the underlying stock or index will go up in the future.
Example of Call Option (Simple Case)
Let’s say you are bullish on Reliance Industries stock, which is currently trading at ₹2,500.
You buy a Call Option with:
Strike Price: ₹2,550
Premium Paid: ₹30 per share
Lot Size: 250 shares
Expiry: Monthly expiry (say end of the month)
You believe Reliance will go up beyond ₹2,550 soon. If it goes to ₹2,600 before expiry:
Your profit per share = ₹2,600 (market price) - ₹2,550 (strike price) = ₹50
Net Profit = ₹50 - ₹30 (premium) = ₹20 per share
Total Profit = ₹20 x 250 = ₹5,000
But if Reliance stays below ₹2,550, say at ₹2,500 on expiry, you won’t exercise the option. You lose only the premium (₹30 x 250 = ₹7,500).
Key Terminologies in Call Options
In the Money (ITM): When the stock price is above the strike price.
At the Money (ATM): When the stock price is equal to the strike price.
Out of the Money (OTM): When the stock price is below the strike price.
2. What is a Put Option?
A Put Option gives the buyer the right (but not the obligation) to sell the underlying asset at a pre-decided price (strike price) on or before the expiry.
When do traders buy a Put Option?
When they believe the price of the underlying stock or index will fall in the future.
Example of Put Option (Simple Case)
Assume HDFC Bank is trading at ₹1,600. You are bearish and expect it to fall.
You buy a Put Option with:
Strike Price: ₹1,580
Premium: ₹20 per share
Lot Size: 500 shares
Expiry: Monthly
If HDFC Bank falls to ₹1,520:
You can sell at ₹1,580 even though market price is ₹1,520
Gross profit per share = ₹60
Net profit = ₹60 - ₹20 = ₹40 per share
Total profit = ₹40 x 500 = ₹20,000
If HDFC stays above ₹1,580, your put expires worthless. You lose only the premium (₹10,000).
Key Terminologies in Put Options
In the Money (ITM): Stock price below strike price.
At the Money (ATM): Stock price = strike price.
Out of the Money (OTM): Stock price above strike price.
Who are the Two Parties in an Option Contract?
1. Option Buyer (Holder)
Pays the premium
Has rights, but not obligations
Can exercise the option if profitable
Loss is limited to the premium paid
2. Option Seller (Writer)
Receives the premium
Has obligation to fulfill the contract if the buyer exercises
Risk is unlimited for call writers and limited for put writers (if stock price becomes zero)
Profit is limited to the premium received
Difference between Call and Put Options (Summary Table)
Feature Call Option Put Option
Buyer’s Expectation Bullish (price will go up) Bearish (price will go down)
Right Buy at strike price Sell at strike price
Profit Potential Unlimited Limited (until price reaches zero)
Risk (for buyer) Limited to premium Limited to premium
Seller’s Role Sells call & hopes price won’t rise Sells put & hopes price won’t fall
Premium and What Influences It?
The premium is the price you pay to buy an option. This is influenced by:
Intrinsic Value: Difference between market price and strike price
Time Value: More days to expiry = higher premium
Volatility: Higher the volatility = higher the premium
Interest Rates and Dividends
What is Strike Price and Expiry?
Strike Price: The price at which you can buy (call) or sell (put) the underlying stock
Expiry: The last date till which the option is valid. In India:
Weekly expiry for Nifty, Bank Nifty, and FINNIFTY
Monthly expiry for stocks
An option is a financial contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset (like a stock or index) at a specific price, on or before a specific date.
Think of it like booking a movie ticket. You reserve the right to watch a movie at a particular time and seat. But if you don’t go, it’s your choice. You lose the ticket price (premium), but you're not forced to go. Options work similarly.
Options are of two basic types:
Call Option
Put Option
Let’s break both down in detail.
1. What is a Call Option?
A Call Option gives the buyer the right (but not the obligation) to buy the underlying asset at a pre-decided price (called the strike price) on or before a certain date (called the expiry date).
When do traders buy a Call Option?
When they believe the price of the underlying stock or index will go up in the future.
Example of Call Option (Simple Case)
Let’s say you are bullish on Reliance Industries stock, which is currently trading at ₹2,500.
You buy a Call Option with:
Strike Price: ₹2,550
Premium Paid: ₹30 per share
Lot Size: 250 shares
Expiry: Monthly expiry (say end of the month)
You believe Reliance will go up beyond ₹2,550 soon. If it goes to ₹2,600 before expiry:
Your profit per share = ₹2,600 (market price) - ₹2,550 (strike price) = ₹50
Net Profit = ₹50 - ₹30 (premium) = ₹20 per share
Total Profit = ₹20 x 250 = ₹5,000
But if Reliance stays below ₹2,550, say at ₹2,500 on expiry, you won’t exercise the option. You lose only the premium (₹30 x 250 = ₹7,500).
Key Terminologies in Call Options
In the Money (ITM): When the stock price is above the strike price.
At the Money (ATM): When the stock price is equal to the strike price.
Out of the Money (OTM): When the stock price is below the strike price.
2. What is a Put Option?
A Put Option gives the buyer the right (but not the obligation) to sell the underlying asset at a pre-decided price (strike price) on or before the expiry.
When do traders buy a Put Option?
When they believe the price of the underlying stock or index will fall in the future.
Example of Put Option (Simple Case)
Assume HDFC Bank is trading at ₹1,600. You are bearish and expect it to fall.
You buy a Put Option with:
Strike Price: ₹1,580
Premium: ₹20 per share
Lot Size: 500 shares
Expiry: Monthly
If HDFC Bank falls to ₹1,520:
You can sell at ₹1,580 even though market price is ₹1,520
Gross profit per share = ₹60
Net profit = ₹60 - ₹20 = ₹40 per share
Total profit = ₹40 x 500 = ₹20,000
If HDFC stays above ₹1,580, your put expires worthless. You lose only the premium (₹10,000).
Key Terminologies in Put Options
In the Money (ITM): Stock price below strike price.
At the Money (ATM): Stock price = strike price.
Out of the Money (OTM): Stock price above strike price.
Who are the Two Parties in an Option Contract?
1. Option Buyer (Holder)
Pays the premium
Has rights, but not obligations
Can exercise the option if profitable
Loss is limited to the premium paid
2. Option Seller (Writer)
Receives the premium
Has obligation to fulfill the contract if the buyer exercises
Risk is unlimited for call writers and limited for put writers (if stock price becomes zero)
Profit is limited to the premium received
Difference between Call and Put Options (Summary Table)
Feature Call Option Put Option
Buyer’s Expectation Bullish (price will go up) Bearish (price will go down)
Right Buy at strike price Sell at strike price
Profit Potential Unlimited Limited (until price reaches zero)
Risk (for buyer) Limited to premium Limited to premium
Seller’s Role Sells call & hopes price won’t rise Sells put & hopes price won’t fall
Premium and What Influences It?
The premium is the price you pay to buy an option. This is influenced by:
Intrinsic Value: Difference between market price and strike price
Time Value: More days to expiry = higher premium
Volatility: Higher the volatility = higher the premium
Interest Rates and Dividends
What is Strike Price and Expiry?
Strike Price: The price at which you can buy (call) or sell (put) the underlying stock
Expiry: The last date till which the option is valid. In India:
Weekly expiry for Nifty, Bank Nifty, and FINNIFTY
Monthly expiry for stocks
Hello Guys ..
WhatsApp link- wa.link/d997q0
Email - techncialexpress@gmail.com ...
Script Coder/Trader//Investor from India. Drop a comment or DM if you have any questions! Let’s grow together!
WhatsApp link- wa.link/d997q0
Email - techncialexpress@gmail.com ...
Script Coder/Trader//Investor from India. Drop a comment or DM if you have any questions! Let’s grow together!
Related publications
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.
Hello Guys ..
WhatsApp link- wa.link/d997q0
Email - techncialexpress@gmail.com ...
Script Coder/Trader//Investor from India. Drop a comment or DM if you have any questions! Let’s grow together!
WhatsApp link- wa.link/d997q0
Email - techncialexpress@gmail.com ...
Script Coder/Trader//Investor from India. Drop a comment or DM if you have any questions! Let’s grow together!
Related publications
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.