Options Trading Basics1. Introduction: What Are Options?
When you hear the word “options” in trading, it might sound complicated. But the truth is, options are just financial contracts that give you a choice.
The word “option” itself means a choice or possibility. In the stock market, options give you the right (but not the obligation) to buy or sell an asset (like stocks, index, or commodity) at a fixed price within a specific time.
If you buy an option, you’re buying the right to do something in the market.
If you sell (write) an option, you’re giving someone else that right.
Think of it like booking a movie ticket online. You pay ₹200 to book a seat (premium). If you go to the movie, great. If you skip it, you lose the ₹200 booking fee. That’s how options work—you pay for the right, but you don’t have to use it.
2. Why Do People Trade Options?
Options are popular because they offer flexibility and leverage. Traders and investors use options for three main reasons:
Speculation (to make profits) – Betting on stock prices moving up or down.
Hedging (to protect investments) – Like insurance for your portfolio.
Income generation – Selling options to earn premiums regularly.
Example:
Suppose you think Reliance stock (currently ₹2,500) will rise to ₹2,700. Instead of buying 100 shares (₹2,50,000 required), you can buy a call option by paying just ₹5,000 premium. If Reliance rises, your profit can be huge compared to the small amount invested.
That’s why options are powerful. But with power comes risk, so you need to understand the basics deeply.
3. Key Terms in Options Trading
Before diving deeper, let’s learn the basic vocabulary:
Underlying Asset: The stock or index on which the option is based (like Reliance, TCS, or Nifty50).
Strike Price: The fixed price at which you can buy/sell the asset using the option.
Expiry Date: The last date until the option is valid.
Premium: The price you pay to buy an option.
Lot Size: Options are traded in fixed quantities called lots (e.g., Nifty option lot size = 50 units).
In-the-Money (ITM): When exercising the option is profitable.
Out-of-the-Money (OTM): When exercising the option gives no benefit.
At-the-Money (ATM): When the strike price is the same as the market price.
Keep these terms in mind—we’ll use them often.
4. Two Types of Options: Call & Put
There are only two types of options you need to remember:
a) Call Option (Right to Buy)
A call option gives the buyer the right (not obligation) to buy a stock at a fixed strike price.
You buy a call when you expect the stock price will go up.
Example:
Reliance is at ₹2,500.
You buy a Reliance Call option with strike price ₹2,600 by paying ₹50 premium.
If Reliance goes to ₹2,700, your option is profitable.
If Reliance stays below ₹2,600, you lose only the premium (₹50).
b) Put Option (Right to Sell)
A put option gives the buyer the right (not obligation) to sell a stock at a fixed strike price.
You buy a put when you expect the stock price will go down.
Example:
Infosys is at ₹1,400.
You buy a Put option with strike price ₹1,380 for ₹20 premium.
If Infosys falls to ₹1,350, your put option is profitable.
If Infosys goes above ₹1,380, you lose only the premium.
5. Who Are the Players in Options Trading?
There are two sides in every option contract:
Option Buyer – Pays premium, gets the right (call = buy, put = sell).
Limited risk (only the premium).
Unlimited profit potential.
Option Seller (Writer) – Receives premium, gives the right.
Limited profit (only the premium).
Unlimited risk potential.
This is like insurance:
Buyer = person buying insurance (pays premium).
Seller = insurance company (earns premium but takes big risk).
6. How Options Work in Real Life (Simple Example)
Let’s simplify with a real-life analogy.
Imagine you want to buy a flat worth ₹50 lakhs, but you’re not sure. So, you sign an agreement with the owner:
You pay ₹2 lakhs today as an advance (premium).
The agreement says: Within 6 months, you can buy the flat at ₹50 lakhs (strike price).
If flat prices rise to ₹60 lakhs, you can still buy it for ₹50 lakhs—huge profit!
If flat prices drop to ₹45 lakhs, you won’t buy. You just lose the ₹2 lakhs advance.
That’s exactly how options trading works.
7. How to Read an Option Quote
Let’s say you see this on NSE:
Nifty 18,000 CE @ ₹120, Expiry 30-August
Breaking it down:
Nifty = Underlying asset
18,000 = Strike price
CE = Call Option
₹120 = Premium (price of the option)
30-August = Expiry date
So, if you buy this option, you are paying ₹120 × 50 (lot size) = ₹6,000 to get the right to buy Nifty at 18,000 before expiry.
8. How Option Prices Are Decided
Option premiums are influenced by:
Intrinsic Value – The real value (how much profit if exercised now).
Time Value – Extra premium for the time left until expiry.
Volatility – If stock moves a lot, option premiums become expensive.
Interest rates & demand-supply – Minor factors.
9. Payoff Scenarios: Buyer vs Seller
Call Option Buyer
Profit if price rises above strike + premium.
Loss limited to premium.
Call Option Seller
Profit limited to premium received.
Loss unlimited if price rises sharply.
Put Option Buyer
Profit if price falls below strike - premium.
Loss limited to premium.
Put Option Seller
Profit limited to premium received.
Loss unlimited if price crashes.
10. Options vs Futures vs Stocks
Stocks: Buy & hold actual shares.
Futures: Agreement to buy/sell at fixed price in future (obligation).
Options: Right, but not obligation, to buy/sell.
That “no obligation” part makes options unique.
11. Strategies in Options Trading (Basics)
You don’t always have to just buy or sell a single option. Traders use strategies by combining call & put options.
Some basic strategies:
Buying Calls – When you expect big upward movement.
Buying Puts – When you expect big downward movement.
Covered Call – Holding stock + selling call to earn income.
Protective Put – Holding stock + buying put as insurance.
Straddle – Buy call + put at same strike (expecting big movement either side).
Iron Condor – Complex strategy to earn steady premium in range-bound market.
12. Advantages of Options Trading
Leverage – Small capital, big exposure.
Limited Risk for Buyers – Risk only the premium.
Flexibility – Can profit in up, down, or sideways markets.
Hedging Tool – Protects portfolio.
Income Generation – Selling options brings regular premium income.
Conclusion
Options trading is like a double-edged sword. Used wisely, it can give you high returns, protection, and steady income. Used recklessly, it can lead to massive losses.
So, learn the basics, understand risk, and start step by step. Once you master it, options become one of the most powerful tools in the financial market.
