Trading Master Class With Experts

What are Options? (Basics)

An Option is a financial contract between two parties:

Buyer (Holder): Pays a premium for the right (not obligation) to buy/sell.

Seller (Writer): Receives the premium and has an obligation to honor the contract.

There are two basic types:

Call Option (CE) – Right to buy.

Put Option (PE) – Right to sell.

Example:
Suppose Infosys stock is trading at ₹1500. You buy a Call Option with a strike price of ₹1550 expiring in 1 month. If Infosys goes above ₹1550, you can exercise your right to buy at ₹1550 (cheaper than market). If it doesn’t, you just lose the small premium you paid.

This flexibility is the beauty of options.

Key Terms in Options Trading

Before diving deeper, let’s understand some key terms:

Strike Price: The fixed price at which you can buy/sell the asset.

Premium: The price paid to buy the option.

Expiry Date: The date on which the option contract expires.

Lot Size: Options are traded in lots (e.g., 25 shares per lot for Nifty options).

In-the-Money (ITM): When exercising the option is profitable.

Out-of-the-Money (OTM): When exercising would cause a loss.

At-the-Money (ATM): When the strike price = current market price.

Option Buyer: Pays premium, has limited risk but unlimited profit potential.

Option Seller (Writer): Receives premium, has limited profit but unlimited risk.

Types of Options – Calls and Puts
Call Option (CE)

Buyer has the right to buy.

Profits when the price goes up.

Put Option (PE)

Buyer has the right to sell.

Profits when the price goes down.

Example with Reliance stock (₹2500):

Call Option @ 2600: Profitable if Reliance goes above ₹2600.

Put Option @ 2400: Profitable if Reliance goes below ₹2400.