Part 2 Ride The Big Moves

Basic Terminology

Before we dive deeper, let’s clear the basic terms in option trading:

Underlying Asset – The stock, index, commodity, or currency on which the option is based. Example: Nifty, Reliance, crude oil.

Option Contract – The agreement between buyer and seller of the option.

Call Option – Gives the holder the right (but not obligation) to buy the underlying asset at a fixed price before expiry.

Put Option – Gives the holder the right (but not obligation) to sell the underlying asset at a fixed price before expiry.

Strike Price – The price at which the option holder can buy (call) or sell (put) the underlying.

Expiry Date – The last date when the option can be exercised. In India, stock options usually expire monthly or weekly (for indices).

Premium – The price you pay to buy an option contract. It’s like a ticket fee for having the right to buy or sell in the future.

Lot Size – Each option contract is traded in fixed quantities called lots. Example: Nifty option lot = 50 units.

How Options Work

Imagine you want to buy a house worth ₹50 lakhs, but you’re unsure whether the price will rise or fall in the next 6 months. Instead of paying ₹50 lakhs now, you strike a deal with the owner:

You pay ₹2 lakhs today as a non-refundable fee (premium).

You get the right to buy the house anytime in the next 6 months at ₹50 lakhs (strike price).

Now:

If the house price rises to ₹60 lakhs, you can still buy it at ₹50 lakhs and make a profit.

If the house price falls to ₹45 lakhs, you can walk away. You lose only the ₹2 lakhs premium.

This is exactly how a call option works.

A put option is the reverse: you get the right to sell something at a fixed price, useful if you think prices will fall.

So options are all about rights, not obligations. The buyer has rights, the seller has obligations.