Stock Market · Options Theory

What an option is

An option gives you the RIGHT, but not the obligation, to buy or sell an asset at a specific price before a specific date. You pay for this right upfront. This payment is called the premium.

The key distinction from futures

Futures: obligation. You MUST settle.

Options: right. You CAN exercise. If the option would result in a loss, you simply let it expire worthless.

This limited risk for the buyer is the fundamental appeal of options.

A simple example

Nifty is at 22,000. You pay ₹150 premium for a 22,100 call option expiring next Tuesday.

Scenario A: Nifty rises to 22,500. Your call is worth ₹400+. Profit = ₹400 − ₹150 = ₹250 × 75 = ₹18,750.

Scenario B: Nifty falls to 21,500. Your call expires worthless. Loss = ₹150 × 75 = ₹11,250. Nothing more.

> Your maximum loss was known upfront. The premium you paid. This is options' defining feature.

Two types of options

• Call option: right to BUY the underlying at the strike price
• Put option: right to SELL the underlying at the strike price

[compare:Call=Right to BUY|Put=Right to SELL]

Callprofits when the underlying rises

Putprofits when the underlying falls

European vs American style

Indian index options (Nifty, Bank Nifty): European style. Can only be exercised at expiry.

Indian stock options: American style. Can be exercised on any day before expiry.

In practice, most traders close options by selling in the market rather than exercising.

Takeaway. An option gives the RIGHT (not obligation) to buy or sell at a set price. Buyers pay a premium and have limited loss (the premium). Calls profit from price rises; puts from price falls.