Before any strategy makes sense, you need the vocabulary. This chapter covers what an option is, the four things you can do with one, and how prices are quoted on Indian exchanges.
An option is a contract. When you buy one, you pay a small amount today (called the premium) for the right — not the obligation — to buy or sell something in the future at a price fixed today.
That word “right” is the whole point. If it turns out to be a bad deal, you walk away. Your loss is only the premium you paid.
If you pay ₹500 today to reserve a hotel room for next month at ₹5,000, you have an option. If the hotel raises rates to ₹8,000, you go stay there — you got a good deal. If they drop to ₹3,000, you skip the reservation, forfeit your ₹500, and pay the lower rate fresh. That ₹500 is the option premium.
Every options contract has these four things:
A call gives you the right to buy the underlying at the strike price. Buy calls when you expect price to go up.
Below strike: flat loss = premium paid. Above strike: rising profit, no cap. This is the “hockey stick” every options text draws.
Nifty spot is ₹25,000 today. You buy a Nifty 25,000 CALL expiring next Tuesday for a premium of ₹120 per share. One Nifty lot = 65 shares, so you pay ₹120 × 65 = ₹7,800.
If Nifty closes at 25,300 on expiry: Your call is worth 300. Payoff = 300 × 65 = ₹19,500. Minus ₹7,800 premium = Profit ₹11,700.
If Nifty closes at 24,900 on expiry: Call is worthless. You lose the full ₹7,800 premium.
Break-even: Nifty at 25,120 (strike + premium).
A put gives you the right to sell the underlying at the strike price. Buy puts when you expect price to go down (or as insurance).
Above strike: flat loss = premium paid. Below strike: rising profit as the underlying falls. Mirror image of the long call.
Sensex spot is ₹80,000. You buy a Sensex 80,000 PUT expiring next Thursday for ₹200. Lot size = 20, so premium = ₹200 × 20 = ₹4,000.
If Sensex closes at 79,300: Put is worth 700. Payoff = 700 × 20 = ₹14,000. Minus premium = Profit ₹10,000.
If Sensex closes at 80,400: Put is worthless. Lose ₹4,000.
Break-even: Sensex at 79,800 (strike − premium).
Each option can be either bought (you become the option holder) or sold/written (you become the option writer). This gives four positions:
Every options position is a mix of these four. Notice the mirror pairs: Buy Call ↔ Sell Call and Buy Put ↔ Sell Put — one side's profit is exactly the other side's loss.
| Position | You expect | Max profit | Max loss |
|---|---|---|---|
| Buy Call | Big move UP | Unlimited | Premium paid |
| Buy Put | Big move DOWN | Strike − Premium | Premium paid |
| Sell Call | NOT go up sharply | Premium collected | Unlimited ⚠️ |
| Sell Put | NOT go down sharply | Premium collected | Strike − Premium |
Buyers pay premium; their risk is capped. Sellers collect premium but take on much bigger risk — potentially unlimited on the call side. Never sell naked options without knowing the maximum loss scenario.
These describe where the strike is relative to the current spot price. Nifty at 25,000:
For a call: strikes below spot are ITM (you'd exercise), above are OTM. For a put: strikes above spot are ITM, below are OTM. Toggle above to see both.
| Term | Meaning | Example |
|---|---|---|
| ITM (In-the-money) | Has value if exercised now | Call at 24,800 · Put at 25,200 |
| ATM (At-the-money) | Strike ≈ spot | Call or Put at 25,000 |
| OTM (Out-of-the-money) | No value if exercised now | Call at 25,200 · Put at 24,800 |
Premium = Intrinsic value + Time value
Theta is the daily decay rate. Every option is a decaying asset — every day closer to expiry means less time value. Buyers fight theta; sellers benefit from it. This is why professional income strategies mostly sell options.
Specifications change — always verify current lot sizes, expiry days, and margins with your broker before trading.
| Instrument | Exchange | Lot | Expiry cycle | Settlement |
|---|---|---|---|---|
| Sensex (most-traded) | BSE | 20 | Weekly (Thursday) + Monthly (last Thursday) | Cash |
| Nifty 50 | NSE | 65 | Weekly (Tuesday) + Monthly (last Tuesday) | Cash |
| Bankex | BSE | 30 | Monthly only (last Thursday) | Cash |
| Bank Nifty | NSE | 30 | Monthly only (last Tuesday) | Cash |
| Finnifty | NSE | 60 | Monthly only (last Tuesday) | Cash |
| Midcap Nifty | NSE | 120 | Monthly only (last Tuesday) | Cash |
| Reliance / TCS | NSE | 250 / 175 | Monthly (last Tuesday) | Physical delivery |
| Gold (MCX) | MCX | 100 g | Monthly | Physical delivery |
After the 01 Sep 2025 expiry-day revision by NSE and BSE, every NSE product (Nifty, Bank Nifty, Finnifty, single stocks) expires on Tuesday. Every BSE product (Sensex, Bankex, Sensex 50) expires on Thursday. Sensex weekly (Thursday) is now the most-traded index option in India. SEBI revised index-derivative lot sizes again from Jan 2026: Nifty 65, Bank Nifty 30, Finnifty 60, Midcap Nifty 120. Always verify current lots with your broker before trading.
Stock options settle in actual shares if held to expiry ITM. Sell a Reliance 3,000 call, it closes at 3,100 — you must deliver 250 shares. Always close stock options before expiry unless you actually want the shares.
An option chain lists every strike for a single expiry — calls on one side, puts on the other. Sample Nifty chain (spot ₹25,000, next Tuesday expiry):
| Strike | Call bid/ask | Call OI | Call vol | Put bid/ask | Put OI | Put vol |
|---|---|---|---|---|---|---|
| 24,800 | 245 / 250 | 82k | 18k | 35 / 38 | 1.2L | 29k |
| 24,900 | 170 / 175 | 95k | 41k | 60 / 63 | 1.4L | 52k |
| 25,000 (ATM) | 115 / 120 | 2.1L | 1.3L | 110 / 115 | 2.0L | 1.4L |
| 25,100 | 70 / 74 | 1.3L | 68k | 165 / 170 | 72k | 15k |
| 25,200 | 38 / 42 | 98k | 29k | 230 / 238 | 25k | 4k |
Key reads:
Every option is defined by 8 characteristics, not just 4:
Retail traders never notice the clearing corporation, but every trade has three parties:
The clearing corp guarantees settlement. It collects margin daily. If prices move against you, margin calls kick in intraday. If you can’t meet margin, positions are force-closed.
For sellers: your account is charged margin daily as SPAN + Exposure. Volatile days = higher margin = potential force-close.
Four different “prices” for one option:
Rule: always work off bid/ask, not last. On illiquid strikes, last can be 30 minutes old.
Indian option markets have institutional market makers (IIFL, Zerodha’s algo desk, jump trading, etc.) providing liquidity. They:
The spread you pay is their compensation. Wider spread = less competitive market = worse fills for you.
| Attribute | Options | Futures |
|---|---|---|
| Rights vs obligation | Right (buyer) / obligation (seller) | Obligation both sides |
| Upfront cost | Premium (buyer); margin (seller) | Margin both sides |
| Max loss | Buyer: premium. Seller: unlimited | Both: unlimited (till stop-loss) |
| Payoff | Non-linear (bent at strike) | Linear (1:1 with underlying) |
| Time decay | Yes (theta) | None |
| Volatility sensitive | Yes (vega) | No |
| Retail complexity | Moderate to high | Low (simple direction bet) |
Options let you shape risk. Futures give you leverage. Different tools for different jobs.
Every option trade in India has costs stacked on top of the premium:
| Cost | Applies to | Approx rate |
|---|---|---|
| Brokerage | Every trade | ₹20 flat (Zerodha) or ~0.03% |
| STT | Sell side only | 0.05% of premium (options) |
| Exchange fees | Both sides | ~0.053% |
| SEBI + stamp duty | Buy side | ~0.003% |
| GST | Brokerage + fees | 18% |
Total round-trip: roughly ₹60-100 per lot for Nifty at typical prices, plus 0.1% of premium.
Options exercised at expiry pay STT at 0.125% of intrinsic value (not premium). If you let a deep-ITM Nifty option expire, STT alone can eat ₹5,000+. Always square off before 3:20 pm on expiry day unless intrinsic > 0.125% is trivial.
Now that you have the vocabulary, we can look at real strategies. The next chapter covers the classic income trade: earning premium on stocks you already own.