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 book 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 booking, forfeit your ₹500, and book 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.
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 = 75 shares, so you pay ₹120 × 75 = ₹9,000.
If Nifty closes at 25,300 on expiry: Your call is worth 300. Payoff = 300 × 75 = ₹22,500. Minus ₹9,000 premium = Profit ₹13,500.
If Nifty closes at 24,900 on expiry: Call is worthless. You lose the full ₹9,000 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).
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:
| 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:
| 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 | 75 | Weekly (Tuesday) + Monthly (last Tuesday) | Cash |
| Bankex | BSE | 30 | Monthly only (last Thursday) | Cash |
| Bank Nifty | NSE | 35 | Monthly only (last Tuesday) | Cash |
| Finnifty | NSE | 65 | 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. Always verify lot sizes with your broker as SEBI adjusts them periodically.
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.
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.