Options Contract

An options contract is a derivative whose value is linked to an underlying asset such as a stock, an index like the Nifty 50, or a commodity. The buyer pays a premium to the seller (writer) for the right to act; if the trade goes against them, the most they can lose is that premium.

How it works

There are two types. A call gives the right to buy at the strike price; a put gives the right to sell. Buyers have limited risk and unlimited upside, while sellers earn the premium but take on large, sometimes unlimited, risk. Indian index and stock options are European-style and settled in cash, so no shares change hands at expiry.

In India

Options trade on the NSE and BSE in standardised lots. Following SEBI's tightening of the derivatives market, weekly expiry contracts are now allowed on only one benchmark index per exchange, so NSE offers weekly options on the Nifty 50 while other indices moved to monthly expiry. SEBI also raised the minimum contract value into the ₹15-20 lakh range, and lot sizes are revised periodically by the exchanges. To enter a trade you post margin (SPAN plus exposure), and buyers pay the premium upfront.

Tax and costs

Options profits are treated as non-speculative business income under Section 43(5) and added to your slab income, not taxed as capital gains. Securities Transaction Tax (STT) applies on the premium and on exercised options, and STT plus GST on brokerage are deductible as business expenses.

Why it matters

Options let you hedge a portfolio, generate income, or take a directional view with defined risk. But SEBI's own studies have repeatedly shown that the large majority of individual F&O traders lose money. The asymmetry is real: a buyer can lose 100% of the premium quickly through time decay, while a seller can be wiped out by a sharp move. For most retail investors, options are best used sparingly and with a clear understanding of premium, strike, and expiry before placing the first trade.