What Is Options Trading and How It Works in India

Short answer: An option is a contract giving the right, but not the obligation, to buy or sell an underlying asset at a fixed price before expiry; in India, options on indices and stocks trade on the NSE and BSE in standardised lots.

Calls and Puts

A call option gives the buyer the right to buy the underlying at a set strike price; a put gives the right to sell at the strike. Buyers pay a premium for this right, while sellers (writers) receive the premium and take on the obligation if the buyer exercises.

Key Terms

The strike price is the agreed price, the premium is the cost of the option, and expiry is the date the contract ends. Indian index options are cash-settled, meaning profit or loss is settled in cash rather than delivery of the index. Stock options can involve physical delivery on expiry.

How Profit and Loss Work

A call buyer profits if the underlying rises well above the strike plus premium; a put buyer profits if it falls well below the strike minus premium. The buyer's maximum loss is limited to the premium paid, while option sellers can face large or theoretically unlimited losses for a limited premium gain.

Lot Sizes and Margins

Options trade in fixed lot sizes set by the exchange, so one contract controls a sizeable value. Buyers pay only the premium, but sellers must post margin, which can be substantial and rise with volatility.

Why People Use Options

Options can be used to speculate with leverage, to hedge an existing portfolio against falls, or to generate income by writing options. Leverage cuts both ways and can amplify losses as much as gains.

A Word of Caution

Options are complex and time-sensitive, since premiums decay as expiry approaches. Most retail option buyers lose money. Learn the mechanics thoroughly, start small, understand the risks of selling, and never trade money you cannot afford to lose.

This explainer was written by The Dispatch desk to answer a question readers commonly ask. It is general information, not personalised financial advice.