Basics of Options: Calls and PutsNifty 50 IndexNSE:NIFTYTechnicalExpressWhat are Options? An option is a financial contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset (like a stock or index) at a specific price, on or before a specific date. Think of it like booking a movie ticket. You reserve the right to watch a movie at a particular time and seat. But if you don’t go, it’s your choice. You lose the ticket price (premium), but you're not forced to go. Options work similarly. Options are of two basic types: Call Option Put Option Let’s break both down in detail. 1. What is a Call Option? A Call Option gives the buyer the right (but not the obligation) to buy the underlying asset at a pre-decided price (called the strike price) on or before a certain date (called the expiry date). When do traders buy a Call Option? When they believe the price of the underlying stock or index will go up in the future. Example of Call Option (Simple Case) Let’s say you are bullish on Reliance Industries stock, which is currently trading at ₹2,500. You buy a Call Option with: Strike Price: ₹2,550 Premium Paid: ₹30 per share Lot Size: 250 shares Expiry: Monthly expiry (say end of the month) You believe Reliance will go up beyond ₹2,550 soon. If it goes to ₹2,600 before expiry: Your profit per share = ₹2,600 (market price) - ₹2,550 (strike price) = ₹50 Net Profit = ₹50 - ₹30 (premium) = ₹20 per share Total Profit = ₹20 x 250 = ₹5,000 But if Reliance stays below ₹2,550, say at ₹2,500 on expiry, you won’t exercise the option. You lose only the premium (₹30 x 250 = ₹7,500). Key Terminologies in Call Options In the Money (ITM): When the stock price is above the strike price. At the Money (ATM): When the stock price is equal to the strike price. Out of the Money (OTM): When the stock price is below the strike price. 2. What is a Put Option? A Put Option gives the buyer the right (but not the obligation) to sell the underlying asset at a pre-decided price (strike price) on or before the expiry. When do traders buy a Put Option? When they believe the price of the underlying stock or index will fall in the future. Example of Put Option (Simple Case) Assume HDFC Bank is trading at ₹1,600. You are bearish and expect it to fall. You buy a Put Option with: Strike Price: ₹1,580 Premium: ₹20 per share Lot Size: 500 shares Expiry: Monthly If HDFC Bank falls to ₹1,520: You can sell at ₹1,580 even though market price is ₹1,520 Gross profit per share = ₹60 Net profit = ₹60 - ₹20 = ₹40 per share Total profit = ₹40 x 500 = ₹20,000 If HDFC stays above ₹1,580, your put expires worthless. You lose only the premium (₹10,000). Key Terminologies in Put Options In the Money (ITM): Stock price below strike price. At the Money (ATM): Stock price = strike price. Out of the Money (OTM): Stock price above strike price. Who are the Two Parties in an Option Contract? 1. Option Buyer (Holder) Pays the premium Has rights, but not obligations Can exercise the option if profitable Loss is limited to the premium paid 2. Option Seller (Writer) Receives the premium Has obligation to fulfill the contract if the buyer exercises Risk is unlimited for call writers and limited for put writers (if stock price becomes zero) Profit is limited to the premium received Difference between Call and Put Options (Summary Table) FeatureCall OptionPut Option Buyer’s ExpectationBullish (price will go up)Bearish (price will go down) RightBuy at strike priceSell at strike price Profit PotentialUnlimitedLimited (until price reaches zero) Risk (for buyer)Limited to premiumLimited to premium Seller’s RoleSells call & hopes price won’t riseSells put & hopes price won’t fall Premium and What Influences It? The premium is the price you pay to buy an option. This is influenced by: Intrinsic Value: Difference between market price and strike price Time Value: More days to expiry = higher premium Volatility: Higher the volatility = higher the premium Interest Rates and Dividends What is Strike Price and Expiry? Strike Price: The price at which you can buy (call) or sell (put) the underlying stock Expiry: The last date till which the option is valid. In India: Weekly expiry for Nifty, Bank Nifty, and FINNIFTY Monthly expiry for stocks