A derivative contract giving the holder the right, but not the obligation, to buy (call) or sell (put) an asset at a predetermined price before expiry.
An option is a derivative contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a predetermined price (strike price) on or before a specified expiry date. The buyer pays a premium for this right. There are two types: a call option gives the right to buy, and a put option gives the right to sell.
On the NSE, options are available on the Nifty 50, Bank Nifty, FinNifty, and approximately 180+ individual stocks. Nifty options are European-style (can be exercised only on expiry day), while stock options are also European-style in India. Weekly options on Nifty expire every Thursday, while monthly options expire on the last Thursday of each month.
Consider a practical example: Nifty is at 22,000 and a buyer takes a 22,200 call option expiring next week for a premium of ₹80 per unit. With a Lot Size of 50, the total cost is ₹4,000. If Nifty rises to 22,500 by expiry, the option is worth ₹300 per unit (22,500 − 22,200), producing a profit of (300 − 80) × 50 = ₹11,000 on a ₹4,000 investment - a 275% return. If Nifty stays below 22,200, the option expires worthless and the buyer loses the entire ₹4,000 premium.
Option pricing is governed by factors captured in the "Greeks": Delta (sensitivity to underlying price change), Gamma (rate of change of delta), Theta (time decay - options lose value each day), Vega (sensitivity to volatility changes), and Rho (sensitivity to interest rates). Delta and Theta are the two Greeks most commonly used in day-to-day options decisions.
Option selling (writing) is the opposite side - the seller collects the premium upfront but takes on the obligation to fulfil the contract. Selling options has a higher probability of profit (most options expire worthless) but carries substantial risk: a naked call seller has theoretically unlimited loss potential. SEBI requires significantly higher Margin from option sellers than buyers, reflecting this risk asymmetry.
India Context
Indian options are European-style. Nifty weekly options expire every Thursday. SEBI mandates higher margins for option sellers. Stock options available on 180+ stocks.