Option

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 you buy a 22,200 call option expiring next week for a premium of ₹80 per unit. With a Lot Size of 50, your total cost is ₹4,000. If Nifty rises to 22,500 by expiry, your option is worth ₹300 per unit (22,500 − 22,200), giving you 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 you lose 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). Understanding at least Delta and Theta is essential for any options trader.

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 mandates significantly higher Margin for option sellers than buyers, reflecting this risk asymmetry.