What is Options Trading? A Beginner’s overview, Benefits & Strategies
- Share. Market
- 9 min read
- 08 Jul 2025
Options trading is gaining popularity among Indian retail investors as a smart way to manage risk, speculate on price movements, or earn additional income. But for many, options remain a mystery filled with jargon and complex strategies.
In this guide, we’ll break down the concept of options trading in a simple, beginner-friendly manner—covering its meaning, workings, advantages, risks, and key strategies you can use.
What Are Options?
Options are financial contracts that give you the right, but not the obligation, to buy or sell an underlying asset (like a stock or index) at a fixed price within a certain period.
There are two types of options:
- Call Option: Gives the buyer the right to buy the asset at a set price before expiry.
- Put Option: Gives the buyer the right to sell the asset at a set price before expiry.
Unlike buying a stock outright, you don’t own the asset—you’re simply betting on the direction of its price movement.
Key Terminologies in Options Trading
To trade options confidently, it’s essential to understand some foundational terms that impact how options are priced, traded, and executed. Here’s a breakdown of the most important terminologies:
1. Strike Price
The strike price, also known as the exercise price, is the fixed price at which an option holder can buy or sell the underlying asset. In a call option, it’s the price to buy the asset; in a put option, it’s the price to sell.
- Example: If you hold a call option with a strike price of ₹1,000 and the stock is trading at ₹1,050, you can buy it for ₹1,000 and gain ₹50 per share.
2. Premium
The premium is the amount paid to buy an options contract. It serves as the upfront cost and is paid by the buyer to the seller (also known as the writer) of the option.
- Premiums are quoted on a per-share basis, but each options contract typically represents one lot.
- Example: A premium of 30 on a lot of 25 shares would cost (30 × 25=₹750)
3. Expiry Date
The expiry date is the last day on which an option can be exercised. If the option is not exercised by this date, it expires and becomes worthless
- In India, stock options typically expire on the last Thursday of each month, while index options (such as Nifty50 and Sensex) have weekly and monthly expirations.
4. Understanding Intrinsic Value and Option Moneyness
The intrinsic value of an option represents the real, immediate profit you’d earn if the option were exercised right now.
- For a Call Option:
Intrinsic Value = Spot Price – Strike Price - For a Put Option:
Intrinsic Value = Strike Price – Spot Price
An option is classified based on whether or not it has intrinsic value:
- If an option has intrinsic value, it is called In-the-Money (ITM).
- If it has no intrinsic value, it is considered Out-of-the-Money (OTM).
- When the strike price is equal or very close to the spot price, the option is called At-the-Money (ATM).
Call Options:
- Strikes lower than ATM are ITM (since the spot price is higher).
- Strikes higher than ATM are OTM (since exercising wouldn’t be profitable).
Put Options:
- Strikes higher than ATM are ITM (as the strike is above the spot price).
- Strikes lower than ATM are OTM (as the market price is already lower).
Currently, Nifty 50 is trading at 24,887, so in this case, the 24,900 call and put options are At the Money (ATM).
5. Theta Decay
Theta decay—also called Time decay refers to the gradual reduction in an option’s premium purely because time is passing. It happens even if the price of the underlying asset doesn’t move. This is a natural feature of options: the closer they get to expiry, the less time they have to become profitable, which reduces their value.
Who Are the Key Participants in Options Trading?
Every options trade involves two primary participants, each with a distinct role, risk profile, and objective:
1. Option Buyer (Holder)
The buyer of an option is the one who pays a premium to acquire the right—but not the obligation—to buy or sell the underlying asset at the agreed strike price before expiry.
- If the market moves in their favour, the buyer can exercise the option and potentially earn a profit.
- If the market moves against them, the maximum loss is limited to the premium paid.
Roles:
- Call Option Buyer: Expects the asset price to rise.
- Put Option Buyer: Expects the asset price to fall.
2. Option Seller (Writer)
The seller (or writer) of an option is the counterparty who receives the premium upfront but takes on the obligation to fulfil the contract if the buyer chooses to exercise their right.
- Sellers earn a fixed premium as income but face unlimited risk in both call and put options—calls due to unlimited upside in price, and puts due to the potential for the underlying to fall to zero.
- Option writing is usually done by more experienced traders or institutions with higher risk tolerance and margin capacity.
Roles:
- Call Option Seller: Expects the asset’s price to remain steady or decline.
- Put Option Seller: Believes the asset’s price will stay flat or move upward.
How to Use Call and Put Options?
Options trading isn’t just about predicting market movements — it’s about strategically positioning yourself to benefit from them while managing risk. Understanding when and how to use call and put options is the foundation of any successful options trading strategy.
How to Use Call Options (Bullish Outlook)
A call option gives you the right to buy an underlying asset at a fixed strike price before the expiry date. Traders typically buy call options when they expect the price of the asset to rise in the near future.
When to Use:
- You believe the stock or index will go up.
- You want leveraged exposure without buying the actual shares.
- You want to cap your maximum loss to the premium paid.
Example :
Suppose Infosys shares are trading at ₹1,200, and you expect the price to rise. You buy one lot of a call option (400 shares) with a strike price of ₹1,250, paying a premium of ₹25 per share.
If Infosys rises to ₹1,320 before expiry, your call option becomes in-the-money. You can exercise your right to buy at ₹1,250 and sell at ₹1,320.
- Per share gain = ₹1,320 – ₹1,250 = ₹70
- Net profit per share = 70 – 25 = 45
- Total profit = 45 × 400 = ₹18,000
However, if Infosys doesn’t cross ₹1,250, the option expires worthless.
- Maximum loss = ₹25 × 400 = ₹10,000, limited to the premium paid.
How to Use Put Options (Bearish Outlook)
A put option gives you the right to sell an underlying asset at a fixed strike price before the expiry date. Traders use put options when they believe the price of the asset will go down.
When to Use:
- You expect a stock or index to decline.
- You want to profit from a price drop or protect your portfolio from losses.
- You’re looking for a low-risk way to take a bearish position.
Example:
Example: Suppose Tata Motors is trading at ₹850, and you expect the price to fall. You buy one lot of a put option (550 shares) with a strike price of ₹820, paying a premium of ₹25 per share.
If Tata Motors drops to ₹760 before expiry, your put option becomes in-the-money. You can exercise your right to sell at ₹820, while the market price is only ₹760.
- Per share gain = ₹820 – ₹760 = ₹60
- Net profit per share = 60 – 25 = 35
- Total profit = 35 × 550 = ₹19,250
However, if Tata Motors stays above ₹820, the option expires worthless.
- Maximum loss = 25 × 550 = ₹13,750, limited to the premium paid.
Popular Strategies in Options Trading
Options trading offers flexibility to adapt to various market conditions—bullish, bearish, or neutral. Below are the most widely used strategies, each with a brief explanation, risk profile, and ideal use case.
| Strategy | Market Outlook | Risk | Reward |
| Long Call | Bullish | Low | High |
| Long Put | Bearish | Low | High |
| Covered Call | Neutral/Bullish | Medium | Medium |
| Protective Put | Bullish with hedge | Low | High (if stock rises) |
| Straddle | Highly volatile | Medium | High |
| Strangle | Highly volatile | Medium | High |
| Bull Call Spread | Moderately bullish | Low | Limited |
| Bear Put Spread | Moderately bearish | Low | Limited |
| Iron Condor | Range-bound | Low | Medium |
| Iron Butterfly | Flat/Neutral | Low | High |
Benefits and Risks of Options Trading
Options trading provides a range of opportunities for investors, but it also comes with specific risks. Understanding both sides is essential before diving in.
Benefits of Options Trading
- Low Capital Requirement: You can gain exposure to large positions by paying only a small premium, making options more affordable than buying shares outright.
- Leverage for Higher Returns: Options allow you to amplify potential profits since you’re controlling more value with less money.
- Risk Management Tool: Put options are commonly used to hedge against portfolio losses, offering downside protection without selling your holdings.
- Flexibility Across Market Conditions: Whether the market is bullish, bearish, or neutral, options strategies can be tailored accordingly, like long calls for uptrends or Iron Condor for sideways markets, etc.
- Extra Income Generation: Selling options (e.g., covered calls or cash-secured puts) can generate regular premium income, especially for long-term stockholders.
Risks of Options Trading
- Time Decay (Theta): Options lose value over time, especially as they approach expiry, working against option buyers.
- Complexity: Understanding pricing, implied volatility, and Greeks (Delta, Theta, Vega, Gamma) requires a learning curve.
- Potential Losses in Options: In long options positions, if the market moves against you, you risk losing the entire premium paid. For option sellers, while they receive the premium upfront, their potential losses can significantly exceed the amount received.
- Volatility Sensitivity: Sudden price swings can drastically affect option values, leading to quick gains or steep losses.
FAQs
Options trading is the buying and selling of contracts that give you the right—but not the obligation—to buy or sell an asset at a fixed price before a set expiry date. It works by using two types of options: Call Options and Put Options.
For option buying, the minimum capital depends on the premium price and lot size. However, for option selling (writing), the capital requirement is much higher due to margin needs. You typically need around ₹2 to ₹3 lakhs to sell a single lot
It depends on your risk appetite and knowledge. Options can offer higher returns with less capital, but they are also riskier and more complex than stocks. Long-term investors often prefer stocks, while active traders may choose options for short-term strategies.
No, not if done with proper knowledge and risk management. Options trading is a strategic financial tool. However, trading blindly or without a plan can feel like gambling and lead to losses.
Options trading can be good if you understand the market, manage risks, and use the right strategies. But it can be bad if you chase quick profits without proper education. It’s a double-edged sword—powerful, but risky.
Most traders lose money because of poor risk management, lack of understanding of options, overtrading, or unrealistic expectations.
For beginners, cash market (stocks) or index ETFs are easier to understand. Once you gain experience, you can explore covered calls or basic option buying or Options selling strategies with proper risk management.
