An option is a contract that gives you the right, but not the obligation, to buy or sell a stock at a fixed price by a future date.
An option is an agreement between two people: a buyer who pays for a right, and a seller who accepts an obligation in exchange for premium.
Think of booking a flat. You pay a small token (the premium) to lock in today’s price of a flat you may buy later. If the flat’s market price jumps, your locked-in price becomes a great deal. If it drops, you walk away and only lose the token. The builder on the other side keeps your token either way — that’s the option seller.
Stock is at ₹1,000. You buy a 1 month call with strike ₹1,050 for ₹20 premium (so ₹20 × 100 = ₹2,000 paid). If the stock ends at ₹1,100 at expiry, the option is worth ₹50. You make ₹50 − ₹20 = ₹30 per share × 100 = ₹3,000 profit. If the stock stays at or below ₹1,050, your call expires worthless and you lose the full ₹2,000 premium — no more, no less.
When you buy a stock, you own a slice of the company. When you buy an option, you own a promise — a legal right to buy or sell that stock at a specific price (the strike) before a specific date (expiry). You do not own the stock until you exercise the contract.
A call is the right to BUY shares at the strike price. You want the stock to go up. A put is the right to SELL shares at the strike price. You want the stock to go down. Same mechanics, opposite direction.
Every option has a buyer (who pays premium for a right) and a seller / writer (who collects premium and takes on the obligation). If the buyer exercises, the seller must deliver — this is why sellers have defined rewards and potentially larger risks.
Unlike stocks, options have a shelf life. At expiry, the contract either gets exercised (if it is profitable — in-the-money) or it expires worthless (if it is not — out-of-the-money). Time literally runs out.
A buyer pays premium upfront. Below are the three outcomes at expiry.
The stock has moved in your favour past the strike. The option has intrinsic value. You can exercise (or just sell the option) and walk away with the difference, minus the premium you paid.
Bought a 100 call for ₹5. Stock expires at 110. Intrinsic value is ₹10. Net profit per share = 10 − 5 = ₹5.
The stock finished right around the strike. The option has little to no intrinsic value at expiry. You usually lose most or all of the premium because there is no upside left and no time value remaining.
Bought a 100 call for ₹5. Stock expires at 100. Intrinsic value is 0. You lose the entire ₹5 premium.
The stock did not move enough in your direction. The contract has no intrinsic value and nobody wants to exercise it. You lose 100% of the premium you paid — but nothing more. That is the cap on a buyer’s risk.
Bought a 100 call for ₹5. Stock expires at 95. Contract is worthless. Loss = full ₹5 premium.
A seller (writer) collects premium upfront and takes on the opposite obligation. The outcomes flip.
The option expires worthless for the buyer, which is exactly what you wanted. The obligation disappears and the premium you collected upfront is 100% yours. This is the seller’s goal.
Sold a 100 call for ₹5. Stock expires at 95. Contract expires worthless. You keep the full ₹5 premium.
The option finishes right near the strike. Intrinsic value is tiny. You still pocket most of the premium you collected, since there is nothing meaningful for the buyer to exercise against you.
Sold a 100 call for ₹5. Stock expires at 100. Intrinsic value near 0. You keep close to the full ₹5 premium.
The buyer exercises against you. You must deliver shares at the strike (for a call) or buy shares at the strike (for a put), even though the market price is worse. Your loss is the intrinsic value minus the premium you collected — and it can be much larger than the premium.
Sold a 100 call for ₹5. Stock expires at 120. You owe ₹20 of intrinsic value per share. Net loss = 20 − 5 = ₹15 per share × 100 shares = ₹1,500.
Indian contracts use lot sizes (e.g. 50 or 75), US contracts typically use 100 shares. When a call buyer exercises, the seller hands over real shares at the strike price. When a put buyer exercises, the seller receives real shares and pays the strike price. Most retail traders close the contract before expiry for cash P&L rather than actually delivering shares, but the shares are the anchor that gives the option its value. That is why an option moving ₹1 in price can mean ₹100 of real P&L per contract — you are controlling a much bigger pile of stock than the premium suggests.
See how well you understand the term before moving on.
1 An option gives the buyer:
2 One standard options contract represents how many shares?
3 As an option buyer, what is your maximum possible loss?
4 At expiry, an out-of-the-money option is worth: