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Calls, puts, premium, lot size, time decay and risk, explained with simple rupee examples.
Options trading means buying or selling contracts that give the buyer the right, but not the obligation, to buy or sell an index or stock at a fixed price before a fixed date. A buyer pays a premium and can lose at most that premium. A seller collects the premium but takes on the obligation, and with it far larger risk.
An option is a derivative contract whose value comes from an underlying asset such as the Nifty 50 index or a stock. Options trading is the buying and selling of these contracts, either to speculate on direction or to hedge an existing position. The price you pay for an option is called the premium.
If you are asking what is options trading, the honest answer has two halves. Options give you small capital outlay and defined risk when you buy. They also decay with time, which is why many beginners are right on direction and still lose money. I like to trade options in Nifty 50, and the first thing I teach my students is to decide the loss before the profit.
In this guide I explain the mechanics first, then the risks, then a simple plan with the maths shown. Every number is illustrative.
Every option has five parts: an underlying, a strike price, an expiry date, a premium and a lot size. You decide your view, pick a strike and expiry, pay or receive the premium, and the contract settles at expiry or when you close it earlier.
| Term | Meaning | Nifty example |
|---|---|---|
| Underlying | The asset the option is based on | Nifty 50 index |
| Strike price | The fixed price in the contract | 22,900 |
| Expiry | The date the contract ends | Weekly or monthly expiry |
| Premium | The price of the option, quoted per unit | Rs 100 |
| Lot size | Units in one contract | 65 for Nifty (verify on NSE) |
Total cost of one lot is premium multiplied by lot size. At a premium of Rs 100 and a lot of 65, one lot costs Rs 6,500. Index options on NSE are cash settled, so no shares or index units are delivered.
Check the current lot size and expiry day on the NSE website before trading, because both have changed in recent years. At the time of writing, sources I checked show Nifty weekly options expiring on Tuesday.
A call option gains when the market rises above the strike plus premium. A put option gains when the market falls below the strike minus premium. In both cases, a buyer's loss is capped at the premium paid.
Take a 22,900 call bought at Rs 100 with one lot of 65 units. You pay Rs 6,500. The call only starts making money above 23,000, the strike plus premium. The table shows the result at expiry.
| Nifty at expiry | Call payoff per unit | Profit or loss per unit | Per lot (65 units) |
|---|---|---|---|
| 22,800 | 0 | -100 | -Rs 6,500 |
| 22,900 | 0 | -100 | -Rs 6,500 |
| 23,000 | 100 | 0 | Rs 0 |
| 23,100 | 200 | +100 | +Rs 6,500 |
| 23,200 | 300 | +200 | +Rs 13,000 |
Charges, taxes and slippage are not included, so real results are lower. The put works in mirror image: with the same strike and premium, it breaks even at 22,800 and loses the full premium above 22,900.
Buyers have limited risk and open-ended potential. Sellers have limited reward, which is the premium, and potentially large risk, so they must post margin.
| Option buyer | Option seller (writer) | |
|---|---|---|
| Pays or receives | Pays premium | Receives premium |
| Maximum loss | Premium paid | Can be many times the premium |
| Maximum profit | Large if the move is big | Premium received |
| Time decay | Works against the buyer | Works for the seller |
| Margin needed | No, premium only | Yes, often substantial |
| Obligation | None | Must honour the contract |
Common mistake: selling options because they "win more often". A seller can win many small trades and lose one large one. Practical fix: if you are new, start by buying options with a fixed rupee risk, or use defined-risk spreads, before selling naked positions.
An option loses time value every day, and the loss accelerates as expiry gets close. This is called time decay, or theta. It is why you can be right on direction and still lose money if the move comes too late.
Implied volatility also changes premium. When the market expects a big move, premiums rise; when expectations calm, premiums fall even if the index barely moves. A beginner who buys before a big event can lose after the event as volatility drops, even when direction is correct.
Regulators have repeatedly cautioned retail traders about F&O losses. Check the latest SEBI studies on sebi.gov.in for current figures.
| Strategy | View | Risk profile |
|---|---|---|
| Long call | Market will rise | Loss limited to premium |
| Long put | Market will fall | Loss limited to premium |
| Bull call spread | Moderately bullish | Both profit and loss are capped |
| Protective put | Hedge a holding | Cost of the put is the price of protection |
| Covered call | Neutral to mildly bullish on a stock you own | Caps upside, earns premium |
| Straddle | Big move, direction unknown | Pays two premiums, hurt by decay |
Learn one strategy well before adding another. For most beginners, a single long call or put with a fixed stop loss teaches the mechanics at the lowest cost.
A sound options plan fixes the rupee risk first, then works out the quantity. The example below is illustrative and is not a recommendation.
| Element | Illustrative plan |
|---|---|
| Concept | Nifty holds above a support level, so a 22,900 call is bought |
| Entry | Premium Rs 100 |
| Confirmation | Spot holds above the support level on closing basis |
| Stop loss | Premium Rs 80, or spot closing below support |
| Target | Premium Rs 140 |
| Risk-reward | Risk Rs 20, reward Rs 40, RR 1:2 |
| Position size | Capital Rs 3,00,000, risk 1% = Rs 3,000. Quantity = 3,000 / 20 = 150 units, rounded down to 2 lots of 65 = 130 units (verify lot size) |
| Actual risk and cost | Risk 130 x 20 = Rs 2,600. Premium outlay 130 x 100 = Rs 13,000 |
| Invalidation | Spot closes below support, or premium hits Rs 80 |
| Mistake | Practical fix |
|---|---|
| Buying cheap far out-of-the-money options | Prefer liquid strikes near the money |
| Ignoring time decay | Choose an expiry that gives your idea time to work |
| No stop loss on the premium | Set the exit before entry |
| Sizing by conviction | Size from risk per trade, as in the plan above |
| Selling naked options early | Learn defined-risk spreads first |
| Trading every day | Trade only setups that meet your checklist |
It is trading contracts that give you the right to buy or sell an index or stock at a fixed price before expiry. You pay a premium for that right.
No. A buyer's maximum loss is the premium paid, plus charges. Sellers can lose much more.
A futures contract binds both sides to the trade. An option gives the buyer a choice, and the buyer's loss is capped at the premium.
There is no guarantee of profit, and many retail traders lose money. Risk control, small size and a written plan matter more than any single strategy.
It is the fixed number of units in one contract. You trade in multiples of the lot, and NSE revises lot sizes periodically, so check the current figure.
To buy one lot you need the premium multiplied by the lot size, plus charges. Start with an amount you can afford to lose.
Options reward preparation. Know your maximum loss in rupees, respect time decay, size from risk and keep a written plan. If you cannot explain the trade in two sentences, wait.
More lessons: Trading Direction blog.