Glossary
What is Options? Meaning, Example & Why It Matters
A contract giving the buyer the right, but not the obligation, to buy or sell an asset at a set price before expiry.
An option gives its buyer a right, not an obligation. A call option gives the right to buy at a fixed strike price, and a put option gives the right to sell at that price, up to the expiry date. The buyer pays a premium to the seller, who takes on the obligation to honour the contract if the buyer chooses to exercise it.
Why Options matters to you
For option buyers, the maximum loss is the premium paid, but many options expire worthless, so losing that premium is common. For option sellers, the premium received is the maximum profit, while potential losses can be large. Sellers must post significant margin because of this risk.
Charges on options are often calculated on premium rather than full contract value, which makes per-trade costs look small. But options traders tend to trade frequently, and charges like STT on sell side or exercise can add up. Time decay also works against buyers: options lose value as expiry approaches, all else being equal.
Practical tip: understand whether you are buying or selling, your maximum loss, and how time decay affects the position before you trade. Avoid treating cheap, far out-of-the-money options as lottery tickets; they are cheap because they usually expire worthless.
Example: Illustrative only: if you buy a call option at a premium of ₹10 per unit with a lot of 100 units, you pay ₹1,000 plus charges. If the option expires worthless, your loss is that ₹1,000 plus charges.
See it in rupees: every charge and tax on a real trade, at every broker. Open the brokerage calculator
Related terms
- GlossaryF&O (Futures and Options)
The derivatives segment where traders buy and sell futures and options contracts based on stocks or indices.
- GlossaryStrike Price
The fixed price at which an option holder can buy (call) or sell (put) the underlying asset.
- GlossaryOption Premium
The price an option buyer pays to the seller for the rights the option contract provides.
- GlossaryExpiry
The date on which a futures or options contract ends and is settled according to exchange rules.
Frequently asked questions
What is the difference between a call and a put?
A call gives the right to buy at the strike price, and a put gives the right to sell at the strike price.
Is buying options safer than selling them?
Buying limits your maximum loss to the premium, but most bought options can still lose money. Selling has limited profit and potentially large losses, so each carries different risks.
Do options trade in lots?
Yes, exchange-traded options in India trade in fixed lot sizes set by the exchange, which are revised periodically.