Key Takeaways:

• Option trading involves buying/selling contracts giving you the right to buy/sell assets at a set price within a time frame.

• It offers flexibility, leverage, and allows control of larger positions with less capital.

• Key terms: Strike price, premium, expiry date, in-the-money (ITM), out-of-the-money (OTM).

• Two main types of options: Call options (right to buy) and put options (right to sell).

• Options Greeks (Delta, Gamma, Theta, Vega, Rho) help measure price sensitivity to market changes.

• Basic strategies: Buying calls/puts, covered calls, and cash-secured puts for income generation.

• Risks: Premium decay, volatility changes, and large losses for option sellers if not managed properly.

• Understanding pricing factors like the asset’s price, time decay, and volatility is crucial for trading options.
  

Option Trading Basics:

Option trading has become one of the fastest-growing ways for retail investors to participate in the market—offering flexibility, leverage, and multiple ways to profit even when stock prices move sideways. But unlike stock investing, options come with their own set of rules, terminology, and risks that beginners must understand before placing their first trade.

Before you jump into live markets, let’s break down options in the simplest way possible—so you understand exactly how they work, why traders use them, and what you must know to get started confidently.

What Is Option Trading?

Option trading is a form of derivatives trading where you buy or sell contracts that give you the right, but not the obligation, to buy or sell an underlying asset (such as stocks or indices) at a fixed price within a specific time frame.

Unlike stock investing—where you must purchase shares outright—option trading allows you to control a larger position with a smaller amount of capital, making it popular for hedging, speculation, and income strategies.

Key Terminologies in Option Trading:

To understand option trading basics, here are the most important terms:

• Strike Price: The fixed price at which you can buy or sell the asset.
  
  
• Premium: The cost you pay to buy an option.
  
  
• Expiry Date: The last day the option contract is valid.
  
  
• In-the-Money (ITM): When exercising the option is profitable.
  
  
• Out-of-the-Money (OTM): When exercising the option is not profitable.
  
  
• Lot Size: The fixed quantity of shares in one options contract.
  
  
• Option Greeks: Tools like Delta, Theta, Gamma, and Vega that show how option prices react to market changes.

Types of Options:

In the Indian market, there are two major types of options used by traders and investors: Call Options and Put Options. Both serve different purposes—ranging from hedging and speculation to income generation—yet work on the same principle of buying or selling at a predefined strike price.

What is a Call Option?

A call option gives you the right (not obligation) to buy the underlying asset at a predetermined strike price before expiry.

Traders buy call options when they expect the price to go up, making it a popular strategy for bullish market outlooks.

What is a Put Option?

A put option gives you the right (not obligation) to sell the underlying asset at a fixed strike price before expiry.

Traders buy put options when they expect the price to fall, making it ideal for bearish or hedging situations.

Features of an Options Contract:

An options contract comes with specific terms that define how the trade works—such as strike price, expiry date, premium, lot size, moneyness (ITM/OTM/ATM), and whether the contract is a call or put. These features determine the value of the contract, how option prices move, and how the contract is ultimately settled. 

Option Chain

An option chain (also called an options chain table) is a list of all available call and put options for a particular stock or index, shown strike-wise. It includes essential data such as premium, open interest, volume, IV (implied volatility), LTP, bid–ask prices, and Greeks, helping traders analyse demand, liquidity, and price expectations. Reading the option chain is a core skill in understanding option trading basics.

ITM, OTM and ATM

These terms describe an option’s moneyness, i.e., whether exercising the option is currently profitable:

• ITM (In the Money): Call ITM = spot > strike; Put ITM = spot < strike.
  
  
• OTM (Out of the Money): Call OTM = spot < strike; Put OTM = spot > strike.
  
  
• ATM (At the Money): Spot price is approximately equal to the strike price.

No Obligation To Buy or Sell

One of the biggest advantages of options trading is that the buyer has no obligation to buy or sell the underlying asset. The buyer can simply choose not to exercise the contract and let it expire worthless, losing only the premium paid. This limited-risk structure makes “buy options” strategies safer than futures or direct stock leverage.

Lot Size

Options cannot be traded in single shares. Every contract has a predefined lot size, which is the number of shares represented by one option. For example, Nifty options have a lot size of 50; Reliance may have a lot size like 250 (varies by SEBI rules).

Lot size directly affects your total premium, margin, and position sizing, making it an important part of option trading strategies.

Settlement of an Option

Options in India follow European-style settlement, meaning they can be exercised only on expiry.

• Index options are cash-settled.
  
  
• Stock options are physically settled, meaning buyers/sellers may need to deliver or receive shares if the option expires ITM.

Options Greeks

Option Greeks (Delta, Gamma, Theta, Vega, Rho) measure how sensitive an option’s price is to market factors like stock movement, volatility, and time decay.

• Delta: Change in premium vs. price movement.
• Gamma: Speed at which Delta changes.
• Theta: Time decay of the option (premium erosion).
• Vega: Sensitivity to volatility.
• Rho: Sensitivity to interest rates.

How Do Options Work?

Options work by giving the buyer the right, but not the obligation, to buy or sell an underlying asset at a predetermined strike price before expiry. The buyer pays a premium for this right, while the seller (writer) earns the premium and carries the obligation.

When market prices move favourably, options increase in value; when they move unfavourably, buyers can let the contract expire by losing only the premium. This structure allows traders to benefit from directional moves, volatility changes, or hedging needs with limited upfront capital.

Suggested Read: 5-Step Guide to Getting Started with Options Trading

Why Investors Trade in Options?

Investors and traders use options for multiple purposes:

• Hedging: To protect their stock portfolio against downside risk.
  
  
• Speculation: To take directional bets using low capital with high leverage.
  
  
• Income Generation: By selling options (like covered calls or cash-secured puts) to earn premium income.
  
  
• Risk Management: To control exposure during volatile markets.

Basic Option Trading Strategies for Beginners:

Beginners typically start with simple, low-risk option trading strategies such as:

• Buying Call Options: For bullish expectations with limited risk.
  
  
• Buying Put Options: For bearish expectations or hedging long positions.
  
  
• Covered Call Writing: Selling calls against owned shares to generate income.
  
  
• Cash-Secured Puts: Selling puts while keeping cash aside to potentially buy shares at a discount.

Risks Involved in Option Trading:

Option trading carries risks such as premium decay (Theta), volatility changes, liquidity issues, and significant losses for option sellers due to unlimited risk. Misreading market direction, trading on expiry day, or ignoring Greeks can also lead to losses.

While buyers risk only their premium, sellers may face large mark-to-market losses—making education, discipline, and proper sizing essential for safe option trading basics.

Understanding Options Pricing:

Option pricing is determined by a combination of factors, including the underlying asset’s price, strike price, time to expiry, volatility, interest rates, and dividends. These elements are captured through the Black-Scholes model and Option Greeks.

• Intrinsic Value reflects whether the option is ITM or OTM.
  
  
• Time Value reflects how much time is left before expiry—more time means a higher premium.
  
  
• Volatility (IV) plays a major role: higher IV increases option prices because the probability of large price movement rises.
  
  
• Theta (time decay) reduces the premium as expiry approaches.

Conclusion:

Options trading gives investors a flexible way to hedge risks, generate income, or speculate with limited capital using a reliable trading app, but it requires a solid understanding of option basics, option pricing, and risks. By learning core concepts such as call and put options, strike price, moneyness, option chain, Greeks, and settlement, beginners can build a strong foundation for safe and intelligent options investing. With the right strategy and discipline, options can become a powerful tool in a trader’s portfolio—offering both protection and opportunity.

Start online trading today at Best Online Trading Platforms

FAQs:

What is the difference between call and put options?

A call option gives you the right (not obligation) to buy a stock at a fixed price, while a put option gives you the right to sell a stock at a fixed price—both within a specified time period.

How do you read an option chain?

An option chain displays all available call and put options for a stock, showing strike prices, premiums, open interest, volume, implied volatility (IV), and Greeks—helping traders compare and choose the right contract.

What are Option Greeks and why do they matter?

Greeks (Delta, Gamma, Theta, Vega, Rho) measure how option prices react to changes in stock price, volatility, and time—making them essential for understanding risk and building option trading strategies.

Why do margins change on expiry day?

Margins increase on expiry day because option contracts face maximum volatility, gamma risk, and a higher probability of sudden price moves, so exchanges demand additional funds to protect against extreme losses.

Which platform is best for beginners to trade options in India?

For beginners, apps like Zerodha, Upstox, Angel One, and mastertrust are considered the best option trading apps thanks to low brokerage, clean UI, and helpful tools like option chains, calculators, and strategy builders.

Why are Options used?

Options are used for hedging, speculation, income generation, and leveraged positioning, allowing traders to manage risk or bet on market direction with limited capital.

Are Options Better than Stocks?

Options aren’t “better” or “worse”—they’re different: options offer leverage and low upfront cost, but stocks are simpler, safer, and suitable for long-term investing without expiry pressure.

Is there too much risk in Options trading?

Buying options has limited risk, but selling options or trading without understanding volatility, Greeks, or expiry can be highly risky, making option trading basics essential before placing trades.