Options contract

An option is a contract with a strike price and an expiry. A call option gives its buyer the right to buy the underlying at the strike. A put option gives the right to sell at the strike. The buyer pays a premium for this right and has no obligation. The seller, also called the writer, receives the premium and carries the obligation.

On NSE option chains, calls are marked CE and puts PE. Index options on Nifty and Bank Nifty are European style: they can be exercised only at expiry, though you can sell them in the market any time before. A call is in the money when the index is above the strike, at the money when close to it, and out of the money when below. Puts are the reverse.

Option buying is popular with Indian intraday traders because the maximum loss is the premium paid, and the capital needed is small compared with futures. The seller's position is the opposite: limited gain, large possible loss, and margin required. Sellers often buy a further strike as a hedge, which caps that loss and turns the position into a spread.

The common mistake is thinking a correct view on direction is enough. An option's price depends on the underlying, the time left and volatility together. If Nifty rises slowly, a bought call can still lose value. Far out-of-the-money strikes look cheap for a reason: they need a big, fast move to pay. Many buyers are right on direction and still lose the premium.