Option Trading

Options trading lets buyers purchase or sell assets at a set price by a specific date. As a derivatives contract, it’s a popular investment strategy.
Option Trading
3 mins
11-July-2025

Options trading involves buying or selling contracts that give the holder the right—without the obligation—to buy or sell an underlying asset at a predetermined price (known as the strike price) before or on a specific date (called the expiration date).

Here, we’ve discussed all an investor needs to know about trading options, option strategies and more.

What is Option trading

Option trading gives the buyer the right but not the obligation to buy (call option) or sell (put option) a certain underlying asset at a predetermined price within a stipulated period. Options trading involves strategies that provide traders with various market positions to make gains or mitigate the spot market risk.

How does options trading work?

Whenever an options trader is buying or selling options, he/she receives a right, but not an obligation, to exercise an option before expiration. The purchase and sale of an option contract do not mandatorily need to be executed; if the position gets unfavorable, one can simply avoid executing.

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Strategies in option trading

There are various strategies prevalent in options trading, which include the following:

1. Long call strategy

- This strategy involves buying a call option, which gives you the right, but not the obligation, to buy the underlying asset at a specified price (strike price) before or on the expiration date.

- Traders use this strategy when they anticipate the price of the underlying asset to rise significantly.

2. Short call strategy

- In this strategy, you sell a call option without owning the underlying asset.

- You're obligated to sell the underlying asset at the strike price if the option buyer exercises their right.

- Traders use this strategy when they expect the underlying asset's price to remain relatively stable or decrease.

3. Short put strategy

- This strategy involves selling a put option without owning the underlying asset.

- You're obligated to buy the underlying asset at the strike price if the option buyer exercises their right.

- Traders use this strategy when they believe the underlying asset's price will remain stable or increase.

4. Long straddle option strategy

- In a long straddle, you simultaneously buy a call option and a put option with the same strike price and expiration date.

- It's used when you expect a significant price movement in the underlying asset but are uncertain about the direction (up or down).

5. Short straddle strategy

- This strategy involves selling a call option and a put option with the same strike price and expiration date.

- Traders use it when they expect the underlying asset's price to remain relatively stable within a specific range.

6. Long put strategy

- This strategy entails buying a put option, giving you the right to sell the underlying asset at the strike price.

- Traders use this strategy when they anticipate a significant drop in the underlying asset's price.

Each of these strategies has its own risk-reward profile and is chosen based on a trader's outlook on the underlying asset's price movement.

Participants in options trading

Here are the participants who take part in option trading:

  • Option Buyer: The option buyer pays a premium to acquire the right, but not the obligation, to buy or sell an asset. This trader can choose to exercise the option or let it expire.
  • Option Writer/Seller: The writer (seller) collects the premium from the buyer and is obligated to fulfil the contract if the buyer exercises the option—either by selling or purchasing the underlying asset.
  • Call Option: A call option grants the buyer the right to purchase the underlying asset at a fixed strike price before or on the expiry date. It’s useful when the trader expects prices to rise.
  • Put Option: A put option provides the buyer the right to sell the underlying asset at a fixed strike price before or on the expiry date. It is typically used when expecting a price drop.

Notable terms in options trading

Here are some notable terms in option trading:

  • American option: American options are those contracts that can be exercised at any date before their expiry date and also on the expiry date itself.
  • European option: European options are those contracts that can be exercised only on the expiration date. Only European options are available in the Indian market.
  • Strike price: The strike price is the price at which both parties entered the contract. It is also known as the exercise price.
  • Premium: It is the amount that the buyer of an option pays to the seller.
  • Expiry date: It is the date specified in an option beyond which the contract becomes invalid.

Note: To trade with options, you’ll need a Demat and trading account with any SEBI-registered broker.

Profitability Scenarios in options trading

Listed below are the three profitability scenarios in options trading:

  • In-the-money (ITM): This is the profitability scenario in options trading that results in a positive cash flow to the option holder when executed immediately.
  • At-the-money (ATM): In this scenario, the option’s spot price is the same as its strike price. This results in a situation of no profit or no loss when executed right away.
  • Out-of-the-Money (OTM): This is a scenario that would result in a loss if executed immediately. OTM options do not have any intrinsic value.

There is often a misconception among people that options involve high risk. Although options trading can result in losses, individuals with sufficient market knowledge will make more profits over time. Options serve different purposes like hedging, speculation, or leveraging. But it is always recommended to acquire knowledge of options before trading.

Advantages of Option trading

Here are some advantages of option trading

1. Cost-efficiency

Options have great leveraging power, allowing investors to obtain an option position similar to a stock position, but at significant cost savings. This makes option trading a more affordable way to invest in the market.

2. Risk reduction

Options contracts can provide investors with risk-reduction strategies. Used as a hedging device, options can help investors protect their portfolios against adverse market movements.

3. Higher percentage returns

Options have the potential to deliver higher percentage returns than other forms of trading. This is because options allow traders to profit from both upward and downward price movements in the underlying asset.

4. Flexibility

Options give traders and investors more flexible and complex strategies such as spread and combinations that can be potentially profitable under any market scenario. This flexibility allows traders to customize their trades according to their specific needs and risk tolerance.

Difference between options trading and other instruments

Option trading is a type of financial trading that allows buyers to purchase the right, but not the obligation, to buy or sell an underlying asset at a predetermined price and date. Options trading differs from other financial instruments in several ways. Firstly, options contracts are highly flexible, allowing traders to customise their investment strategies by selecting a variety of variables, including the strike price and expiration date. Secondly, options contracts provide leverage, allowing traders to potentially earn high returns with relatively low capital.

It comes with limited downside risk, making it a safer investment than futures or margin trading. In addition, option trading can be more complex than other financial instruments, as it requires traders to have a good understanding of the underlying asset and market conditions.

Lastly, successful options trading requires good timing and market knowledge, as traders must correctly predict the direction and magnitude of price movements to profit.

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Frequently asked questions

Is Option trading better than stock trading?

Whether options trading is better than stock trading depends on your goals and risk tolerance. Options offer flexibility and higher return potential but come with complexity and greater risk. Stock trading is simpler and generally less risky. Choose based on your experience level, financial strategy, and comfort with volatility.

Is option trading safe?

Options trading carries inherent risks, like all market investments. It can lead to substantial profits or losses depending on how it’s used. When approached with solid strategies, risk management, and adequate knowledge, it can be effective. However, it's not inherently safe and requires careful planning and market awareness.

How to do option trading?

Here's a breakdown of how to get started with option trading:

  1. Open a Trading Account: Open a brokerage account that allows options trading. You'll need to meet certain requirements and pass a knowledge test to get approved.
  2. Understand Option Basics: Learn about the different types of options (calls and puts), strike prices, expiration dates, and how options contracts work.
  3. Develop a Trading Strategy: Decide on a specific option strategy that aligns with your investment goals and risk tolerance. Some common strategies include buying calls, buying puts, selling covered calls, and selling cash-secured puts.
  4. Analyze Market Trends: Use technical and fundamental analysis to identify potential opportunities in the market. Pay attention to factors like stock prices, volatility, and market sentiment.
  5. Manage Risk: Options trading involves risks, so it's crucial to implement risk management strategies like setting stop-loss orders and diversifying your portfolio.
  6. Monitor Your Positions: Keep a close eye on your positions and adjust your strategy as needed. Use tools like option chains to track the performance of your options contracts.
  7. Stay Informed: Stay updated on market news, economic indicators, and regulatory changes that can impact the options market.

Remember, options trading is complex and involves significant risk. It's essential to educate yourself thoroughly and consider consulting with a financial advisor before diving into options trading.

What is options trading and how does it work?

Options trading is a type of financial trading that allows investors to buy or sell the right to purchase or sell an underlying asset at a fixed price, at a future date. Options trading operates on the basis that the buyer has the option to exercise the contract but is not under any obligation to do so. Options traders can buy or sell rights to equity ownership (stock options) or rights to sell or buy financial indexes (index options) to profit from fluctuations in the market.

What is option trading with example?

Option trading enables investors to buy or sell the right to purchase or sell an underlying asset at a predetermined price within a specified timeframe. For instance, consider buying a call option for 100 shares of Company X at a strike price of Rs. 110, with an expiry on December 1. If, on December 1, Company X shares trade above Rs. 110, you can exercise the option, buying shares at a lower price to profit from the market price. However, if the shares trade below Rs. 110, you can opt not to exercise, limiting your loss to the premium paid for the option. This strategy offers flexibility, allowing investors to capitalize on price movements and manage risks effectively.

Is option trading high risk?

Yes, option trading is considered high-risk. Due to leverage, time decay, and market volatility, traders can incur rapid losses. Proper research, discipline, and strict risk management are crucial to reducing exposure. It is not advisable for inexperienced traders to enter without a solid understanding of how options work.

Which option trading is safe?

No option strategy is entirely risk-free. However, conservative strategies like covered calls, protective puts, or spreads can reduce risk compared to naked options. A diversified portfolio, stop-loss rules, and continuous learning help make option trading relatively safer. Always evaluate the risk-reward ratio and consult professionals if unsure.

What Is Option Trading In Share Market

An option is a financial contract that gives the buyer the right, but not the obligation, to buy (call option) or sell (put option) an underlying asset at a predetermined price (strike price) on or before a specific date (expiration date).

The seller of the option is obligated to fulfill the buyer's exercise of the option.

Why do 90% option traders lose money?

Most option traders lose money due to lack of proper knowledge, emotional trading, poor risk management, and incorrect timing. Options are complex and time-sensitive instruments. Without a sound strategy, discipline, and understanding of market behaviour, many traders end up making speculative decisions that lead to losses.

Can I start option trading with 3000 rupees?

Yes, it’s possible to start option trading with ₹3,000, but the choices will be limited. You can begin by trading inexpensive options, especially weekly contracts. However, due to high risk and potential for complete capital loss, it is advisable to learn thoroughly and start with virtual trading first.

Can I earn 1 lakh per day from option trading?

Earning ₹1 lakh daily from option trading is theoretically possible but highly unrealistic for most traders. It requires large capital, expert knowledge, precise timing, and a high-risk appetite. Losses can also be equally large. Beginners should focus on learning and consistency rather than chasing large daily profits.

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