A call option gives you the right to buy an underlying stock or index at a fixed price (the strike price) on or before expiry; a put option gives you the right to sell at a fixed price. The buyer of either pays a fee called the premium for that right, and the seller of the option takes on the matching obligation.
Options are one half of the derivatives segment; the other half is futures. For the full picture, start with What is F&O (Futures and Options)?
Who has rights and who has obligations?
This is the single most important idea in options, so let's pin it down:
| Position | What you pay/receive | What you get |
|---|---|---|
| Buy a call | Pay premium | Right to buy at the strike, no obligation |
| Sell a call | Receive premium | Obligation to sell at the strike if the buyer exercises |
| Buy a put | Pay premium | Right to sell at the strike, no obligation |
| Sell a put | Receive premium | Obligation to buy at the strike if the buyer exercises |
An option buyer can never lose more than the premium paid. An option seller (also called a writer) pockets the premium upfront but carries an open-ended obligation, so a seller's losses can be far larger than the premium received.
How does a call option work? A worked example
Kaveri Motors trades at ₹480. Priya believes the stock will rise over the next few weeks, so she buys a Kaveri Motors ₹500 call option, paying a premium of ₹12 per share.
- If the stock rises to ₹530 by expiry: her right to buy at ₹500 is worth ₹30 per share (₹530 − ₹500). After subtracting the ₹12 premium, her gain is ₹18 per share.
- If the stock stays below ₹500: nobody would use the right to buy at ₹500 when the market is cheaper. The option expires worthless, and Priya's loss is the ₹12 premium, nothing more.
Note that Kaveri Motors had to climb past ₹512 (strike plus premium) before Priya actually made money. A stock that rises "a little" can still leave a call buyer with a loss.
How does a put option work? A worked example
Bharat Paints Ltd trades at ₹250. Vikram expects the stock to fall, so he buys a Bharat Paints ₹240 put option for a premium of ₹6 per share.
- If the stock falls to ₹215 by expiry: his right to sell at ₹240 is worth ₹25 per share (₹240 − ₹215). After the ₹6 premium, his gain is ₹19 per share.
- If the stock stays above ₹240: the put expires worthless and Vikram loses only the ₹6 premium.
In both examples, the person on the other side (the option seller) keeps the premium if the option expires worthless, but bears the loss if it doesn't.
One practical detail: options trade in exchange-set lots, not single shares, so premiums and profits are multiplied by the lot size. The rupee figures above are per share and purely illustrative.
Things to keep in mind
- Buying options caps your loss at the premium, but most far-away options expire worthless, so "limited loss" can still mean losing 100% of what you paid, repeatedly.
- Selling options reverses the trade-off: limited income (the premium) against potentially very large losses, with margin blocked upfront.
- An option's premium erodes with time even if the stock doesn't move, which works against buyers.
- Before trading, read What are the risks of trading Futures and Options (F&O)?. Options magnify both outcomes, and nothing here is a recommendation to buy or sell.
Read next
What are strike price, ITM, ATM and OTM? — Every option needs a strike, and where price sits against it changes everything.