What is an option? Calls, puts and premium, in plain language

The foundations under every strategy on this site, written for someone opening an option chain for the first time.

An option is a contract, not a share

An option gives its buyer the right, but not the obligation, to buy or sell an underlying asset at a fixed price on or before a fixed date. In Indian markets the underlying is usually an index such as NIFTY or BANKNIFTY, or a listed stock. You never have to exercise an option; most index option trades in India simply settle in cash at expiry, and most positions are closed before that.

Two numbers define the contract. The strike price is the level the right applies at. The expiry is the date the right ends. Everything an option is worth flows from where the underlying trades relative to that strike, and how much time is left.

Calls and puts

A call is the right to buy at the strike. Its value grows when the underlying rises. Buying a call is the simplest way to express "I think this goes up" with a known, capped cost.

A put is the right to sell at the strike. Its value grows when the underlying falls. Traders buy puts to profit from declines, or to protect holdings the way insurance protects a car.

For every buyer there is a seller (or writer) on the other side, who collects the premium up front and takes on the obligation the buyer holds as a right. Sellers post margin because their loss is not capped the way a buyer's is. That asymmetry, capped risk for buyers and capped reward for sellers, shapes almost every strategy built from options.

The premium: what you actually pay

The price of an option is its premium, quoted per unit and traded in lots. Index lots are fixed by the exchange, so a premium of 120 on a NIFTY option with a lot size of 75 costs 9,000 rupees for one lot.

The premium has exactly two parts:

• Intrinsic value: what the option would be worth if it expired right now. A call with a strike of 24,000 while NIFTY trades at 24,300 has 300 of intrinsic value. An option with no such edge has zero intrinsic value, never a negative one.
• Time value: everything above intrinsic. It is the price of possibility, what the market charges for the chance that the underlying moves further before expiry. Time value melts as expiry approaches, which is the decay that option sellers earn and buyers pay. The Greeks give this melt a name, Theta.

Moneyness: ITM, ATM and OTM

Strikes are described by where they sit relative to the underlying. In the money (ITM) options have intrinsic value: calls below the market, puts above it. At the money (ATM) strikes sit nearest the current price, carry the most time value, and are where most of the trading happens. Out of the money (OTM) options are all time value: cheaper, and more likely to expire worthless.

Expiry in Indian markets

Index options expire weekly, with a monthly contract alongside; stock options are monthly. On expiry day an option either finishes with intrinsic value and settles, or expires worthless. The closer expiry comes, the faster time value drains, and the more an option behaves like a bet on that single day's move.

Where to see all of this at once

An option chain lays out every strike for one expiry: calls on one side, puts on the other, with premium, open interest and implied volatility per strike. It is the page this product opens on, and once you can read one, the rest of the toolkit follows. The Greeks guide is the natural next step: it explains the four numbers that say how a premium will move before it does.

Educational content only: not investment advice. You are responsible for your own trading decisions.