Learn options trading, from the ground up

An option is a contract that gives its buyer the right — but not the obligation — to buy or sell an underlying asset at a fixed price before a set date, in exchange for a premium paid to the seller.

A call option gives its buyer the right to buy the underlying at a fixed strike price before expiry, profiting when the underlying rises — it is the fundamental bullish options contract.

A put option gives its buyer the right to sell the underlying at a fixed strike price before expiry, profiting when the underlying falls — it is the fundamental bearish options contract and the classic hedging tool.

The strike price is the fixed price at which an option can be exercised — the reference level that determines whether an option has intrinsic value and how it behaves.

The expiry date is the day an option contract ceases to exist and is settled — Indian index options have weekly and monthly expiries, and the closer expiry gets, the faster time value decays.

The premium is the price an option buyer pays the seller — it is made up of intrinsic value plus time (extrinsic) value, and it is what you risk as a buyer and collect as a seller.

Intrinsic value is the portion of an option's premium that comes from being in-the-money — the real, exercisable value an option would have if it expired right now.

Extrinsic value — also called time value — is the part of an option's premium beyond its intrinsic value, representing the price of time and volatility, and it decays to zero by expiry.

Open interest is the total number of outstanding option contracts that have not yet been closed or settled — a key gauge of how much money and conviction is sitting at a given strike.

Implied volatility (IV) is the market's forecast of how much the underlying will move, embedded in an option's price — the single biggest driver of extrinsic value and the reason options can gain or lose value with no price move at all.

Time decay is the steady loss of an option's extrinsic value as expiry approaches — measured by Theta, it is the option buyer's constant headwind and the seller's steady income.

Moneyness describes an option's strike relative to the current price of the underlying — in-the-money (ITM) already holds intrinsic value, at-the-money (ATM) sits near the price, and out-of-the-money (OTM) has only time value.

The Black-Scholes model is a mathematical formula that estimates a European option's fair premium from the spot price, strike, time to expiry, interest rate and volatility — the 1973 framework that underpins modern options pricing and the Greeks.

A futures contract is a standardised exchange-traded agreement to buy or sell an underlying at a fixed price on a set expiry date — an obligation for both parties, settled daily through mark-to-market margin.

Lot size is the fixed number of units of the underlying in one exchange-traded derivatives contract — every Nifty or Bank Nifty option and future trades in whole multiples of this lot, set by the NSE.

The breakeven of an option is the underlying price at which the position exactly recovers its cost at expiry — for a long call it is the strike plus the premium paid, and for a long put the strike minus the premium.