What is an option?

An option is a contract on an underlying (index, stock, commodity, currency) with a strike price and expiry. Call → right (not obligation) to buy at the strike by expiry. Put → right (not obligation) to sell at the strike by expiry. Buyer pays a premium (max loss). Seller/Writer receives the premium (limited gain) and takes on obligations, usually with margin. Thumb rule: Buyers have defined risk / undefined reward; Sellers have defined reward / potentially large risk (unless hedged). When to use a Call vs. a Put Buy a Call (long call) View: Bullish; expect strong upside before/near expiry. Edge: Limited risk (premium), convex payoff (benefits from big moves). Best when: IV is moderate/low, catalysts ahead, clear technical breakout. Sell a Call (short call) View: Neutral-to-bearish; expect price to stay at/below strike. Only do as defined-risk spread (bear call spread) to cap tail risk. Buy a Put (long put) View: Bearish; want downside protection or speculation. Use as portfolio hedge (protective puts) or as a clean short with capped loss. Sell a Put (short put) View: Neutral-to-bullish; happy to own the stock at an effective discount. Prefer bull put spreads to limit risk. Payoff intuition (no calculus needed) Long Call: Loss limited to premium. Profit grows as spot > strike + premium. Long Put: Loss limited to premium. Profit grows as spot < strike − premium. Credit Spreads (sell one option, buy a further OTM hedge): Max profit = net premium received. Max loss = strike gap − net premium. Think in R multiples: target 1–2R on winners; cut losers at 1R. Greeks in one line each Delta: direction sensitivity (calls +ve, puts −ve). Gamma: how fast delta changes—spikes near ATM & close to expiry. Theta: time decay; hurts buyers, helps sellers. Vega: sensitivity to volatility; options expand when IV rises. Match strategy to IV regime: Low/Normal IV → debit strategies (long calls/puts, debit spreads). High IV → credit strategies (bear call / bull put spreads, iron condors). Strike & expiry selection (fast framework) Directional debit: choose ATM or slightly ITM strike, expiry 2–6 weeks out to balance theta vs. move probability. Income credit: choose OTM short strike where price “shouldn’t go,” hedge further OTM; use 1–4 weeks to harvest theta. Align strikes with support/resistance, moving averages, VWAP, or option chain OI clusters. Two beginner-friendly setups 1) Bull Call Spread (defined-risk long) Buy ATM call, sell higher OTM call (same expiry). Cuts cost & theta vs. naked call; caps upside at the short strike. Example (illustrative): Spot 22,500. Buy 22,500 CE @ ₹160; Sell 22,900 CE @ ₹70 → Net debit ₹90. Max loss: ₹90 × lot size. Max gain: (22,900 − 22,500 − 90) = ₹310 × lot size. Works if price grinds up without needing a moonshot. 2) Bear Put Spread (defined-risk short) Buy ATM put, sell lower OTM put. Cleaner than shorting futures; caps risk and reduces cost. Common mistakes (and fixes) Lottery OTM buys: Cheap ≠ good. Prefer ITM/ATM or use spreads. Holding to zero: Theta accelerates near expiry—exit on plan, not hope. Naked short options: Tail risk kills. Use spreads. Ignoring IV: Buying in high IV or selling in low IV inverts edge. Sizing too big: Keep single-trade risk ~0.5–1% of capital. Quick decision tree Do I have a clear directional view? Yes + low/normal IV → Debit spread (bull call / bear put). No + high IV, range expected → Credit spread (iron condor/vertical). Where’s my invalidation? Convert that into strike/expiry. What’s my risk per trade & portfolio exposure? Set before entry. Events ahead? (results, policy) → adjust size or trade volatility explicitly. Mini-glossary ATM/ITM/OTM: at/ in/ out-of-the-money vs current price. Premium: price of the option. Breakeven: strike ± premium (plus/minus for calls/puts). OI (Open Interest): outstanding contracts; clusters can mark levels. FAQs Is buying options safer than futures? Risk per trade is capped, yes—but theta decay and IV crush can still hurt. Spreads improve odds. Can I sell options for income as a beginner? Only with defined-risk spreads and strict risk limits. Avoid naked shorts. What expiry works best? For directional debit trades, give yourself time to be right (2–6 weeks). For credit spreads, shorter expiries harvest theta faster. Bottom line Calls and puts are tools, not magic. Your edge is defined risk, IV-aware structures, disciplined sizing, and pre-written exits. Start small, log every trade, and let process—not emotion—compound your results. Disclosure: For education only, not investment advice. Options are risky and may not suit all investors. Verify live specs, margins, costs, and taxes with your broker.