Call
Gives the holder the right to buy the underlying at the strike price.
Put
Gives the holder the right to sell the underlying at the strike price.
Premium
The price paid for the option. Strike is the agreed transaction price; expiry is the contract deadline.
BULLISH BUYERBuying a call
The buyer pays a premium for upside participation without being required to buy the underlying. At expiry, the call has intrinsic value only above the strike.
- Maximum loss: premium paid
- Expiry breakeven: strike + premium
- Profit potential: theoretically unlimited as price rises
- Usually positive Delta; Theta generally works against the buyer
NEUTRAL / BEARISH SELLERSelling a call
The seller collects the premium and takes the obligation to deliver the underlying or settle the contract if assigned. An uncovered call is not simply the opposite of a “safe” buyer position—it can have unlimited loss.
- Maximum gain: premium received
- Expiry breakeven: strike + premium
- Uncovered upside risk: theoretically unlimited
- Usually negative Delta; Theta generally helps the seller
BEARISH OR PROTECTIVE BUYERBuying a put
The buyer pays for the right to sell at the strike. A put may express a bearish view or protect an existing holding against a decline.
- Maximum loss: premium paid
- Expiry breakeven: strike − premium
- Gain grows as price falls, capped when the underlying reaches zero
- Usually negative Delta; volatility increases often help
NEUTRAL / BULLISH SELLERSelling a put
The seller receives premium and may be obligated to buy the underlying at the strike. A cash-secured put reserves enough cash for that purchase; an uncovered put adds funding and margin risk.
- Maximum gain: premium received
- Expiry breakeven: strike − premium
- Large downside risk if the underlying collapses
- Assignment can leave the seller owning the underlying above market price
Example · A ₹100-strike call costs ₹6. If the underlying finishes at ₹115, its expiry value is ₹15 and the buyer’s simplified profit is ₹9 per unit (₹15 − ₹6), before fees and taxes.
WATCH & REINFORCEOptions Basics, Types, and Contracts
Options Industry CouncilA detailed walkthrough of calls, puts, contract terms, exercise, moneyness and premium.
Open on YouTube ↗ In the money
A call is ITM when spot is above strike; a put is ITM when spot is below strike.
At / out of the money
ATM means spot is near strike. OTM options have no intrinsic value, though they can still have time value.
Buyer vs writer
A buyer can lose the premium paid. An uncovered writer can face much larger losses, depending on the position.
Value before expiry
An option price contains intrinsic value plus extrinsic value. Extrinsic value reflects remaining time, expected volatility, interest rates and dividends; it can disappear by expiry.
- ITM does not automatically mean profitable—the premium matters
- OTM does not automatically mean worthless before expiry
- A profitable position can still have no intrinsic value yet
- Market value before expiry is not the same as expiry payoff
Exercise versus closing
A holder can often sell an option to close instead of exercising it. A writer buys back the option to close. Exercise and settlement rules vary by product and exchange.
- Closing may preserve remaining extrinsic value
- Liquidity and bid–ask spread affect the exit price
- European-style contracts exercise only at expiry; American-style may allow earlier exercise
- Always check the actual contract specification
Example · At expiry, a ₹200-strike put has ₹18 of intrinsic value when the underlying is ₹182. If it cost ₹7, simplified profit is ₹11 per unit before fees and taxes.
Delta & Gamma
Delta estimates price response to a ₹1 underlying move. Gamma estimates how much Delta changes as the underlying moves.
Theta
Estimates change from one day passing, all else equal. Time decay often accelerates near expiry.
Vega & Rho
Vega estimates response to a 1 percentage-point volatility change. Rho measures sensitivity to interest rates.
From the buyer’s side
Long options usually have positive Gamma and Vega. A favorable move can make Delta more favorable, and rising implied volatility can lift value. Theta is the daily cost of waiting, all else equal.
- Long call Delta: generally 0 to +1
- Long put Delta: generally −1 to 0
- Long Gamma: positive
- Long Theta: generally negative
From the seller’s side
Short options reverse those exposures. Theta may help, but negative Gamma means a large move can make directional exposure worsen quickly. Short Vega also suffers when implied volatility rises.
- Short Gamma: adverse convexity
- Short Theta: generally positive
- Short Vega: generally negative
- Near-expiry Gamma can become especially sensitive near the strike
Example · Delta of 0.45 suggests an estimated ₹0.45 option-price move for a ₹1 underlying move, all else equal. Gamma, volatility and time passing mean Delta itself will not stay fixed.
WATCH & REINFORCEUnderstanding the Option Greeks
Options Industry CouncilCovers Delta, Gamma, Theta, Vega and Rho with chapter timestamps.
Open on YouTube ↗ Expiry risk
Gamma and time decay can become especially sharp near expiry, particularly around the strike.
Volatility risk
An option can lose value after implied volatility falls even if the underlying moves in the expected direction.
Execution risk
Bid–ask spreads, liquidity, fees, taxes, assignment and exchange-specific contract terms all matter.
Buyer checklist
Limited loss does not make every long option attractive. The buyer must be right about direction or magnitude, timing and the price paid for volatility.
- How much movement is already priced in?
- How quickly must the move occur?
- What happens if implied volatility falls?
- Is the spread narrow enough to enter and exit?
Seller checklist
Premium received is the maximum gain for a naked short option, while losses may be many times larger. Margin can increase when the position moves against the seller.
- Is the position covered or risk-defined?
- Can the account withstand a volatility spike?
- What is the adjustment or exit trigger?
- What are assignment and expiry procedures?
Pre-trade check · Know the maximum planned loss, size, expiry, liquidity, volatility exposure and exit rule. Verify lot size, exercise and settlement rules with the exchange and broker.
Straddle
A call and put at the same strike and expiry. Long seeks a move larger than the premium implies; short seeks stability but carries substantial risk.
Strangle
A lower-strike put and higher-strike call with the same expiry. It usually costs less than a straddle when long, but needs a larger move.
Iron condor
A short OTM put and call plus farther OTM protective options. It seeks a range-bound outcome while keeping maximum loss defined.
LONG STRADDLE / STRANGLEBuying volatility
The buyer pays two premiums and needs the eventual movement—or an earlier volatility increase—to overcome that cost. Direction does not need to be predicted, but magnitude and timing still do.
- Defined maximum loss: total debit
- Two expiry breakevens
- Positive Vega and Gamma, usually negative Theta
- A strangle is cheaper but places breakevens farther away
SHORT COMBINATIONS / IRON CONDORSelling volatility
The seller receives a credit and benefits from stability and time decay. A naked short combination has open-ended risk; the iron condor trades some credit for defined protective wings.
- Limited maximum profit: net credit
- Negative Vega and Gamma, usually positive Theta
- Iron-condor risk: wing width minus credit
- Gap moves and volatility expansion can overwhelm accumulated decay
LOSSPROFIT
Large move either wayLong straddle
Buy call + put · same strike
- MAX REWARD
- Large upside; substantial downside potential
- MAX RISK
- Premiums paid
- TIME DECAY
- Usually hurts
- IV RISE
- A rise usually helps
LOSSPROFIT
Very large move either wayLong strangle
Buy lower put + higher call
- MAX REWARD
- Large upside; substantial downside potential
- MAX RISK
- Premiums paid
- TIME DECAY
- Usually hurts
- IV RISE
- A rise usually helps
LOSSPROFIT
Price stays in a rangeShort straddle / strangle
Sell both legs; same or separate strikes
- MAX REWARD
- Premium received
- MAX RISK
- Unlimited upside; substantial downside
- TIME DECAY
- Usually helps
- IV RISE
- A rise usually hurts
LOSSPROFIT
Price stays between inner strikesIron condor
Short put spread + short call spread
- MAX REWARD
- Net credit received
- MAX RISK
- Wing width − net credit
- TIME DECAY
- Usually helps
- IV RISE
- A rise usually hurts
Example · Underlying at ₹100. A long ₹100 straddle costing ₹12 has simplified expiry breakevens of ₹88 and ₹112. A ₹90/95/105/110 iron condor entered for a ₹2 credit has maximum profit of ₹2 and maximum loss of ₹3 per unit, before fees and taxes.
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