What Is Options Trading? A Complete Beginner Guide to Options, Strikes, Premium & Greeks

Financial markets today offer far more than just buying and selling shares. Options are one of the most widely used derivative instruments for managing risk, improving capital efficiency, and amplifying returns.

Options trading is a derivative trading method that allows traders to participate in market movements, protect their portfolios, and generate income without owning the actual stock. Instead of buying shares outright, traders use option contracts to gain exposure with lower capital, defined risk, and strategic control.

At its core, an option is a contract that gives the buyer the right, but not the obligation, to buy or sell an asset at a fixed price before a specified expiry date.

This “choice” is what makes options powerful.
It allows traders to benefit from price movements and step aside when conditions are unfavourable.

Options are not just a trading instrument.
They are a risk-structuring tool used by professional traders, institutions and hedgers across global markets.

What Is an Option?

An option is a contract between two parties that gives the holder the right, but not the obligation, to buy or sell an underlying asset at a fixed price on or before a specific expiry date.

This means:

• You are not forced to act.
• You only exercise the contract if the market moves in your favour.
• If the market moves against you, you can simply let the contract expire.

This is what separates options from traditional stock trading control without commitment.

Call Options vs Put Options

Options are divided into two main types, depending on whether they give the right to buy or to sell the underlying asset..

Option Type	What It Means	When Traders Use It
Call Option	Right to buy the asset	When expecting prices to rise
Put Option	Right to sell the asset	When expecting prices to fall

Let’s understand with an example:

Suppose Nifty is currently trading at 25800, and you choose a 26000 strike option expiring on 25 March 2026.

• A Call Option allows you to lock the right to buy the Nifty 26000 contract at at premium of ₹180 on 25 March 2026.
• A Put Option allows you to lock the right to sell the Nifty 26,000 at a premium of ₹170 on 25 March 2026.

Key Option Trading Terms You Must Know

In the above example, every number has a specific meaning.

The strike price is the reference price around which the entire option contract is built.
It is not what you pay it is the price level that decides:

• When your option becomes profitable
• How much intrinsic value it carries
• How your premium moves

In this example, 26,000 is the strike price it is the price level that your Call and Put options are linked to.
Whether your option makes or loses money depends on how Nifty behaves with respect to this level.

Strike Price

When you trade options, you don’t directly bet on “buy” or “sell” the market.
You first choose a strike price a specific level and then take a view around that level.

In simple terms, you are saying:

• “I think the market can move above this level,” or
• “I think the market can move below this level.”

You use the strike price as a comparison point against the current market price to judge:

• How far the market needs to move
• Whether your option can become profitable
• And how sensitive your premium will be

This is why the strike price is called the reference level of the option contract.
It decides:

• When your option becomes profitable
• How much intrinsic value it carries
• How your premium moves

In this example, 26,000 is the strike price the level you are using to compare Nifty’s current price and take your directional view.

Premium

The premium is the price you pay to purchase the option contract.
It is the entry cost of your trade and also the maximum loss you can face as an option buyer.

In the example above, ₹180 (Call) and ₹170 (Put) are the premiums paid to buy the option.

Expiry Date

Every option contract has a limited life.
The expiry date is the last day on which the contract is valid.
After this, the option settles and becomes worthless if not profitable.

In the example above, 25 March 2026 is the expiry date of the option contract.

Moneyness: In-The-Money (ITM), At-The-Money (ATM) & Out-Of-The-Money (OTM)

Now that you understand strike price, premium and expiry, the next natural question is:
Which option should you buy or sell?
And how do you know whether an option already has value or needs the market to move?

This is where the concept of moneyness comes in.
Moneyness simply describes how close an option is to being profitable if it were exercised today.

It compares the option’s strike price with the current market price of the underlying asset and tells you whether the option already has real value or is still waiting for the market to move.

In-The-Money (ITM)

An option is In-The-Money when it already has real, usable value.It is called ITM because if you exercised the option today, it would result in a profit.

• A Call option is ITM when the market price is above the strike price
• A Put option is ITM when the market price is below the strike price

Example:
If Nifty is trading at 27,000, a 26,000 Call is ITM because you have the right to buy lower and sell higher making it immediately profitable.

ITM options are more expensive but also more stable because they already carry intrinsic value.

At-The-Money (ATM)

An option is At-The-Money when its strike price is very close to the current market price.
ATM options are at the balance point; they are neither profitable nor unprofitable if exercised today.

They are important because:

• They react fastest to price movement
• They are the most actively traded
• They are often used for short-term trading strategies

Example:
If Nifty is at 26,020, the 26,000 strike is considered ATM.

Out-Of-The-Money (OTM)

An option is Out-Of-The-Money when it does not yet have real value.
These options need the market to move further in your favour to become profitable.

• A Call option is OTM when the market price is below the strike price
• A Put option is OTM when the market price is above the strike price

Example:
If Nifty is at 25,200, a 26,000 Call is OTM.

OTM options are cheaper but riskier, because their profitability depends entirely on future market movement.

Types of Options in the Market

Options are not a single uniform product. They differ based on what they track, how they settle, and how they can be exercised. Understanding these distinctions helps traders choose the correct contracts for trading, hedging, or income strategies.

1. Based on the Underlying Asset

Equity Options (Stock Options)

These options are based on individual listed companies such as Reliance Industries, TCS, HDFC Bank, Infosys, etc.

They are commonly used for:

• Stock-specific directional trades
• Hedging long-term delivery portfolios
• Covered call income strategies

Equity options are physically settled in India, meaning if you hold them till expiry, delivery obligations apply.

Index Options (Most Actively Traded)

Index options are based on market indices rather than individual stocks.
Major Indian index options include:

Index	What It Represents
Nifty 50	Top 50 Indian companies
Bank Nifty	Banking sector
Fin Nifty	Financial services
Sensex	BSE’s benchmark index

Why traders prefer index options:

• Higher liquidity
• Lower manipulation risk
• Cash-settled (no delivery risk)
• Ideal for intraday and expiry trading

These make index options the backbone of Indian derivatives trading.

ETF Options

ETF options track Exchange Traded Funds such as:

• Gold ETFs
• Bank ETF
• Nifty ETF

They are primarily used by institutions and long-term investors for portfolio hedging and asset allocation protection.However, ETF options are currently not actively available for retail trading in Indian markets.

2. Based on Settlement Type

Settlement	What It Means
Cash Settlement	Profits/losses adjusted in cash (Index options)
Physical Settlement	Delivery of shares (Stock options)

This difference is critical for margin planning and risk control.

3. Based on Exercise Style

Style	Meaning
American	Can be exercised anytime
European	Exercised only on expiry

What Is Used in India?

In India, all exchange-traded equity options both index options and stock options follow the European style, which means they can be exercised only on the expiry day.

When you see “CE” or “PE” written next to an option contract in India, it refers to a European-style Call Option (CE) and a European-style Put Option (PE) not American-style options.

This naming convention confirms that Indian listed options settle only on expiry and cannot be exercised early.

This means:

• You can freely buy, sell, square-off or rollover your option positions any time during market hours,
• But actual exercise and settlement can happen only on the expiry day, not before.

This structure was mandated by SEBI in 2010 to improve market stability and reduce delivery-related risk.

Why Traders Use Options Trading

Options are not just “cheap lottery trades”.
They are capital-efficient tools designed to solve real trading problems that stock trading alone cannot.When used correctly, options allow traders to limit losses, manage volatility exposure and structure returns with mathematical clarity something simple stock trading cannot offer.

Here’s why options play a central role in professional trading.

Capital Efficiency

Buying stocks requires full capital.
Options allow you to control the same market exposure with a fraction of the capital.

This means:

• Better capital utilisation
• Ability to diversify across multiple trades
• Lower capital blockage per trade

Options allow traders to trade smarter, not bigger.

Defined Risk Trading

In stock trading, losses increase as prices continue to move against your position.
In option buying:

• The maximum possible loss is known in advance it is limited to the premium paid
• Risk can be quantified before entering the trade
• Position sizing and stop-loss planning become more structured

This allows traders to approach trades with clear risk visibility and better capital planning.

Portfolio Hedging & Protection

Options act as insurance for your portfolio.
If markets crash:

• Protective puts can cap losses
• Hedging reduces volatility stress
• Capital survival improves

This is how institutions protect wealth during uncertain markets.

Income Generation

Option selling allows traders to earn steady premium income in sideways markets.

Covered calls, spreads and neutral structures allow:

• Monthly income
• Time decay advantage
• Structured compounding

This is why many professionals treat options as a cashflow engine.

Flexibility in All Market Conditions

With options, you can structure trades for:

Market	Option Approach
Bullish	Calls, bull spreads
Bearish	Puts, bear spreads
Sideways	Iron condors, strangles
Volatile	Straddles

Stocks can only profit in one direction.Options profit in every market environment.

Introduction to Option Greeks

Option prices do not move randomly. They are mathematically influenced by four major forces: price movement, time, volatility and interest rates.

These forces are measured using what are called Option Greeks.

Greeks help traders understand why an option premium is rising or falling even when the market appears stable.

The Four Core Greeks You Should Be Aware Of

Greek	What It Measures	Why It Matters
Delta	Speed of premium movement	Shows how strongly your option reacts to price
Theta	Time decay	Shows how much value your option loses daily
Vega	Volatility sensitivity	Explains IV crush and premium spikes
Gamma	Change in Delta	Explains sudden premium acceleration

Even beginners benefit from knowing Greeks because many losses occur not due to wrong direction but due to wrong structure.

To read more about greeks tap here

Popular Beginner Options Trading Strategies

Options are best approached through structured strategies, not random buying and selling. These beginner strategies introduce traders to options while keeping risk defined.

Long Call

A Long Call strategy is used to benefit from a rise in prices with limited risk.

Market View: Bullish
What It Means: You buy a Call option expecting the price to rise.

Why Beginners Use It:

• Limited loss (premium paid)
• Unlimited profit potential
• Simple and intuitive

Used when you expect strong upward movement.

Long Put

A Long Put strategy is used to benefit from falling markets with limited risk.

Market View: Bearish
What It Means: You buy a Put option expecting the price to fall.

Why Beginners Use It:

• Defined risk
• Profits during market declines
• Excellent for crash protection

Covered Call

A Covered Call strategy is used to earn regular income on an existing stock holding.

Market View: Neutral to slightly bullish
What It Means: You hold shares and sell a Call option on them.

Why It Is Used:

• Earns premium income
• Reduces downside impact
• Ideal for long-term investors

Protective Put

A Protective Put strategy is used to protect a stock portfolio against sharp falls.

Market View: Portfolio protection
What It Means: Buying a Put option to insure your stock holdings.

Why It Is Used:

• Acts like insurance
• Caps portfolio losses
• Maintains upside potential

Risks & Risk Management in Options Trading

Options trading is powerful but it is not risk-free.
Most beginners lose not because of bad predictions, but because of poor structure and uncontrolled leverage.

Understanding risk is what separates consistent traders from gamblers.

Key Risks in Options Trading

Time Decay (Theta Risk)

Options lose value daily.
Even if the market moves slowly in your direction, your premium can still fall.

Volatility Risk

Sudden drops in implied volatility can reduce option prices sharply, even when price direction is correct.

Leverage Risk

Options provide high exposure with low capital.Without proper sizing, losses can accumulate quickly.

Option Selling Risk

Unstructured option selling can involve large margin and potentially unlimited losses.

Risk Management Principles

Principle	Why It Matters
Defined-risk strategies	Limits losses before trade entry
Position sizing	Prevents account blow-ups
Stop-loss discipline	Protects emotional capital
Avoid overtrading	Preserves long-term survival

In options trading, capital protection is more important than profit generation.

Options trading is not about speculation alone.
It is a risk-structuring and capital-efficiency tool used by professional traders, institutions and portfolio managers across global markets.

When applied with discipline, defined-risk strategies and proper execution, options allow traders to:

• Protect capital
• Generate income
• Trade with lower capital blockage
• Remain consistent across all market cycles

The real edge in options trading does not come from prediction it comes from structure, risk control and execution quality.

Sahi is built specifically to support option traders with faster execution, intelligent risk tools, deep option chain insights and strategy-friendly workflows helping traders trade with clarity rather than chaos.

FAQs

What is options trading?
Options trading is a way to profit from market movements using contracts instead of buying actual stocks.

Is options trading risky?
Options trading has defined risk when structured properly and limited loss for buyers.

How much money is needed to start options trading?
You can start option buying in India with as low as ₹3,000–₹5,000.

What is a call option?
A call option gives you the right to buy an asset at a fixed price.

What is a put option?
A put option gives you the right to sell an asset at a fixed price.

What is strike price?
Strike price is the reference level that decides when your option becomes profitable.

What is premium in options?
Premium is the price paid to buy an option and is the buyer’s maximum loss.

What is expiry in options trading?
Expiry is the last valid day of the option contract.

What is moneyness in options?
Moneyness shows whether an option is ITM, ATM or OTM based on current price.

What is ITM option?
An ITM option already has intrinsic value and is profitable if exercised today.

What is ATM option?
An ATM option has a strike price close to the current market price.

What is OTM option?
An OTM option needs further market movement to become profitable.

Which options are best for beginners?
Long Call, Long Put, Covered Call and Protective Put are best for beginners.

Why are ATM options most traded?
ATM options react fastest to price movement and have the highest liquidity.

What is time decay in options?
Time decay is the daily loss of option value as expiry approaches.

Can I lose more than my premium?
Option buyers cannot lose more than the premium paid.

Which index is best for options trading in India?
Nifty and Bank Nifty are the most liquid option indices in India.

Are Indian options American or European?
All Indian exchange-traded options follow European style.

Why do traders prefer options over stocks?
Options offer lower capital use, defined risk and income generation.

Is options trading legal in India?
Options trading is fully legal and regulated by SEBI.