Options Trading Basics: Calls, Puts, and How They Work in India

The fundamental distinction: right, not obligation

The defining characteristic of an option — and the property that makes it different from a futures contract — is that it confers a right without an obligation. When you buy an option, you are purchasing the ability to do something (buy or sell the underlying at a specified price) on the expiry date. You are not required to exercise that right. If exercising would result in a loss, you simply let the option expire worthless and your loss is limited to the premium you paid upfront.

The party on the other side — the option writer (also called the seller) — receives the premium and takes on the corresponding obligation. If the buyer chooses to exercise, the writer must honour the contract regardless of what the current market price is. This asymmetry is the core economic structure of any option.

Calls and puts

There are two types of options:

• Call option. Gives the buyer the right to purchase the underlying at the strike price on expiry. A call buyer benefits when the underlying price rises above the strike — the higher above the strike, the more intrinsic value the call holds. The writer of a call has the obligation to sell the underlying at the strike price if the buyer exercises.
• Put option. Gives the buyer the right to sell the underlying at the strike price on expiry. A put buyer benefits when the underlying price falls below the strike. The writer of a put has the obligation to purchase the underlying at the strike if the buyer exercises.

These four positions — long call, short call, long put, short put — are the four elementary options positions. All more complex strategies (spreads, straddles, strangles, iron condors, and so on) are simply combinations of these four building blocks in various quantities and strike combinations.

European-style exercise in Indian markets

Options come in two exercise styles: American (can be exercised on any day up to and including expiry) and European (can only be exercised on the expiry date itself). All equity options on NSE — both index options and individual stock options — are European-style. This means that no matter how deep in-the-money your option becomes before expiry, you cannot exercise early. Your only way to realise the value before expiry is to sell the option in the secondary market.

The European-style constraint simplifies options pricing (the Black-Scholes model applies directly without the complexities of early exercise) and is one reason why Indian options pricing theory is relatively straightforward compared to American-style markets.

Premium = intrinsic value + time value

The premium is the price you pay to buy an option (or receive if you write one). It has two components:

• Intrinsic value. The amount by which the option is currently in-the-money. For a call with a strike of 22,000 when the Nifty spot is at 22,300, the intrinsic value is 300 points. For an out-of-the-money option, intrinsic value is zero — it cannot be negative.
• Time value.The remaining premium above intrinsic value. Time value reflects the probability, embedded in the market's collective view, that the option moves further in-the-money before expiry. It is influenced by the time remaining to expiry and by implied volatility (IV) — the market's expectation of how volatile the underlying will be over the option's remaining life.

An at-the-money option has zero intrinsic value but often commands the largest time value of any strike, because the probability of finishing in-the-money is closest to 50% and the optionality has the most value. Deep in-the-money options have high intrinsic value and low time value; deep out-of-the-money options have zero intrinsic value and very low time value because the probability of finishing in-the-money is small.

Moneyness: ITM, ATM, and OTM

The relationship between the current price of the underlying (spot) and the option's strike price is called moneyness:

• In-the-money (ITM).A call is ITM when spot > strike; a put is ITM when spot < strike. An ITM option has positive intrinsic value and would be worth exercising immediately if it were American-style.
• At-the-money (ATM). Spot and strike are equal (or approximately equal, as strike prices on NSE are available only in fixed intervals). The ATM strike for Nifty options is typically the strike closest to the current Nifty level.
• Out-of-the-money (OTM).A call is OTM when spot < strike; a put is OTM when spot > strike. OTM options have zero intrinsic value and a lower probability of finishing in-the-money before expiry.

The NSE option chain — accessible on the NSE website and most brokerage platforms — displays all available strikes for a given underlying and expiry, along with the last traded price, bid-ask, open interest, and volume for each call and put. Reading the option chain is a foundational skill for understanding market sentiment around key levels.

Weekly vs monthly expiry in India

Indian options markets offer two expiry cycles depending on the underlying:

• Weekly expiry.Nifty 50 options have historically had weekly expiry every Thursday (or the preceding trading day if Thursday is a holiday). Bank Nifty had weekly expiry on Wednesdays before SEBI's 2023 rationalisation of expiry days, which reduced the number of concurrent weekly expiry contracts across indices. NSE periodically updates the expiry calendar, so checking the current schedule on the NSE website is necessary for accuracy.
• Monthly expiry. Individual stock options expire on the last Thursday of each contract month, consistent with stock futures. Three monthly series are available simultaneously: near, mid, and far month.

Weekly expiry contracts have become the dominant source of F&O volume in India, particularly for Nifty options. Their short duration means time value decays very quickly, which has historically benefited option writers (who profit from decay) and created rapid premium erosion risk for buyers who hold positions into the final day.

Physical settlement for stock options

Like stock futures, individual stock options in India moved to physical settlementunder SEBI's October 2019 mandate. A stock option that finishes in-the-money at expiry will result in actual delivery of shares, not a cash payment.

For a call option buyer whose call finishes ITM: shares are credited to your demat account and you pay the strike price. For a put option buyer whose put finishes ITM: you deliver shares and receive the strike price. The practical implication is that you need either shares (for an exercised put) or cash (for an exercised call) available at expiry. Brokers have historically managed this by requiring elevated physical delivery margins in the final few days before expiry — our F&O margin calculator provides illustrative figures for current requirements.

Index options (Nifty, Bank Nifty) remain cash-settled because an index cannot be physically delivered.

Why most options have historically expired worthless

A widely observed pattern in global options markets — and Indian markets are no exception — is that the majority of options contracts expired worthless (i.e., out-of-the-money) over historical periods. The reason is structural: the premium paid by an option buyer includes compensation to the writer for taking on open-ended risk. For an OTM option to generate a profit for the buyer, the underlying must move beyond the strike plus the premium paid — a "breakeven" level that requires a significant directional move in the remaining time.

This observation has led many market participants to view option writing (selling) as a structurally favoured position over option buying over time. However, this framing omits a critical asymmetry: option writers face potentially large losses in tail-risk events (sharp gaps, unexpected macro shocks, circuit breaker triggers) that can dwarf many months of collected premium in a single session. Historical studies on this question from SEBI and academic sources should be read carefully to understand the full distribution of outcomes, not just the average.

Premium decay near expiry

Time value does not decay linearly over an option's life. It decays slowly at first and then accelerates dramatically in the final days and hours before expiry — a phenomenon quantified by the Greek letter Theta (covered in detail in our Option Greeks Explained article).

For weekly Nifty options, this decay has historically been extreme in the final Thursday session. An ATM option that had significant premium at market open on expiry day has historically lost most of its remaining time value within a few hours if the underlying stayed near the strike. Buyers of such contracts faced rapid erosion even without an adverse directional move in the underlying — a risk that is separate from and in addition to directional risk.

Risk profile: buyers versus writers

The risk profile of option buyers and writers is fundamentally asymmetric:

• Option buyer (long call or long put). Maximum loss is the premium paid, which is known at the time of entry. Maximum gain is theoretically unlimited for a call (capped at the underlying reaching zero for a put). The buyer needs a sufficiently large move in the right direction by expiry to profit.
• Option writer (short call or short put). Maximum gain is the premium received, collected upfront. Loss is theoretically unlimited for a short call (if the underlying rises without limit) and substantial for a short put (if the underlying falls to zero). Writers require margin deposits because of this open-ended risk, unlike buyers who only pay the premium.

Neither position is inherently superior. The suitability of either depends on an individual's risk tolerance, market view, time horizon, and capital — all factors that fall outside the scope of an educational article and require individual assessment.

Related tools and further reading

To understand how the Greeks — Delta, Gamma, Theta, and Vega — affect option premium in practice, see our Option Greeks Explained article. To explore live Greeks for any NSE option strike, use our Options Greeks calculator. For a primer on futures — where both parties carry an obligation — see our Futures Trading Basics article.

This article is educational only and does not constitute investment advice or a solicitation to trade derivatives. Options trading involves substantial risk of loss. Option writers face potentially unlimited losses. Past market behaviour is not indicative of future results. Please consult a SEBI-registered investment adviser before making any trading decision.