Module 5: Options theory for professional trading

An option gives its buyer a right, not an obligation, to buy or sell at a set price before a set date. The seller takes the obligation in return for the premium. Options are the most traded instruments in India, and the most misunderstood.

01The call option

A call gives the right to buy at the strike price. The buyer's loss is limited to the premium paid; the seller collects the premium and carries the risk if price rises.

02The put option

A put gives the right to sell at the strike price. It gains when the underlying falls, which is why puts are used both to bet on a fall and to protect holdings.

03Premium, strike and expiry

The premium is the option's price. The strike is the agreed price. Expiry is the last day. Index options in India expire weekly or monthly depending on the index; contracts and dates are set by the exchange.

04Moneyness

An option is in the money, at the money or out of the money depending on where the strike sits against the current price. Moneyness decides how much of the premium is intrinsic value.

05Intrinsic and time value

Intrinsic value is what the option would be worth if exercised now. Everything above that is time value, which melts away as expiry approaches.

06Delta

Delta describes how much the premium moves for a one-point move in the underlying. It also gives a rough sense of how an option behaves like a share of the underlying.

07Gamma

Gamma describes how fast delta itself changes. It is highest for at-the-money options close to expiry, which is why their premiums can swing sharply.

08Theta

Theta is time decay: the premium lost each day, all else equal. Buyers pay it; sellers collect it.

09Vega and volatility

Vega describes how the premium reacts to a change in implied volatility. Premiums rise when the market expects bigger moves, even if price itself has not moved.

10Pricing an option

Models such as Black–Scholes combine price, strike, time, rates and volatility into a fair premium. Traders use them to compare, not to predict.

11Where this leads

On A1Stock, Chain Lab and Options Lab show the chain, the Greeks and an option position's payoff before you take it.