What an option is
An option is a contract giving the buyer the right, not the obligation, to buy (a call) or sell (a put) an underlying at a set strike price by a set expiry. The buyer pays a premium for that right; the seller receives the premium and takes on the obligation.
Intrinsic value, time value & the Greeks
An option's premium has two parts: intrinsic value (how far in-the-money it is) and time value (everything else — the value of the remaining chance). Time value decays to zero by expiry.
- Delta — how much the option price moves for a ₹1 move in the underlying.
- Gamma — how fast delta itself changes.
- Theta — time decay: how much value the option loses each day, all else equal.
- Vega — sensitivity to changes in implied volatility.
- Rho — sensitivity to interest-rate changes (usually minor for short-dated options).
Payoffs & breakeven
At expiry a long call profits above strike + premium; a long put profits below strike − premium. Try the breakeven idea below.
Where a bought option starts to profit at expiry, before costs and taxes.
Call breakeven = strike + premium · Put breakeven = strike − premium
Common strategy structures (concept only)
Strategies combine options to shape a payoff. These are described so you understand the vocabulary — not as recommendations.
- Covered call — holding a stock and selling a call against it to earn premium, capping upside.
- Protective put — holding a stock and buying a put as insurance against a fall.
- Vertical spread — buying one option and selling another of the same type to define risk and cost.
- Straddle / strangle — buying both a call and a put to position for a big move in either direction (expensive if the move never comes).
Key terms
Strike price
The fixed price at which the option can be exercised.
Expiry
The date the contract ends; Indian index options have weekly and monthly expiries.
Implied volatility (IV)
The market's expectation of future movement, baked into the premium; higher IV means costlier options.
Moneyness
Whether an option is in-, at- or out-of-the-money relative to the current price.
Test yourself
1. The buyer of an option has…
Buyers hold a right; only sellers carry the obligation.
2. Theta refers to…
Theta measures how much value an option loses with the passage of time.
3. A long call's breakeven at expiry is…
A bought call needs price above strike + premium to profit.
FAQs
No. This page teaches how options work. PCJ does not provide tips, signals, strategy recommendations or advice, and SEBI/exchange advisories specifically warn against trading options on unsolicited tips. Every decision is your own.
Time decay (theta) works against buyers every day, and many trade with leverage they don't fully understand. SEBI's studies show the large majority of individual F&O traders make net losses — read the derivatives risk disclosure in our footer.
Not necessarily. Sellers earn the premium but take on much larger — sometimes unlimited — risk and must post margin. The premium is compensation for that risk, not a free income.
IV is the market's expectation of how much the underlying will move, embedded in the option's price. When IV is high, options are expensive; when it falls, option prices can drop even if the underlying is steady.
Educational content for general awareness only — not investment, trading or tax advice, and not a recommendation to buy or sell any security. PCJ Holdings does not provide research or advisory services. Examples and calculator outputs are hypothetical and illustrative. Investments in securities markets are subject to market risks; read all related documents carefully. Figures are indicative for FY 2025-26 and may change.