Options are derivative contracts that give the buyer a right but not an obligation, and the seller an obligation if exercised. A call gives the right to buy, and a put gives the right to sell at a preset strike price within a specified period. Understanding premium, moneyness, and intrinsic value helps you evaluate cost, payoff, and risk.
Core terms explained
- Option: A contract on an underlying such as a stock or index. One side buys the right and the other side sells the obligation.
Call vs Put:
- Call option: Right to buy the underlying at the strike price before or on expiry.
- Put option: Right to sell the underlying at the strike price before or on expiry.
- Premium: The price of the option paid by the buyer to the seller. Influenced by the underlying price, strike, time to expiry, and volatility.
- Strike price: The preset price at which the option can be exercised. Its relationship to the market price determines moneyness.
Moneyness
In the Money (ITM):
- Call: Market price above strike.
- Put: Market price below strike.
- At the Money (ATM): Market price approximately equal to strike.
Out of the Money (OTM):
- Call: Market price below strike.
- Put: Market price above strike.
Intrinsic value
The real, exercise-based value of an option at this moment. Only ITM options have intrinsic value.
- Call intrinsic value = max(0, Market Price − Strike Price)
- Put intrinsic value = max(0, Strike Price − Market Price)
Simple examples
Call example: Underlying at ₹100, 1-month Call 105 priced at ₹5.
- If the price at expiry is ₹120: the payoff per share = 120 − 105 − 5 = ₹10 profit.
- If price stays ≤ ₹105: do not exercise; max loss = ₹5 premium.
Put example: Underlying at ₹1,300, 1-month Put 1,300 priced at ₹50.
- If price falls to ₹1,100: payoff per share = 1,300 − 1,100 − 50 = ₹150 profit.
- If price stays ≥ ₹1,300: option expires; max loss = ₹50 premium.
Always include the premium when calculating potential profit or loss, and check moneyness and intrinsic value to understand what the option is truly worth today.
What if...
| Scenario | Outcome |
|---|
| Price finishes above strike for a call buyer | Buyer profits by the amount above strike minus premium; seller’s obligation creates intrinsic loss. |
| Price finishes below strike for a put buyer | Buyer profits by the amount below strike minus premium; put seller may be obligated to buy the underlying at strike. |
| Option finishes OTM | Expires worthless. Buyer loses the premium. Seller keeps the premium. |
| Option is ATM near expiry | Small moves can flip moneyness and change intrinsic value quickly. |
| I want a limited downside with upside potential | Consider buying calls for bullish views or buying puts for bearish protection. |
Last updated: 07 Nov 2025
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