An option is a financial contract that gives the buyer the right (but not the obligation) to either buy (in the case of a call option) or sell (in the case of a put option) an underlying asset at a predetermined price within a specified time period.
Let’s consider Ms. Radha’s trade:
Ms. Radha anticipates that XYZ’s stock price will rise in the next month. The stock price rises to ₹120 by the expiry date.
However, if the stock price remains below ₹105 at expiry, Ms. Radha may choose not to exercise the option. Her maximum loss is limited to the premium paid, which is ₹5.
Scenario | Outcome |
---|---|
Price rises above strike price at expiry | Buyer profits based on the difference between market price and strike price, minus premium |
Price stays below strike price at expiry | Buyer loses the premium paid; seller keeps the premium |
Option expires worthless | Buyer loses the premium; seller keeps the premium |
For a deeper understanding of Options, visit School of Stocks.
Last updated: 27 Jun 2025