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.

Key Terms in Options Trading

Strike Price

• The Strike Price is a fixed price specified in the option contract.
• It determines the price at which the buyer of the option can either buy or sell the underlying asset when the option is exercised.
• The strike price plays a crucial role in determining whether the option is In-The-Money (ITM), Out-Of-The-Money (OTM), or At-The-Money (ATM).

Premium

• The Premium is the price paid by the option buyer to the option seller to enter into the contract.
• The premium’s value is influenced by several factors:
  • Current price of the underlying asset
  • The strike price
  • Time remaining until expiry
  • Market volatility

Example: Ms. Radha’s Call Option

Let’s consider Ms. Radha’s trade:

• Underlying asset: XYZ stock
• Current market price: ₹100
• Strike price: ₹105
• Premium paid: ₹5
• Expiry date: 1 month

Ms. Radha anticipates that XYZ’s stock price will rise in the next month. The stock price rises to ₹120 by the expiry date.

• Ms. Radha can exercise the option to buy at ₹105 (strike price), even though the market price is ₹120.
• Profit calculation: ₹120 (market price) – ₹105 (strike price) – ₹5 (premium paid) = ₹10 profit per share.

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.

What if...

For a deeper understanding of Options, visit School of Stocks.

Last updated: 27 Jun 2025