Introduction to Options Trading

CA Manish Singh: 
Hello everyone, and welcome to the 22nd chapter. Today we will learn something new. This is one product that has reshaped the entire trading landscape in India. In fact, it has influenced almost every segment of active traders in the country. 

Before we begin, let us start from the basics. 

Many traders pick up options trading as a habit because it appears simple or exciting. However, this approach can lead to significant losses. SEBI released a three-year study in 2024 which showed that only 7 percent of traders in options were profitable. When we say 93 percent of traders lost money, it does not mean that 93 out of every 100 new traders will lose. It means that most people begin trading without knowing the essentials, and during that learning phase, they incur losses. 

Options trading requires understanding, practice and risk management. 

Understanding Options with an Example 

Let us take a simple example. 
Assume you want to invest in gold. 

Suppose gold is priced at ₹97,000 today. You may not have enough money to buy it right now, but you expect to have funds in October. However, you fear that by October the price may not remain the same. It might rise to ₹1,00,000 or ₹1,20,000. There is uncertainty. 

Now imagine there is an options contract that allows you to lock in a price of one lakh, with a premium of ₹2,000. The contract value is one lakh, while the cost to you is only ₹2,000. 

Two scenarios arise in November: 

Scenario 1: Gold rises 

If gold goes to ₹1,20,000, the premium of ₹2,000 might rise to ₹20,000. 
So you gain ₹18,000 (20,000 minus 2,000). 
Your effective cost becomes ₹97,000 plus 18,000, which is ₹1,15,000. 
Compared to the market price of ₹1,20,000, this is still better. 

Scenario 2: Gold falls 

If gold drops to ₹90,000, you lose only the ₹2,000 premium. 
Your effective cost becomes ₹97,000 (your initial expectation) minus the premium benefit, which still keeps your outflow much lower than buying gold at a higher price earlier. 

This is how options contracts work. Once the price goes above the strike price of ₹1,00,000, you start gaining. If the price stays lower, you are still comfortable because you originally wanted to buy the asset anyway. 

History of Options Trading in India 

Options were introduced in India in 2001 for hedging portfolios. In the early years, they were not popular. 

During the financial crisis of 2008, traders holding very inexpensive put options saw their values rise sharply as the market fell. These stories made options more visible, and retail interest grew. 

A major turning point came in 2016 when Bank Nifty weekly options were introduced. Until then, all option contracts were monthly. Today, Nifty also has weekly contracts while most other instruments continue to be monthly. 

Interest surged further during the 2020 lockdown. Markets crashed sharply and then rallied from 8,000 on Nifty in March 2020 to around 12,500 by the end of the same year. Many traders saw large swings and attempted to profit through options. From 2021 to 2024, nearly 1 crore individuals tried options trading. This is the period SEBI studied when it reported the 93 percent loss figure. 

The Two Types of Options 

Options have two basic classifications: 

1. Call Options 

Used by traders expecting the market to rise, or by those who fear missing an upside move. Both buyers and sellers of call options have different motives and views. 

2. Put Options 

Used when traders expect the market to fall, or they want protection against a decline. 

Your view, whether bullish or bearish, decides whether you buy or sell these options. 

Why Do People Trade Options? 

1. Leverage 

For example, buying one lot of Nifty through an ETF may require ₹17–18 lakh. Buying it through futures may require around ₹2.25–2.30 lakh. Buying the same exposure through an option may require as little as ₹10,000. The leverage is high. 

2. Hedging 

Options allow traders and investors to protect their portfolios or positions. 

3. Flexibility 

Options offer strategies for bullish markets, bearish markets and even sideways markets. Even when the market does not move, option sellers can benefit from time decay. 

What Comes Next 

In the next chapter we will understand: 

• What is option premium
• How option premium is calculated
• Components such as intrinsic and extrinsic value 

We will explore each part in detail so you can read options more confidently. 

Disclaimer: Investments in securities markets are subject to market risks. Read all related documents carefully before investing.