Understanding Option Contracts 

Options, in the context of the derivatives market, are contracts that grant the buyer the right, but not the obligation, to buy or sell an underlying asset at a predetermined price on a future date. 

So, what is option trading all about? It’s a method of participating in price movements without actually owning the asset. Since physical delivery isn’t involved, buyers only pay a premium to enter the trade. For example, if one expects a stock price to rise, they will purchase a call option. If a price decline is anticipated, they would go for a put option. 

Types of Options: European vs American 

There are two primary types of options: European and American. 

• European Options can only be exercised on the expiry date. 

• American Options allow exercise any time before expiry. 

In India, European-style options are the norm. This is why you often see CE (Call European) and PE (Put European) listed on trading platforms.  

Lot Sizes and Tradable Stocks 

Unlike the cash market, where you can buy even a single share, option trades come with pre-set lot sizes. These vary across stocks e.g., Asian Paints has a lot size of 200, whereas GMR Infra’s is 22,500. So, purchasing 1 CE or PE contract of Asian Paints means you're effectively buying or selling 200 shares. 

Only stocks listed under F&O (Futures & Options) by the exchange can be traded in the options market. Currently, over 200 stocks are approved for such trades on the National Stock Exchange (NSE). 

Real-World Example: Asian Paints Trade Scenario 

Let’s take a case study using Asian Paints: 

Imagine a trader forecasts a positive price trend and wants to invest. Asian Paints is F&O-enabled, so the trader has three avenues: 

1. Cash Market 

2. Futures 

3. Options 

Assuming the trader invests in all three on 8th July, buying 200 shares in each segment (aligned with lot size), the fund requirement will differ across markets. 

After nearly a month, if the trader exits all positions: 

• Absolute profit may be the same in Cash and Futures. 

• Relative profit will likely be higher in Futures due to lower initial margin. 

• Options will require the least capital but also yield the lowest absolute return. 

However, in options trading, the maximum risk is capped at the premium paid. In this case, Rs. 22,000. That’s a major advantage defined risk from the outset. 

Participants in Options Trading 

The options market is made up of: 

• Buyers: Seeking directional exposure with limited risk. 

• Sellers (Writers): Typically high net-worth individuals (HNIs) aiming to earn premiums. 

Option writers need to be skilled at reading market trends: 

• In a bearish trend, writing call options is favorable. 

• In a bullish market, writing put options is beneficial. 

Writers often prefer less volatile stocks and diversify by writing multiple contracts to manage risk and enhance returns. 

How to Begin Trading Options 

Starting your options trading journey is simple: 

1. Ensure your m.Stock trading account has derivatives enabled. 

2. If not, submit basic documents (like 6-month bank statements or ITR acknowledgments) to activate it. 

3. Once your account is ready and margin money is deposited, you’re good to go! 

Why Choose Options Over Futures? 

Both Futures and Options are derivatives, but the key difference lies in commitment: 

• Futures require you to execute the trade on expiry (unless squared off). 

• Options provide the right but not the obligation, adding flexibility. 

Another key difference is margin requirement: 

• For example, buying August Futures of Asian Paints (~₹3,485) may need Rs. 1,36,000 margin. 

• Buying an August Options contract (e.g., 3500 strike) may only need ₹14,700—almost 10x lower. 

That said, Futures offer direct exposure to price movement, while Options rely on premium appreciation. Investors and institutions often use options to hedge long-term portfolios against short-term volatility. 

Key Takeaways to Remember 

• Options contracts grant rights, not obligations, to buy/sell assets at future dates. 

• Call options are for bullish views, put options for bearish ones. 

• Options trading requires the least capital among cash, futures, and options. 

• Maximum loss is limited to the premium paid making it ideal for risk-conscious traders. 

• India follows European options (exercised only on expiry). 

• Long-term investors often use options to manage short-term market swings.