Market Sentiment and Its Influence on Options 

Market movements are typically driven by either bullish (rising) or bearish (falling) sentiment. These trends serve as the foundation for two primary types of option contracts: call options and put options. 

• A call option allows the buyer to profit from a price increase in the underlying asset. 

• A put option benefits the buyer when the price is expected to decline. 

In both cases, the buyer is granted the right, but not the obligation, to execute the contract either to buy (in case of a call) or sell (in case of a put) at a predefined strike price before or on the expiry date. 

Instead of going through physical settlement, traders often square off their position before expiry to pocket the premium differential. 

Profit & Risk Dynamics 

Your success in options trading hinges on predicting the correct market direction. If the price moves as anticipated: 

• Call buyers benefit when prices go up. 

• Put buyers gain when prices fall. 

If the price moves in the opposite direction, the buyer’s maximum loss is limited to the premium paid. They can choose to: 

• Square off early to recover some premium 

• Or let the contract expire, losing only the premium invested 

This capital protection feature makes options trading a preferred tool for many retail traders. 

Option Classification: Based on Underlying Asset 

Stock Options 

These are not to be confused with employee stock option plans (ESOPs). Stock options in the market refer to publicly listed stocks permitted for derivatives trading. On the National Stock Exchange (NSE), nearly 175 stocks qualify based on metrics like: 

• Average daily market capitalization 

• Average daily traded value over the previous six months 

Stocks remain in the F&O segment as long as they meet these requirements. 

Index Options 

Indices like Nifty 50, Bank Nifty, Nifty Financial Services, and Nifty Midcap serve as popular underlying assets. These are highly favored due to: 

• Lower lot sizes 

• Less margin requirement 

• High liquidity 

They’re often used by institutions for hedging market exposure. 

Currency Options 

Also called Forex Options, these are contracts on currency pairs. On the NSE, rupee-denominated pairs (like USD/INR) dominate due to better liquidity. These instruments are largely used by: 

• Banks 

• Exporters and importers 

• Borrowers in foreign currency 

Commodity Options 

Unlike equity options, commodity options are based on futures contracts rather than spot prices. While relatively new in India, they are gradually gaining acceptance. 

Option Classification: Based on Market Type 

Exchange-Traded Options 

These are the most common form of options, traded through formal platforms like NSE, under regulations by SEBI. 

• Transparency and standardisation 

• Contract enforcement is guaranteed 
  These features make exchange-traded options safer and more accessible to retail investors. 

OTC-Traded Options (Over-the-Counter) 

These are privately negotiated contracts, typically used for custom currency transactions. 

• Less regulation 

• Limited accessibility 

• No stock options available via OTC in India 

These are primarily utilised by institutions rather than retail traders. 

Option Classification: Based on Expiry Cycle 

Regular Options 

Listed with standard monthly cycles, traders can access: 

• One near-month 

• One mid-month 

• One, far-month contract at any time 

On the NSE, these expire on the last Thursday of the respective month. 

Weekly Options 

Introduced in India in: 

• 2016 for Bank Nifty 

• 2019 for Nifty 50 

• 2018 for Sensex 30 

Weekly options offer the same mechanics as regular options but with shorter durations, making them increasingly popular for short-term traders. 

Quarterly Options 

Though not available for stocks in India, these are used in other markets where traders can choose contracts from: 

• Any of the nearest four quarters 

• Plus the last quarter of the following year 

LEAPS (Long-Term Expiration Anticipation Securities) 

These are long-dated options with expiries extending up to 3 years, ideal for institutional investors looking to hedge long-term equity holdings. 

Snapshot: Trading Volumes on NSE (as of 08/08/2022) 

Observation Index Options are by far the most traded derivative instrument in India. Among stock derivatives, stock options have greater traction than stock futures, indicating a growing preference for limited-risk instruments. 

Things to Remember 

• Market trends are either bullish or bearish—, these dictate call and put options strategies. 

• Call buyers expect a rise, while put buyers anticipate a fall in asset prices. 

• A call option = right to buy, and a put option = right to sell (no obligation in either). 

• Index Options lead the market in terms of contract volume. 

• Among equity derivatives, stock options are more widely used than futures.