Options — Call, Put, Buyer, Writer
An option is a contract that gives the buyer the right — but NOT the obligation — to buy (Call) or sell (Put) the underlying at a predetermined strike price on ...
Option Contract — Rights vs Obligations
An option is a contract that gives the buyer the right — but NOT the obligation — to buy (Call) or sell (Put) the underlying at a predetermined strike price on or before a stated date. The buyer pays a premium to the seller (also called writer) upfront in exchange for this right.
Options break the symmetric obligation of futures. The buyer has only RIGHTS — she pays a premium today, then can walk away if the trade goes wrong (max loss = premium). The seller (writer) collects the premium but has only OBLIGATIONS — if the buyer exercises, the writer must deliver. This asymmetry is the entire beauty and hazard of options. Two types: a Call gives the right to BUY at strike (useful when bullish); a Put gives the right to SELL at strike (useful when bearish or for insurance). In India, all equity options are European-style — exercise only on expiry day — and almost all are physically settled except index options which are cash-settled.
You paid ₹200 for a ticket — you can use it or skip; you never owe more
Put option = insurance for your stock portfolio — pay premium for protection
Call = right to buy; Put = right to sell — directional differs
Writer keeps premium but is on the hook if buyer exercises
A Practical Example
| Role | Pays / Receives | Right or Obligation? | Max Profit | Max Loss |
|---|---|---|---|---|
| Call Buyer | Pays premium | RIGHT to buy at strike | Unlimited | Premium paid |
| Call Writer | Receives premium | OBLIGATION to sell at strike | Premium received | Unlimited |
| Put Buyer | Pays premium | RIGHT to sell at strike | Strike − 0 = Strike | Premium paid |
| Put Writer | Receives premium | OBLIGATION to buy at strike | Premium received | Strike − 0 = Strike |
What Makes This Important
Frequently Asked Questions
No. The maximum loss for a call or put buyer is the total premium paid. This is the crucial difference from futures, where losses are unlimited.
🧠 Quick Quiz
3 questions to check your understanding