11.13What are options?
1What is it?
An option gives the buyer the right, but not the obligation, to buy or sell an underlying at a fixed price (the strike) on or before expiry. The buyer pays a premium for this right.
2Why does it exist?
Options let you pay a small amount for protection (like insurance) or for a leveraged bet with limited downside for the buyer.
3Real-life example
You pay ₹50,000 as a token to reserve a flat at ₹50 lakh for 3 months. If prices rise to ₹60 lakh, you buy at ₹50 lakh. If prices fall, you walk away, losing only the ₹50,000. That token is an option premium.
4Quick revision
- Right, not obligation (for the buyer).
- Buyer pays premium.
- Strike and expiry define it.
5Knowledge check
Q1. Does an option buyer have to buy/sell?Show answer
No, it’s a right, not an obligation.
Q2. What does the buyer pay?Show answer
The premium.
Q3. Max loss for an option buyer?Show answer
The premium paid.