Part 3 Learn Institutional Trading

How Option Trading Works

Option trading involves two main parties: the buyer and the seller (writer).

The buyer pays a premium and gets the right (not obligation) to buy or sell the underlying asset.

The seller receives the premium and takes on the obligation to buy or sell the asset if the buyer exercises the option.

Let’s take an example:
Suppose a trader buys a call option for Stock A with a strike price of ₹1,000, paying a premium of ₹50. If the stock rises to ₹1,100, the trader can exercise the option to buy at ₹1,000 and sell at ₹1,100, earning ₹100 per share (minus the ₹50 premium). The profit is ₹50 per share.

If the stock stays below ₹1,000, the trader won’t exercise the option and only loses the ₹50 premium paid.