A call option gives its buyer the right to buy an underlying asset at an agreed price, while a put option gives its buyer the right to sell it. The buyer pays a premium for this right. The seller receives the premium and takes on the corresponding contractual obligation.
Call and put options can be used to take a view on price movements or hedge an existing exposure. However, getting the market direction right does not always mean making a profit. The premium, timing and settlement terms matter too.
Key Takeaways
- Options are derivative contracts that give the buyer a right, but not an obligation, while the option seller takes on an obligation under the contract.
- A call option gives the buyer the right to buy the underlying asset at the strike price, while a put option gives the buyer the right to sell it.
- The option buyer pays a premium for this right, while the seller receives the premium in exchange for taking on the corresponding obligation.
- Option prices are influenced by factors such as the underlying asset price, strike price, time to expiry, volatility and prevailing interest rates.
- Options can be used for purposes such as hedging and taking a view on market movements, but derivatives involve significant risks and losses can be substantial.
Table of Contents
What are call and put options?
Call and put options are derivative contracts, meaning their value is linked to an underlying asset, such as a share or an index.
A call buyer may expect the underlying price to rise. A put buyer may expect it to fall or may want protection against a decline in an existing holding. In both cases, the buyer pays for a contractual right rather than immediately purchasing or selling the underlying asset.
The seller, also called the option writer, accepts the other side of that contract. Depending on the option and its settlement rules, the seller may have to deliver shares, receive shares or settle an amount in cash.
Both calls and puts can be bought or sold. “Call” does not mean placing a buy order, and “put” does not mean placing a sell order. They identify the type of option.
Source: NSE, Individual securities F&O, updated 28 October 2025.
Difference between call and put options
The main difference is the buyer’s contractual right. The comparison below considers a standalone option held until expiry, before transaction costs.
| Point of comparison | Call option | Put option |
| Buyer’s right | Buy the underlying at the strike price | Sell the underlying at the strike price |
| Price movement that generally benefits the buyer, other factors unchanged | A rise in the underlying price | A fall in the underlying price |
| In-the-money condition | Underlying price is above the strike price | Underlying price is below the strike price |
| Buyer’s break-even at expiry | Strike price + premium paid | Strike price − premium paid |
| Buyer’s maximum loss on the option payoff | Premium paid | Premium paid |
| Uncovered seller’s loss exposure | Theoretically unlimited as the underlying price rises | Substantial but bounded by the underlying price falling to zero |
For physically settled contracts, funding, delivery and subsequent share-price exposure also need to be considered. The option-payoff limit is not a statement that the premium is the only cash you could need.
What are call and put options used for?
Options can serve different purposes depending on the position and any investments held alongside it. Their role is easier to understand through three common uses.
- Taking a market view: A trader may buy a call expecting a rise or buy a put expecting a fall, although the size and timing of the move must justify the premium paid.
- Hedging an existing exposure: An investor may buy a put to reduce the effect of a decline in a holding, with protection depending on the strike, expiry and quantity covered.
- Receiving premium through writing: A writer receives a premium in exchange for accepting an obligation, but losses from the position can exceed that receipt.
Important terms used in call and put options
Understanding a few terms makes it easier to read an option contract and follow the examples.
- Underlying asset: The share, index or other asset to which the option is linked.
- Spot price: The underlying asset’s current market price or index level.
- Strike price: The agreed price used to determine the option’s exercise entitlement.
- Premium: The price paid to buy the option and received by its seller.
- Expiry date: The date on which the contract ends.
- Lot size: The number of units covered by one contract, as specified by the exchange.
- Intrinsic value: The favourable difference between the underlying price and strike price, with a minimum value of zero.
- Break-even price: The underlying price at expiry at which the option’s payoff covers the premium, before costs.
A quoted premium is usually expressed per unit. To calculate the premium for a position, multiply it by the lot size and the number of lots.
How does a call option work?
A call buyer benefits from a rise in the underlying price, other factors remaining unchanged. At expiry, the call has intrinsic value only if the underlying settlement price is above its strike price.
However, the buyer has also paid a premium. The expiry payoff must cover that premium before the position breaks even.
Call option example
Suppose you buy a call with a strike price of ₹100 and pay a premium of ₹5 per unit. The following outcomes assume you hold it until expiry and exclude transaction costs.
| Underlying price at expiry | Call payoff per unit, before premium | Buyer’s profit or loss per unit |
| ₹ 90 | ₹ 0 | −₹5 |
| ₹ 100 | ₹ 0 | −₹5 |
| ₹ 103 | ₹ 3 | −₹2 |
| ₹ 105 | ₹ 5 | ₹ 0 |
| ₹ 120 | ₹ 20 | ₹ 15 |
At ₹103, the call is in the money, but the buyer still loses ₹2 per unit because the ₹3 payoff does not cover the ₹5 premium.
The break-even price is ₹105, calculated as ₹100 + ₹5.
The figures shown are for illustrative purpose only
How does a put option work?
A put buyer benefits from a fall in the underlying price, other factors remaining unchanged. At expiry, the put has intrinsic value when the underlying settlement price is below its strike price.
A put can also help hedge an existing holding. That protection comes at a cost, and its extent depends on the strike price, quantity, expiry and how closely the option matches the exposure being hedged.
Put option example
Suppose you buy a put with a strike price of ₹100 and pay a premium of ₹5 per unit. Again, the figures assume the option is held until expiry and exclude transaction costs.
| Underlying price at expiry | Put payoff per unit, before premium | Buyer’s profit or loss per unit |
| ₹ 120 | ₹ 0 | −₹5 |
| ₹ 100 | ₹ 0 | −₹5 |
| ₹ 97 | ₹ 3 | −₹2 |
| ₹ 95 | ₹ 5 | ₹ 0 |
| ₹ 80 | ₹ 20 | ₹ 15 |
At ₹97, the put has intrinsic value, but the buyer still loses ₹2 per unit after the premium.
The break-even price is ₹95, calculated as ₹100 − ₹5.
The figures shown are for illustrative purpose only
How to calculate call and put option payoffs
For clarity, the formulas below distinguish payoff before premium from profit or loss after premium. They apply at expiry, not to the option’s market price before expiry.
Let S represent the underlying settlement price at expiry, K the strike price and P the premium per unit. “Max” means taking whichever value is greater.
| Calculation | Call option | Put option |
| Buyer’s payoff per unit | Max(S − K, 0) | Max(K − S, 0) |
| Buyer’s profit or loss per unit | Max(S − K, 0) − P | Max(K − S, 0) − P |
| Writer’s profit or loss per unit | P − Max(S − K, 0) | P − Max(K − S, 0) |
To calculate the position’s result:
Position profit or loss = Per-unit profit or loss × Lot size × Number of lots
Then deduct applicable costs. For index options, the settlement difference is measured in index points and converted into rupees using the applicable contract quantity.
Source: NSE, Bank Nifty options strategies booklet.
Before expiry, a buyer who closes the position calculates the trading result from the difference between the selling premium and purchase premium, multiplied by the quantity, less costs.
Risk and reward for option buyers and sellers
Buying and writing an option produce different outcomes. This table shows the expiry limits for standalone positions, assuming the underlying price cannot fall below zero and excluding transaction costs.
| Position | Maximum profit per unit | Maximum loss per unit | Break-even price at expiry |
| Buy a call | Theoretically unlimited | Premium paid | Strike price + premium paid |
| Write an uncovered call | Premium received | Theoretically unlimited | Strike price + premium received |
| Buy a put | Strike price − premium paid | Premium paid | Strike price − premium paid |
| Write a put | Premium received | Strike price − premium received | Strike price − premium received |
In the money, at the money and out of the money
These terms describe the relationship between the underlying price and the strike price. This relationship is called moneyness.
| Classification | Call option | Put option |
| In the money, or ITM | Underlying price is above the strike price | Underlying price is below the strike price |
| At the money, or ATM | Underlying price equals, or is close to, the strike price | Underlying price equals, or is close to, the strike price |
| Out of the money, or OTM | Underlying price is below the strike price | Underlying price is above the strike price |
An OTM option has zero intrinsic value, but it can still trade at a premium before expiry because there is time for the underlying price to change.
Being ITM does not establish whether your trade is profitable. Moneyness does not account for the premium you paid or your transaction costs.
What does selling a call or put option involve?
Writing an option means opening a short position and accepting an obligation in exchange for the premium. This is different from selling an option you already own to close your position.
Selling a call option
A call writer receives the premium but faces an adverse payoff if the underlying price rises above the strike price at expiry.
For an uncovered call, losses are theoretically unlimited because the underlying price has no fixed upper limit. A covered call combines ownership of the underlying shares with a written call. The shares can meet the delivery obligation, but they can still lose value, and the written call limits gains from a rise above its strike price.
Selling a put option
A put writer receives the premium but faces an adverse payoff if the underlying price falls below the strike price at expiry.
For a physically settled stock put, assignment requires the writer to buy the contracted shares at the strike price even if their market value is much lower.
Holding enough cash to meet that obligation does not remove the loss from a fall in the shares. It addresses funding, not market risk.
How do exercise and settlement work in India?
Closing an option trade and exercising an option are different actions. You can close a position through an opposite trade in the same contract, while exercise applies the rights and obligations specified by the contract.
NSE stock and index options use European-style exercise, meaning exercise takes place at expiry rather than at any time during the contract.
The settlement method then determines what changes hands:
- Index options: Settlement is in cash; you do not receive or deliver the index’s constituent shares.
- Individual stock options: Exercised contracts are physically settled through delivery of shares against payment.
In-the-money positions remaining open at expiry are subject to automatic exercise and assignment under the clearing rules. A stock-option holder should therefore understand the required funds or shares before carrying the position into expiry.
Check the contract specifications and your broker’s expiry procedures, including any earlier funding or position-closing deadlines.
Sources: NSE, Individual securities F&O, updated 28 October 2025; Nifty 50 F&O, updated 23 September 2025; NSE Clearing, Settlement mechanism, updated 27 September 2023.
Factors that affect option premiums
An option’s premium can change even when the underlying price barely moves. Several factors influence its price together.
- Underlying price: A rise generally supports call premiums and reduces put premiums, with other factors unchanged.
- Strike price: Its relationship with the underlying price affects the option’s intrinsic value.
- Time to expiry: Remaining time influences the premium, and time value generally erodes as expiry approaches.
- Implied volatility: Higher expected price fluctuations generally increase both call and put premiums, with other factors unchanged.
- Interest rates and expected dividends: These influence option valuation and can affect calls and puts differently.
This explains why a call buyer can lose money despite the underlying price rising. A small favourable move may be outweighed by time decay or a fall in implied volatility.
Source: NSE, Nifty 50 F&O: Option-pricing inputs, updated 23 September 2025.
Risks of trading call and put options
Options carry different risks for buyers and writers. Understanding the maximum payoff loss is useful, but it does not cover every trading or settlement risk.
- Loss of the premium: A bought option can expire worthless, resulting in the loss of the entire premium plus costs.
- Large writer losses: An uncovered writer’s loss can greatly exceed the premium received.
- Margin requirements: Writers must maintain applicable margin, and requirements can increase as market conditions change.
- Liquidity and execution: A wide gap between buying and selling quotes can make an exit expensive, while insufficient trading interest can make it difficult.
- Sharp price changes: Market gaps and expiry-related movements can change an option’s value quickly.
- Settlement obligations: Physically settled stock options can require funds or shares beyond the premium initially paid.
A hedge can change the risk of a combined position, but it should not be assumed to remove every risk. The quantities, strikes, expiry dates and settlement obligations need to work together.
FAQs
Can I sell an option before its expiry?
Yes. If you own an option, you can generally close the position by selling the same contract before expiry, subject to liquidity and trading restrictions. That sale closes your holding; it does not create a new short position unless you sell more contracts than you own.
Can an option seller exit before expiry?
Yes. An option writer can generally close the short position by buying back the same contract. The difference between the premium received and the buyback premium determines the trading profit or loss before costs.
What do CE and PE mean in options trading?
CE means Call European, and PE means Put European. These labels identify the option type and its European exercise style, under which exercise occurs at expiry.
Does an option seller always keep the premium as profit?
No. Receiving the premium does not establish the final profit. The cost of buying back the option or meeting its settlement obligation can partly offset, fully offset or exceed the premium received.
Is selling a put the same as placing a limit order to buy shares?
No. Selling a put creates a derivative position with margin and settlement obligations. A limit order is an instruction to buy shares if its execution conditions are met. An index put is cash settled and does not result in buying the index constituents.
Tools for Investors
