Part 6 Learn Institutional Trading

How Option Trading Works

When you trade options, there are two sides to every contract: the buyer and the seller.

Option Buyer: Pays the premium for the right to exercise the option. Their risk is limited to the premium paid but potential profit is unlimited (in calls) or substantial (in puts).

Option Seller (Writer): Receives the premium upfront but assumes an obligation if the buyer exercises the option. Their potential loss can be large, depending on market movement.

For example:

Let’s say stock XYZ is trading at ₹100.
You buy a call option with a strike price of ₹105, paying a premium of ₹3.
If XYZ rises to ₹115 before expiry, your profit = (115 – 105) – 3 = ₹7 per share.
If it stays below ₹105, your loss is limited to ₹3 (the premium paid).