Part 3 Learn Institutional Trading

How Option Trading Works

Let’s say you believe that the stock of XYZ Ltd., currently trading at ₹100, will rise in the next month. Instead of buying 100 shares (which would cost ₹10,000), you could buy one call option that gives you the right to buy 100 shares at ₹100 (the strike price) within a month.

If this option costs ₹5 per share, your total cost is only ₹500 (₹5 × 100).

If the stock price rises to ₹120, you can exercise your call and buy the shares at ₹100, making a profit of ₹20 per share minus the ₹5 premium = ₹15 per share.

If the stock stays below ₹100, you simply let the option expire worthless, losing only your ₹500 premium.

This leverage — the ability to control ₹10,000 worth of stock with just ₹500 — is what makes options powerful but also risky.