What is Options Contract?

A financial derivative that gives the buyer the right, but not the obligation, to buy (call option) or sell (put option) an underlying asset at a specified price (strike price) before or on a specified date (expiry), in exchange for a premium paid upfront.

PrepClever Glossary · Derivatives

updateUpdated July 2026

Formula

Option Premium = Intrinsic Value + Time Value

An options contract is a derivative instrument that grants the buyer a right without imposing an obligation. The seller (writer) of the option receives a premium and is obligated to fulfil the contract if the buyer exercises.

Types of Options

Call Option: Right to buy the underlying at the strike price. Profitable when spot price rises above strike + premium.
Put Option: Right to sell the underlying at the strike price. Profitable when spot price falls below strike − premium.

Moneyness

In-the-Money (ITM): Call when spot > strike; Put when spot < strike.
At-the-Money (ATM): Spot ≈ Strike price.
Out-of-the-Money (OTM): Call when spot < strike; Put when spot > strike.

Option Value

Option Premium = Intrinsic Value + Time Value

Intrinsic value = max(0, S − K) for calls; max(0, K − S) for puts.

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Example

Nifty is at 23,000. A 23,200 Call Option is OTM (intrinsic value = 0). If it trades at ₹120, all ₹120 is time value. A 22,800 Put is ITM (intrinsic value = 200). If it trades at ₹250, time value = ₹50.

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Relevant NISM series

Series VIII

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FAQs about Options Contract

What is the maximum loss for an option buyer?add

The maximum loss for an option buyer is limited to the premium paid, regardless of how far the market moves against the position. This makes options attractive for hedging — the downside is capped.

What is the difference between European and American options?add

European options can only be exercised at expiry. American options can be exercised any time before expiry. Index options in India (Nifty, Sensex) are European-style; stock options are American-style.

Formula

Option Premium = Intrinsic Value + Time Value

Types of Options

Call Option: Right to buy the underlying at the strike price. Profitable when spot price rises above strike + premium.
Put Option: Right to sell the underlying at the strike price. Profitable when spot price falls below strike − premium.

Moneyness

In-the-Money (ITM): Call when spot > strike; Put when spot < strike.
At-the-Money (ATM): Spot ≈ Strike price.
Out-of-the-Money (OTM): Call when spot < strike; Put when spot > strike.

Option Value

Option Premium = Intrinsic Value + Time Value

Intrinsic value = max(0, S − K) for calls; max(0, K − S) for puts.

lightbulb

Example

info

Relevant NISM series

Series VIII

See Options Contract in exam questions

1,200+ NISM practice questions. Free to start.

Start Practice Free

What is Options Contract?

Types of Options

Moneyness

Option Value

Related Terms

Futures Contract

Option Greeks

Put-Call Parity

Implied Volatility

Strike Price

FAQs about Options Contract

Where to go from here

Master every term that matters

What is Options Contract?

Types of Options

Moneyness

Option Value

Related Terms

Futures Contract

Option Greeks

Put-Call Parity

Implied Volatility

Strike Price

FAQs about Options Contract

Where to go from here

Master every term that matters