Options and trading glossary
Plain-English definitions of the terms used in Indian options and derivatives trading, with links to the full lessons. Educational only, not investment advice. Reviewed by Amit Kumar Jain, Director, Tradetoday Multitrade Private Limited.
Call option (CE)
A contract giving the buyer the right, but not the obligation, to buy the underlying at the strike price on or before expiry. The buyer pays a premium and can lose at most that premium; the seller receives the premium and takes on the obligation.
Put option (PE)
A contract giving the buyer the right, but not the obligation, to sell the underlying at the strike price. Put buyers gain when the underlying falls well below the strike; put sellers receive the premium and carry the risk of a large fall.
Strike price
The fixed price written into an option contract at which the underlying can be bought (call) or sold (put). Each expiry has a ladder of strikes listed by the exchange.
Expiry
The date on which an option or futures contract ends. Index options have weekly and monthly expiries set by the exchanges, which change their schedules from time to time, so always check the current circular.
Premium
The price of an option per unit. The amount paid or received for one lot is the premium multiplied by the lot size. Premium is made of intrinsic value and time value.
Lot size
The fixed number of units in one derivatives contract, set and revised periodically by the exchange. Orders are placed in whole lots.
Intrinsic value
What an option would be worth if exercised now: underlying minus strike for a call, strike minus underlying for a put, and zero if that is negative.
Time value
The part of an option's premium above its intrinsic value. It reflects the chance of a favourable move before expiry and falls to zero at expiry.
ITM, ATM and OTM
Moneyness. In the money (ITM) options have intrinsic value; at the money (ATM) options have a strike near the current price; out of the money (OTM) options have no intrinsic value.
Delta
How much an option's price changes for a one-rupee move in the underlying: between 0 and +1 for calls and between 0 and -1 for puts. It is a model estimate that changes as the market moves.
Gamma
How fast delta changes as the underlying moves. Gamma is highest for at-the-money options close to expiry, which is why their prices can swing sharply near expiry.
Theta
The estimated loss of an option's value per day from the passage of time, other things equal. Option buyers pay theta and sellers collect it.
Vega
How much an option's price changes for a one-point change in implied volatility. Long options have positive vega; short options have negative vega.
Implied volatility (IV)
The volatility implied by an option's market price through a pricing model. It reflects what traders are paying for uncertainty, not a forecast that must come true.
Open interest (OI)
The number of derivative contracts still open. Rising OI means new positions are being added; falling OI means positions are being closed.
Put-call ratio (PCR)
Total put open interest divided by total call open interest for an expiry. People read it as a rough mood gauge, and the same value can be interpreted in different ways.
Max pain
The strike at which option buyers' combined payout at expiry would be smallest, calculated from current open interest. The market is not obliged to settle there.
Long and short buildup
Labels combining price and open-interest change for a contract: price and OI up is long buildup, price down with OI up is short buildup, price and OI down is long unwinding, price up with OI down is short covering.
Margin
The deposit a broker requires for positions with large potential losses, such as sold options and futures. It is set from exchange risk parameters and can change during the day.
Securities Transaction Tax (STT)
A tax levied on certain securities and derivatives transactions in India. Rates and the side on which it applies are set by law and change from time to time, so check current rates with your broker.
Stop-loss
A predefined exit price or loss amount at which a position is closed. In real markets, gaps and fast moves can make the actual exit worse than the stop.
Trailing stop-loss
A stop-loss that moves with the price in a position's favour and never moves back, so part of a gain can be kept if the price reverses.
Payoff diagram
A chart of a strategy's profit or loss against the underlying price at expiry. It shows maximum profit, maximum loss and breakevens at a glance.
Paper trading
Practising trades with virtual money, without any real order or money. It teaches mechanics and discipline but cannot reproduce real fills, liquidity or emotions.
How common options strategies are built and what they risk.
Strategy explainers Practise on paper