Options contracts are instruments that give the holder of the instrument the right to buy or sell the underlying asset at a predetermined price. An option can be a 'call' option or a 'put' option.
A call option gives the buyer, the right to buy the asset at a given price. This 'given price' is called 'strike price'.
Similarly a 'put' option gives the buyer a right to sell the asset at the 'strike price' to the buyer
Strike price is the target price/value around option traders play their positions.
For example consider Nifty trading at 5500 and available strike prices will be 4000, 4100, 5000, 5100, 5200 …. 5600, 5700, 5800, … 6000,6100 ….. Trading volume of nearby strike prices will be more
Buy a call option if your perception about market is bullish
Similarly buy a put option if your perception about market is bearish
Sell a call option if you think stock/index will not go beyond your strike price
Similarly sell a put option if you think stock/index will not go below your strike price
How one benefited from selling options:
The main enemy for buyers of call option is time decay. Consider if nifty trading at 5500 and if a trader buy’s one 5600 call option in a perception that nifty will go up by paying 100 Rs. premium. Due to different market condition nifty did not move up or down much. If trader check his option after few trading sessions his 5600 call option may become 50 or 60 Rs even though nifty is at 5500. Option sellers ( writers ) can benefit from this time decay. In the same above case call writer gets profit of this premium difference (100-50) * lotsize
In The Money ( ITM ) option:
For a call option, when the option's strike price is below the market price of the underlying asset.
For a put option, when the strike price is above the market price of the underlying asset.
Out of The Money ( OTM )option:
For a call, when an option's strike price is higher than the market price of the underlying asset.
For a put, when the strike price is below the market price of the underlying asset.
Example: consider currently nifty is at 5500
5400 strike call option is ITM call option and 5600 strike is OTM call option
Similarly 5600 strike put option is ITM put option and 5400 strike is OTM put option
