Call and Put Options: The Right to Choose

The call has value at expiry when NIFTY’s official settlement level is above 25,000. The put has value when it is below 25,000. To get either right, the buyer pays the premium, which is the option’s price. The seller receives that premium and takes on the obligation to meet the settlement. What the seller may owe can be far more than the premium received.

Call and put tell you which contract you are looking at; buying and selling tell you which side of it you take. You can buy or sell either type, creating four positions: bought call, sold call, bought put and sold put. Buying a put is still an option purchase, even though it can benefit from a falling market. We start with the two bought positions here and compare buyers with sellers in the next lesson.

The quantity of 65 is an explicit assumption for our example. NSE’s 3 October 2025 circular revised the NIFTY lot size to 65 for the applicable January 2026 contracts. Because quantities can change, check the selected contract and current exchange specifications rather than treating one remembered lot size as permanent.

Our ticket uses an illustrative expiry of 27 October 2026. NSE’s specifications checked on 7 October 2026 use Tuesday expiries, moving to the preceding trading day if the expiry day is a trading holiday. Read the exact date on the contract you select: it is the deadline for that option’s life, regardless of when you expect your market view to work.

At 25,050, NIFTY has risen by 50 points from our starting level. The call pays ₹50 × 65 = ₹3,250, but you paid ₹6,500 to buy it. Your loss is therefore ₹3,250. At 25,100, the call pays ₹100 × 65 = ₹6,500 and recovers its purchase cost exactly. This level is the expiry breakeven: strike 25,000 plus premium 100. Trading costs would move the net breakeven higher.

At 25,300, the difference above the strike is 300 points. Cash settlement is ₹300 × 65 = ₹19,500; subtract the original ₹6,500 premium to obtain a ₹13,000 profit before costs. The chart shows this result after the premium, rather than just the cash received. A bought call has no fixed theoretical upper profit limit as the underlying rises, but the rise must arrive within the contract’s life.

At 24,950, the index has fallen by 50 points. The put pays ₹50 × 65 = ₹3,250, leaving a ₹3,250 loss after its purchase cost. At 24,900, the difference is 100 points and the ₹6,500 cash value recovers the premium exactly. Put expiry breakeven is strike minus premium: 25,000 − 100 = 24,900 before costs. Trading costs require a slightly larger fall to break even overall.

At 24,700, the difference is 300 points: 25,000 − 24,700. The put pays ₹19,500, producing a ₹13,000 profit after the ₹6,500 premium, before costs. Its theoretical maximum profit is finite because NIFTY cannot fall below zero. At that mathematical endpoint, (25,000 − 100) × 65 = ₹16,18,500; this explains the limit, not a realistic expectation that the index will reach zero.

We made the call and put prices equal, at ₹100, only to keep the sums easy. Real quotes depend on time to expiry, interest rates, expected dividends and the movement the market expects, and that expectation differs by strike. Equal distance from the market does not mean equal premiums.

Suppose NIFTY is at 25,050 while our call still has time left, and you sell it at the assumed ₹140 premium. You receive ₹140 × 65 = ₹9,100 after paying ₹6,500 originally. Your profit is (₹140 − ₹100) × 65 = ₹2,600 before costs. NIFTY is below the 25,100 expiry breakeven, but the sale is profitable because the quote still includes value beyond the ₹50 intrinsic amount.

Consider a separate outcome at the same 25,050 index level: the call sells for an assumed ₹70, comprising ₹50 intrinsic value and ₹20 remaining value. Your result is (₹70 − ₹100) × 65 = −₹1,950. If you instead hold until expiry and NIFTY settles at 25,050, the loss is ₹3,250. The sale quote and the expiry cash value answer different questions; these are alternative outcomes, not payments to add together.

The last price displayed on a screen is not necessarily the price at which you can sell. The bid is what a buyer offers; the ask is what a seller requests; their difference is the spread. Liquidity describes how readily the contract can trade at available prices. A wide spread or a fast market can make an exit more costly or prevent a fill. Calculate the result from the executed sale price and then deduct applicable costs.

Time also matters. As expiry approaches, there is less opportunity for a useful move to occur, so the remaining value of a bought option generally declines when other inputs are unchanged. Theta estimates this time effect. It does not mean the screen price must fall every day: a market move or a change in movement expectations can outweigh it. Time decay varies with the option’s moneyness and remaining life.

Those movement expectations are reflected in implied volatility, or IV. Higher IV generally makes both calls and puts more expensive, with other inputs unchanged; lower IV generally makes them cheaper. IV describes the scale of movement being priced, not a prediction of its direction. Vega estimates how much a premium changes when IV changes. If IV falls sharply after an anticipated event, often called an IV crush, the option can lose value even when the underlying moves in your favour.

Look again at the ₹70 exit example. NIFTY’s rise gives ₹50 of intrinsic value, but only ₹20 of remaining value is left, so the premium sits below the ₹100 you paid. The market moved your way and the option still lost value. These quotes are assumed, so they do not split the loss between time and volatility. Later lessons measure each force with the Greeks.

For a single-stock option on NSE, exercise leads to physical settlement: actual shares and the corresponding payment. An ITM bought call held to expiry requires payment for the shares you receive; an ITM bought put requires shares to deliver. Delivery margins may apply to these bought ITM stock options before expiry. The option’s premium-limited payoff does not remove the funding or share-delivery obligation. NSE Clearing discontinued the Do Not Exercise facility from the March 2023 expiry, so do not assume you can decline an open ITM stock option’s automatic exercise.

For scale, take a separate teaching stock contract with an assumed 500-share lot, a ₹1,000 strike and a ₹12 premium. Buying it costs ₹6,000, but exercising an ITM call requires ₹5,00,000 to receive the 500 shares. The premium purchased the right; the delivery payment purchases the shares. Check the exchange rules and your broker’s expiry policy before holding a stock option near expiry. A planned broker square-off still needs an actual executed trade to close your position.

In the illustration, a ₹16,25,000 basket of company shares falls 10%, or ₹1,62,500, while NIFTY finishes at 25,000. Our NIFTY put has no expiry value, so the share loss plus the ₹6,500 premium produces a ₹1,69,000 combined loss. The index contract followed NIFTY correctly; the basket moved differently. This mismatch is often called basis risk. A holding in Reliance or another company does not necessarily move point for point with NIFTY.

For comparison, assume a simplified holding worth ₹16,25,000 at NIFTY 25,000 that moves exactly ₹65 for every index point. At 24,700, the holding loses ₹19,500 and our 25,000 put pays ₹19,500. Those amounts offset, leaving the ₹6,500 premium as the combined loss. At 25,300, the holding gains ₹19,500 and the put expires worthless, leaving a ₹13,000 combined gain after its premium. Exact alignment is built into this model; it is not assumed for every fund or portfolio.

Quantity, strike and expiry determine the reach of the protection too. Too few contracts leave exposure uncovered; extra contracts can create another directional position. A lower put strike leaves the first part of a fall uncovered, and an expired put cannot protect a later decline. A useful hedge therefore matches a defined risk in the actual holding, accounting for its changing value, execution costs and settlement.