The Option Buyer vs. The Option Seller

Take one contract: the Nifty 24,600 call at ₹120, lot size 65. All levels here are round numbers for illustration. The buyer pays 120 × 65 = ₹7,800 to the seller at the start. Nothing more is asked of the buyer. The seller receives ₹7,800 but must keep a margin with the broker, because the seller promises to deliver the gain if the buyer is right. The margin is set by the exchange, changes with market conditions, and is far larger than the premium received.

At expiry the money moves again. If Nifty ends at 24,500, the buyer’s right is worthless. The buyer has lost ₹7,800 and the seller has gained ₹7,800. If Nifty ends at 24,900, the buyer’s right is worth 300 × 65 = ₹19,500. The seller pays that, keeps ₹7,800 of premium, and is down ₹11,700. The buyer is up ₹11,700. Before costs, what one side gains the other loses.

Look at the shape of the two results. The buyer’s worst case is ₹7,800. The buyer’s best case has no fixed limit for a call. The seller’s best case is ₹7,800. The seller’s worst case has no fixed limit for a call. The picture below sets the four outcomes side by side.

Suppose Nifty is at 24,500 and you buy the 24,600 call for ₹120. To break even at expiry the index must not only cross 24,600 but pass 24,720. If it ends at 24,650, the option is worth 50 × 65 = ₹3,250, so you still lose ₹4,550. If it ends at 24,600 or below, you lose all ₹7,800. A weekly option has very little time to make a move.

The buyer also fights time. An option loses value every day, even if nothing else changes. This loss is called theta. Even if the index drifts up slowly in your favour, the option may still lose value, because time is being taken away faster than direction is adding. So the buyer usually needs a move that is quicker and bigger than the market already expects.

Why do people still buy? Because the payoff can be very large compared with the cost, and because the loss is fixed and known. A buyer does not receive a margin call and cannot owe the broker money on that position. Buyers also use options for protection: a put bought against a portfolio is a policy premium paid for peace of mind, and paying it for years without a claim is not a failure.

What this means in practice: a buyer should think about the whole set of conditions, not only the direction. Far out-of-the-money options are cheap because the market considers the required move unlikely. A low price is not a discount. It is a fair reflection of a low chance, and no one can promise the chance is higher than the price suggests.

Now take the other seat. You sell the same 24,600 call and ₹7,800 is credited to you. You want Nifty to stay at or below 24,600 until expiry. You do not need to be right about direction. If the market falls, you keep the premium. If it moves sideways, you keep the premium. If it rises a little but stays below 24,600, you keep the premium. That is why sellers often collect their premium.

Time helps the seller. Each quiet day lowers the value of the option that the seller must one day settle. The seller can wait for it to expire, or buy it back cheaper. Many professional desks sell options for this reason, and they manage the risk by keeping positions small, by using spreads that cap the loss, and by hedging.

Now the cost. The seller’s gain is fixed at ₹7,800, but the loss has no fixed limit for a call. If Nifty jumps to 25,600, the seller loses ₹57,200 on one lot. The seller must also keep a margin, so money is locked. A saying among traders describes it: picking up small coins in front of a steamroller. Small gains arrive often, and one bad month can return many of them, or more.

The picture below uses ten made-up expiries to show this shape. It is not data and not a win rate. Nine quiet months earn ₹7,800 each and one sharp rally costs ₹57,200. The seller nets +₹13,000. The buyer of the same ten contracts is down ₹13,000. Change the number of sharp moves and the totals change sides. Nobody can tell in advance how many will come.

The table below compares the two. Read it as a menu of trade-offs. Each side gains something and pays for it. A buyer gives up frequency of winning for a limited loss. A seller gives up a limited loss for frequency.

You may have read numbers such as “sellers win 70 to 80% of the time” or “buyers win 20 to 30%”. Be careful with them. They are usually quoted without saying which market, which strikes, which period or how the losses were counted. A high rate of small wins can still end with a net loss if the rare losses are large, and a low rate of wins can still end well if the rare wins are large. This article does not quote a win rate because none can be given honestly.

What the evidence does say is about costs and behaviour. SEBI’s study of the equity F&O segment for FY22 to FY24 found that about 93% of individual traders made net losses. The study looks at individuals as a group. It does not say who was a buyer and who was a seller, and it does not show that either side wins. Brokerage, exchange charges and taxes are paid by both sides, win or lose.

A fair summary is this. Buying limits your loss but demands accuracy in three things. Selling rewards patience but exposes you to large loss and needs margin. Spreads, which combine a bought and a sold option, are covered later in this series. They are one way to limit the loss on the selling side.