ganesh bhai, options are of two types. one is call and other is put.
call is a right to buy a share at a given value ie,Strike Price
put is a right to sell a share at a given value ie,Strike Price
Like a share, you can buy and sell call and put. buyer of a put or call is called holder .seller of a call or put is called writer.
CALL :
Example : TISCO cash price on 29/05/06 - is say 569/-
BUYING A CALL:
Suppose you want to buy a lot(for TISCO - 675 shares) of TISCO today, but do not want to take the risk of investing 3.86 lakhs. So in order to participate in the bull run you can buy 560 call expiry date 29/6/2006, paying a premium of Rs.27/-.ie,Rs18225/-.if the share price in cash crosses 560 + 27 = 587, you will start earning money. any time till expiry, you are eligible to exercise the option.ie, you can buy 675 shares @ 560 + 27.This strategy is called going long.In case the share price at end of month is less than 587/-, you will lose the premium paid.ie, even if value of TISCO goes down below 569/-, your loss is limited to the premium paid.Since it is naked long position, you use this only when you are sure of a bull run.
SELLING A CALL :
From charts, if you feel that the price in cash will not exceed 600, you can sell a 600 call for Rs.10/-.as long as the value of share is below 610/-, you are in profit. But as soon as it crosses 610/- you will start losing money.The buyer of your call is in profit.In this strategy, your profits are limited to the money received, but loss is unlimited after 610. so it is like shorting TISCO at 610.
PUT:
BUYING A PUT :
Buying a put is the right to sell a share. i buy a TISCO 520 PUT @ 22.45. Suppose the share price in cash falls below 520-22.45=497.45, i will earn a profit.Above this my loss is Rs.15153/- . The difference in price at expiry and strike rate will be your profit.Say on 29th June cash price of TISCO is 400.The your profit is 520-22.45-400=97.55 * 675 =65850/-.
Suppose you hold 675 shares of TISCO, and you are afraid that the share price will fall below 520 ie, your stop loss, but at the same time you want to participate in the bull rally, then you can buy 520 PUT. in case the share price stays above 520, you will lose 15153.But if the share price falls below 520 , you need not worry and sell your share, since you already have purchased a right to sell at 520.For this right, you have to pay a price, which in this case is 22.45.(premium).Any downside risk is protected, theoratically upto zero share price before month end.Bear strategy.
SELLING A PUT :
If you feel that share of TISCO will not fall below 520, you will sell a 520 PUT. You will receive a inflow of 675(lot size)*22.45= 15153.but in case the share price is below 497, you will start losing money. so limited profit, unlimited risk.
But normally you will employ strategy to minimise your loss. this is done on a continuous basis.
Say if your charts show NIfty to be in range of 3050 - 3250, then what you can do is sell 3250 call and 3050 put and pray!!! that on the expiry ie month last thursday, Nifty will be within this range.In case on 20th Nifty is at 3060 and there are chances of further fall, you can buy 3060 put .this will reduce your profit in case Nifty closes above 3050, but you will gain if nifty falls below 3050. Similarly on 20th if Nifty is about 3230, then you can buy 3220 call and protect your trade. many strategies are avaliable.the one i discussed will bring intial credit to your account. debit strategies are available. here intial outflow, with loss or profit.
Important thing to note is premium. this can be calculated with many option calculator's available in net for free.it require interest rate ( around 6% pa0, volatility rate (obtained from NSE website).we should be sure that we are paying a optimal rate for premium. using this calculator, you should sell a option at price higher than calculated value and buy a option at a price less than this calculated value. do not buy at extreme high rates as your chances of profit diminish as the rate moves away from the calculated rate