Options and derivatives

Reading for India · about 6 min

What this cluster is for

This is the part of the market where individual investors lose the most money.

That is not an opinion. SEBI has studied it directly, using actual trade data rather than surveys, and published the results more than once. The studies report that the large majority of individuals trading equity derivatives in India lose money, and that the aggregate losses run into lakhs of crores of rupees over a 3 year period. the September 2024 study and its January 2023 predecessor for the current figures.

These 21 lessons exist to reduce that number.

So they are written differently from every other options course you will find. The usual approach is a payoff diagram and a best case, followed by a suggestion that you try it. Every strategy article here does 5 things instead, in this order:

What the position actually is, in plain words.
What it costs you and what it gives up.
Who is on the other side, and why they are willing to be there.
The maximum loss, as a number and as a percentage of the capital committed, including the case where the price gaps overnight.
When it is genuinely reasonable to use, which is narrower than the internet suggests.

The third of those is the discipline that matters most, and it is asked almost nowhere else. Every options trade has somebody on the other side. That person is usually a firm whose entire business is knowing what your option is worth. Once you are in the habit of asking why they are happy to take your side, most bad trades answer for themselves.

The purpose here is to make you slower and more suspicious, not more active. A reader who finishes this cluster and decides not to trade options at all has used it correctly. That is a good outcome, it is the right outcome for most people, and nothing on this page is trying to talk you out of it.

By the end of this cluster you will be able to:

Read the move already priced into an option, before deciding whether you agree
Compute the maximum loss of any position on your own broker's screen, which most platforms already display and almost nobody looks at
Divide the maximum loss by the premium received, which is the single number that decides whether a premium-selling strategy is sane
Total the bid-ask cost across every leg, and see when it exceeds the profit
Tell the difference between a hedge and a bet with a floor
Explain why a strategy with a 90% win rate can still lose money every year

Nothing here names an instrument and an action. Nothing here is a trade recommendation. Everything here should still be true in 2036.

The reading order

These build on each other more strictly than any other cluster. Read them in order. The strategy articles at the end assume every idea before them.

The instruments

What a derivative is — value taken from something else, and why the market is larger than the assets underneath it.
Futures and forwards — the price you actually agree to, and the margin that makes it dangerous.
What an options contract is — calls, puts, strike, premium, expiry.
Buying options compared with writing options — 2 completely different games, and only 1 of them has an unlimited loss.
In the money, at the money, out of the money — intrinsic value, time value, and why a worthless option still has a price.

The Greeks

Delta — how much your option actually moves, and why it is not 1 for 1.
Gamma — how fast delta itself changes, and why options near expiry get wild.
Theta — why every option you own is quietly losing value.
Vega — how the price of your option moves when the market does not.
Rho, and the 5 Greeks together — the risk dashboard, read at a glance.

Using them for protection

Hedging with options — what insurance actually costs, and why most retail hedges are not hedges.
The covered call — you are not collecting income. You are selling your best possible outcome at a price somebody else set.
The protective put — the floor is at the strike, not at today's price. Multiply the premium by 12 before deciding anything.
The collar — zero cost describes the cash and nothing else. Measure both distances from the current price.

Betting on movement

The straddle — the move is already in the price. You need it to beat the forecast, not merely to happen.
The strangle — cheaper, and needs more. Sold instead of bought, it is the most dangerous trade in retail derivatives.

Betting on direction, with a cap

The bull call spread — defined risk means the loss is known, not small. The number it is known to be is all of it.
The bear put spread — the cap sits exactly where a crash starts to matter.

Betting on stillness

The calendar spread — not a bet on time decay. A bet on the difference between 2 volatility numbers you have probably never looked at.
The butterfly spread — a 20 to 1 payoff is a probability written backwards, and 8 crossings of the bid-ask spread take a large share of it.
The iron condor — wins most months. Returns several of them at once, in a session you cannot trade.

The checklist

Every article ends in something you do on your own broker app in about 5 minutes. Collected here, they are a single afternoon, and they are the most valuable thing in this cluster.

Before any options trade at all

Say who is on the other side and why they are willing to be there. (4)
Read the maximum loss your own platform already displays. (12 to 21)
Total the bid-ask spread on every leg, then double it for the round trip. (17, 20, 21)
Check the open interest and volume on the far legs — the ones that protect you — and ask whether they could be sold in a fast market. (21)

Before buying an option

Straddle premium ÷ price of the underlying = the move already priced in. Compare it with the last 4 realised moves. (15)
Debit ÷ width of the spread = the market's odds. Do you disagree? (17)
Implied volatility of the same strike across 3 expiries. Is the curve inverted? (19)

Before selling any premium

Maximum loss ÷ premium received. Write it on the ticket. (16, 21)
What a 10% adverse gap costs, in rupees or dollars, tonight. (16)
Whether you would place the same trade again the month after that loss. (21)

On a stock you already own

The strike you are agreeing to sell at, and whether you are content with it. (12)
The premium, multiplied by 12, against the return you expect. (13)
Both collar distances: is the ceiling closer than the floor? (14)

Habits that cost nothing

Close every leg before expiry week. In India this is not optional. (17, 18, 19)
Never adjust a losing premium-selling position by adding size. (21)
Size by the maximum loss, never by the credit and never by the margin. (21)

India and the United States, equally

Every article covers both markets at the same depth, and then says where they differ and what that difference tells you. In this cluster those sections carry more weight than anywhere else on the site, because the divergence is enormous and because most options education reaching Indian readers was written for American conditions.

Four differences run through everything here.

Settlement. Indian index options are cash settled and European. American options on shares and funds are physically settled and American style, so they can be assigned early and can leave you holding stock. India removed a complicated risk and left the one that causes the losses.

Size. Indian lot sizes and the minimum contract value make multi-leg strategies capital-heavy. There is no small version to learn on. the current contract value and lot sizes, which were raised with effect from 20 November 2024.

Taxes and charges. Securities transaction tax on exercised in-the-money options in India has produced large and unexpected losses for traders who let options expire instead of selling them. American index options receive a different tax treatment again. the current rates in both countries.

Liquidity in the far legs. American strike coverage is wide and the distant options genuinely trade, which is what makes a spread closeable and "defined risk" real. Indian liquidity concentrates in the nearest strikes and the nearest expiry. The same payoff diagram describes 2 different trades.

There is a fifth difference that is really a warning. Indian weekly expiries concentrated an extraordinary amount of activity into a small number of contracts and days, and SEBI has intervened repeatedly — raising contract sizes, collecting premiums upfront, adding expiry-day margin and cutting the number of weekly expiries. the circular of 1 October 2024 and everything issued since. When a regulator keeps changing the rules of a game, that is information about the game.

A note on what this is not

This is not an options course that ends with an encouragement to start trading.

Derivatives have real uses. A farmer locking in a price, a fund insuring a portfolio, an employee protecting a holding they are not allowed to sell — all of these are sensible, and the instruments were built for them. Several of the strategies here are genuinely the right tool for a narrow job, and each article says exactly what that job is.

What derivatives are not is a faster way to make money from a small account. The leverage that makes them efficient for a hedger is the same leverage that makes them ruinous for somebody using them to be more active. SEBI has measured the result. It is not ambiguous.

These lessons are free and they will stay free. They are the text version of the ideas in our video course, written for anybody who cannot spend money on learning right now. The goal is the same one it has always been: fewer people in the 95%.

In this cluster, the most reliable way to achieve that is for you to finish reading and do nothing at all.