What you actually buy
An option is a contract giving the buyer the right, not the obligation, to trade a fixed quantity of the underlying at a set strike price before a set expiry. US equity options cover 100 shares per contract. A call grants the right to buy, a put the right to sell, and the premium paid upfront is the buyer's maximum loss. The seller collects that premium and carries the risk, an asymmetry worth remembering before anyone envies option seller income.
Payoff diagrams in words
Picture a call payoff as a hockey stick. Below the strike the line sits flat at minus the premium; at the strike it bends upward, rising one dollar for each dollar the stock climbs. Break-even sits at strike plus premium: pay 1.50 for the 105 call on a stock trading 100, and the position needs 106.50 at expiry just to square.
The put is the mirror image, flat at minus the premium above the strike and rising as price falls below it, with break-even at strike minus premium. Both diagrams share a feature beginners skip: every region of buyer profit is seller loss, and the reverse.
Strike and expiry mechanics
Strikes sit at fixed intervals, a dollar apart on many US stocks and wider on high priced names. Expiry is the second variable and the crueler one: standard monthly contracts run to the third Friday, and short dated weeklies now dominate trading volume worldwide. RattanaHub lays out the full chain across expiries with live open interest, and the strikes holding the largest positions mark where real money has committed. Index options such as those on the Nifty cash settle, so nothing changes hands but the difference. Moneyness completes the vocabulary: a call with strike below spot is in the money, at spot is at the money, above spot is out of it.
Intrinsic value and time value
Every premium splits in two. Intrinsic value is what the contract is worth immediately: with the stock at 104, the 100 call holds 4 points of intrinsic. The remainder is time value, the price of possibility. That same 100 call might trade at 6.50, meaning 2.50 is time value sitting on a melting clock.
Time value peaks for at the money contracts with months remaining and bleeds to zero at expiry. An option buyer therefore needs direction and timing together, a compound bet that retail flow systematically overprices. Implied volatility is the hidden third input, since expectations of a large move inflate time value long before any price change arrives.
Why most buyers lose to time decay
Theta, the daily decay of time value, accelerates as expiry approaches, and the final weeks consume the largest share. SEBI's September 2024 study of Indian derivatives found 93 percent of individual traders lost money across FY22 to FY24, with average losses around 2 lakh per person, concentrated in short dated weekly contracts where theta is most violent. The lesson travels beyond India. Out of the money options expiring worthless is not an edge case; it is the base rate.
Covered calls as income
Own 100 shares, sell one call against them, and the premium arrives immediately. A stock at 100 selling the one month 105 call might collect 1.50, roughly 1.5 percent for accepting the obligation to deliver at 105. If the stock surges, gains cap out at strike plus premium; if it slides, the premium is thin consolation against the full downside of the shares. The income tag is earned in flat and slowly rising markets, and the strategy badly lags strong trends. Assignment risk clusters around dividends and expiry week, when short calls trading in the money get called away. Before selling, scan the RattanaHub chain history for how often that stock has actually closed above the strike, because you are selling exactly the outcome momentum traders pay for.