Option trading is a form of derivative trading where the value of the contract is derived from an underlying asset such as stocks, indices, or commodities. An option gives the buyer the right but not the obligation to buy or sell the underlying asset at a predetermined price, known as the strike price, on or before a specific date called the expiry date.

There are two main types of options ó Call Options and Put Options. A call option gives the holder the right to buy the underlying asset, while a put option gives the holder the right to sell it. Traders use options for various purposes such as hedging, speculation, or income generation. For example, investors may purchase put options to protect their portfolios against potential market downturns, while others may write options to earn premiums.

Option prices are influenced by several factors including the underlying assetís price, time to expiry, volatility, interest rates, and dividends. These variables are modeled through pricing tools like the Black-Scholes Model to estimate fair value. Understanding these factors helps traders make informed decisions and manage risk effectively.

However, trading in options involves significant risk. While buyers can lose only the premium paid, option writers or sellers may face unlimited losses if the market moves against their position. Therefore, itís important to have proper risk management strategies in place and to understand margin requirements before trading.

In India, options trading is regulated by the Securities and Exchange Board of India (SEBI) through exchanges such as the NSE and BSE. Investors should ensure they understand the product, use it responsibly, and align their trades with their investment goals and risk tolerance.