Key F&O Terms: Lot Size, Strike Price, Premium and Everything Else You Need to Know

Imagine you sit down to read F&O tutorials. The first paragraph mentions an "ATM straddle with theta decay heading into expiry." You read it twice. Nothing clicks. You close the tab. This is how most F&O education ends, not because the concept was too difficult, but because ten unfamiliar words blocked access to one idea. The vocabulary became the wall.

This article takes down that wall. The ten terms covered here appear in virtually every F&O discussion, option chain, broker platform, and financial news segment you will ever encounter. Learn them once, with concrete examples, and every other F&O article becomes readable.

Lot Size: Meaning & Why It Matters

What is a lot in F&O?

In the stock market, you can buy a single share of any listed company. In F&O, you cannot trade a single unit of the underlying. Every F&O contract comes packaged in a fixed quantity called a lot, and the smallest position you can take is one full lot.

For Nifty 50, one lot currently equals 65 units.

Here is where the number becomes practically important. If Nifty is at 24,000, the notional value of one Nifty futures lot is 65 x 24,000 = Rs. 15,60,000. You are not paying this amount to enter the trade. You are depositing a fraction of it as margin. But the market exposure you are carrying is the full Rs. 15,60,000, every point Nifty moves, you gain or lose Rs. 65.

The gap between what you deposit and what you are actually exposed to is one of the most important things to understand before placing any F&O trade. You cannot take half a lot or a quarter of one. Positions always run in whole lots: one, two, five, never fractions.

Expiry Date: Meaning & Types

Weekly expiry

A bus or train ticket has a specific travel date printed on it. After that date, the ticket is worth nothing, no refund, no extension, regardless of what you paid for it. F&O contracts carry exactly this feature.

Every F&O contract comes with an expiry date. After that date, the contract ends.

You cannot keep the same contract after expiry. If you want to continue the trade, you need to enter a new contract with a later expiry date.

In India, Nifty 50 options on NSE currently expire every Tuesday. The monthly contract expires on the last Tuesday of each month. A contract bought on Monday therefore usually expires the next trading day, leaving very little time for the index to move in your favour.

Weekly options attract a large share of trading activity in India, but they also lose value quickly as Tuesday’s expiry approaches. Even if Nifty barely moves, the option premium can fall because there is less time left for the market to move in your favour.

Options lose time value continuously, a property covered in detail in the Option Greeks chapter.

Monthly expiry

Monthly Nifty options usually expire on the last Tuesday of the month. If you buy one near the beginning of the month, it may have three to four weeks left before expiry.

Monthly options generally cost more than weekly options at the same strike price because they give Nifty more time to move in your favour. In simple terms, you are paying extra for additional time.

What happens at F&O expiry

Nifty options are settled in cash. Stock options can involve the actual delivery or receipt of shares if they remain open at expiry. This may require a large amount of money or sufficient shares in your demat account.

For beginners, holding stock options until expiry can therefore create additional risks. Brokers may also close positions before expiry if the account does not have enough funds or shares to complete the settlement.

Strike Price: Meaning & How to Choose

What Is a Strike Price?

A strike price is the fixed level attached to an option contract. Suppose Nifty is currently at 24,000. On the option chain, you may see contracts such as:

• Nifty 23,500 CE
• Nifty 24,000 CE
• Nifty 24,500 CE

The numbers 23,500, 24,000 and 24,500 are the strike prices.

The strike price does not change during the life of the contract. Nifty may move from 24,000 to 24,300 or fall to 23,700, but a 24,000 strike option remains a 24,000 strike option until it expires.

For a call option, the strike price is the level above which the option starts having value at expiry.

For a put option, the strike price is the level below which the option starts having value at expiry.

In the contract name:

• CE means call option
• PE means put option

For example:

Nifty 24,500 CE

• Nifty is the underlying index
• 24,500 is the strike price
• CE means it is a call option

A futures contract does not have a strike price. Futures trade at a live market price. Strike prices are used only in options.

ATM, ITM and OTM Explained Simply

ATM, ITM and OTM describe where an option’s strike price stands compared with the current Nifty level. These terms do not tell you whether the trade is profitable. They only describe the option’s current position relative to the market.

Assume Nifty is trading at 24,000.

ATM: At the Money

An option is at the money, or ATM, when its strike price is equal to or closest to the current Nifty level.

ITM: In the Money

An option is in the money, or ITM, when it already has some value based on the current Nifty level. For a call option, a lower strike is ITM.

For a put option, the opposite applies. A higher strike is ITM.

OTM: Out of the Money

An option is out of the money, or OTM, when the market has not yet crossed its strike price in the required direction. For a call option, a higher strike is OTM.

For a put option, a lower strike is OTM.

Strike Price vs Market Price

Beginners often confuse the strike price with the current Nifty level because both appear as numbers on an option chain. The difference is simple:

• Strike price: fixed level written into the option contract
• Market price or spot price: current live level of Nifty

Crossing the Strike Does Not Guarantee Profit

This is one of the most important points for beginners. Suppose you buy a Nifty 24,500 call for a premium of ₹120. Nifty must not merely cross 24,500 for you to make a profit at expiry. It must also recover the premium you paid. Your expiry break-even point is:

24,500 strike + ₹120 premium = 24,620

So the strike price tells you when the option starts having value at expiry. The break-even point tells you when your trade starts making a profit after recovering the premium paid. These are not the same number.

Premium: Meaning & What You Pay

What Is an Option Premium?

When you buy a call or put option, you pay the seller for the rights provided by that contract. This upfront amount is called the option premium.

Suppose a Nifty 24,500 call option is trading at a premium of ₹120. The quoted ₹120 is the premium per unit, not the amount required for the entire trade. Since the current Nifty lot size is 65 units, the total cost of buying one lot would be:

₹120 × 65 = ₹7,800

For an index-option buyer, the premium paid is generally the maximum amount that can be lost on the position, excluding brokerage, taxes and other charges.

The seller receives the premium but accepts the obligation created by the contract. Because the seller’s potential loss can be much larger than the premium received, the broker blocks margin from the seller.

Option Buyer vs Option Seller

The Premium Shown on Screen Is Not Your Total Cost

Beginners frequently see an option trading at ₹50 and assume the contract costs only ₹50. But option prices are quoted per unit. Your actual trade value is:

Premium × Lot size

Trading charges, securities transaction tax, exchange charges, GST and stamp duty are additional. Before buying an option, check both the premium shown on the option chain and the final amount displayed on the broker’s order screen.

Intrinsic Value vs Time Value

An option’s premium is made up of two parts:

Option premium = Intrinsic value + Time value

Intrinsic value is the immediate value already present in an option based on the current Nifty level and its strike price.

Suppose Nifty is trading at 24,000 and you are looking at the 23,500 call option. The call gives the holder exposure from a strike of 23,500 while Nifty is already at 24,000. The difference is:

24,000 − 23,500 = 500 points

The call therefore has ₹500 of intrinsic value per unit.

Time value exists only because time remains for the market to move. As expiry approaches, that remaining opportunity becomes smaller. The time-value portion of the premium therefore gradually falls.

On expiry day, once the contract reaches settlement, no future time remains. Time value becomes zero.

Why Does an Option Premium Keep Changing?

An option’s premium changes throughout the trading session. Three major factors drive that movement.

A call option generally becomes more valuable when Nifty rises and less valuable when Nifty falls.

A put option generally becomes more valuable when Nifty falls and less valuable when Nifty rises.

An option with three weeks remaining has more opportunity to benefit from a market move than an option expiring tomorrow. All else being equal, the option with more time remaining will usually carry a higher premium. As each day passes, part of this time-based value disappears. The loss is usually most noticeable near expiry.

Premiums also depend on how much movement traders expect in the market.

Open Interest (OI): Meaning & Use

What Is Open Interest?

Open interest, or OI, is the total number of active derivative contracts that have not yet been closed, exercised or settled. Think of it as a count of contracts that are still alive. Suppose one buyer and one seller create a new Nifty option contract. Open interest increases by one contract.

Why only one?

Because the buyer and seller are the two sides of the same contract. Open interest counts the contract, not both participants separately. NSE defines open interest as the number of outstanding contracts held by market participants.

Open Interest Is Not the Same as Volume

Volume measures how many contracts were traded during a period. Open interest measures how many contracts remain open. Suppose the following activity occurs during one trading day:

• Ten fresh contracts are created.
• Eight existing contracts are closed.

The trading volume is 18 contracts because 18 contracts changed hands. But open interest rises by only two:

10 new contracts − 8 closed contracts = Net increase of 2

A contract may be traded several times during the day and add repeatedly to volume, while open interest may remain unchanged.

Margin: The Money Blocked to Support a Position

What Is Margin?

Margin is money or approved collateral blocked in your trading account to protect against potential losses. It is not the full value of the contract, and it is not necessarily a fee that is permanently deducted.

Think of it as a security buffer required before the broker allows you to take a leveraged position. Margin is generally required for:

• Buying or selling futures
• Selling call options
• Selling put options

A buyer of an index option generally pays the complete premium upfront instead of depositing futures-style margin. NSE Clearing calculates derivative margins through its SPAN portfolio-risk system and may levy additional margins depending on the position and prevailing risk conditions.

Margin Is Not the Same as Your Total Exposure

Suppose Nifty futures are trading at 24,000 and the lot size is 65. The total contract value is:

24,000 × 65 = ₹15,60,000

Your broker may not require the entire ₹15.6 lakh to enter the trade. Instead, it may block a smaller margin amount based on the exchange’s risk calculations.

The critical distinction is:

Suppose ₹1.5 lakh is blocked as margin for a contract worth ₹15.6 lakh. A 1% move in Nifty affects the ₹15.6 lakh exposure, not merely the ₹1.5 lakh margin. This leverage can magnify both profits and losses.

What Makes Up the Margin Requirement?

The main margin components for equity derivatives include:

• SPAN Margin: It estimates how much the position or portfolio could lose under a range of adverse market scenarios.
• Extreme Loss Margin: Extreme Loss Margin, or ELM, also called exposure margin, provides an additional buffer for losses beyond the scenarios covered by the standard risk model.

If volatility rises or exchange requirements increase, additional funds may be required.

What Is a Margin Shortfall?

Suppose your broker requires ₹1.5 lakh to maintain a futures position. You have ₹1.7 lakh available, but the position suffers a ₹40,000 loss. Your available funds may fall below the required margin. The broker may then ask you to add money. This is commonly called a margin call or margin-shortfall notification.

You generally have two choices:

• Add sufficient funds or approved collateral.
• Reduce or close the position.

Mark to Market: Daily Profit and Loss Settlement

What Is MTM?

Mark to Market, or MTM, is the daily settlement of profit and loss on an open futures position.

A futures trade is not left untouched until expiry. At the end of each trading day, the exchange compares the futures settlement price with the price used for the previous settlement. The resulting profit is credited and the loss is debited.

NSE Clearing calculates the daily futures settlement price using the prescribed market-price methodology and settles futures positions through daily mark-to-market adjustments.

MTM resets the daily reference price, but it does not erase your overall profit or loss from the original entry.

Rollover: Continuing a Position Beyond Expiry

What Is a Rollover?

Every futures and options contract has an expiry date. The exchange does not automatically extend the contract into the next month. If you want to continue the same market exposure after the current contract expires, you must:

• Close the expiring contract.
• Open a new position in a later-expiry contract.

This process is called a rollover. A rollover is therefore not an extension of the original contract. It consists of two separate market transactions.

Rolling an option does not erase the profit or loss on the original position. The first trade is closed, and the next-expiry option becomes a new trade with a new premium, new break-even level and new expiry risk.

Note: Rollover is not Automatic. You must place the closing and new orders yourself, although some brokers may provide a rollover order feature that submits both legs together. If you do not roll the position, the contract will be settled according to the applicable expiry rules.

Limitations of This Glossary

This glossary explains the basic terms you need to understand most beginner-level F&O discussions, option-chain screens and trading articles. It does not cover every concept in derivatives.

Knowing the definitions is only the first step. The next step is learning how they appear together on a live option chain. For example, you may see:

Nifty 24,500 CE | Premium: ₹87.35 | OI: 48 lakh | IV: 14.2

To understand this line properly, you need to know:

• Nifty is the underlying index.
• 24,500 is the strike price.
• CE means it is a call option.
• ₹87.35 is the premium per unit.
• OI shows how many contracts remain open.
• IV reflects the level of future movement currently expected by the market.

The goal is not to memorise every definition in one sitting. The goal is to understand each term well enough that a live option chain gradually stops looking like a wall of numbers. This glossary gives you the vocabulary. The next modules will show you how to combine that vocabulary to read prices, compare contracts and understand risk before entering a trade.