As we saw earlier, a call options is a right to buy and a put option is a right to sell. How to apply the same? If RIL is currently quoting at Rs.960 and you expect the price to go to Rs.1000, then you can buy a Reliance 980 call option at a price of Rs.4. When the price of the option reaches Rs.1000, the price of the option will have gone up to more than Rs.20. You can just reverse the option and book profits. When you expect prices to go down, you can buy put options. When you buy a call or put option, your loss is limited to the premium paid but profits can be unlimited. When on the topic of call and put options, let us also spend a few moments capturing the gist of ITM and OTM options.

To begin with, let us get an understanding of in-the-month (ITM) and out-of-the-money (OTM) options. This is one of the most important aspects of options. An option is in-the-money when the price of the stock is above the strike price in case off call options. If the price of SBI is Rs.260, then the Rs.250 call option will be ITM. Similarly, the Rs.270 call option will be OTM. In case of put options the reverse rule will apply. If the stock price is lower than the strike price then it is ITM and if the stock price is above the strike price then it is OTM. In the above case, if you are buying SBI put options then Rs.270 put will be ITM and Rs.250 put will be OTM.