In India, options can be exercised on the day of expiry (that is you get the difference between market price and strike price). But the more popular method of trading options is to reverse your positions. If you have bought an option, you can sell it in the market and book the profit or loss. Liquidity is not an issue in most of the index and stock options. Apart from trading, you can also use options to hedge your portfolio. Here is how it works.

More than trading, options should be actually used for protecting against risk. How does that work? If you have bought Tata Motors at Rs.345 in the cash market, you can protect by buying an Rs.340 put option at Rs.3. Your total cost goes to Rs.348 (345+3), but then your total risk is limited to just Rs.8 {345-340) + 3}. Thus, even if Tata Motors goes down to Rs.250, your total loss will be limited to Rs.8 only. On the up side, your profits can be unlimited above Rs.348.