Options - Derivatives - What is it?

Options is the right to do something but it is not an obligation.

Types of Options: Call option and a Put Option
Call Option: Option to buy
Put Option: Option to Sell

The mechanism: If i want to buy something in the future at a particular price and i expect the price of it to go up, then i enter into a contract with somebody at a particular fixed price. I pay a fixed amount called as option premium. This option premium gives me the right to execute the option in the future, if situation is beneficial for me.

Example: I want to buy Infosys shares three months down the line at a price of Rs.3400 (Strike Price), whereas it is quoting at 3300 today. I believe that Infosys scrip may go up in the next three months. Hence i enter into a contract with a party by paying a premium of say 50 Rs. Now three months down the line if the price is above 3400 then i would benefit because my counter-party is obligated to sell Infosys at 3400 to me irrespective of the market price.
The reverse case where i have the option to sell by paying a premium is called the put option.

Premium of a contract in our view, is sum of its intrinsic value and expected value beyond strike price at the end of the contract period. This expected value drops as time to expiry drops, as Volatility Index drops and as CMP falls away from strike price.

Watch the below video to understand basics of options trading