5.1 – Getting the orientation right
I hope by now you are through with the practicalities of a Call option from both the buyers and sellers perspective. If you are indeed familiar with the call option then orienting yourself to understand ‘Put Options’ is fairly easy. The only change in a put option (from the buyer’s perspective) is the view on markets should be bearish as opposed to the bullish view of a call option buyer.
The put option buyer is betting on the fact that the stock price will go down (by the time expiry approaches). Hence in order to profit from this view, he enters into a Put Option agreement. In a put option agreement, the buyer of the put option can buy the right to sell a stock at a price (strike price) irrespective of where the underlying/stock is trading at.
Remember this generality – whatever the buyer of the option anticipates, the seller anticipates the exact opposite, therefore a market exists. After all, if everyone expects the same a market can never exist. So if the Put option buyer expects the market to go down by expiry, then the put option seller would expect the market (or the stock) to go up or stay flat.
A put option buyer buys the right to sell the underlying to the put option writer at a predetermined rate (Strike price. This means the put option seller, upon expiry will have to buy if the ‘put option buyer’ is selling him. Pay attention here – at the time of the agreement the put option seller is selling a right to the put option buyer wherein the buyer can ‘sell’ the underlying to the ‘put option seller’ at the time of expiry.
Confusing? well, just think of the ‘Put Option’ as a simple contract where two parties meet today and agree to enter into a transaction based on the price of an underlying –
- The party agreeing to pay a premium is called the ‘contract buyer’ and the party receiving the premium is called the ‘contract seller’
- The contract buyer pays a premium and buys himself a right
- The contract seller receives the premium and obligates himself
- The contract buyer will decide whether or not to exercise his right on the expiry day
- If the contract buyer decides to exercise his right then he gets to sell the underlying (maybe a stock) at the agreed price (strike price) and the contract seller will be obligated to buy this underlying from the contract buyer
- Obviously, the contract buyer will exercise his right only if the underlying price is trading below the strike price – this means by virtue of the contract the buyer holds, he can sell the underlying at a much higher price to the contract seller when the same underlying is trading at a lower price in the open market.
Still, confusing? Fear not, we will deal with an example to understand this more clearly.
Consider this situation, between the Contract buyer and the Contract seller –
- Assume Reliance Industries is trading at Rs.850/-
- Contract buyer buys the right to sell Reliance to contract seller at Rs.850/- upon expiry
- To obtain this right, the contract buyer has to pay a premium to the contract seller
- Against the receipt of the premium, contract seller will agree to buy Reliance Industries shares at Rs.850/- upon expiry but only if contract buyer wants him to buy it from him
- For example, if upon expiry Reliance is at Rs.820/- then contract buyer can demand contract seller to buy Reliance at Rs.850/- from him
- This means contract buyer can enjoy the benefit of selling Reliance at Rs.850/- when it is trading at a lower price in the open market (Rs.820/-)
- If Reliance is trading at Rs.850/- or higher upon expiry (say Rs.870/-) it does not make sense for contract buyer to exercise his right and ask contract seller to buy the shares from him at Rs.850/-. This is quite obvious since he can sell it at a higher rate in the open market
- An agreement of this sort where one obtains the right to sell the underlying asset upon expiry is called a ‘Put option’
- Contract seller will be obligated to buy Reliance at Rs.850/- from contract buyer because he has sold Reliance 850 Put Option to the contract buyer
I hope the above discussion has given you the required orientation to the Put Options. If you are still confused, it is alright as I’m certain you will develop more clarity as we proceed further. However, there are 3 key points you need to be aware of at this stage –
- The buyer of the put option is bearish about the underlying asset, while the seller of the put option is neutral or bullish on the same underlying
- The buyer of the put option has the right to sell the underlying asset upon expiry at the strike price
- The seller of the put option is obligated (since he receives an upfront premium) to buy the underlying asset at the strike price from the put option buyer if the buyer wishes to exercise his right.
5.2 – Building a case for a Put Option buyer
Like we did with the call option, let us build a practical case to understand the put option better. We will first deal with the Put Option from the buyer’s perspective and then proceed to understand the put option from the seller’s perspective.
Here is the end of day chart of Bank Nifty (as on 8th April 2015) –
Here are some of my thoughts with respect to Bank Nifty –
- Bank Nifty is trading at 18417
- 2 days ago Bank Nifty tested its resistance level of 18550 (resistance level highlighted by a green horizontal line)
- I consider 18550 as resistance since there is a price action zone at this level which is well spaced in time (for people who are not familiar with the concept of resistance I would suggest you read about it here
- I have highlighted the price action zone in blue rectangular boxes
- On 7th of April (yesterday), RBI maintained a status quo on the monetary rates – they kept the key central bank rates unchanged (as you may know RBI monetary policy is the most important event for Bank Nifty)
- Hence in the backdrop of technical resistance and lack of any key fundamental trigger, banks may not be the flavour of the season in the markets
- As a result of which traders may want to sell banks and buy something else which is the flavour of the season
- For these reasons I have a bearish bias towards Bank Nifty
- However shorting futures maybe a bit risky as the overall market is bullish, it is only the banking sector which is lacking lustre
- Under circumstances such as these employing an option is best, hence buying a Put Option on the bank Nifty may make sense
- Remember when you buy a put option you benefit when the underlying goes down
Backed by this reasoning, I would prefer to buy the 18400 Put Option which is trading at a premium of Rs.315/-. Remember to buy this 18400 Put option, I will have to pay the required premium (Rs.315/- in this case) and the same will be received by the 18400 Put option seller.
Of course, buying the Put option is quite simple – the easiest way is to call your broker and ask him to buy the Put option of a specific stock and strike and it will be done for you in a matter of a few seconds. Alternatively, you can buy it yourself through a trading terminal such as Zerodha Pi We will get into the technicalities of buying and selling options via a trading terminal at a later stage.
Now assuming I have bought Bank Nifty’s 18400 Put Option, it would be interesting to observe the P&L behaviour of the Put Option upon its expiry. In the process, we can even make a few generalizations about the behaviour of a Put option’s P&L.
5.3 – Intrinsic Value (IV) of a Put Option
Before we proceed to generalize the behaviour of the Put Option P&L, we need to understand the calculation of the intrinsic value of a Put option. We discussed the concept of intrinsic value in the previous chapter; hence I will assume you know the concept behind IV. Intrinsic Value represents the value of money the buyer will receive if he were to exercise the option upon expiry.
The calculation for the intrinsic value of a Put option is slightly different from that of a call option. To help you appreciate the difference let me post here the intrinsic value formula for a Call option –
IV (Call option) = Spot Price – Strike Price
The intrinsic value of a Put option is –
IV (Put Option) = Strike Price – Spot Price
I want you to remember an important aspect here with respect to the intrinsic value of an option – consider the following timeline –
The formula to calculate the intrinsic value of an option that we have just looked at is applicable only on the day of the expiry. However, the calculation of the intrinsic value of an option is different during the series. Of course, we will understand how to calculate (and the need to calculate) the intrinsic value of an option during the expiry. But for now, we only need to know the calculation of the intrinsic value upon expiry.
5.4 – P&L behaviour of the Put Option buyer
Keeping the concept of intrinsic value of a put option at the back of our mind, let us work towards building a table which would help us identify how much money, I as the buyer of Bank Nifty’s 18400 put option would make under the various possible spot value changes of Bank Nifty (in the spot market) on expiry. Do remember the premium paid for this option is Rs 315/–. Irrespective of how the spot value changes, the fact that I have paid Rs.315/- will remain unchanged. This is the cost that I have incurred in order to buy the Bank Nifty 18400 Put Option. Let us keep this in perspective and work out the P&L table –
Please note – the negative sign before the premium paid represents a cash out flow from my trading account.
| Serial No. | Possible values of spot | Premium Paid | Intrinsic Value (IV) | P&L (IV + Premium) |
|---|---|---|---|---|
| 01 | 16195 | -315 | 18400 – 16195 = 2205 | 2205 + (-315) = + 1890 |
| 02 | 16510 | -315 | 18400 – 16510 = 1890 | 1890 + (-315)= + 1575 |
| 03 | 16825 | -315 | 18400 – 16825 = 1575 | 1575 + (-315) = + 1260 |
| 04 | 17140 | -315 | 18400 – 17140 = 1260 | 1260 + (-315) = + 945 |
| 05 | 17455 | -315 | 18400 – 17455 = 945 | 945 + (-315) = + 630 |
| 06 | 17770 | -315 | 18400 – 17770 = 630 | 630 + (-315) = + 315 |
| 07 | 18085 | -315 | 18400 – 18085 = 315 | 315 + (-315) = 0 |
| 08 | 18400 | -315 | 18400 – 18400 = 0 | 0 + (-315)= – 315 |
| 09 | 18715 | -315 | 18400 – 18715 = 0 | 0 + (-315) = -315 |
| 10 | 19030 | -315 | 18400 – 19030 = 0 | 0 + (-315) = -315 |
| 11 | 19345 | -315 | 18400 – 19345 = 0 | 0 + (-315) = -315 |
| 12 | 19660 | -315 | 18400 – 19660 = 0 | 0 + (-315) = -315 |
Let us make some observations on the behaviour of the P&L (and also make a few P&L generalizations). For the above discussion, set your eyes at row number 8 as your reference point –
- The objective behind buying a put option is to benefit from a falling price. As we can see, the profit increases as and when the price decreases in the spot market (with reference to the strike price of 18400).
- Generalization 1 – Buyers of Put Options are profitable as and when the spot price goes below the strike price. In other words, buy a put option only when you are bearish about the underlying
- As the spot price goes above the strike price (18400) the position starts to make a loss. However, the loss is restricted to the extent of the premium paid, which in this case is Rs.315/-
- Generalization 2 – A put option buyer experiences a loss when the spot price goes higher than the strike price. However, the maximum loss is restricted to the extent of the premium the put option buyer has paid.
Here is a general formula using which you can calculate the P&L from a Put Option position. Do bear in mind this formula is applicable on positions held till expiry.
P&L = [Max (0, Strike Price – Spot Price)] – Premium Paid
Let us pick 2 random values and evaluate if the formula works –
- 16510
- 19660
@16510 (spot below strike, position has to be profitable)
= Max (0, 18400 -16510)] – 315
= 1890 – 315
= + 1575
@19660 (spot above strike, position has to be loss making, restricted to premium paid)
= Max (0, 18400 – 19660) – 315
= Max (0, -1260) – 315
= – 315
Clearly both the results match the expected outcome.
Further, we need to understand the breakeven point calculation for a Put Option buyer. Note, I will take the liberty of skipping the explanation of a breakeven point as we have already dealt with it in the previous chapter; hence I will give you the formula to calculate the same –
Breakeven point = Strike Price – Premium Paid
For the Bank Nifty breakeven point would be
= 18400 – 315
= 18085
So as per this definition of the breakeven point, at 18085 the put option should neither make any money nor lose any money. To validate this let us apply the P&L formula –
= Max (0, 18400 – 18085) – 315
= Max (0, 315) – 315
= 315 – 315
=0
The result obtained is clearly in line with the expectation of the breakeven point.
Important note – The calculation of the intrinsic value, P&L, and Breakeven point is all with respect to the expiry. So far in this module, we have assumed that you as an option buyer or seller would set up the option trade with an intention to hold the same till expiry.
But soon you will realize that more often than not, you will initiate an options trade only to close it much earlier than expiry. Under such a situation the calculations of breakeven point may not matter much, however, the calculation of the P&L and intrinsic value does matter and there is a different formula to do the same.
To put this more clearly let me assume two situations on the Bank Nifty Trade, we know the trade has been initiated on 7th April 2015 and the expiry is on 30th April 2015–
- What would be the P&L assuming the spot is at 17000 on 30th April 2015?
- What would be the P&L assuming the spot is at 17000 on 15th April 2015 (or for that matter any other date apart from the expiry date)
Answer to the first question is fairly simple, we can straightway apply the P&L formula –
= Max (0, 18400 – 17000) – 315
= Max (0, 1400) – 315
= 1400 – 315
= 1085
Going on to the 2nd question, if the spot is at 17000 on any other date apart from the expiry date, the P&L is not going to be 1085, it will be higher. We will discuss why this will be higher at an appropriate stage, but for now just keep this point in the back of your mind.
5.5 – Put option buyer’s P&L payoff
If we connect the P&L points of the Put Option and develop a line chart, we should be able to observe the generalizations we have made on the Put option buyers P&L. Please find below the same –
Here are a few things that you should appreciate from the chart above, remember 18400 is the strike price –
- The Put option buyer experienced a loss only when the spot price goes above the strike price (18400 and above)
- However, this loss is limited to the extent of the premium paid
- The Put Option buyer will experience an exponential gain as and when the spot price trades below the strike price
- The gains can be potentially unlimited
- At the breakeven point (18085) the put option buyer neither makes money nor losses money. You can observe that at the breakeven point, the P&L graph just recovers from a loss-making situation to a neutral situation. It is only above this point the put option buyer would start to make money.
Key takeaways from this chapter
- Buy a Put Option when you are bearish about the prospects of the underlying. In other words, a Put option buyer is profitable only when the underlying declines in value
- The intrinsic value calculation of a Put option is slightly different when compared to the intrinsic value calculation of a call option
- IV (Put Option) = Strike Price – Spot Price
- The P&L of a Put Option buyer can be calculated as P&L = [Max (0, Strike Price – Spot Price)] – Premium Paid
- The breakeven point for the put option buyer is calculated as Strike – Premium Paid
Hello Kartik,
I want to clearify on hoe to select weather to buy call or sell put, cause both will be benifited if the market goes up. Same thing for selling a call and byuing a put, both will be profitable if market goes down. Then how to make choice or right decesion? Is it depends on margin money needed more for selling and amount to be invested is less if byuing an option? Or some other technical points or there.
My next question on hoe to make use of volatility of the underlying stock?
Thanks
Well this depends on how cheap or expensive the premiums are. We will discuss this topic shortly very soon in this module, request you to stay tuned. Thanks.
Hi karthik,
First of all thanks for the best stuff.
I have a query to be resolved.
Call option buyer buys the right to buy stocks from the call option seller at strike price by paying the premium.
Put option buyer buys the right to sell stocks to the put option seller at strike price by paying the premium.
My doubt is: Here call option seller and put option seller are receiving premiums as well as putting themselves into a riskier situation i.e., if trade goes against them then they’ll be losing huge amounts of money.
IF A CALL OPTION SELLER IS BEARISH ON A STOCK THEN HE MIGHT BE A PUT OPTION SELLER
SIMILARLY IF A PUT OPTION SELLER IS BULLISH ON A STOCK HE MIGHT BE A CALL OPTION BUYER
**THIS REDUCES THEIR RISK RIGHT??
Could you please explain this for me??
Thanks, Vinay.
If you are bearish about a stock then you can write the call or buy a put. Likewise, if you are bullish, you can write put or buy call. The reason why one would choose to sell an option as opposed to buying one really depends on the way the premiums are positioned.
Thanks for the reply Karthik!!
I have one more doubt.
Let’s take the most recent example of INFIBEAM AVENUES stock which came all the way down to 27 rupees from 195!!!
Suppose I’ve already bought a put option @ 194. The next day stock came to 27 rupees.
1. Would I get all the money as you said the put option buyer has unlimited profit potential i.e., IV = 194-27 = 167 rupees per stock for the entire lot?? (Considering the day as the last day of expiry)
2. All the margin amount blocked for the put option seller would be vanished. Then from where do I get the remaining amount??
Please do explain this for me.
1) Yes Sir, you would
2) As and when the stock starts moving in the opposite direction of the seller, the broker would demand more margins from the seller.
Hi Karthik,
Thanks for the reply.
One more doubt!!
1. In the first four chapters you are saying that option buyers will pocket the profits as they have unlimited profit potential i.e., Intrinsic value. And also said that options can be excersied only on the last day of expiry!!
2. But, In the next chapters you are saying that most of the traders in India trade options just to pocket variation in premiums on a daily basis??
As you explained me in the INFIBEAM AVENUES example that as a PUT OPTION BUYER, I will be pocketing the IV. Then what about the variation in premium?? According to what you said I have to pocket the variation in premiums as well??
I.e., I mean I will get IV + variation in premiums?????
Totally confused!!
Please get me out of this!!
There are two things here Vinay –
1) You can buy the option (premium) now and sell it immediately even after 30 secs. This is trading on the premium, no need to wait for the expiry
2) You can exercise the option but this can be done only upon expiry. If you exercise the option, you will get the intrinsic value of the option.
Please do read through the comments, the same query has been asked by many.
Thanks man!! Perfect!! 🙂
Good luck, Vinay!
Hello karthik,
Suppose I bought 2 lots of RIL DEC 1160 CE today i.e, on 24-12-2018 by paying 1 rupee premium. Assuming today is Monday, you said options expire on last Thursday of every month. Then, 1160 CE expires on 27-12-2018.
I will be pocketing the profits if it moves above breakeven point i.e., above 1161 rupees on the last day of expiry.
** My query is: Suppose the stock is trading at 1125 rupees on last day of expiry. Any how I know that I would lose my premium!! But, Assume the premium moved to 1.50 rupees(I paid 1 rupee premium). IS THERE ANY CHANCE ON THE LAST DAY TO EXERCISE THE OPTION AND POCKET THE PREMIUM DIFFERENCE I.E., 1.50-1 = 0.5 RUPEES INSTEAD OF LOSING ENTIRE PREMIUM??
You can book the profits anytime you want, Vinay. No need to wait for the expiry.
Hello,
I want to know how to trade options in the last 10 days before expiry,as i read that an option loses 2/3rd of its value in the last 15 days.If i buy call or put and banking on increase in its premium but the time decay (theta) increases during the last 10-15 days and everyday the option loses some value due to time decay.So can you please clarify how to trade in this situation.Is it better to stick to intraday option trading in the last 10 days? Thanks in advance.
The time decay is just one of the force that acts upon the option premium….which by virtue tends to lower the option premium. Simultaneous there could bbe another force (say Vega) which can increase the option premium. The net increase or decrease of option premium is a sum of all these individual forces, collectively called the ‘Option Greeks’. So make sure you understand the Option Greeks well.
karthik, i gone through abv blog, but could not get my answer ie how to protect loss created by shorting option? . and how to calculait stop loss while shorting any option call or put.
The best way to protect your loss is to have a stoploss. You can set up the stoploss based on 2 factors – (1) Support & Resistance Levels (2) Volatility of the stock. We have discussed the S&R levels here – http://zerodha.com/varsity/chapter/support-resistance/ . Volatility based stoploss is something we have not discussed yet on Varsity, we will do it in the options module.
thanks, karthik, pls arrang descussion on volatility based stoploss. in the mean time , i am confused that whether stoploss sould be put on b premium value or on nifty spot price basis, for example- i short nifty put option of 8350 @ 22/- when spot nifty was 8600, now whether i should put SL on premium that if it goes rs. 44 or 50 trade should sq off. or on basis of nifty spot that if nifty goes down to 8500 or 8450 trade should be sq off, i want to know the base of stoploss it sud be price of undertaking or premium value. pls reply, very important to me.
Yes, we will discuss volatility in great length very soon.
The SL should always be based on the underlying spot.
hi kartik
thanks for your previous reply!
Q.- since NSE or BSE opening bell is at 9:30 am. if i want to place an order before market open at first market price i.e. i want to place an order to buy or sell at first market price can i place an order at 9:00 am because opening and closing periods are very volatile the order to get stock at screen displayed price is very difficult. is the above is possible with futures, options, currency and commodity
Dear Sir,
your module on options are really very good, we are also learning patience in waiting for next chapters which takes longer time.
Thanks/regards
Regards
Sorry for the delay, we are trying our best to put it fast…thank you so much for your patience 🙂
i have asked it earlier but you have not given reply. my question is
Q.- since NSE or BSE opening bell is at 9:30 am. if i want to place an order before market open at first market price i.e. i want to place an order to buy or sell at first market price can i place an order at 9:00 am because opening and closing periods are very volatile the order to get stock at screen displayed price is very difficult. is the above is possible with futures, options, currency and COMMODITY
Sorry to have missed your query earlier. Also, the market opening bell is at 9:15 AM and not really 9:30 AM.
Yes, you can place orders before market opens. This is called Pre market order, suggest you read about it here – http://zerodha.com/z-connect/queries/stock-and-fo-queries/pre-marketpost-marketafter-market-orders
hi very new to trading. at this age of 68, i am very much confused between call sell and put buy both are in the bearish, premium is more in call sell, when actually we have to plan call sell. let me know. I have gone thru many books, out of all u people are very good knowledge, easy to undertand, very thankful to u. somasekhar.
Thank you for the kind words Sir.
For selling a call you will need to deposit margins but for buying puts you dont need margin. I would suggest you just stick to buying puts till you get comfortable with options. You can try call option selling once you are comfortable with derivatives.
sir, can i do option trading in commodities
Nope, options on commodities is not yet available in India.
so sad…
anyway thanks sir…
Hopefully over the next few years 🙂
what about commodity futures ?
Futures on commodity is quite active on MCX exchange.
Hi Karthik,
Thank you for this option module.It is really good.I am having one query.
Call Option sell and put option buy both represents bearish situation.But why would any one sell call option,if he/she is bearish he can buy put option.As in call option sell we have to add margin amount , profit is limited to premium amount and loss is exponential where as in put option buy it is vice-versa.
So if any one is bearish then why he would sell call option insteasd he can buy put option.
Please explain.
Umang you do have a point, however there could be circumstances where the volatility is high and therefore the option premiums would be high. In such circumstances it makes sense to write options and collect premium rather than buy options at an expensive rate.
hi Karthik..you have really made it simple.i want to ask if i see the open interest of call is increasing and put option decreasing what should we perceive …its bullish or bearish..because as i have checked the past data of nifty i have found that trading in puts is significantly higher than trading in call option(as mentioned at the lower bottom of option chain ..right/right)..and i also observed that PCR increasing while its moving up and decreses while trend goes down..please help me with this..thank you
Ajit – instead of reading the OI data directly, I would suggest you use the ‘Options Pain’ theory…we will discuss the same shortly. I think Options pain is a slightly better indicator than the plain vanilla OI data.
Dear Karthik, very good and informative blog on option greeks, pls continue educating your client, God bless you. how to contact you personaly in any emergency.
Thanks for the kind words :).
I;m usually quite active here..so you could drop in a message here itself.
THANKS, Dear Karthik, i was going through your option modul-5 chapter-17 heading VOLATILITY & NORMAL DISTRIBUTION. i was confused when i reached to para 17.4 normal distribution……..
1. how you came to daily average as – 0.04% as well daily standard deviation as 1.046%. i have tried my best and by going through earlier chapter, but could not, hence request to mail me excel file of this
2. in solution -1, while getting andannualized number , you * by 252, why not 365. and even when i calculat on 252 it comes – 10.08% and not 9.66%.
3. while caculating upper range of 8337 ,what do you mean by word EXPONTIAL, how it effect calculation, as per my calculation it is 10559 instead of 10841. same way lower range comes 7758.instead of 7777.
pls let me know where i am wrong ?
You can download the excel sheet towards the end of the chapter, this should solve your 1st query.
365 is the convention used by NSE, hence I’ve used the same.
Guess I’ve used exponential in a contextual sense. Suggest you refer the excel for more clarity on numbers.
Karthik, further to my earlier mail of taday, just now as per yr theory for daily return and annual volatility, i calculated nifty spot daily and annual vol… for 23-09-2014 to 22-09-2015. the result is daily
volatility is .. 1.033 and annual 19.73 (by1.033 * sqrt(365) ). where as nse website shows daily as 1.47 and annual as 28.13. pls advise why so much difference. which one is applicable.
Extract from chapter 16 – So why is there a slight difference between our calculation and NSE’s? – One possible reason could be that we are using spot price while NSE is using Futures price.
Having said so, I really dont think there should be so much difference. Let me do the calculations once again..thanks.
i am very eagerly waiting for pain theory Karthik…thanks for help
As soon as possible Ajit.
Thanks, karthik for prompt reply, specialy, for your personal advise/suggestion in CHAPTER-18, i guess , i would have read it earlier than i could have saved
my heavy loss incurred in august and september. any way few further queries– for doing option writting trade in each month and if we start it from 15 days from expiry as greatly suggested by you—
1. to get average, how many days old data , we should take to calculate average number?
2. to get annual figure which number , we should take ie 252 or 365 ?
your suggestion and advise will be highly helpful to us.thanks
1 year historical data should be good….also suggest you take 365 days.
Thanks, pls keep posting yr advise, it will be very useful to your clients.
Cheers.
from where do i get this data?
zerodha rocks,you guys have done a very good job in helping us with zerodha varsity,thanks a lot 🙂 ,one more thing(probably not the right place to say it) if you can also start offering us the IPO facility we no longer will need to have our other brokerage accounts.
Glad you liked it Himanshu. With our own DP in place, IPOs should be possible soon.
Why there are no difference in chart. Even though they are different strike price.
Ex: Nifty 8100, 8200, 8300 PE(CE)
Everything same in chart even though premium price is different.
P.S: I know it derives from Underlying price. But still I want to have little bit clarity on this.
Thank you
For 2 reasons –
1) 8100 to 8300 are not very far off strikes
2) Point 1 is further supported by the fact that time to expiry is high, hence all these strikes are considered nearly the same
3) See the same set of charts very close to expiry and you will see a difference
Hi, can you please re-upload the screenshots?
Hi Karthik,
Here it is,
http://zerodha.com/varsity/wp-content/uploads/2015/04/20185.png
I deleted from my system. But I guess it’s still present is blog.
Thanks Sam..just wanted to reconfirm if I was looking at the right image. Btw, your site is quite nice 🙂
Take a guess. It was founded by one of your best tech man.
I just keeping it alive.
And you know it also.
That’s why you put smiley in the end.. Please upload options strategy soon.
Yup, I was just fooling around 🙂
Will start work on Options strategy soon.
Hi Karthik, I have few queries..
1. Does the variation of the premiums purely depends on the Options Greeks? Buyers and Sellers does not have anything to do with it?
2. Suppose LTP of Premium = 100. Now I put a buy order at 80 and someone sells it at 80.. So, my order gets executed and now the latest LTP=80.. It will remain at 80 till the next order gets executed right..Now, where does the Option Greeks comes into picture for determining the Premium value??
1) Demand supply matter, which is captured via greeks (Delat)
2) Correct
3) Chance of you getting an option @ 80 when its trading @ 100 is low, greeks does not let you do this 🙂
Hey Karthik,
Won’t the premium will get change when the spot price will change on the basis of strike price ?
It does!
sir,
On friday I buy 2 qty of put option banknifty at 140.00. Then I kept stop loss order for the same. When the price was reached at148.00 I modified st loss order 1 qty for the price 148.00 and 1 qty sold . Now there was no open order. And then when I tried to put 1 stop loss order for the remaining 1 buy order qty at the price 140.00 the order executed at 140.00 and sold for 140.00 even though the price was running at148.00. It shouldn’t remained open for the price 140.00. Why it happened ? And how to put stop loss order after removing partial buy order qty.? please reply.
Devanand – I would suggest you speak to [email protected] about this.
karthik i have a few doubs how is nifty spot traded how do i monitor the price of nifty spot in my trading platform . when u trade nifty options what is the underlying asset nifty spot or the current month future price
Nifty Spot is the underlying and not the Futures. You can track the spot data from your trading terminal.
Hi sir, .
You have done a great job in explaining stock market in simple language and examples.
I have one doubt, in call options or put options I have read that open interest of for example of 10500 CE of nifty is more , so it will act as resistance and similarly some 10000 PE OI is more so it will act as support for nifty.
Explain me this please.reply on [email protected]
Regards.
Irfan
Not really, Irfan. YOu need to read the chapter on OI to get more clarity on this. Check this – https://zerodha.com/varsity/chapter/open-interest/
i thought indexes are traded only in futures. but what is the concept of trading nifty spot
Yes, indices in India can be traded via futures or options.
Can anyone suggest suggest good candlestick pattern to predict bearish fall in stock? So that after analyzing that I can go for put option.
Eg- Pole-flag candle stick pattern is very good for predicting that stock will go up or not?
Some of the patterns that I like – Bearish Marubuzo, Bearish engulfing followed by a doji, and Evening star.
thanks….these patterns are good. But can you suggest any patter where we can calculate target, stop loss etc?
like in pole- flag bullish pattern, we can calculate target, time to target etc.
Rohan – you can do this for each and every pattern. The trick is to develop a logic and quantify it.
Have a look at this – https://zerodha.com/expert-advisors/code/bullish-engulfing-with-ema
Hi,
Is anyone aware of the following / attached excel sheet… if case if you are aware kindly provide me the link
Looks like a regular heat map.
I have question regarding buying put options when the companies declare dividend. Generally when the dividend is distributed, the stock price falls down by the same amount. can we buy put option for the stock & sell on Ex-dividend date? i know if the Div is very low against the stock price the movement may not be significant, but if the dividend is 4-5% like 5 Rs. on 100 Rs stock price, can we take a chance? or the drop in price will be adjusted in the put option pricing?
Usually the drop in price is factored in and the premiums reflect the effect of dividend. So I suppose there is not much gravy left in this strategy.
I have purchased 4 lots of icici bank put option at strike price 180 @rs 7.60 as premium. After few days price of icici bank come down to 178. Now premium price of 180 put of icici bank raises to 11. Now i want to sell my 4 lot of put option @rs 11 as premium before. My profit would be 3.40 per share. is it write. plz explain
You are right, your profits will be 11 – 7.6 = 3.4.
I am a new trader & have never traded in Options, but am thinking of doing so, but before so doing, I have been going through the modules on Options. In the above module while explaining, you said the following, “If Reliance is trading at Rs.850/- or higher upon expiry (say Rs.870/-) it does not make sense for contract buyer to exercise his right and ask contract seller to buy the shares from him at Rs.850/-. This is quite obvious since he can sell it at a higher rate in the open market.” Does this mean, in such a situation, I can sell these shares in the open market? Kindly explain.
This is just a comparison…it means that you can literally sell the stock at a higher price in open market, why bother to settle for a lesser price via options.
Thanks Karthik. Today is the first day, I tried to trade in OPTIONS. What I actually did is I used the “Call & Trade” facility because I simply could not understand how to initiate the trade. From where to find the Charts which showed all the Strike prices of a particular Stock or Index, which strike price to choose from them, etc. Suppose I want to option trade on SBI, where from do I get the chart showing all the details…..etc? My question I know is silly, but I believe once I get accustomed to the mechanism, it won’t appear so difficult. Until then, I need your kind support. Thanks.
Indrani – If you are a Zerodha client, I would suggest you login using Kite….Kite is quite user friendly and I’m sure you will find it lot easier to use. Also, I’d suggest you give a call to Zerodha, our support executives will hand hold you.
Yes dear Karthik. I am actually going through these modules as well as using the help from Zerodha support.Thanks a lot.
Super, good luck Indrani 🙂
Why PUTs are cheaper ?
Nifty Spot closed @ 7615, but 7600CE closed @78, where as 7600PE closed @ 22.
7600CE is just 15 points ITM, but the difference b/w premiums is very high. Any specific reason for the same.
Thanks in Advance
Generally speaking puts are cheaper to calls (belonging to same strike). Lots of factors contribute to this, including something called as the ‘Put call Parity’.
Hi ….. Good to see u are guiding so many people… Today is my first day in options… I bought put options nifty 7700 @124 …. So I paid 9300 as margin…. Now nifty closed at around 7602.. So can I square off now… If I square off now will I get both profit and the margin I paid… Or only the profit… I mean what happens to the margin I paid…?
If you have bought options then there is no margin that gets blocked. So yes, you would be profitable here – you can choose to square off and book profit.You will get back premium + profits.
Dear Sir,
If I have bought 3lots of put buy of bhel in intraday. How to square of my position in intraday?
You just have to buy back 3 lots Pradeed, this would square off the short position.
sir , if i buy options on expiry day MIS basis and if i didn’t square it off will i will be charged extra stt or it will be automatically squatre off by the system ,please tell in which case i have to pay extra stt.
It will be automatically squared off by 3:20. Also, make sure you dont buy ITM options and leave it to expiry as you will have to pay a STT, check this for more information – http://zerodha.com/z-connect/queries/stock-and-fo-queries/stt-options-nse-bse-mcx-sx
Dear Karthik Sir,
Whenever I try to buy options of the stocks not index following problems occur:
1) I can’t buy them at market price
2) while selling or buying I have to use limit orders…
Why this is happening?? is there any other procedure to buy stock options ?? because I dont find such problem while buying index options..
I can get any detailed process on how to buy and sell stock options?? and does trailing stoploss work on stock option premiums??
This is mainly because stock options are not as liquid as index options. It is recommended you look at liquidity before placing orders.
Hi,
How do we calculate the Support and Resistance Levels for Premium prices ie, for individual Stock Options like for example, SBI 180 Call option is trading at Rs.4.50. How do we calculate the Pivot Point, Support and Resistance for this premium price of Rs.4.50 for the stock SBI.
Regards,
T Venkatesh
Please do NOT apply TA to options. Apply TA only to spot.
Sir isn’t futures better than options with a strict stop loss and discipline especially since you can follow technical analysis like stochastics (and others) and more simpler ?
This is not true as we cannot really compare the two instruments. The characteristics, payoff, leverage etc are all different. You use them as per the situation.
please confirm which is the right way to calculate.spot is 550,strike is 540 and choose to put buy at premium rs 12, and after 3 hours spot moves down 545 ,premium get 14 rs ,then i want to square off my position then what calculation would be applicable.(1).IV=strike-spot,p&l=IV-12 in that case i will get loss ,but conversely in case of (2).difference between premium (14-12=2*lot size) in that case i get profit ,so can you confirm me which calculation will get executed ,please clear it .
In this case it is quite straight forward as you are just trading the premium. You will make 14-12 = 2 as profits.
Kindly cleat the doubt ,i am using zerodha PI for trading .If i have rs 5000/- in my trade account and i buy a put option at premium rs 4,lot size 1000 .and after few times or day as premiun increases to rs 10/- in that case i square off my position and want to get the profit difference ,then it is necessary to have (10-4=6*1000=6000/-) in my trade account for square off the position ,or no extra fund required and rs 5000/- is sufficient .because i am selling to square off my position .Because as we buy then sell must be compulsory for square off the position .
No. It is very simple here – you bought something for Rs.4 which is not valued at Rs.10, hence you make Rs.6 as profits.
What happens if I own an out of the money put option on expiration day and I don’t square it off?
You will lose money to the extent of premium paid.
Hi Karthik,
Since Put and call options individually cover the both, bearish and bullish, movements, how do we decide when to use put and when to use call. For example, if I am bearish on the stock, I can buy put or sell the call option or vice-versa. The only difference I could see between these is the extent of profit, which is limited in selling the call option. Is there any other point to be considered in such case?
Thanks,
Rajat
Well, it really depends on the premiums are playing out. If volatility is high and the premiums have gone up significantly, then writing a call and collecting the premium is a much better idea than buying an expensive put.
It is observed that questions and replies by MR Karthik pertains to year 2015. Now it is year 2017, whether this question answer session is still active?
Yes Sir, site is very active. Comments are updated everyday here and new chapters are added once in 10 – 12 days.
hello sir,
If i want to exercise the put option( in profit) what is the procedure to do it. will it be done automatically by zerodha or do i need to do something.
You can let the option expire. However, you may not really want to do it due to high amount of STT. Please do check this – https://zerodha.com/z-connect/queries/stock-and-fo-queries/stt-options-nse-bse-mcx-sx
hello karthik,
i have a doubt about futures margin. for suppose i bought ITC futures contract at 350rs with a margin of 90000rs and lot size is 2400. recently one day ITC had gap downed nearly 50 to 60 points and came to 280 rs . In that case my loss is 120000 rs. so i lost my entire margin and i want to square off my position in order to avoid further loss. so who is going to face that extra 30000 rs loss ? i can afford loss only upto 1 lakh rupees, beyond that i dont have money . please explain this scenario.
Ravi, Margin is made up of two components. SPAN and exposure margin. The moment you lose your exposure margin and start losing from SPAN margin, your position is squared off. Think of it as two halves…moment you lose one-half, the entire position is closed. This is a part of the broker’s risk management policy.
Hi Kartik,
A pretty basic question here…the Option seller has to hold the option till expiry…is that correct??
Not necessary. Both the option buyer and seller can trade the premiums…meaning they can buy and sell for any time frame they deem suitable. Could be few seconds, few mins, few days…or even hold till expiry.
Sir,i’m new to option trading .Today I bought 2 lot of nifty 9850 put option ,expiry 28th Sep and Index is trading at 9912. My P&L showing -1860 .Suppose i sell the contract now ,will I lose the whole premium or only 1860 .?
Only 1860 (plus applicable charges).
Hi,Kartik, if I have bought a stock in future can I hedge it by buying the put option of the same stock?
Thanks
Yes, you can.
Sir,
I feel that put option profits are not unlimited, as mentioned in the article.. as spot price can theoretically be lowest to zero only, and not negative..
In a sense yes. But that hardly happens.
Hi,
I had 1 query with regards to what you mentioned above in case of Buying a Put option.
How can “The gains can be potentially unlimited”??
If the underlying falls to Zero, that is where your Profit will stop isn’t it? So how can it be unlimited?
Can you clarify??
Technically yes, but stocks, especially in F&O segment seldom fall to 0.
In simpler terms, can you explain the change which has happened to the STT trap (for which you shared the link somewhere in the comments above) since 31st Aug, 2017? I understood what used to happen before that date, that is, the STT which got applied if one didn’t square off his position before expiry used to be very high, and eat away a lot (or all) of the profit. But what exactly has changed w.r.t to that rule?
Thanks!
Here is the link – https://tradingqna.com/t/no-more-stt-trap-on-exercised-in-the-money-options/18977, explained really well 🙂
Yup, this was the link I was talking about. Read it but didn’t exactly understand what had changed.
Earlier, STT was charged on all exercised option. An option is assumed to have been exercised even if it slightly in the money upon expiry. A slight ITM option may not really be worth exercising since you’d have ended up paying huge STT. This was the case until recently. Now exchanges have given the option for brokers to select which options to exercise and which ones not too. So If an option is slightly ITM, we can always not exercise it and save massive STT payouts.
After reading your comment & going through the link again, I think I got it. Thanks!
Cheers!
Dear Sir,
I have doubt regarding premium movement and settlement of options.
1) what will be, if there is no trade for option which I have already purchased on 1st Dec17 by the end of expiry date of it. In this case how the settlement will be done.
Ex:1) If I purchased “Nifty Dec 10200 CE” @ Premium Rs.200/- on 1st Dec17.
2) If I sold “Nifty Dec 10200 CE” @ Premium Rs.200/-on 1st Dec17.
If there is no trade on expiry day what will be the settlement?
1) The exchange will settle this for you on the expiry day
2) The settlement value will be dependent on the intrinsic value of the stock. However, the settlement itself will be carried out by the exchange if there are no buyers/sellers for your contract
Hi Karthik,
For a option Call buyer the profit can be potentially unlimited as the stock can reach any highest point. However, for a option put buyer their profit reach saturation point as underlying stock cann’t fall below zero. Am I correct?
Yes, that is right.
Dear Sir,
Thanks for good information on Put and Call options. I also read on investopedia that put option can be used for hedging.
I hold shares. Out of my portfolio, I want to hedge the shares of very good comanies, like Maruti, RIL, Britannia etc. Although I have understood the concepts of Put and Call options, I do not know how to hedge my existing good shares. I would appreciate if you explain.
best regards,
Tushar.
Check this – https://zerodha.com/varsity/chapter/hedging-futures/
If OI increases more than 95%, then security will go in Ban. This Ban starts immediately when it reaches to 95% or it is applicable from next day?
It starts right away.
Then how we get information that particular security is in ban now ?
I checked NSE’s website their they update security in ban for particular day but if security is going in ban say at 11 am then how traders come to know about this ?
You will have to check this – https://zerodha.com/margin-calculator/SPAN/ , the banned securities are noted in red.
Please help me in knowing the margin money required for executing the following transactions.
1. Buying a lot of Nifty option, strike price 10,500 @ Rs. 200
2. Selling a lot of Nifty options, same strike price
1 lot = 75.
1) You only need to pay the premium i.e 200 * 75 = 15000
2) Check the margin calculator – https://zerodha.com/margin-calculator/SPAN/
Hi,
Bank nifty PE 24,200 is available at the premium of 427 and Bank Nifty CE at the premium of 460. Strike date for both is 28 th march 2018. If we sell the both PE and CE then will get Rs.887 as premium. So ultimately we will be in profit upto the decline or increase in the actual price of bank nifty upto Rs.887 from the strike price of 24,200…. Am I correct??? Is it happen like this? Are we safe upto the change in price by Rs.887?
This is a short strangle, I’d suggest you plug in the numbers on the excel sheet here and check the range – https://zerodha.com/varsity/chapter/the-short-straddle/
Sir,
Currentlly nifty is at 10790 near.
I want to buy nifty put option at 10800.
Premium is 12000approx that is 154.
Wht will be the breakeven point for me?
10800 – 154 = 10646 is the breakeven for this trade.
When i Place an order in optons Buy Call/Put it shows MIS/DAY Pleae describe the differencce
Select NRML if you want to buy and hold the position overnight. If you want intraday trade, select MIS.
In the P&L behaviour How does the premium – 315/- remain the same when the spot prices keep changing?
Premium is a function volatility as well, Shyam 🙂
Hi Karthik,
You are doing a great job answering queries of traders and investors.
For the first time, I bought Options and want to understand P&L associated with it. I bought 105 India Cements PE at a premium of 1.80. Currently, it is trading at 107.55 (LTP as of Jun 21).
Assuming India Cem Spot price on expiry is 104, will I make a loss of 0.80 (Considering Max (0, 105-104) – 1.80?
Assuming India Cem Spot price on expiry is 103, Will I make a profit of 0.20 (Considering Max (0, 105-103) – 1.80?
This would happen If I alllow contracts to expire ITM on the expiry day or else I square off my positions in between the difference in premium paid will be my actual P/L.
In case the spot price remains above 105 on expiry day, I will lose the entire premium of 1.80… Right?
Please correct me if I am wrong on any of the above statements. Thank you in advance!
1) Yes, at 104, you will lose 0.8.
2) Yes, at 103, you will make a profit of 0.2
3) Yes, if you sq off the position before expiry, then you will make the difference between the buy and sell price of the premium
4) Yes, at 105, you lose the entire premium paid.
Good luck!
Is it possible to do intraday trading on options?
if yes how will expiry date be managed? As options expiry only on last Thursday.
kindly reply me, sir.
Hello
I have buy put option of Nifty 10600 @ RS 3 on 28th June 1018.
Nifty spot closed @ 10589 on expiry.
What is value of this position on expiry ?
How settlement price be calculated by NSE ?
The option will be settled at 11/- i.e 10600 – 10589. Since you have paid 3 as premium, your profit will be 11-3 = 8. However, I’m assuming charges and STT would have eaten this up.
Hi Karthick,
Where can I check the liquidity of options. Today I expected Bajajfinsrv prices to go up following the results. So I wanted to implement a long straddle. When I checked NSE page there were enough contracts for call options but there was nothing for put option. So I was hesistant to take the trade as I was worried whether I could sell back the put option. Please let me know if my understanding is correct.
More over there is a decent number of contracts for call options in all stocks but for most of the stocks there is not enough contracts for put options. Can we use contracts to determine the liquidity of options. Please correct me if I am wrong.
Vinoth, this a problem with the stock option. The contracts are not too liquid. To check the liquidity, you can check –
1) The spread between the bid and ask. The larger the spread, the lower the liquidity. The lower the spread, higher the liquidity
2) You can also track the number of contracts being traded to get a sense of liquidity.
Hi Karthik,
Thanks a lot for your reply. I have back tested (paper traded) some option strategies (intraday) on various stocks for some time now and it seems to be working. Initially I did not think that liquidity will come as a barrier. Is there any other way we could overcome this?
The reason I have chosen stocks over index is that we could see more than 2% to 3% movement intraday and that really is essential for making profits. Please correct me if I am wrong.
Once again thanks a lot for your help.
Vinoth, no, unfortunately, you cannot do anything much with liquidity. It is a real risk. Also, I hope you are aware of the new physical delivery for F&O settlement that has been introduced. If not, I’d suggest you check this link – https://tradingqna.com/t/how-does-the-new-physical-settlement-of-stock-derivatives-work/37830
Hi,
Good chapter. To test I bought 1 PUT option of Nifty at strike 11100 at 25 Rs (20×75 rs = 1500 Rs). Suppose, if NIFTY goes back to 11050 how do I exercise the option? In Zerodha Kite, I have 2 options: 1 – Exit and 2 – Convert. Exit gives the price of premium. I know the value will decay with expiry. For tomorrow expiry if the premium value is less than 50 points NFITY profit how does it work?
Its confusing can’t I exercise the NIFTY at 11050 and get 50 points profit instead of premium? or will premium change to 70rs? How does it work.
It useful to link the Kite platform to understand the chapters here.
In Nifty expires at 11050, then the 11100 PE option will expire with a 50 point intrinsic value. I’d suggest you exit the position.
is CE seller is analogy to PE buyer is some sense ? as both has bearsish view
Yes, but there are differences in terms of views on volatility.
Is their any specific guideline for buying a option contract in zerodha ? Today’s bank nifty is 28300 & I was trying to buy 27200 put option but zerodha was not allowing to put the order … plz explain
Dear Karthik,
I would like to mention, that I was always hesitant to learn and trade in options because, it used to seem very confusing to me. I tried few educational sources to enlighten me. But my perception about options was same. After I started to read your lessons on options, I found how easy options are. It is easiest way of understanding options using your lessons.
A big thumbs up to you for all of your efforts for this series.
Regards,
Sunil
Hey Sunil, thanks so much for the kind words, glad you liked the content 😉
Hi Karthik,
Thanks for this great module on options. Im very confident with how buying a call and a put works but few queries on selling both of them.
Once i receive a premium after selling a call or put, is it possible to exit the position before the expiry? (Similar to the case if i would have bought either of them). Or do i need to hold it until expiry ?
Thank you.
Yes, you can exit the position anytime you wish. No need to wait till expiry.
Hi Karthik,
Recently I went for Put Buy on BankNifty and the next day Bank Nifty was moving up which throwed me in loss.
Broker asked me to add margin as the put option went in loss. But I didn’t . Broker squared off half 75% of my Bank Nifty put holdings.
Could you please help me that was it correct what broker did?
In any case , do I need to pay extra margin( When margin shows short fall either in Call buy or Put buy)?
Thanks in advance
Rajasekhar
Nope, your broker does not have the right to close a long option position as you’d have paid the full premium to buy the option. You may want to question your broker as to why he did this.
Karthik,
Thanks for the quick reply.
Mail has already been sent to the broker one week ago but still no response but at-least as per your confirmation I got confidence to question the broker on this.
Thanq Karthik.
Yes, please do. Good luck.
Hi Karthik,
Here is the reply for the Broker.. Could you please validate !
So that I can ask the Broker again.
Thanks in advance
—————————–
Dear RAJASEKHAR NELLURU,
Thank you for giving us the opportunity to serve you.
This is with reference to your communication with us regarding the squaring-off of your open position.
We would like to bring to your notice that you are required to maintain requisite margin for your open position(s) at all times and fund the shortfall amount (if any) immediately. We also wish to state that squaring-off of an open position is a last resort of risk containment.
On 21/09/2018, your ledger net margin is in negative of Rs.6818/- and the market is up hence your PUT position value is eroding hence your open position of OPTIDX BANKNIFTY Sep 25500.00 PE is liquidated.
In view of the above, we express our inability to compensate for any loss incurred in your account.
Request you to quote this reference number ******** for any future correspondence in this regard.
I’m confused, were you long or short? If you were long that means, you have paid the full premium, hence there is no question of how much money you have in your ledger. However, if you are short, then the broker has the right to close your position.
Karthik,
Below are the details
OPTIDX BANKNIFTY Sep 25500.00 PE – Buy
Please clarify.
If this is a long option position with full premium paid, then there is no way the broker can close the position on your behalf.
Hi Karthik
Why PUT writers dosent buy CALL to protect their loss?
GAJANAN
They do, why do you think they don’t?
Sir,
To Hedge 1 Lot of Nifty for minimum 3 months, which strike of Put ption should be bought, At the Money today or Far month Future Contract price or 1 strike up from far month Future Contract price.
Darshan
I;d suggest you look at a slightly ITM option for this.
Hi Karthik,
How the long PUT options premium adjusted to stock dividend? Could you please provide more information on the PUT option pricing before and after EX-Dividend date. Vedanta has declared Rs 17 as dividend, Now currently trading at 207, Yesterday it was at 223.
if we have bought PUT 210 PE yesterday( as it was far Out of the money) the premium might be less. Could you please shed some light on this.
Thanks
Satya
Satya, the contract would be adjusted for the dividend and the strikes would be accordingly adjusted on the ex-dividend date.
Does kartik sir still trade . If yes how much return on capital employed is expected in one month.
I’ve not been trading actively, most of my personal funds are invested for the long term.
‘Option buyer risk is limited to paid premium, but reward is unlimited….’
Theoritically
– Option Call buyer
spot = 150, bought a call say 170 at 4/-
on expiry pnl = (Spot – Strike) – premium paid
spot value goes to +ve infinity reward is ‘unlimited’
– but hows that true for PUT buyer
Spot = 150 bought a 120 Put at rs 4/-
on expiry (Strike – Spot) – Premium paid
Spot can go max 0 so
(Strike – 0) – premium paid
unless Spot can go to -ve infinity the genaralization wouldn’t stand true.
(Strike – -veInfinity) – Premium paid = ‘Unlimited’
pretty am sure missing something….
Well, yes…the spot can go to 0 (theoretically) and the put can grow to that extent, but in terms of % this will be huge. Hence the term unlimited.
Karthik sir
I want to know how to place long duration call or put option in zerodha terminal.
Today I tried to buy March 26500 put but it showing order open but not excuted why
I guess there was is no liquidity, Parvez.
i’m option trader, every dayi start trading near in 1st hour. but once in a week your server down, and you claim you are no.1 broker of india. this error is common in every week “Something went wrong while placing order: Request failed (kitefront-upstream). Please check the orderbook before placing the order again.
“
Milan, once is a week is an extreme exaggeration :). We would not be where we are if such things were to happen every week.
Hey,
First of all thanks for providing such great writing. I could imagine the effort and patience it would have taken.
Though I have a doubt.
Suppose I sold McDowell 550CE for a premium of 10 and held it till expiry. On the day of expiry, McDowell’s Priced ranged from 540 to 560 and finally closed at 550. Similarly, the premium also moved from 0.5 to 12 and finally closed at 1. Is it possible? Will the exchange adjust the price of the option to 0 from 1 or they will take last 30 mins volume-weighted price? If they will take volume-weighted Price what will happen if in last 30 mins stock was mostly trading at 555 and therefore the option at 5?
Please Give clarity on this doubt. Thank you.
It will be the weighted average price of the last 30 mins.
Hi Team,
First off, you have been doing an amazing job in terms of empowering common retail investors in such vast and interesting concepts. Thank you so much for your efforts.
My question is this, to enter into a contract a clear directional view on the underlying is essential, now why would a person write (Sell) a call option when he can limit his loss and gain unlimited profits by buying a put option when his view is of a down trend? Likewise, why would a person write (Sell) a put option when he/she can buy a call option when they are expecting a uptrend in the market and gain unlimited profit while limiting their risk?
Directional View: Uptrend.
Options available…
1.Buy Call Option: Limited Risk & Unlimited Profit
2.Sell Put Option: Limited Profit & Unlimited Loss.
Directional View: Down Trend.
Options available…
1.Buy Put Option: Limited Risk & Unlimited Profit
2.Sell Call Option: Limited Profit & Unlimited Loss.
In both cases, option 1 looks very attractive, considering known risk and exponential profit potential. Then why would people take the riskier deal.
Now if its just the statistical edge that makes the latter attractive, I don’t feel its a strong argument, or am I missing something.
Please Help. 🙂
Hi Lavish,hope you are doing good.Buying call options is expensive most of the time because of time value and implied volatility.When you buy call or put options,you will be paying more than the real value of it.For example,a option value which should have its real price i.e intrinsic value as 10 might be available for 20 due to time value and IV.So you will be paying extra 10 to buy.This extra 10 will get reduced by some points every single day.We call this as time value decay.Your profits will start only once your options value goes past the strike price you selected plus the premium value you paid.This why buying options when the value is really low is preferred.When stocks drop by 10-20 % in 2-5 days your nearest call option value will be too low and you can buy it.This is how I buy options and vice versa.
Selling Options
In selling options contracts, you do have unlimited risk if you open one single position like selling just a call option or selling just the put option.But when you create credit spread positions like short strangle i.e selling out-of-the-money call and put at same time,your one position will give you guaranteed profits.And in selling you will receive the net premium. You will make losses only when there will be a big move and that too can be adjusted or minimized with proper risk management and trade adjustment.
Final Words
Selling options has higher risk only if you don’t know how to control it.Overnight risks you cant control in any financial instruments.By controlling overnight gap risks and doing proper trade adjustments sell position goes against you,you have better chances of making money with selling options.So don’t get excited with low risk and unlimited profits concept of buying options.Trade accuracy of buying options are too low if you compare them with selling options as time value is always depleting and in your favor when you sell options.Hope I was able to provide you valuable information.Thank you.
Thanks Jai, that was really helpful… 😊 And I’m gonna take back few technical terms you used and learn them to understand discreetly what you meant, though I seem to have got the crux of the matter. 🙂
That’s absolutely right, Hari. Thanks for pitching in 🙂
Hi Lavish, I think Hari has answered your question in great detail 🙂
Page 48 point no. 9
“However shorting futures maybe a bit risky as the overall market is bullish, it is only the banking sector which is lacking luster.”
Can you please explain this point favouring Put option buy.
Guess it means to convey that the overall market is bullish, except for the banking sector.
Hi sir, I’ve a doubt, by the first day I’ve started reading varsity, you’re telling sometimes a news came on this stock or a news is going to come this week or reserve bank policy release. My question is where to look at this news for a stock or some bank policies?? Can you suggest anything to watch these news other than watching Tv finance channels
Bala, I’d suggest you start reading the business newspaper. With that, you will get a good grip on all the upcoming news bit and event. Also, you have a notification of the upcoming events on the Kite widget, check this – https://kite.trade/docs/kite/marketwatch/#stock-widget
Hi Sir,
I have a doubt. Could you pls clarify.
I bought OTM PUT on last Friday and I didn’t exit it as it is in loses. Can I hold it till expiry date and sell it on or before expiry date though it is im profits or loses.
Thanks in advance.
Yes Krishna, you can sell it anytime you want.
Thank you very much Karthik for your quick response.. You are awesome 👍👍
Good luck, Krishna!
1. By squaring off before expiry, we’re essentially trading the premium prices. If our directional view is strong, why not trade futures which give us exposure to a much greater lot size?
2. Since we’re trading premium prices, why not just trade in spot?
1) Yes, I agree. In fact, if the agenda is to play the direction (especially in the shorter term), futures is a
better deal
2) If you are fine with no leverage, then spot is good.
Is it OK to buy 1 year PUT OPTION for Hedging the Equity Portfolio. If Zerodha offers 1 year PUT Option. Which Broking Firms offer
1 year or more PUT Options. What can be cost of Hedging. If it mayl be app. 2% per year
Prakash, long-dated options are called ‘Leaps’, which is not possible on Indian markets due to lack of liquidity.
Hello Zerodha Varsity Team,
I have read options concept at multiple blogs/videos but still i was unclear of the concepts, at the last came to the rescue was Zerodha Varsity i thank so much to the team for the effort spending on creating a wonderful learning experience with charts/graphs and pictorial representations and step by step approach of teaching the concepts, i was in Awe with the way you have explained . Kudos to the Zerodha Varsity Team ..
Cheers !!!
Ajaykumar B
Thanks for the kind words, Ajay. You made the day for us 🙂
Happy learning!
Dear Sir,
I want of know if the Put Option buyer wants to exercise his right to sell the stocks, then he must have stocks in his account ? Or, it is simply cash settled ?
Regards,
Rahul Mishra
If you take this to till the expiry, then you need to have the stocks in your account. This is a part of the new physical settlement policy. More on that here – https://support.zerodha.com/category/trading-and-markets/margin-leverage-and-product-and-order-types/articles/policy-on-physical-settlement
Respected Karthik Sir,
Could you please let me know what is the potential for my below position which I initiate on 3rd January, 2020
Below is my position, Which I planning to hold till expiry.
1) Suppose I Sell Reliance ATM 1540 PE @ 37 (oblige to buy at the expiry day)
2) Buy Deep ITM Reliance 1800 PE @ 265 (Right to sell at the expiry day)
I understand for my above position at expiry day I oblige to buy Reliance @ 1540 and I have right to sell Reliance @ 1800.
Is the system will automatically adjust the position at the expiry day or I need to do it manually?
A) If I need to do it manually and at the expiry if reliance Trade 1500 from whom I need to buy reliance at @1540 and how? Also To whom I will sell reliance @ 1800 and how?
B) If I need to do it manually What if Reliance trade at the expiry @1560 or above, What I know on that situation PE buyer will lapse his right to sell and how and whom I need to buy stock to claim my right to sell @1800 PE
C) I also kept Ready extra Fund 1540*500 of Rs. 7, 70000/- if required to buy shared at the expiry. ( IS IT MANDATORY TO KEPT THE EXTRA FUND READY INTO TRADING ACCOUNT)
I get premium 37 for 1540 PE sell and Paid extra 5 for 1800 PE (1800-1540= 260, where I have paid Rs. 265 for 1800 PE) my Total Maximum Gain is 32 each share at the expiry for any market condition!
I do not understand what will be my maximum lose/Risk for the above explain position, could you please explain.
Thanks in advance for your time and effort.
Best Regards,
Soumen Sen
1 & 2) Based on the spot at expiry, you will have to either bring cash of stock. This is due to the physical settlement of stocks. Check this – https://support.zerodha.com/category/trading-and-markets/margin-leverage-and-product-and-order-types/articles/policy-on-physical-settlement
A) If you are headed to expiry with a position, then its better you track the position and adjust based on the margin requirements.
B) Reliance is a liquid stock, so it is likely that you get a fill
C) Going into expiry, if the option turns ITM, then yes, you will need to bring in cash
I’d suggest you key in these options position on Sensibull, you will get the exact payoff and risk chart. Will be easier to analyse.
Sir, I am not getting the concept of selling the options (both call & put) before the expiry date although I go through all the comments. In India we use the European Options then hoe can we exercise them before expiration ?
I am confuse, please get me out of this.
Thanks
Nischal, think of the option premium as a stock. You can buy or sell the stock anytime you want right? Just like that, you can buy or sell the premium anytime/any number of time you want. There is no need to wait till expiry.
Got it. Thanks
Dear Sir ,
A Underlying is been Currently priced @ 557.00 I expect it to go down more can i select Options Put option ( BUY ) priced at 600 or more ? the Premium is around 40 . As it is already 600-40 premium Means already in profit . also what happens if the price of the underlaying on the date of Expire is about 540.00, will i get 20 per share , if the price is 555 on the day of Expire will i get 5 per share ? can i select 600PE and make the purchase when the underlying is just 557 ? is it wise or i am all wrong .
If on expiry the underlying is 540, then the intrinsic value for the 600 PE is 60. Since you have paid 40 as premium, your profit is 20.
Hello sir, in the above bank nifty example why don’t we just buy 18500 or 18600 instead of 18400.. ???
18400 is the ATM option right?
[…] 5. The Put Option Buying […]
Hi kartik sir,
Based on pre open market data and I bought 17000 bank nifty puts apr contract. At 492. Though I had planned to scalp some points in opening trade ,the price just crashed and hit my sl.
I m wondering where did I go wrong? Bank nifty index was down and I was expecting the puts to increase.. Also there was hardly any movement in box.
Can You help me understand where did I go wrong?
Tks,
Shyam
That would be very difficult to figure given the context we are in Shyam. Our markets are closely aligned with global mkts, so as you can imagine, multiple factors at play.
Sir
I have a suggestion. In the graphs shown for the probable P&L, kindly show profit line in GREEN and loss line in RED. It will be lot easier to comprehend.
Regards
Thanks, will try and do that.
Going on to the 2nd question, if the spot is at 17000 on any other date apart from the expiry date, the P&L is not going to be 1085, it will be higher. We will discuss why this will be higher at an appropriate stage, but for now just keep this point in the back of your mind.
Can you please share the link for the above?
Link is the chapter itself, right? Sorry, I don’t know if you are looking for anything else.
Hi Karthik,
Thanks for all the info.
Can you explain why would anyone not short instead of buying a put option and vice versa? Because the user is bearish, he can also short right? How do you make that choice?
Thanks!
The decision to buy or sell an option depends on two things –
1) Volatility expectation
2) Current premium owing to the current volatility
Have explained both these concepts in the chapters related to Volatility.
Hi Karthik,
Sorry for not being clear in my previous query. I wanted to know the reason for choosing Options over futures and vice versa.
For ex: If I’m selling Call Options, why can’t I sell futures since they both involve margins.
Thanks
You choose options when you want to de-risk (especially at times you are not sure about the market direction). Futures is best when you are certain about the market direction.
it is very easy.but end of month it becomes lower
i want to buy a put option of cipla APR FUTURE @580 0N 20TH APR AT RS 21. AT THE END OF THIS TIME IS THIS WRITE DECISION. ONLY PAPER TRADING PURPOSE
Yes, as long as you are paper trading and learning from its outcome 🙂
If I bought a put option, once I try to exit the put option, will I be asked for a margin. If yes, then why ?
Thanks
In 5.3 Last paragraph, “Of course we will understand how to calculate (and the need to calculate) the intrinsic value of an option during the expiry”. I’s this “during the series” or “during the expiry Of course we will understand how to calculate (and the need to calculate) the intrinsic value of an option during the expiry”? Can you pl explain if it is not typo
Series and expiry are kindly of loosely used, both are interchangeably used.
If I buy below Nifty Option what will be the expiry date
NIFTY MAY 8500 PE
Why there is no date with this Put Option
You must be buying the May expiry option expiring on 28th May.
Hi Karthik,
Pls help me with following questions
1) I have seen various fascinating trading terminals . All blue and red lights flashing on the screen alongside the script name as and when it moves up or down. NO chart only scripts names especially at the trading houses.
what are those softwares karthik?. do you know any of these ?.I have only used Kite as of now?
For example :- I have seen nse NOW has same software . DO you know any other then that.
2) DO you guys design personal softwares for your clients . I ask this because in one of the comment i read it . I am talking about this :- https://zerodha.com/varsity/wp-content/uploads/2015/04/20185.png
3) Which softwares do these mutual funds/Hedge funds etc use for trading ?
I might seem foolish but pls answer me not limiting yourself to the questions i have put up.
Or suggest something where I can learn about it.
Thanks .
1) There are two different kinds – (a) trading + charting Softwares, which basically lets you look at the chart plus trade. Kite is like this, (b) Charting software – where you can only look at the charts, like an AMIbroker. I’m not sure which one you are referring to 🙂
2) No, we don’t 🙂
3) Depends on the purpose. However, I know few funds who use Kite for placing orders 🙂
how would i know whether the premium i paid for a particular strike price is right or more than its actual value ??
YOu can check the fair value of it on B&S calculator.
Dear Kartik Sir,
Greetings of the day!!!
Sir the above details on put option is good, but i still have confusion, would be highly appreciated if you could help me.
Firstly let me tell you that i am novice and new to the trading world, so forgive me if i am asking a stupid question.
please help me with the below scenario –
With the current situation, the Nifty Bank will go down to say my assumption strike price is 16800
So can i really “BUY 06 LOT’s PUT OPTION FOR BANK NIFTY” but with expiry on June 18th.
And by any reason on the 11th June itself the Bank Nifty is on 16400 so how do i proceed with or do i have to wait till the expiry???
Do i have to square it off or the seller of the contract will buy if from me at the value when the contract was made i.e if i buy the put option and on that day the Nifty Bank was @ 17100 or how does it happen???
please advise/suggest me with your expertise.
regards
KPM {KITNA PAISA MILEGA 🙂 }
No, you need not have to wait till expiry, you can sell it whenever you want even before the expiry.
Sir, I have same question which is clear now, after selling put option can i consider that i am completely free from the contract.
Yes, once you square off the trade, you don’t have any open positions in market.
Respected Sir,
Greetings of the day!!!
Sir please could you reply me on the below query please.
Can i BUY 01 LOT’s PUT OPTION FOR BANK NIFTY” but with expiry on June 18th.
And by any reason on the 11th June itself the Bank Nifty is on 16400 so how do i proceed with to book my profit???
Do i have to square it off or the seller of the contract will buy if from me at the value when the contract was made i.e if i buy the put option and on that day the Nifty Bank was @ 17100 or how does it happen???
Yes you can buy June 18th contract if its available and liquid. Yes, you can sell it before expiry. Sell it like how you would sell a regular contract.
Hi,
If I want to buy a put option of a stock which current value is 100, I want to buy the put option of strike price 90 which is available at rs. 2 and lot size is 1000.
Do I have to pay Rs. 2000 or 90000
2 x 1000 or 90 x 1000
If I have to pay 2000 then do I have to keep 90000 in my trading account
Confused please clarify.
Thanks
You will have to pay 2*1000 = 2000. Basically premium * lot size. No need to keep 90K in the trading account for long options, you just need to pay the premium amount.
Hi Sir, My question is regarding margins to be maintained for executing a option statergy , I wanted to execute a short strangle , i looked at margin calculator and had more than enough funds maintained to execute the strategy . After I had short CE option I was left with less than required margin to short PE option . Now how do I take advantage on the margin to execute two or three orders on kite ? Is it that I have to mandatorily execute the order on sensibull . ? Please guide me on this . Thank you
No, you can execute the same on Kite, no need to execute it on other platforms. Have you looked at the margin calculator? If not, please use the same understand the exact margin requirement https://zerodha.com/margin-calculator/SPAN/
Yes Sir , I have checked the margin on Zerodha margin calculator and basis that I have maintained the funds . Do I need to maintain funds as in I execute both options separately ( in this I have to add additional amount ) and then the margin benefit I get a refund back .?
YEs, after the 2nd leg is executed you will get the margin benefit.
I trade in F&O by buying Individual stock futures and cover by buying put option. In case the stock value is going down (contrary to my anticipation), I would like to sell both Futures Lot as well as the put option lot of the security.
a) But in case , the futures lot gets sold in the market , but there are no buyers for the Option Lot (which becomes In-the-money) then how do I deal with it ? Particularly when the expiry date is nearing. Theoretically, option buyer has right but no obligation. But as per Stock Exchange rules all Stock Derivatives to be physically settled only.
b) In case of the ITM Put cannot be sold in the market, what is the amount to be paid by the option buyer to get the shares delivered into his/her demat account?
1) Illiquidity is in stock options is a real problem, hence you need to watch out. However, if you take to expiry, you will get settled by exhcnages
2) Depends on the stock price. Check this – https://support.zerodha.com/category/trading-and-markets/margin-leverage-and-product-and-order-types/articles/policy-on-physical-settlement
Hi Sir, This question is regarding P&L .
Suppose at the beginning of the month I short a call option of stock XYZ @ 200 Strike Price at Rs 5 premium – 1 Lot = 1000
Current Spot price – Rs 180
At the time of expiry – Spot = Rs 192 and I decided to exercise the call option
LTP = Rs 8
Is the margin calculation correct on expiry of the option ?
P&L@ 192 after I exercise the call option
= 5-Max [0, (192 – 200)]
= 5 x 1000 = Rs 5000
Difference in premium is Rs 3 x 1000 = Rs 3000 . adjusted on MTM
Hence the total profit would be Rs 5000 – Rs 3000 = Rs 2000/- ?
Is the above calculation correct .
Anil, upon expiry this option will be worthless. But if you want to close before expiry then take the difference between the buy and sell option premium i.e. 3 in your case, multiply with lot size and that is your profit.
Sir, In the question above , I short a call and the premium is above my avg purchase price , then this would be a loss ?
But the spot price at expiry is less than strike price . Request for another glance at the question . This would clear my doubt on taking the short options to expiry day .
Yes, when you short, you want the premium to go down. However, if you hold the position to expiry and upon expiry if the spot is below the call option strike, then such call options will expire worthlessly. Hence you get to retain the entire premium.
Sir, Just for an example if I am buying a putof Banknifty , and the current price is lower than my strike price , to execute the contact should I have to hold the quality of lot in the contact/equivalent amount in my dmart account?
No, the physical settlement is not applicable to indices.
If a Put writer writes a put far Out of the Money, far below the spot price, s/he is almost certain to end up with the small premium s/he receives. for example, if the stock price is Rs 180 and the market is a little Bullish, or neutral, the premium for strike price of Rs 150 is Re 0.25 and the market lot is 5000; the Put writer is almost certain to make Rs 1,250 per lot on margin of Rs 1, 50, 000 in a month, giving a return of 10% p.a. Then, is not selling put in such a situation a fairly conservative but profitable method to trade?
Second question is, in such a situation, why should anyone buy a put at Rs 150, far out of the money?
The only thing is when markets fall backed by fear, then 150 will get taken out in a few seconds, leaving you with a major loss. Hence writing PUT is a little scary affair. Why would ppl buy — well, for the exact opposite reasons the seller has. Remember, different opinions are what makes a market 🙂
Hi Karthik,
I am new to the options, just wanted to understand one of the practical scenario.
1. Person A writes the option (Put/Call) for stock/index ABC at strike price “X” for a premium of “Y”
2. Person B buys the above contract – (Person A still has the obligation to buy/sell stocks if the market is in Person B favour)
3. Say Person B sells the contract to Person C before the expiry – I wanted to confirm that Person A is no more in the picture and doesn’t have any obligations and all are now shifted to Person B?
Can you please help me understand the above case if my understanding is right?
In this case, Person B is out of the market and Person A and C are in a contract. Person A still has the obligation and C has the right.
Hi Karthik,
Great learning experience with Zerodha!!!
Just wanted to confirm that.
1. If I buy put (let say Nifty @10200 at 150 Premium) and same is squared off within some days (not expiry), Nifty @10150 at Preimum
i) 160
ii) 140
1. The profit would be 10 Rs for case i
2. The loss would be 10 Rs for case ii
RIGHT?
The contrary to BUY put is Sell Put and Simliary Buy Call is Sell Call???
The contrary to Buy put is Sell Put and Similarly for Buy Call is Sell Call.
Yes for all 🙂
The formula to calculate the intrinsic value of an option that we have just looked at is applicable only on the day of the expiry. However, the calculation of intrinsic value of an option is different during the series. Of course, we will understand how to calculate (and the need to calculate) the intrinsic value of an option during the expiry.
In which chapter I can learn this sir.
Also why the option is making loss despite P & L is positive before the expiry.
My P & L for PE sell is positive before the expiry but If I want to exit the position its showing loss??
Thank you for your help.
Anil, the P&L depends on the premiums. What price did you sell and at what price are you buying back? The difference in premium multiplied by the lot size is your P&L.
Sir is there any virtual trading terminal where i can practice options ? other than sensibull because it is not free
Hi I have question, if i had brought 10300 Put option at the expirey date the spot is 10500 and make my put option price as 1rs or lower, what if i choose not to exit the position since i will be incurring loss as well as other trading charges.
will i be incurred any other charges as well if i dont see off my put option..?
It is just the P&L loss and applicable charges, nothing else.
Hello sir, am a newbie who has been quite intrigued by the course content and your method of explanation(phenomenal to say the least). I just had one doubt, what i have seen so far in the options module is that the P&L formulated is based on the assumption that investors are loss averse. So you mention that a put buyer will not exercise the put option in case the value of the underlying asset is above the strike price. However, he may as well exercise such a loss making deal if he immediately needs some bit of loss elsewhere(where windfall gains have taken place-again the rationality of this could be countered-but let’s just assume he wants to avoid some sort of tax scrutiny), so he’s ready to sell the underlying at the strike price(way below the spot price) and incur a loss, instead of simply letting the put option lapse. So essentially something like this is allowed, right? Or he would be barred.
I get your point of carrying forward a loss to offset the gains in equity. However, a PUT option (or even a call option), does not really get exercised if it has no intrinsic value, it is technically not possible.
https://imgur.com/a/WRTsePp
Kindly refer this image sir,
how come the put option premium varies from the option chain and the order window?
Am I missing anything, sir?
Buyer need to pay only the (premium*lot size), am I right sir?
You may be seeing two different expiries.
yes, got it sir.
Seem that is weekly option contract sir, but we’ve discussed only monthly expiry 🤔
The working of the option remains the same, Mano. Nothing changes.
Sir my question is regarding Nifty…. Suppose I sell 10500 and 21000 put option in nifty and Bank Nifty and both of them expire in the money… how will the options be settled? I read somewhere on zerodha that it will be cash settled but I also so read somewhere that we can buy the Nifty shares if the options expire in the money…. Please provide an accurate answer
No, indices are cash settled. Physical delivery is only for stock options.
It means that I will lose money if it expires itm? Right?
Also is it a rule that indices are cash settled of the exchange or its a Zerodha policy?
Brokers cant come out with these policies, we have to follow rules set by the exchanges. Yes, indices are cash-settled.
Hello sir,
Firstly many thanks for the beautiful content you have put up here; trying to explain the most complex topics in a very lucid manner. Amazing effort!
Sir actually i wanted to know in the example of 18400Bank Nifty PE, if upon expiry the underlying is trading @18300 then will trade still get executed(trader minimises loss to 215)?
Thanks.
Yes, upon expiry this trade will get settled and the P&L will get attributed to the trader.
Dear Karthik,
One Query, i’m new to options, Ive bought a Infy AUG 850 PE put @7 with premium 8400 (1200 Units). If my order moves higher than my strike price eg @9, I Sell it and pocket 1200*2=2400, Do i get my Complete premium+2400 profit or I’ll be at loss as the price must move about 14 to start my profits..I still have a doubt that I would be in profit @break even 14 + above price. Kindly Answer..
Nageshwar, you will get Rs.2400/- as profit.
Karthik – Thank you for reverting so quickly. I have certain Questions, kindly help me understand and I hope you help me understand on below.
1. So, if the Postion moves from 7 to 9, i take profit of 2400, I understand that if it moves against(my price @7) eg5, I will loose 2400. What about my premium which paid in both the cases. Do i get my premium back along with profit in 1st case.
2. What happens if i hold it till expiry in this case if the position pricing @ 13 as an example. kindly hep me understand.
1) Yes, you get back the premium. The worth of the premium is dependent on the price of the premium
2) If you hold to expiry, what matters is the intrinsic value of the option. Which I’ve explained across the module.
Hi Karthik ji … please accept my appreciation and BIG thank You!!! …you are replying everyone’s query and helping them and guiding, almost without fail ! this is really really very helpful for learners!
We are very much thank full to you 🙂 Great Job ! keep it up ! 🙂
Thanks for the kind words, Atul! Happy reading 🙂
Karthik ji,
1. Some confusion in index option contract expiry (NIFTY and BankNify), like in both index, weekly expiry happens every Thursday, so I want to know when a new contract starts ? on every Friday (after expiry of current on Thursday) ? or before Friday also ? how it works ?
Right now I am checking “NIFTY 6th AUG 11000 CE”… 6th Aug is expiry, but on chart its price movement started on 13 July itself ! so quite confusing! please let me know. Thank you.
So we are in Aug 2020 now. At this point, you will have Aug, Sept, Oct contracts available to trade. When Aug contracts expire, November contracts are introduced. So at any point, you have 3 contracts available to trade. So when Aug expires, the immediate next day Nov contracts are introduced.
…now I got it this logic.
But my confusion is still in 6th Aug expiry, it should start from 17th July, but in chart we can see the price movement from 13th Aug itself ! can you please explain how and when this 6th one started ? And why chart showing prices before 17th ?
These are weekly contracts Atul, they get introduced the same way as the monthly do.
Okay Karthik ji thank you 🙂 …I think I need to read and learn more to clear the doubt.
Happy reading, Atul!
Hi ! I have a doubt reg Expiry of Put Option.
Suppose I bought a Put option for Strike Price of 100 at a premium of Rs. 5 and on the day of expiry the Spot price is 120. So, obviously, I will NOT sell the underlying to the Seller of the Opotion. In that case how will be the transaction settled ? (Drawing a parallel to Buying of Call option, the shares will be sold in open market and the transaction is settled. How will this be done in case of a Put option)
On expiry, all options have to be settled at the prevailing settlement price. So there is no other way 🙂
Sorry to bother further. Can you pls elucidate a bit with an example ?
For example, let’s say you hold a 100 strike CE and the spot expires at 110. On expiry, the premium’s LTP would be 11.50/-. Now since the option has expired, your P&L is the intrinsic value of the option i.e 10 and not the LTP which is 11.5/-.
Sir, If I buy put(PE) option at a particular strike price and sell it immediately at a price which is below the strike price,
1)Then be the p/l = difference between the buy/sale premium ?
2) Or will I lose the whole premium (bought) ?
1) Yes, that is correct
2) You would, if this was the case on expiry day.
Hello sir,
My question:
If I have a directional bullish view towards Nifty for tomorrow. Assuming Nifty is trading at 11500. What strike call option should I go for? (ITM,OTM OR ATM, please give me eg wrt the strike price). For intraday.
Ryan
Considering you are bullish and there is ample time to expiry, you can look at slightly OTM options.
Hello Sir,
On 24th September ( Expiry Day )
I just checked the price of following strike price ( for study purpose )
BAJFINANCE 3200 CE = 0.05 Rs
BAJFINANCE 3800 PE = 115 Rs
Spot was around 3050 Rs
Lot size is 250.
Now, when I clicked on Buy for CE, amount required was 12.5 Rs (250*0.05) fair enough,
but when I clicked on Buy for PE, amount required was something around 4.3 lakhs.
and we have learned contract value is lot size * premium , which I think should be around ( 250*115 ) =28750 Rs.
why buying PE was so expensive sir.
Thanks.
Regards
Thats because you are trying to buy close to expiry, at which point the margin requirements go significantly up owing to physical settlement.
then why was CE not expensive sir
why only PE.
thank u sir
Volatility plays a part right?
Hi
I took Muthootfin 29 Oct PE 1000 as per angel broking recommendation in research window in the app. now I have doubts, please clarify.
As per the recommendation given “short term stock option buy Muthootfin OCT PE 1000 @ 56-58 SL 44 target 80”.
I bought on 24 sep2020 @ 29 rupees. Now the share is only 14+ , what will be the scenario now.
Suppose it goes still less (eg: 2 rupees at 2nd Oct. What will be my loss….how to overcome this situation. Please explain.
Still I m holding the stock, is there any major loss ahead or shall I keep continue till the expiry. Please help in this regard.
I am new to derivatives section, few I bought, I lost it because of unawareness. Please help me or can you share any information about these NSE derivatives. Any contact person no. Or any youtube or by any means.
Since I have plenty of questions to ask about derivatives. I like derivatives but it is risky unless if I don’t understand properly, please help me in this regard.
Regards
Saravanan
The recommendation was given with an expectation that the stock price will fall, but that has not happened. Hence you are likely to lose the premium you’ve paid. If you square off the position @ 14, then your loss will be the 56-14*lot size.
Please don’t fall for stock tips and recommendations. Instead, try to learn and do your research on your own.
First of all, that was some great explanation, now what if I buy the BANKNIFTY 17500 PUT 30 April Expiry, could you share a chart as you shared in the end to understand that scenario, it will be a great help to understand the concept further.
I’d suggest you use the pay off from Sensibull – https://sensibull.com/
Sir,
I want to ask here very egarly that i have bought a call option before expire it is profitable and i sell that call it is well settled there or as you said before …..call option buyer risk limited and sell risk unlimited formula applying till expiry.
Hopefully u understand.
Not sure if I fully understand your query, but yes, you can sell the profitable call before expiry, no need to wait for expiry.
Hi
Can I buy PE NRML option today and sell it today, rather than waiting till expiry.
Yup, you can.
Hi Karthik,
1. In many comments I read you are suggesting to place SL for the underlying instead of option premium. But when I try to buy the option premium let’s suppose Reliance Nov 2000 CE, I can only place a SL for premium price. How can we relate that spot market price as SL in trading terminal?
2. You mentioned shorting futures is risky since only bank sector is effected whereas remaining sectors are good, in that case we can short bank nifty also right? So buying option put or shorting bank nifty futures both are good options is what I feel?
3. One important observation I made and need your inputs. Why would anyone short either call option or put option where risk is higher, returns are less and premium is higher?
For eg. consider Reliance – 1993.25 (CMP)
Suppose I have bullish view then
RELIANCE NOV 2000 CE has premium 54.65 and lot size is 505 so total = 27,598.25
Same can be done by shorting RELIANCE NOV 1980 PE which has premium 46 and lot size is 505 but total margin required is 78K
Same goes for bearish view as well, so my point is why would anyone short the option call or put? I don’t understand the advantage here.
1) The thought process is to trade the underlying. For example, RIL is at 2000, I expect it to go down to 1825, so I buy the 1900 PE at whatever price. I will cut the losses if RIL hits 2100 at whatever premium.
2) Yes, but please see the context in which I’ve mentioned this
3) The decision to short comes from how expensive the option is compared to its real value
Follow up question,
In NSE website, where we have option chain I can see a legend which says ‘highlighted options are in-the-money’. The chart is divided into 2 parts horizontally i.e. white background data and yellow background data.
From what I understand yellow background data options already surpassed the current market price but still I could buy those options, how does it make sense to buy?
Same Reliance eg. where CMP is 1993.25 so why will someone buy Nov 1980 CE when CMP is already above that price?
I’ve explained this in the moneyness of options chapter.
HELLO KARTHIK SIR,
I HAVE THIS QUESTION RECENTLY I TOOK A OPTION CALL OF HDFC @ 23 WHICH WAS 550 QUANTITY REQUIRED 12650 BUT I TOOK IT AS INTRADAY(WHICH WAS MY MISTAKE AS I WANTED TO TAKE IT FOR DELIVERY) WHEN IT STARTED GOIN IN LOSS I TRIED EXITING BUT COULDNT AS IT DEMAND MARGIN OF 66K MA ACCONT HAD AROUND 30K…..(As and when the stock starts moving in the opposite direction of the seller, the broker would demand more margins from the seller.)>>>>SECONDLY WAT IF I WOULD HAVE TAKEN IT IN DELIVERY N EXIT WITH PROFIT… IT WOULDNT HAVE REQUIRED EXTRA MARGIN AS I WAS IN PROFIT N I COULD HAVE EXITED IT WITH WATEVER FUND I HAD IN MA ACCOUNT. RIGHT??????
Yes, margin requirements go up if the position moves against you. There is no concept of delivery in options right?
1) The thought process is to trade the underlying. For example, RIL is at 2000, I expect it to go down to 1825, so I buy the 1900 PE at whatever price. I will cut the losses if RIL hits 2100 at whatever premium.
ALSO IN THE ABOVE SCENARIO I WOULD BE ABLE TO EXIT ONLY IF I HAVE ENOUGH MARGIN THOUGH DELIVERY OR INTRADAY………WHAT IF DONT HAVE ENOUGH MARGIN…FOR INTRADAY IT WILL SQUARE OFF………………………WHAT IF I BUY SOME XYZ OPTION 3RS PREMIUM 1000 QUANTITY (3000) RS AS DELIVERY AND MY ACCOUNT FUNDS ARE 10000………………….WHAT HAPPENS IN BOTH PROFIT AND LOSS CASE………..WHAT MY UNDERSTANDING…IF IN DELIVERY I CAN TAKE MY PROFITS AND EXIT IT BEFORE EXPIRY ALSO…. FUNDS OF 10K WONT BE ISSUE …. WHAT HAPPENS IF IN LOSS?
Your trade won’t go through if you don’t have sufficient margins, Mosmi.
Dear Karthik,
I have read the call option buying and selling part of the module. It was easy to understand because you have given the example of land between Ajay and Venu, which helped to understand the call option very well. I did not understand why you have not given the real time or real life example in the put option. I am requesting you to give the real life example for put option to understand the concept pretty well.
Thanking You,
The problem is drawing an analogy with PUT options to real life is very difficult because these are transactions that we don’t really carry outside the market 🙂
Good morning sir.
Sir i bought put option of one stock when premium @ rs. 1.50 but before expiry it becomes zero. What will happend at the time expiry.
That means to say that option expired worthless.
Are you serious ? I am C.A by profession. I have never seen this detailed and so easy with full heartedly explanation of options understanding anywhere. This is a true treasure . I am very thankful for this beautiful understanding.
Thanks a lot!
Thanks for the kind words, Nidhi. Happy learning 🙂
what will happen if banknifty trades @18415
Dear sir,
I have a simple query.
As per the new rule, we have to take the physical delivery or exercise the FNO trade of the stock if we hold the trade until expiry. My question is what will happen if we buy or sell option of Index like Nifty 50 and hold it till Expiry?
Please clarify.
Index contracts are cash-settled, Ankit.
Thank you sir.
Good luck!
I have bought put nifty 50 @11.15 with expiry on 4 th February (14000PE) and I have paid premium amount of rs 826.25…now the nifty50is at 14800 …what will be the maximum loss of me on the expiry day ..
The maximum loss is restricted to the extent of the premium you’ve paid.
Hi Kartik,
Awesome content and explanation.
I am very confused with shorting options.
When some one says he is shorting option, is he shorting for the difference in premium or the difference in value of underlying asset?
When you are shorting you are selling first and buying later. So I am expecting that the value of whatever I am shorting is going to go down. If I am shorting option, today’s premium will be high and when I am closing my position I expect the premium has gone down.
Please clarify with respect to both Call and Put and if possible in both buy and sell cases.
Thanks in advance. You are doing amazing work Kartik.
Deepak, shorting is essentially that, i.e. sell first and buy back later. YOu will make a profit if the asset price that you shorting goes lower than your short price. Else you will make a loss. When someone shorts an option, then they expect the premium to go lower, and they will make a profit if the buy back the option at that lower price.
Thank you
Hello kartik you mentioned that an option seller is exposed to an unlimited risk but i think it is true only for a call option seller as the trade goes against him on expiry and the underlying can move to infinity(theoretically) resulting in an infinite loss for the call option seller however for a put option seller the risk is limited to an extent where the underlying reaches zero theoretically. Am i right?
Thats right, Krishna. But last year around April, crude oil traded at -ve prices, wherein Put sellers lost a lot more.
Ok got it sir Thanks for the quick response sir
Good luck!
A very basic question . Both on the call side and the put side there are Bid price and qty and Ask price and Qty . Also the the Last traded price . How do we know the lot size for for call and put as it seems confusing.
Can i buy put options one day before ex dividend date and close with a profit on the ex dividend date?? Does it work?
Please check this – https://www.instagram.com/p/CLqi2XdHvvc/?igshid=opbzeklkza6y
Karthik Am repeating the question since you have missed answering earlier although It may sound stupid . On the nifty option page there are both on the call side and the put side there are Bid Price and Qty and also Ask Price and Qty .and also the Last traded price . How do we know what is lot size for call and put Options as the Trade page seems confusing
Chacko, the page you are looking at is the Options chain of a contract. But you need to look at the contract page, for example, here is the contract page of Infy, which has all details including the lot size information – https://www.nseindia.com/get-quotes/derivatives?symbol=INFY
thanks got it.
Good luck!
Sir! In the aforementioned Bank Nifty example, you’ve said (in points 9 & 10) that shorting Futures maybe a bit risky as the overall market is bullish. It is only the banking sector which is lacking lustre. Hence buying a Put Option on the Bank Nifty may make sense.
One buys a Put option when one is outright bearish on an underlying and buying a Put option is akin to shorting Futures. If you aren’t shorting Bank Nifty Futures here because the overall market is bullish, then it means you think that Bank Nifty might either stay flat or go down. In such a scenario wouldn’t selling a Call option be a more prudent choice than buying a Put option?
The decision to buy Put or sell call depends on the volatility and the associated premium, Prashant.
Point noted Sir. Also thank you very much for what you’ve done for me as well as countless other people by teaching us the method in this madness called the stock market. Take a bow.
Happy learning, Prashant.
Hello Karthik, Assuming I have bought a call or put option..I have sold the option on the expiry day which has an intrinsic value by booking the profit…… After selling the option ., Suppose if the intrinsic value increase.Will there be any loss…??? ..
Below is what I have understood …
As I have paid the premium I have the right to sell the options at anytime., The maximum loss after selling the options is restricted to my premium ..
Plz do reply… THANK YOU.
Once you sold the option, it does not matter where the option goes. You are out of the market anyway.
Thank you so much Karthik….
Good luck!
Hello!
Love the content. It was mentioned in Futures lesson that if a portfolio(the example given was Rane Holdings I think) is worth less than one nifty futures contract, it can’t be hedged using futures but there is another way which will be explained in the options module. I didn’t come across such explanation in the options module. I’m guessing that long nifty puts or short nifty calls might have something to do with that but can you please explain EXACTLY how it’s done in your way – i.e. using examples and payoff charts etc? Thank you
Its essentially boils down to buying puts, that’s it 🙂
Hello Karthik sir,
I really appreciate your consistent and prompt response to all the queries and admire it.
My question is what is the purpose of one buying a put option of higher strike price ?
There could be many reasons, really depends on the market condition right?
Hi,
I had bought the 7 lot nifty 14900pe Apr monthly series. Nifty closed at the 14894. So how charges and settlement will be calculated?
The Option has a very little intrinsic value i.e. 6 Rupees. Not sure if exercising this will be of any use, hence mostly the strike is considered worthless.
Hi Karthik,
Is exiting the put and selling a put same thing?
I mean, suppose I buy a put at X premium and exit it at a higher Y premium, is it exiting the option (no obligation like selling the option) or it is considered as selling the option (with obligation)?
To exit a position means that you are closing that position. For a long position, exit implies sell. For a short position, exit implies buying back. Selling a put means you are creating a new short position.
If you buy at put at X, its exit position is to sell the same option at Y.
I am planning to place an AMO for nifty 14400 put option but its showing that this option is BLOCKED with a message displayed as (Buy Orders in the following strikes may not go through due to restrictions from the exchange. These do not apply if you are exiting your existing positions.)
what does this mean and what should I do and the msg is showing only for 14400 put option and for all the OTM strikes below it
Strange, its going through for me. Do check this https://support.zerodha.com/category/trading-and-markets/kite-web-and-mobile/holdings/articles/index-options-amo-rejection#:~:text=Your%20index%20option%20AMO%20will,option%20in%20index%20option%20AMOs.
Hello Sir , i was just wondering how are the volume data generated on indices in chartink.com and not on other platforms bcoz indices are not traded directly.
Ah, you need to check with them. I’m not sure what they are using.
hey Kartik,
Im a newbie to options and just loving the way you have made these concepts easily understandable. Have been able to understand the concepts of call and put well so far. Hopefully will start trading in options in few months time.
Thanks for the great content. appreciate your efforts
Happy to note that, and I’m glad you liked the content. Good luck, Lakshmi 🙂
Hi Karthik,
You have mentioned that indian derivatives market follows european model so that buyer of the call option can exercise the right to buy only at expiry and not before the expiry day
I am clear with this
But when I continue further i can also see that “suppose in morning if i bought call option at a premium of 6 rs and after sometime if premium is trading at 9 rs one can sell it”
My doubt is ”is it compulsory for the the call/put option buyer to exercise their right only at expiry day or they can do it on any day before the expiry day
That is if am buying call/put options on 9/6/2021 which expires on 24/6/2021. can i exercise my right to buy even before expiry(say 16/6/21) if the situation is in my favour.
please do clear my doubt
correct me if i am wrong
Thank you.
Dinesh, yes, exercising the option happens only on the expiry day, however, if you wish to buy and sell the option premium, you can do that anything you wish and need not wait till expiry.
Hi karthik
first of all thank you for the kind reply
my doubt is
well as you said exercising the option happens only on the expiry, but while reading i came across this line ”Of course the P&L formula is applicable only if the trader intends to hold the
position till expiry”
Does this mean he can square off the position even before expiry if he intends to (which is opposed to European model).
please clear my doubt
Thank you
Yes, Dinesh. A trader can sell the position anytime he/she wants before the expiry.
Thank you so much karthik
Good luck, Dinesh.
Thanks.
Hello sir…
Just wanted a clarification regarding new amendments in Investment Advisor qualifications. If one has a post graduate degree in finance then 5 years of experience certificate is needed or not. And if needed then what type of experience certificate is considered valid? Please advise.
I’d suggest you check with SEBI directly for this, I’d not be the right person to advice on this 🙂
In the BANKNIFTY example above you said, “However shorting futures maybe a bit risky as the overall market is bullish, it is only the banking sector which is lacking lustre”. Can you please tell the rational behind that as this index is also only of banks so how futures are riskier than options.
The overall market sentiment has an impact on your positions. Hence.
Hi..I have one doubt. If i have put option let say @310 strike price and on expiry CMP of share is 300 then
1. whether I will get exactly 10 rupee without selling put option on expiry.
2. It will settled by delivery. For example if I have shares in my demat account then sell transaction will initiate automatically or I have to inform to broker for initiating a transaction.
Thanks
1) Yes
2) It will be settled physically provided your option is ITM
For example I buy nifty call CE15000 strike price 1 lot at premium 100rs ( 1 lot is 50 quantity which is 50×100 = 5000 i pay 5000 premium to buy CE15000 strike price ) so according to P&L(iv+premimum) stock price is to move 5000 point higher to gain profit. Which is P&L= Max (0, 15000 – 16000) – 5000 = 0 now stock price is 100 point high which is 5000+100 =5100 so P&L= Max (0, 15000 – 16100) -5000 = 100 now i gain profit, in that term if to gain profit we need higher point then premium price which is 5000 point. Am i right these assumption act on real stock market.
Miraz, the profit or loss that you make when you buy an option is the difference between the buy and sell price of the premium, multiplied by its lot size. For example, if you buy an option at 100, sell it at 110, then you make 10 points multiplied by its lot size.
Mr. Karthik,
Enjoying your wonderful explanation on the different aspects of options trading, and I emphasise here that it is a must read for a person planning to enter this territory. Thanks a lot!
Regards
Sunil Arab
Glad you liked it, Yeshwant! Happy reading 🙂
Hi Sir,
First of all thank you so much for this teaching. I tried many times before to understand options but never understood it enough to start trading. So, continued traditional stock trading. Now, I started to understand a bit.
Above, you mentioned that, we are buying put instead of shorting future –
“9.However shorting futures maybe a bit risky as the overall market is bullish, it is only the banking sector which is lacking lustre”
I understand that you mean to keep limited risk while shorting, buying put is better than shorting future. Is that correct? as if price do go down then will make money on shorting future as well but in case it goes up then there is limited risk with buying put.
Thanks.
Jay, thanks for the kind words. Each of these financial instruments have its own risk and reward profile and its not like one is better than the other. While both are risky, you need to figure the which one is a better bet given the situation in the market. For example, if volatility is very high and I expect volatility to increase, then I’m rather comfortable selling options.
Can you please cover Put selling and taking stock delivery
There is nothing much to cover there. Its the physical delivery of options, we have discussed that in the last chapter.
Hi ,
I needed a more clarity in case of OTM Put buying of some stock like HUL or TCS ….weather it’s necessary to take the delivery if the PUT becomes ITM at the day of expiry,
Regards
Anupam Pandey
Necessity depends on your intent right? If you feel you dont need the stock in your DEMAT, then square off the position before expiry.
What if we buy a call option of Strike Price less than Spot Price?
YOu can, that would be ITM if its a call option.
Hi great learnings.
One question on this chapter , infact prior one also – why have you called put shorting future more risky compared to buying PUTS ? After all arent both leveraged instruments ? Infact ‘I can still see some merit here because shorting can theoretically lead to unlimited losses(i.e till underlying reaches zero from CMP). But how is buying CALL option in any way less riskier than buying the future ? Only drawback I can see with Future is high margin requirement
Hmm, its not just about margins Himanshu. With futures, the only thing that impacts the price is the directional movement. But in Options, it is a lot more variables. Also, panic spreads faster than greed in the markets. So when you write a put, the chances of it going haywire is higher.
Sir please immediately contact please
Suppose I have sold the option it can be call/put, and at the time of expiry day, suppose I didn’t execute the exit order, then what will happen, also suppose I am profit and premium is very near to 0, then who will execute that order, will there be liquidity problem?
There is nothing to worry about if the option is OTM. But if the option is ITM, then it will be physically settled.
Yes, there will be liquidity problem. If you do not have sufficient balance, auto-exit will take place at any time. However, if you have sufficient balance and call/put ended out of the money i.e zero and you did not execute exit order, no problem will be there.
First of all, thanks a lot for this content sir.
Today motherson sumi fell about 20% because of demerger & some of put option were up by almost 40000%.
Sir if everybody knew it is going to fall today this huge, then why the put options became rockets.
I am very curious to know the reason. Please reply as soon as possible.
The contracts would be adjusted accordingly, Anupam. There is no free money in the markets 🙂
Check this – https://zerodha.com/marketintel/bulletin/313884/adjustment-of-futures-and-options-contracts-of-mothersumi
Sir can we sell the put option only when the spot price is below the strike price.
As we can buy the put option of strike price 500 at a premium of rs-5 and the on the day of expiry the spot price of share is 600.then can’t we sell it for 600.
bcz it will also be profitable if we can.
Or maybe I am little bit confused.
Will you tell me one thing that:
1.Buying an put option gives us right to sell the underlying. Or
2.Buying an option gives us right to sell the underlying at defined strike price.
Buying the put option gives you the right to sell the underlying at the strike price. Also, you can buy and sell options anytime, no need to wait till expiry.
The PUT buyer makes the highest profit when the spot price is zero on the day of expiry, which means that the maximum profit the put buyer can make is=Strike Price – premium and rather not unlimited.
Yes, but think about the stock price going to 0 and its impact on your margins.
Hello sir
Thank u bcoz of ur clear explanation I got knowledge regarding to options but I have some doubts
1 if any one who is bearish view on market can they will go for call option sell then what is neseccary for put option buy
2 if I take any option sell position I get the premium amount . immediately we receive premium amount or on expiry
1) Call option sell requires margins
2) You get it immediately.
I BOUGHT put options at Strike price of 16300 in Nifty. Nifty closed at 16209. My premium was 9.35 rupees, it is now at Rs. 60 at close. But when I tried to sell, I was required to add 97000 rupees to my demat. Why is that?
You must have other open F&O positions (maybe long futures) which would have got hedged with your puts. When you close your puts the other F&O position will need full margins, hence 97K.
If i sell a put option and its ITM on expiry do i need to purchase the stock or it will be automatically assigned to me….also if i sell call option and its ITM on money on expiry do i need to give the stock or it will be deducted from my demat account automatically …
The settlement will happen automatically provided you have the necessary cash and stock in your account.
Dear Karhik sir,
We know that IV = Spot-Strike for CE buyer and Strike – Spot for PE buyer And P&L = IV-Premium. But
in section 5.4 you have mentioned that the calculation of IV and P&L is done using a different formula
when you close the option trade before expiry. What are those formulae? Please let me know.
Thanks
If you close the trade before expiry, then its the difference between the buy and sell price of the premium.
That’s the P&L calculation upon expiry. But what about the IV calculation during the series?
You have mentioned in the section 5.3 —-> “However, the calculation of the intrinsic value of an option
is different during the series. Of course, we will understand how to calculate (and the need to calculate)
the intrinsic value of an option during the expiry.”
My questions are :
1. What is the formula to calculate the IV during expiry?
2. You said need. So what’s the need to calculate the IV during the series?
1) There are mathematical models to forecast volatility. A few models are GARCH (1,1) GARCH (1,2) etc.
2) To take positions, especially options based on your expectations of volatility.
That’s the P&L calculation upon expiry. But what about the IV calculation during the series?
You have mentioned in the section 5.3 —-> “However, the calculation of the intrinsic value of an option
is different during the series. Of course, we will understand how to calculate (and the need to calculate)
the intrinsic value of an option during the expiry.”
My questions are :
1. What is the formula to calculate the IV during the series?
2. You said need. So what’s the need to calculate the IV during the series?
Sandeep, please check the previous reply.
Dear Karthik sir,
Sorry for the repost.
I was asking about the Intrinsic Value not the Intrinsic Volatility.
Section 5.3 says —-> “The calculation of INTRINSIC VALUE of an option is different during the series”
I want to know what is the formula of Intrinsic value during the expiry series (before expiry)?
Kindly let me know.
Thanks
There is no intrinsic value before the expiry. The value of the option (premium) is essentially the difference between the buy and sell price of the premium. So if you buy an option at 25 and sell at 30, the P&L is 5.
The chapter says —> “The calculation of the P&L and intrinsic value does MATTER and there is a different formula to do the same”
If there is no IV , then why does it matter?
I’d suggest you check this – https://zerodha.com/varsity/chapter/options-m2m-and-pl/
Hi! Is PE buyer for stocks required to maintain delivery margin on expiry in Indian Markets.?
Yes, thats right.
Hello Karthik sir,
I agree with you that before expiry, the P&L = Premium(sell) – Premium(buy).
And the Intinsic Value (IV) of the option does not apply there.
My question is that why have you written in the section 5.3 —>
“The calculation of the P&L and intrinsic value does MATTER and there is a different formula to do the same”
If the Intinsic Value (IV) does not apply, why does it’s calculation MATTER?
The text is wrong? Kindly tell me Yes or No.
Sandeep, text is not wrong. So there are only two situations here – YOu hold to expiry or you sell before expiry. If you hold to expiry, the intrinsic value approach for P&L kicks in. If you sell before expiry, the difference in premium kicks in. Thats about it.
Dear Karthik sir,
I agree with you that Intrinsic Value is not a part of P&L before expiry.
But since the text is correct, I just want to know the formula to calculate IV before expiry even though it doesn’t matter.
Kindly let me know this much.
Here you go –
Assume a 200 CE is trading at 25, which the spot is 220. Here the intrinsic value is 20 because we are dealing with a 200CE and spot us at 220. The excess premium overand and above the IV is time value i.e. 5.
So Premium = IV + Time value.
Thank u Karthik sir, So what I see, before the expiry also, the formula for IV remains the same, i.e, Spot price – Strike price.
Am I right?
Yes, that’s right.
If formula for Intrinsic Value remains the same in both the cases(before/upon expiry), this statement is wrong in Section 5.3 —> “However the calculation of intrinsic value of an option is different during the series.”
Do you agree now sir? Please clarify.
Yes, will re-read what Ive written to get the context and change if required.
Dear Karthik sir,
Did you get the context of this line in 5.3? —> “However the calculation of intrinsic value of an option is different during the series.”
Its basically what we discussed earlier. At expiry, the intrinsic value is based on the difference between spot and strike. Before expiry, the intensive value is extracted from the premium after adjusting for the time value.
But earlier you said that before expiry Premium = IV + Time value. The value above the IV is the time value. As we see, the calculation of
Time value is itself dependent on IV. So as you say extract the IV from Premium.
Kindly explain how to do that.
Its simple. For example, Adani 2220 CE is trading at 102, while the spot is at 2247.
Intresic value = 2247-2220
= 27
Time value = 102 – 27
= 75
So out of the total premium of 102, 75 is attributed to time value and the rest is intrinsic value.
Hello Karthik,
I’m struggling with this one issue. In the previous Ch. you mentioned that in India we only use European Call/Put option which means we cannot exercise our right till date of expiry…but all the following lessons indicate that we can exercise the right before dat of expiry. Please explain.
Nikita, these are two different things. Have explained it here – https://zerodha.com/varsity/chapter/options-m2m-and-pl/
Dear Karthik sir
You told in your earlier comment (Please see above) “Before expiry, the intensive value is extracted from the premium after adjusting for the time value.”
And in the next comment you have shown Intrinsic Value as = 2247-2220 which is Spot – Strike. So you are not extracting the IV from the premium rather the formula for IV remains the same as is done upon expiry, i.e. Spot – Strike. Did you get my point?
Sandeep, why are you getting confused? Please ignore all comments. Consider this – if you are looking at IV before expiry, then it has be extracted (or adjusted) after factoring in the time value. I have explained this in my earlier comment. If you are trying to find the IV post expiry, then its just the difference between the strike and spot. Thats it.
Therefore I am saying that what you’ve written in the section 5.3 —> “However the calculation of intrinsic value of an option is different during the series”
I believe it should be THE CALCULATION OF P&L OF AN OPTION IS DIFFERENT DURING THE SERIES. Did you get me now sir?
Please clarify if I am wrong.
Please see my previous comment.
Dear Karthik sir,
My confusion arises when you say IV is extracted from the Premium after factoring in the time value. In the examples above what you do?
You calculate IV = Spot – Strike price. So tell me where are you extracting the IV from the Premium? Moreover time value can’t be calculated
before calculating the IV first. Right ?
Sandeep, I explained with the example on how to extract the intrinsic value from premium (before expiry) in my previous comment no. Please check that again.
In your comment above, you calculated IV = 2247-2220 (Spot – Strike) and telling to extract IV from Premium. Is it not confusing.
How is it that confusing Sandeep? First, you need to figure out where you stand in series. At expiry or before expiry. If its before expiry then extract the IV from the premium after deducting time value. If its after expiry, take the difference between spot and strike. That’s it. Its as simple as that. I’m explained the same thing many times in my response to your queries 🙂
It’s confusing because you say you extract IV from Premium while calculate IV = Spot – Strike.
We know Premium = IV + Time value. Tell me can we calculating time value without calculating IV first, no right ?
So for that
Step 1. IV needs to be calculated. right? (As per you example above, 2247-2220 = 27). Now tell me you are calculating IV as you do before expiry, ie. Spot – Strike. So the formula remains same in both cases before/at expiry. But you say you are extracting IV from Premium.
Step 2. Now after calculating the IV, you deduct it from Premium to get the time value. 102 – 27 = 75.
So my point is that you aren’t extracting the IV from premium rather extracting the time value from premium. I want you to correct your statement and text in Section 5.3. That’s all i want sir 🙂
Fine Sandeep.
Zerodha Pi and Kite both same or different
Very different. Pi is discontinued by the way.
Dear Karthik sir
Do you agree with me now that it’s the time value that is extracted from Premium while IV remains the same in both before/at expiry, i.e. Spot-Strike price? Please clarify sir.
I think the issue you have is that I’ve used the word, éxtracted.
Suppose I bought 2 lots of (x) 1160 CE today i.e, on 23-05-2022 by paying 1 rupee premium. Assuming today is Monday, you said options expire on last Thursday of every month. Then, 1160 CE expires on 26-05-2022.
I will be pocketing the profits if it moves above breakeven point i.e., above 1161 rupees on the last day of expiry.
** My query is: Suppose the stock is trading at 1125 rupees on last day of expiry. Any how I know that I would lose my premium!! But, Assume the premium moved to 1.50 rupees(I paid 1 rupee premium). IS THERE ANY CHANCE ON THE LAST DAY TO EXERCISE THE OPTION AND POCKET THE PREMIUM DIFFERENCE I.E., 1.50-1 = 0.5 RUPEES INSTEAD OF LOSING ENTIRE PREMIUM??
You cant exercise the option since its OTM. But if you get the opportunity, you can sell it before market close and pocket the premium.
Dear Karthik sir
No I just want to say it is the time value which is extracted from Premium, not the IV. IV remains the same in both before/at expiry, i.e. Spot-Strike price. Do you agree?
Yes, I do.
Thanks Karthik sir. If you agree with me then kindly change the text in section 5.3. Thanks
Assuming Reliance spot price is 1000/- per share
If I buy reliance 900 strike put @10 rs premium so 250×10=2500
Where my loss is total 2500/- if it’s go higher and I will square off my position on or before expiry
But
On expiry or before expiry it’s turns in the money and spot price is 500
So at this point I am setting on profit assuming x amount
But if I want to square up my position with my X profit amount
I need to sell the put which I bought @10 rs
But what happen if there are no buyers on that day and this strike price become illiquid till on the day of expiry
And I am not able to square off my position
Jigs, yes, you can sell the option anytime before expiry and no need to hold to expiry. If there are no buyers, then you can hold tyo expiry and expect the broker to settle it for you.
Thanks Karthik
hello sir
is it require to have margin amount if we want to sell the put holding
yesterday i traded nifty 15750 put buy option for first time. after getting some profit i place sell but i get error that is “insufficient funds. Required margin is 72929.96 but available margin is 72026.40.Check the orderbook for open orders”. can u clarify this sir
thank u
This happens if there are multiple positions. Check this – https://support.zerodha.com/category/trading-and-markets/kite-web-and-mobile/articles/kite-margin-on-exit
Hii Karthik
Qst.
1) buying a option today will automatically go forward to the next day till expiry?
2) today’s PE premium has been shrinked from 60 to 20 I think Tommrow will a gap down so i hold it, what if market went opposite to my technicals so is there a chance I would be charge more than my total amount paid for the lot
1) It will get carried through till expiry unless you decide to close it before
2) No, when you buy an option, the maximum you lose is premium paid
hello Karthik, if I bought a european style put options that expired on 23 july but my otc is 20 july.How can I hedge against for that.
OTC? Which market are you referring to Jiny?
Hi Karthik,
Check Section 5.5-last sentence when you concluded on Break-even Point for a Put option buyer, saying “It is only above this point the put option buyer would start to make money”.
I think this has to be corrected as ” It is only below this point the put option buyer would start to make money” as you meant the strike price going below Break-even point for the put option buyer to start making money.
Is my understanding correct?
Thx,
Gopa.
Ah yes, guess that’s a typo 🙂
I had gone through lot of YouTube videos but after going through this.i will rate this one of the best.excellent information.thanks.
Happy learning 🙂
Hello Sir, I am new to options and going through your materials and yet to start its trading……I have one doubt to get clarified…if I buy one Put/Call option as Overnight/NRML, can I square it off the same day if my conditions are meet or is it necessary to hold it for at least a day? Thanks
Yes, you can. No need to wait to expiry.
How to place a sell order for a put option. How to know the margin requirement for it. How to monitor a executed sell trade of a put option. Do you have a demo video for placing a sell order for a put option ?
Hey, do check our video series on Youtube, we have demonstrated this.
Hello,
On option (put bought) expiry date our profit is strike price minus spot price of expiry date if spot price is more. My question is (1) Will we get profit as difference of strike price and spot price of expiry date + any premium left on expiry date of our bought put option. (2) expiry date price means any time price of expiry date or closing price of expiry date.
1) Yes, but only for index options as index options are cash settled. For stock options, the options contracts are physically settled.
2) Its the settlement price on expiry day, which is the average of the last 30 minutes of trading.
Hi Karthik,
I too had a doubt regarding selling call options and buying put options. I went through the comments where you had stated that it is a game of premiums and margins required. Could you explain it in a more elaborate way?
Thanks
You can check this – https://www.youtube.com/watch?v=0CnHdzTE66s&list=PLX2SHiKfualEyD05J9JsklEq1JFGbG6qJ&index=1
Hi,
I am confused by fund requirements for a BUY order for PE of HDFCBank.
How much fund do I need if I buy a PE for strike price of 1460 with premium showing up @9.95?
Can you please clarify?
YOu will have to pay the premium i.e. 9.95*lot size.
That comes to 9.95x 550(lot size for HDFCBANK) =₹5472.50.
Thanks so much for clarifying that Karthik…you are the best!
Happy to be of help 🙂
what if I take two puts , both having different expiry ? How will payoff be calculated then ?
You can use Sensibull’s platform to visualize this, Vivek. They give the pay-off plots.
Hi Karthik,
I observed something strange today. Nifty closed at 17662, weekly expiry still has 2 more days to go and still the 18000 put ltp is 334. Shouldn’t it be at least 338? More surprisingly 18100 put ltp at close was 410 so it’s trading at almost 28 rupees discount. Someone who has bought 18100 put few days back is getting a raw deal here. How’s it even possible that put premium is less than its intrinsic value?
Thanks in advance for clarifying on this
I’m guessing you are seeing the LTP; please check the close price.
Hi Karthik,
Though i wrote it as ltp it was actually a closing price, you can check this yourself at your end
Thanks
Sure, also, I’m not sure about the liquidity. The LTP reflects its low intrinsic value, based on a previous trade, but you should also check the bid and ask. This is common with contracts that don’t have much liquidity.
Sorry Karthik, closing price of 18000 put was 324 but it’s still at 4 INR discount when the expiry is still 2 days away. How come?
Please check the previous comment.
However shorting futures maybe a bit risky as the overall market is bullish, it is only the banking sector which is lacking lustre. Under circumstances such as these employing an option is best, hence buying a Put Option on the bank Nifty may make sense.
Please explain this. How is shorting futures is risky and Buying Put is not? Not understood.
The only reason to state that is that the loss with a naked put is restricted to the premium paid.
Ok. I will keep an eye on those things in the future because obviously checking it now is not possible. But from the market integrity standpoint I still don’t understand how it can be trading at discount. I understand that the additional premium could be 0 but 2 days before expiry it should be trading at least at the intrinsic value isn’t it? I checked in Google and found few links explaining this but nothing specific as such. All I found that this could happen due to market inefficiencies. There is no explanation about what that meant
Amit, its unlikely to trade below the intrinsic value. There must be some mistake. Anyway, keep an eye out and take screenshots the next time you spot such an anomaly 🙂
Hi Karthik,
See today – 21 Mar 2023 at 1350 hrs. Nifty spot at 17083 and Nifty Mar Put of 17500 trading at 393. Shouldn’t it be at least 417? Put expiry is more than a week away as you can see. You said that it’s unlikely scenario but it’s not. Can you please clarify on this now?
Hey Amit, one thing to note is that the reference should be to future price. Can you check where futures were at that point?
I have screenshot of the scenario but no way to attach here.. Monthly put is clearly trading at discount here which is beyond me..
Like I mentioned, also please check the futures price.
Surprisingly there is a discussion thread on tradingqna.com on this scenario (link below) but no one seems to be having a satisfactory answer.. Can you please shed some light on this Karthik?
https://tradingqna.com/t/why-are-bank-nifty-options-trading-at-discount/42087
Ok. Today’s situation – Nifty spot 17129, Nifty Mar Fut – 17165 Nifty Mar 17500 PE – 360. Thus it is trading at 10 rupees discount at the moment. Same is the case with 17600 PE trading at 445 thus at discount of 25 INR. How do you explain it? What’s the relation of Nifty futures price with Nifty option price? And why then ATM or slight otm put options are trading at premium and not at discount. Please care to enlighten people like us..
The reference price for option pricing is option futures (I will have to update the chapters). So please look at the premiums with reference to the futures.
Well, your answer was terse that didn’t give me any idea about the reason behind the discounted premiums of far otm options. I will keep finding answers myself though and also keep a close watch on when you update the chapters on futures/options pricing
Amit, I was just checking your previous comment.
Strike = 17600 PE
Nifty Fut= 17165
Min price at which 17600 PE should trade = Strike – Spot
i.e. 17600 – 17165
= 435
According to you, the primum is 445, so 10 Rupee higher than the theoretical price. So the additional 10 can be attributed to time value.
Wow, your explanation came to me as a bummer. Nifty Option Premiums being pegged against the Nifty futures and not the Nifty spot is something new for me. I find this a bit misleading though because on Nifty weekly expiry (Not the monthly expiry) Nifty futures and spot don’t converge (most of the times) and if one checks the option premiums on the weekly expiry day then at around 3.25 PM they are just near to Nifty spot and not the Nifty futures. Even their final closing prices (not the last traded prices) perfectly match to Nifty spot. For example – on 23-Mar-2023 Nifty weekly expiry Nifty finally closed at 17076 and Nifty 17050-23Mar CE closing price was 26 but Nifty futures closed at 17087, so as per your logic 17050 23-Mar CE final closing price should have been 37 and not 26 isn’t it?
Please explain if you are not bothered by the flurry of my queries
Thanks in advance
Amit, so its a little tricky and I’ll try and explain why, if not at least point you in the direction in which you’ll have to explore more. Options are pegged to the spot itself and not futures (unlike commodities). The risk-free rate is one variable to consider when arriving at the option premium. Riskfree rate is also a common variable for futures pricing. So while calculating the options premium, factoring in the futures instead of the spot implies that you are baking in the risk-free rate as an input into your option pricing.
This should also solve the weekly settlement gap you think exists.
Thanks Karthik for the explanation. I never thought I will have to get into Black-Scholes formula to understand the option premium pricing but looks like now I have to. As a trader who has bought the monthly PE say for example 17500 PE Mar at the start of the month is getting a raw deal here if they want to square off their position because here it’s trading at less than the intrinsic value. That’s actual point when this thing came to my notice. Nevertheless I will explore more in the direction you have provided and try to find the answer that is satisfactory for myself
The theoretical price of an option is based on the B&S calculator, Amit. Btw, one thing in market, if something looks too good to be true, then its not true 🙂
Thanks Karthik but I didn’t understand the last line in your response above. May be you are asking me to read in between the lines (of your response) which I am not able to do. Frustrated by seeing the far otm options trading at discount on a daily basis these days and not getting the statutory answer. But this motivates me to get to the bottom of this until I am satisfied..
What I mean by that is, if you think there is a very nice and obvious opportunity to trade and profit from, then chances are that its not really an opportunity and our understanding of the market is not complete. Hence if something look too good to be true, that it is 🙂
Oh ok.. Got it now..:-) 😄
Sure, feel free to post all your queries here 🙂
Dear Karthik sir,
In the section 5.4, you have given an example of Put option where Strike = 18400, Spot = 18085 and the Premium = 315/
The net P&L = 18085. This happens on the day of expiry. Here you say that if the spot is 18400 before the expiry day,
then the profit would be higher. Sir, could you please explain how ? Thanks.
Not sure if I fully understand your query. 18085 is the spot right? P&L is the difference between buy and sell value of the premium.
No 18085 is the Profit which I understand. What I am asking is you have said that the Profit would be higher if the option is sold
before expiry. This I want to understand that how will be higher. Sir, kindly explain how is it so.
Great work by Zerodha Team, I have received lot of suggestions ( different sources of material ) from friends to learn F&O, my instinct suggest varsity over all other sources. your explaination is simply amazing.
I foung this (could be error) in 5.5 – Put option buyer’s P&L payoff, point 5 stating about break even point( It is only above this point the put option buyer would start to make money.)
recommended suggestion: It is only below this point the put option buyer would start to make money. please let me know if i am wrong. i will reread this chapter.
Thanks, Manisha.
Correction noted, will do 🙂
Dear Karthik sir,
In the section 5.4 of P&L behavior of Put option buyer example, you have said that if the buyer had closed the trade
before expiry then his P&L would have been higher.
Sir, kindly explain how P&L would be higher before expiry than on the expiry day.
On Expiry, the premium is only equal to the intrinsic value. But Before expiry, the premium is intrensic value plus time value.
Thank you so much sir.
Sure, happy learning 🙂
Dear Karthik sir,
IV is calculated as Spot-Strike or Strike-Spot on the expiry day. But what is the formula to calculated the IV before expiry day?
For that, you will have to use the B&C calculator Sandeep.
Hello Kartik Sir,
Good Afternoon,
Thanks for all ur concern knowledge on CALL & PUT option.
Really it helps me a lot.
Now may be i clear on this topic but if i have some quries on this topic then i call u surelly.
Thanks.
Of course, feel free to post your queries here.
Hi Karthik,
Please clarify the difference in buying 18000CE & 18000PE same way selling18000PE & 18000 CE its one and the same right ?
Hmm, not the same. Check this – https://www.youtube.com/watch?v=0CnHdzTE66s&list=PLX2SHiKfualEyD05J9JsklEq1JFGbG6qJ&index=1
it would be important to update this in Indian context as now DNE rights of option buyer are taken away. in that sense, call option buyer has to buy the stock and put option buyer has to sell the stock
DNE was not there originally, it was introduced for a bit and then taken away, Pawan.
Hi Karthik
Today in Bank Nifty, even if Bank Nifty is going up the put option premiums are also going up for all the strikes, can you explain the reason?
Option greeks at play 🙂
Hi kartik
I want you to clarify that the maximum loss of a option (CE or PE) buyer may experience is the premium of the strike or the margin paid (premium * lot size) for the strike.
For buyers, it is to the extent of premium paid.