3.1 – Buying call option
In the previous chapters we looked at the basic structure of a call option and understood the broad context under which it makes sense to buy a call option. In this chapter, we will formally structure our thoughts on the call option and get a firm understanding on both buying and selling of the call option. Before we move ahead any further in this chapter, here is a quick recap of what we learnt in the first chapter –
- It makes sense to be a buyer of a call option when you expect the underlying price to increase
- If the underlying price remains flat or goes down then the buyer of the call option loses money
- The money the buyer of the call option would lose is equivalent to the premium (agreement fees) the buyer pays to the seller/writer of the call option
We will keep the above three points in perspective (which serves as basic guidelines) and understand the call option to a greater extent.
3.2 – Building a case for a call option
There are many situations in the market that warrants the purchase of a call option. Here is one that I just discovered while writing this chapter, thought the example would fit well in the context of our discussions. Have a look at the chart below –
The stock in consideration is Bajaj Auto Limited. As you may know, they are one of the biggest manufacturers of two wheelers in India. For various reasons the stock has been beaten down in the market, so much so that the stock is trading at its 52 week low price. I believe there could be an opportunity to initiate a trade here. Here are my thoughts with respect to this trade –
- Bajaj Auto is a quality fundamental stock, there is no denying this.
- The stock has been beaten down so heavily, makes me believe this could be the market’s over reaction to volatility in Bajaj Auto’s business cycle.
- I expect the stock price to stop falling sometime soon and eventually rise.
- However I do not want to buy the stock for delivery (yet) as I’m worried about a further decline of the stock.
- Extending the above point, the worry of M2M losses prevents me from buying Bajaj Auto’s futures as well.
- At the same time I don’t want to miss an opportunity of a sharp reversal in the stock price.
To sum up, I’m optimistic on the stock price of Bajaj Auto (the stock price to eventually increase) but I’m kind of uncertain about the immediate outlook on the stock. The uncertainty is mainly due the fact that my losses in the short term could be intense if the weakness in the stock persists. However as per my estimate the probability of the loss is low, but nevertheless the probability still exists. So what should I do?
Now, if you realize I’m in a similar dilemma that was Ajay was in (recall the Ajay – Venu example from chapter 1). A circumstance such as this, builds up for a classic case of an options trade.
In the context of my dilemma, clearly buying a call option on Bajaj Auto makes sense for reasons I will explain shortly. Here is a snapshot of Bajaj Auto’s option chain –
As we can see the stock is trading at Rs.2026.9 (highlighted in blue). I will choose to buy 2050 strike call option by paying a premium of Rs.6.35/- (highlighted in red box and red arrow). You may be wondering on what basis I choose the 2050 strike price when in fact there are so many different strike prices available (highlighted in green)?. Well, the process of strike price selection is a vast topic on its own, we will eventually get there in this module, but for now let us just believe 2050 is the right strike price to trade.
3.3 – Intrinsic value of a call option (upon expiry)
So what happens to the call option now considering the expiry is 15 days away? Well, broadly speaking there are three possible scenarios which I suppose you are familiar with by now –
Scenario 1 – The stock price goes above the strike price, say 2080
Scenario 2 – The stock price goes below the strike price, say 2030
Scenario 3 – The stock price stays at 2050
The above 3 scenarios are very similar to the ones we had looked at in chapter 1, hence I will also assume that you are familiar with the P&L calculation at the specific value of the spot in the given scenarios above (if not, I would suggest you read through Chapter 1 again).
The idea I’m interested in exploring now is this –
- You will agree there are only 3 broad scenarios under which the price movement of Bajaj Auto can be classified (upon expiry) i.e. the price either increases, decreases, or stays flat
- But what about all the different prices in between? For example if as per Scenario 1 the price is considered to be at 2080 which is above the strike of 2050. What about other strike prices such as 2055, 2060, 2065, 2070 etc? Can we generalize anything here with respect to the P&L?
- In scenario 2, the price is considered to be at 2030 which is below the strike of 2050. What about other strike prices such as 2045, 2040, 2035 etc? Can we generalize anything here with respect to the P&L?
What would happen to the P&L at various possible prices of spot (upon expiry) – I would like to call these points as the “Possible values of the spot on expiry” and sort of generalize the P&L understanding of the call option.
In order to do this, I would like to first talk about (in part and not the full concept) the idea of the ‘intrinsic value of the option upon expiry’.
The intrinsic value (IV) of the option upon expiry (specifically a call option for now) is defined as the non – negative value which the option buyer is entitled to if he were to exercise the call option. In simple words ask yourself (assuming you are the buyer of a call option) how much money you would receive upon expiry, if the call option you hold is profitable. Mathematically it is defined as –
IV = Spot Price – Strike Price
So if Bajaj Auto on the day of expiry is trading at 2068 (in the spot market) the 2050 Call option’s intrinsic value would be –
= 2068 – 2050
= 18
Likewise, if Bajaj Auto is trading at 2025 on the expiry day the intrinsic value of the option would be –
= 2025 – 2050
= -25
But remember, IV of an option (irrespective of a call or put) is a non negative number; hence we leave the IV at 2025
= 0
Now our objective is to keep the idea of intrinsic value of the option in perspective, and to identify how much money I will make at every possible expiry value of Bajaj Auto and in the process make some generalizations on the call option buyer’s P&L.
3.4 – Generalizing the P&L for a call option buyer
Now keeping the concept of intrinsic value of an 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 Bajaj Auto’s 2050 call option would make under the various possible spot value changes of Bajaj Auto (in spot market) on expiry. Do remember the premium paid for this option is Rs 6.35/–. Irrespective of how the spot value changes, the fact that I have paid Rs.6.35/- remains unchanged. This is the cost that I have incurred in order to buy the 2050 Call 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 | 1990 | (-) 6.35 | 1990 – 2050 = 0 | = 0 + (– 6.35) = – 6.35 |
| 02 | 2000 | (-) 6.35 | 2000 – 2050 = 0 | = 0 + (– 6.35) = – 6.35 |
| 03 | 2010 | (-) 6.35 | 2010 – 2050 = 0 | = 0 + (– 6.35) = – 6.35 |
| 04 | 2020 | (-) 6.35 | 2020 – 2050 = 0 | = 0 + (– 6.35) = – 6.35 |
| 05 | 2030 | (-) 6.35 | 2030 – 2050 = 0 | = 0 + (– 6.35) = – 6.35 |
| 06 | 2040 | (-) 6.35 | 2040 – 2050 = 0 | = 0 + (– 6.35) = – 6.35 |
| 07 | 2050 | (-) 6.35 | 2050 – 2050 = 0 | = 0 + (– 6.35) = – 6.35 |
| 08 | 2060 | (-) 6.35 | 2060 – 2050 = 10 | = 10 +(-6.35) = + 3.65 |
| 09 | 2070 | (-) 6.35 | 2070 – 2050 = 20 | = 20 +(-6.35) = + 13.65 |
| 10 | 2080 | (-) 6.35 | 2080 – 2050 = 30 | = 30 +(-6.35) = + 23.65 |
| 11 | 2090 | (-) 6.35 | 2090 – 2050 = 40 | = 40 +(-6.35) = + 33.65 |
| 12 | 2100 | (-) 6.35 | 2100 – 2050 = 50 | = 50 +(-6.35) = + 43.65 |
So what do you observe? The table above throws out 2 strong observations –
- Even if the price of Bajaj Auto goes down (below the strike price of 2050), the maximum loss seems to be just Rs.6.35/-
- Generalization 1 – For a call option buyer a loss occurs when the spot price moves below the strike price. However the loss to the call option buyer is restricted to the extent of the premium he has paid
- The profit from this call option seems to increase exponentially as and when Bajaj Auto starts to move above the strike price of 2050
- Generalization 2 – The call option becomes profitable as and when the spot price moves over and above the strike price. The higher the spot price goes from the strike price, the higher the profit.
- From the above 2 generalizations it is fair for us to say that the buyer of the call option has a limited risk and a potential to make an unlimited profit.
Here is a general formula that tells you the Call option P&L for a given spot price –
P&L = Max [0, (Spot Price – Strike Price)] – Premium Paid
Going by the above formula, let’s evaluate the P&L for a few possible spot values on expiry –
- 2023
- 2072
- 2055
The solution is as follows –
@2023
= Max [0, (2023 – 2050)] – 6.35
= Max [0, (-27)] – 6.35
= 0 – 6.35
= – 6.35
The answer is in line with Generalization 1 (loss restricted to the extent of premium paid).
@2072
= Max [0, (2072 – 2050)] – 6.35
= Max [0, (+22)] – 6.35
= 22 – 6.35
= +15.65
The answer is in line with Generalization 2 (Call option gets profitable as and when the spot price moves over and above the strike price).
@2055
= Max [0, (2055 – 2050)] – 6.35
= Max [0, (+5)] – 6.35
= 5 – 6.35
= -1.35
So, here is a tricky situation, the result what we obtained here is against the 2nd generalization. Despite the spot price being above the strike price, the trade is resulting in a loss! Why is this so? Also if you observe the loss is much lesser than the maximum loss of Rs.6.35/-, it is in fact just Rs.1.35/-. To understand why this is happening we should diligently inspect the P&L behavior around the spot value which is slightly above the strike price (2050 in this case).
| Serial No. | Possible values of spot | Premium Paid | Intrinsic Value (IV) | P&L (IV + Premium) |
|---|---|---|---|---|
| 01 | 2050 | (-) 6.35 | 2050 – 2050 = 0 | = 0 + (– 6.35) = – 6.35 |
| 02 | 2051 | (-) 6.35 | 2051 – 2050 = 1 | = 1 + (– 6.35) = – 5.35 |
| 03 | 2052 | (-) 6.35 | 2052 – 2050 = 2 | = 2 + (– 6.35) = – 4.35 |
| 04 | 2053 | (-) 6.35 | 2053 – 2050 = 3 | = 3 + (– 6.35) = – 3.35 |
| 05 | 2054 | (-) 6.35 | 2054 – 2050 = 4 | = 4 + (– 6.35) = – 2.35 |
| 06 | 2055 | (-) 6.35 | 2055 – 2050 = 5 | = 5 + (– 6.35) = – 1.35 |
| 07 | 2056 | (-) 6.35 | 2056 – 2050 = 6 | = 6 + (– 6.35) = – 0.35 |
| 08 | 2057 | (-) 6.35 | 2057 – 2050 = 7 | = 7 +(- 6.35) = + 0.65 |
| 09 | 2058 | (-) 6.35 | 2058 – 2050 = 8 | = 8 +(- 6.35) = + 1.65 |
| 10 | 2059 | (-) 6.35 | 2059 – 2050 = 9 | = 9 +(- 6.35) = + 2.65 |
As you notice from the table above, the buyer suffers a maximum loss (Rs. 6.35 in this case) till the spot price is equal to the strike price. However, when the spot price starts to move above the strike price, the loss starts to minimize. The losses keep getting minimized till a point where the trade neither results in a profit or a loss. This is called the breakeven point.
The formula to identify the breakeven point for any call option is –
B.E = Strike Price + Premium Paid
For the Bajaj Auto example, the ‘Break Even’ point is –
= 2050 + 6.35
= 2056.35
In fact let us find out find out the P&L at the breakeven point
= Max [0, (2056.35 – 2050)] – 6.35
= Max [0, (+6.35)] – 6.35
= +6.35 – 6.35
= 0
As you can see, at the breakeven point we neither make money nor lose money. In other words, if the call option has to be profitable it not only has to move above the strike price but it has to move above the breakeven point.
3.5 – Call option buyer’s payoff
So far we have understood a few very important features with respect to a call option buyer’s payoff; I will reiterate the same –
- The maximum loss the buyer of a call option experiences is, to the extent of the premium paid. The buyer experiences a loss as long as the spot price is below the strike price
- The call option buyer has the potential to realize unlimited profits provided the spot price moves higher than the strike price
- Though the call option is supposed to make a profit when the spot price moves above the strike price, the call option buyer first needs to recover the premium he has paid
- The point at which the call option buyer completely recovers the premium he has paid is called the breakeven point
- The call option buyer truly starts making a profit only beyond the breakeven point (which naturally is above the strike price)
Interestingly, all these points can be visualized if we plot the chart of the P&L. Here is the P&L chart of Bajaj Auto’s Call Option trade –
From the chart above you can notice the following points which are in line with the discussion we have just had –
- The loss is restricted to Rs.6.35/- as long as the spot price is trading at any price below the strike of 2050
- From 2050 to 2056.35 (breakeven price) we can see the losses getting minimized
- At 2056.35 we can see that there is neither a profit nor a loss
- Above 2056.35 the call option starts making money. In fact the slope of the P&L line clearly indicates that the profits start increasing exponentially as and when the spot value moves away from the strike
Again, from the graph one thing is very evident – A call option buyer has a limited risk but unlimited profit potential. And with this I hope you are now clear with the call option from the buyer’s perspective. In the next chapter we will look into the Call Option from the seller’s perspective.
Key takeaways from this chapter
- It makes sense to be a buyer of a call option when you expect the underlying price to increase
- If the underlying price remains flat or goes down then the buyer of the call option loses money
- The money the buyer of the call option would lose is equivalent to the premium (agreement fees) the buyer pays to the seller/writer of the call option
- Intrinsic value (IV) of a call option is a non negative number
- IV = Max[0, (spot price – strike price)]
- The maximum loss the buyer of a call option experiences is to the extent of the premium paid. The loss is experienced as long as the spot price is below the strike price
- The call option buyer has the potential to make unlimited profits provided the spot price moves higher than the strike price
- Though the call option is supposed to make a profit when the spot price moves above the strike price, the call option buyer first needs to recover the premium he has paid
- The point at which the call option buyer completely recovers the premium he has paid is called the breakeven point
- The call option buyer truly starts making a profit only beyond the breakeven point (which naturally is above the strike price).
Dear sir,
Can you explain how the premium of call options got diluted while nearing the expiry ? Is there ant formula ?
Time decay besides other factors. We will talk about all of these things eventually in this module. Request you to stay tuned.
Hi I wanted to know if we buy 8600 PE at 15 ,75 quantity is the minimum required so how much I have to pay to get those shares and what ij case if it goes down to 5 rupees what will be the total loss .. can u pls reply on this as it will be really helpful
You will have to pay 15 * 75 = 1125. If it goes to 5, then the value will be 5*75 = 375 and your loss will be 750.
Sir,I bought ACC AUG 1840 CE 1 LOT(400) @ 33 Rps and now would lkie to sell @ 40 today so please help me,what will be my profit and will I lose all my 13200 if I sell today as ACC CMP is 1816 now?
You will make a profit of 7 per unit. Since lot size is 400, your total loss would be 400*7 = 2800
Hi,
Just observed 1 point above so the same is posting below:-
Question by one of the member – Sir,I bought ACC AUG 1840 CE 1 LOT(400) @ 33 Rps and now would lkie to sell @ 40 today so please help me,what will be my profit and will I lose all my 13200 if I sell today as ACC CMP is 1816 now?
My view – I think he will make profit of 7*400=2800 if sell before expiry.
Remarks – excluding question regarding ACC CMP 1816.
Yup, he basically makes the difference between the premium he paid and will receive, multiply that with lot size. So 40-33 = 7 and 7*400 = 2800.
Hi Karthik
With regards to the earlier query from another member, please could you assist on my query.
Sir,I bought ACC AUG 1840 CE 1 LOT(400) @ 33 Rps and now would lkie to sell @ 40 today so please help me,what will be my profit and will I lose all my 13200 if I sell today as ACC CMP is 1816 now?
1. Is is possible for the premium to increase to 40 when the underlying value comes down to 1816?
2. Should i look out for the increase in premium to consider that i will be in profit or should look out for the underlying value as well?
3. Wouldn’t the total loss be 13200 as the underlying value is below the strike price?
Thank you in advance
You bought the option at 33 and selling the same at 40, which means your profit will be Rs.7, multipled by 400 which is 2800. When you sell the option, you will get 40*400 = 16000, which includes the premium and the profit.
1) Yes, for this to happen the volatility should also increase. This is explained later in the module
2) If it is a short-term trade, focus on the premium
3) No.
I knew that CE and PE are to be bought, never sold for huge risk of loss is involved. So forget selling options altogether. If my view is price will go up, I have to buy CE and if my view is price will go down I have buy PE. Be it PE or CE, I have to buy of the strike price which is at the near by value of CMP. Expiry of current month options is always on the last Thursday that month. My questions are ” 1-Can I first buy and then sell PE or CE from last Friday of current to last Thursday of next month at any time in the live market hours?”
2- ” I bought CE on last Friday of current month. Lot 75. Premium 150. I paid 11250. Mon, Tue, Wed. On Wed Premium is 250 on live chart of my that CE. Can I sell or not? If yes is my profit= 75(250-150)=75*100=7500 ( including brokerage+ charges)?
3- If I have to day trading of options (only first buy then sell of PE and CE) I need lot size * current premium as capital. For buy today and sell on any day any time before expiry, do I need same capital to buy now? Means lot size * current premium of that option?
1) Yes, you can.
2) Yes, you can. Yes, you make 100 in profit
3) Yes, it is the same. No additional margins for buying options. Check this – http://zerodha.com/z-connect/tradezerodha/margin-requirements/zerodha-margin-policies
Dear Sir,
If i am able to sell my option before expiry then what do you mean when you say ,” Here is an important point to note – you can exercise the option only on the day of the expiry and not anytime before the expiry.”
Exercising an option is only on the day of expiry. However, you can buy and sell the premium at any time frequency.
As you are saying “Exercising an option is only on the day of expiry. However, you can buy and sell the premium at any time frequency”….. that means we may not get profit sometime when even price of the stock increased but its premium price not…before expiry…!!!!
Think of the premium in terms of buying and selling a stock. You make a profit as long as you buy at a lower price and sell at a higher price.
EX: A Bajaj AUTO option Contract lot of 500 CE strike price 2950 bought on on 15 march at premium 45, expiring on 28 march now premium got increased to 52 and spot price is 2951. If i sell my premium at 52 i will make of 7 rupees on premium and do i have anything to do with spot price at the time of selling my premium and also at the time of expiry date. If spot price increases to 3000 do i incur into any losses.
No, you just have to sell it and pocket the premium of 52. Your profit will be 45-52 = 7.
how do i put stop loss i have brought options in normal orderand its in profit but i want to trail stop loss so i dont lose profit in case market turns so how do i put stop loss in this scenario
2) howdo i put stop loss after i have brought options
ty
You can do this by placing a regular stop loss and then you can keep modifying the limit price as and when the premium goes higher.
Hi Karthik, Do we have facility in PI to see payoff charts since it’s required when we play on option strategies (straddle,strangle etc.) ?
Thanks,
Ashish
No, I dont think so, but we are exploring an idea similar to what you have mentioned.
How to calculate break even point in real market
Which price take as strike price day starting share price or close price
And which premium price I take month starting or take everyday different premium prices
Plz explain it with real market example
Breakeven point is = Strike + Premium paid. It is the same in theoretical and practical world.As I have mentioned in the chapter, selecting the strike price requires some amount of background knowledge on options theory, towards the end of this module you will get a fair understanding on the same.
Sir, Toaday I bought 8600CE at 75/- Pr. and sold at 85/- with a profit of 10/-per lot. Iam unable to understand, as per formula Break even pt. Strike price + Pr.( 8600+75) indicates nifty should trade above 8675 to be in profit. but I have already got 10/- profit per lot even though nifty not even crossed 8500. Pl. explain. Thanks
Regards
I too had a same question similar to Rama Devi. Can you please explain ?
Rama / Suren – The break even point is applicable only if you hold the option till expiry. It is not applicable during the series.
Hi rama,
You said you made a profit of Rs 10 per lot. so here if you have bought one lot what is your total profit ?. Is it 10 rupees or 75*10 = 750 rupees (taking lot size of nifty is 75).
Answering on behalf of Rama – yes, it would be 75*10 = 750.
Dear Sir,
Appreciated for your efforts in teaching for novice traders/investors, I have a doubt; As stated in the above chapter, on 26.03.15 Bajaj Auto 2050CE is at Rs.6.35/- while stock is trading at 2026.90 , today at 3.15pm stock trading at 2025.10 but 2050CE trading at Rs.50/- i.e a profit of Rs. 43.65 per lot. Hence, what is the role of breakeven point, as per rule buyer of 2050 CE option would be in profit only when stock price trades above 2050+6.35= 2056.35. Pl. clarify. Regards
Dear Sir, On my above query, I have noted that expiry dates differs, still my question remains same, if we take todays Nifty 8600 CE of April is low 72.50 and at 3.20Pm is Rs. 114.90. If I bought the same CE option when it is at a premium of 80/- and closed at 110/- for a profit of 30/- per lot at the same time Nifty is trading at 8492 Spot. Please clarify.
As I mentioned, during the series, the profitability depends on many other factors. We will get to that as we progress through this module. Request you to stay tuned 🙂
Two things Kishore –
1) As you have noted it correctly (in your next message) you are looking at two different expiry series. Hence the huge difference.
2) The break-even point we are discussing in this chapter is ‘Upon Expiry‘. During the series besides the breakeven point there are other important factors that will determine the profitability of the trade. More on these factors when we take up option geeks.
sir,as they say to become ELITE TRADER
sir,as they say to become ELITE TRADER we should not watch TV&GET CONFUSED is it true,if it is how come we know why mkts r falling&rising r we should MUTE & watch clarify
Elite Trader is a fancy word used to refer to someone who employs complex trading strategies. However, any trader who is consistently profitable is an Elite Trader…you can achieve this by watching TV or by completely avoiding it. It is all in your mind and depends on your market discipline.
t-u work smartly to achieve
Sorry, dint quite get that!
Sir it was thank u
🙂
Sir, is this bullish engulfing?
Yes, this is a great example of a bullish engulfing pattern.
Thank u sir.,
Sir, Waiting for other chapters, when will be uploaded. Regards
We will upload at least 2 more chapters this week. Thanks for your patience.
T RAMA DEVI
April 7, 2015 at 7:33 am
Sir,
In Technical Analysis module Chapter 10 clause 10.4, Iam unable to understand this rule “As a rule of thumb, higher the number of days involved in a pattern the better it is to initiate the trade on the same day`. Is it to enter on day 3 i.e P3.
Thanks
I had posted this answer earlier – re-posting the same again, also request you to keep the comments under the relevant chapters so that we can keep it well organised.
It means, for example – a bullish engulfing pattern (2 day pattern) is more dependable than a hammer (1 day pattern) and a morning start (3 day pattern) is more dependable than a bullish engulfing (2 day pattern). So higher the number of days in a pattern the higher the conviction to trade. Please note this is just mu personal observation while trading.
Let’s say, i buy tata steel call option of Rs350 April series @ premium of 10 Rs & I sell tata steel call option of 370 April series @ premium of 10 Rs.
For me it looks win win for me. I get premium squared. If it goes above 370 my profit is locked to 20 Rs. If it goes to 330, the 370 buyer will not exercise option of buying. So will I for 340 option. For intermediate price e.g. 360, I get 10 Rs.
Is my understanding correct?What will be the other risks on this trade?
What will happen if these contracts are not squared before expiry? Also what are ways for a buyer to exit contract or what will buyer has to do so that his option of not buying is executed if the price goes in opposite direction of call?
Btw, the premiums I mentioned are hypothetical. Though there could be some cost covering when I sell & buy option of different cost in same series. For example The CE 350 is @ 9.25 & CE #370 is @ 3.3 so effectively my risk is only for 5.95 *500 = ~ 3000. But I am not sure about all risks involved in this trade. How a buyer can decide whether to execute his option & how will he do it?
There are many things involved here kaushik – however I’m really glad you are able to think in terms of an option strategy. Request you to please stay tuned…we will discuss all this and more shortly.
Kaushik – if 350 Call option is trading at Rs.10, then there is no way 370 Call option will also trade at Rs.10. This is because of many factors involved in option pricing….we will soon discuss option pricing in this module. Also, the strategy that you are talking about is called the ‘Bull Call Spread’…again we will discuss this stratergy along with many others in the next module i.e ‘Option Strategies’.
You can buy a call option now and sell it within few minutes if you wish…so exciting an option is not a problem provided a counterparty is available.
If I buy some call option @ 5 RS & hold it till expiry. Lets say @ expiry the value is 2 Rs. or 8 Rs. Will I get that money?
Yes sir, you will!
Sir, how to select a strike price? e.g on 1st May,15 I decide to buy a call option of June 26,15 and the option is open then do it make sense to buy a call option of second month and also please suggest the criterion to select a strike price. How much difference of strike price to the spot price is safe?
Aarti – Selecting the right strike to trade is a huge task and a very critical task. We will take it up in this module shortly. Please stay tuned till then 🙂
“The profit from this call option seems to increase exponentially.”
Shouldn’t this be linear?
If options are linear then the gains and losses should be equal. However this is not the case when you buy an options. When you buy the loss is restricted to the extent of premium paid and gains can be unlimited. Hence one tends to say that there is a scope for exponential gains. I agree mathematically ‘exponential’ may not be the right word to use – but its just to drive the point across.
I think in the interest of precision and correctness you should not use the word exponential, simply for the fact that derivatives do exist whose values vary exponentially relative to the value of the underlying(perhaps we’ll see these and stuff like CDOs in a future module?) therefore it’s ambiguous.
Also you mentioned limited liability but unlimited potential profit – same applies in direct equity, too.
Alright, Sir. Noted.
The line that claims the exponential increase in profit when the spot price moves higher is clearly misleading. The profit actually increase in a linear fashion rather than in exponential form. Please rectify.
Options are non linear instruments Batchu. Futures are linear – meaning for every 1 point move in the underlying your P&L reacts by 1 point.
It’s ‘linear’ even if the value of the derivative changes by k points for every 1 point change in the underlying.
If I buy a call option at say Rs. 10, can I set a stoploss higher than 10, as in say Rs. 20, so that whenever the option premium reaches double its value, the trigger is activated and the option premium is sold? What happens when I set a stoploss of a call buying option higher than the buying price in Pi?
You can create a limit order and keep it pending in the system. Suggest you email [email protected] to figure out how to get this done on Pi.
Hello Karthik,
July Contract for Nifty at Strike Price 8600 trading at Premium of Rs.64/-
With a bullish perspective, I can buy a CE of the above contract of say 4 lots, thereby 64*100=6400 will be my F&O obligation amount which will be debited from my A/c at EOD.
But can I also short it for intraday trading just like we do for Nifty Futures and also hold the short position for a few days?? And if I can short the above contract at the above price, will I become a Seller of the Option Contract and get 64*100=6400 credited to my account or will I still have the same F&O obligation and 64*100=6400 will be debited from my account at EOD ?? If it is possible to short the above contract, will it be better to buy a PE instead of shorting a CE?? I am confused. Please help.
Regards,
Sunil.
On one hand you buy the position and on the other hand if you sell it….it leaves you with a net obligation of 0, meaning you do not have an exposure to the instrument. So you cannot do this. If your view point is this – Nifty will cross 8600 by expiry but over the next few days it will correct before crossing the 8600 then in my opinion you are better of buying calls and shorting futures.
hello karthik,
my apologies for confusing u. I didn’t mean to buy and sell the same option. That obviously would nullify everything. What I meant was , what happens when i sell a CE ? In the above example, if i sold 4 lots of a CE (the way we short a futures contract) trading at 64 premium for a 8600 Strike Price, will my account get credited with 64*100=6400 at the end of day due to premium collected from the buyer? And suppose I buy the same CE tomorrow at a premium of 60, in that case 60*100=6000 will be debited from my account at end of day? Thereby causing a profit of Rs.400/-. Till now, I have only bought a CE or PE. Never sold one as I am confused how the payment settlement works. Please clarify my doubts.
Thanks & Regards,
Sunil.
Oh yes, this is exactly how it works 🙂
So when you short options your account would be credited and when you buy it back money would be debited. The difference is what you end up making. Also, this is pretty the same way long trade works – when you are long you buy first and sell later…and when you short you sell first and buy later…its just that the order is reversed. Either ways the Profit or loss you make is the difference between the debit and credit.
can u kindly elaborate more on the shorting of CE concept ?
continuing same example given by mr.sunil .
in first scenario , he sells CE at 64 and buys back next day at 60 … thus earning 400 profit.
similarly if his buying price is more than selling , he will make a loss ….upto here i got the idea.
what happens when he doesn’t buy back and expiry date is reached ? kindly explain pls
Well you seem to have got the concept completely 🙂
On expiry day if the option is worthless then it will have a price of 0. So you would have sold at 64 and exchange will assume you are buying back at 0, hence your profit will be 64. In case of any other positive value for option then your profits will decrease accordingly. For example if its 15, your profits will be 64-15, if its 30 ..profits will be 64-30….and its its 80 then you will incur a loss 64 – 80.
As you said we can short the options till expiry, As on expiry every option nears to Zero or becomes zero, isn’t shorting options then always profitable, like if we short 2-3 days before expiry and on expiry it going to become zero, so buying back on expiry date. Please clarify
Only OTM options goto 0 (or expire worthless). All In the money options have a non zero value.
karthik,
i have a doubt iv= spot-strike,when i see the option chain in nse website this formula not working — nifty spot at 8567
8800 ce iv =11.16 ,8750ce iv=11.20,etc please explain what it is
Sarath – the IV mentioned in the option chain is Implied Volatility and not intrinsic value.
thank-you very much sir
Welcome!
hello sir i m new to option… n have just signed up with zerodha… my question is today say nifty is at 8415, and i m bullish on it , so i predict the mrkt to go up so i buy a call option .. nifty trading @ 8415, i buy CE option with stike price 8450 and in return pay the premium for the same which is say 75 , so my queery is what will happen to my premium of 75 when nifty shoots from 8415 to 8435 , will my premium of 75 also move up i.e say 79 for that instance.. or will it remain at 75 only and will move up only once nifty moves above 8450 … bcoz i have purchased a call option with strike price at 8450 .. plz eplain..
Hi AMOGH,
The premium changes as and when Nifty value changes. If Nifty goes up, the premium goes up and vice versa. How much the premium will change wrt the change in Nifty depends on the delta of the strike price. The change in premium is directly proportional to the change in Nifty. You can book profit when the premium goes up just like u do when the price of a stock goes up. Hope that answers ur query. Happy trading.
I dint notice your comment Sunil, thanks for pitching in 🙂
If Nifty moves up, the call option will also move up..to what extent it will move depends on the Delta of the option.
Hi Karthik.,
U have taught us soooo many things. So I consider it my responsibility to pass on the knowledge gained from u to others. After all, knowledge increases by sharing. 🙂
Sunil, I’m very happy to hear this ! Have you read this – http://zerodha.com/z-connect/queries/stock-and-fo-queries/introducing-varsity
It talks about our rational behind starting Varsity.
Yes Karthik, I had read that article. I’m really glad to see the effort you guys take to educate people. And best part is that you are giving the knowledge for free at a time when hardly anything comes without a price. Won’t be surprised if some day we also have to pay for the air we breathe. Lol. Zerodha not just offers an amazing and low cost trading experience , but also connects well with people. That’s what sets Zerodha apart. Keep up the good work. God bless the team.
Thank you so much for the kind words Sunil 🙂
Good day Karthik,
I need a little help from you. I am doing intraday nifty options trading and I want to develop a strategy for the same. I tried looking up online. But didn’t find anything relevant. Could you please help me with it.
Thanks in advance.
Sunil – please do let me know if you need anything specific.
Hello Karthik,
I want to know how to analyze nifty chart and what things to consider to decide whether to go for CE or PE….. And what strike price to trade…..Is there some intraday trading strategy for nifty options?
My question might seem too generic, but I myself am confused what to look for…. Technical Indicators and candlestick patterns don’t seem to be helping much while I’m trading options in intraday….. Kindly advise…
Thanx
Sunil – you should not be looking at technical charts of options, it is pointless. Will be including 1 or 2 case studies towards the end of this module which I suppose will help you get a better picture.
Thanx Karthik. I will wait for it. As of now I am trading the OTM options for CE/PE and looking at the price action from the option charts, I’m determining my entry, stop loss, target and whether to go for CE or PE. In case I bought CE, and my CE stop loss order is about to get triggered, I am placing a SL buy order for PE and vice versa. This strategy seems to be doing fine till now. But I want something better. The Option Strategies I found online are all for holding the position till expiry. Nothing for intraday. Anyways, will wait for your future modules.
In fact most of the options are designed for expiry. The next module is all about Options strategy…hopefully it should give you an insight into devloping something for intraday as well.
yea.. thanks sunil… my queery got cleared..
thankz karthik….
hey karthik, i was always under the impression that the option on expiry day trails to zero. the HDFC CE1180 ended the day at 12 rs odd. why would any one hold on to options after expiry?
Madhu – Only ATM and OTM options expire worthless..but HDFC closed at 1193 yesterday…so 1180 CE had an intrinsic value of 13.
blooper!!! missed that….ok, so from the above e.g of HDFC if i chose a strike and am confident that the spot would be above that on expiry by say 13 points as it was then, would it be prudent to buy the option when its trading at a price below 13 and then sell it when it hits the price equivalent to its intrinsic value ( i.e 13)….of course this is based on the premise that the stock will not dip below 13 points to its strike 11 eight zero.
Madhu – selecting a strike such that you gain the most form the expected outcome is the most trickiest job of the options trader. Towards the end of this module, I will attempt to explain this…request you to please stay tuned 🙂
hi karthik ,
great forum.
for eg: if I bought nifty 8100 call @142 CMP 8002, my doubt is even if the spot reaches the strike price I will make a profit of 98/- rs per share but i’m paying 142 premium per share ,so will 8142 be my breakeven pt, please clarify.
My frnd said it does not matter if spot reaches that strike price i can book profits as premium increases , and square it off.
please clarify possibly with an example of how premiums change with time.
Thanks in advance
Yes, your breakeven point is 8142. However the breakeven point matters only if you intend to hold till expiry. In case the spot reaches the strike and there is ample time to expiry then like your friend mentioned, your premium is likely to be much higher than 142.
Dear karthik
I have a small doubt …plzz tell me can we earn profit on premium even if the market price doesn’t reach the break-even…???
Eg- suppose if I buy NIFTY 12000 CALL at 5rs …so my breakeven should be 12000+5=12005
So if the market price do not cross 12005 but premium increases to 10 rs….
Then in this case what will be my profit or loss if it has not reached expiry???
Yes, you can Prakash. But like you mentioned, the premium should increase.
Dear karthik
I think the break even in the above case should be the strike price+premium so it should be 8100+142=8242
Kindly correct me if I m wrong ???
M bit confused here ??
Plzz reply to this
Thanks
Yes, thats the breakeven for a call option.
is it possible that the MP of the stock goes up but at a particular strike price on the same day for buying call the premium price goes down?
Possible, please do check the chapter on Vega – http://zerodha.com/varsity/chapter/vega/
On exercising a call,do the shares need to be sold immediately?Or can they be sold later?
Everything is cash settled, so there is no need for actual buying/selling of stocks.
The commission paid is not included in calculation of Break Even point.
The break Even formula should be modified as below :
B.E = Strike Price + Premium Paid + Commissions
Agreed…also it should be noted that the commissions vary broker to broker.
I got a little confused after reading the comments.
1. If I buy an option today, can I sell it before the expiry date?
Yes you can sell it before expiry.
Hi Karthik,
I am beginner in options. Its very nice information about options. I have below queries:
1. How to select Strike price? U mentioned in few comments that u will take it up and add about it in this module. but I am unable to find about this. Can you please elaborate this?
2. About option strategies, U mentioned one or two comments u will give one or two scenarios for better understanding of option trading and strategy..Also I am not able to find Option Strategy module…
Thanks in advance!
The next chapter (chapter 22) – will upload next week) is all about strike selection.
In chapter 23 I will discuss few case studies – simple option trades and the rational behind. Hopefully this will help.
Hi Karthik,
Wonderful, truly amazing an initiative the whole Varsity is. IMHO, Its one of the best resources for uninitiated aspirational traders/Quants to get started.
Just one thing specific to the Options – Everywhere you have indicated 3 scenarios while taking a Call Buying decision. (lemme take Ajay-Venu’s example).
1. Price of Land can go higher than 500,000, say 800,000
2. Price of land goes lower, say 300,000
3. Stays same @ 500,000.
Mind you, the premium was 100,000 to start with, right ?
Now, you have indicated that under Scenario 1, Ajay stands to gain. i.e, if price of Land upon expire is > 500,000(> Strike Price).
Should scenario 1 be sharpened to say that Ajay stands to gain when {Land Price > (Strike+Premium) } ?? I mean, what happens if Land price increases from 500,00 but only till 575,000 ? In that case, Ajay pays = 100,000(Premium) + 500,000(Strike Price) but his in-flow will be only 575,00. Doesn’t he lose 25,000 in this case though it meet criteria of Scenario 1 ?
Maybe, I am missing a very basic point while raising this question. Do help me get clarity.
Rgds,
Anurag
P.S: Keep up the great, GREAT work !!!
Got it by getting to the B.E point later in the chapter. 🙂
Ignore the question. But still keep up the great work !!
Rgds,
Anurag
Good luck 🙂
Anurag – Thanks for kind words 🙂
Yes, it does make sense. However the idea at this stage is to slowly introduce the concept. Eventually I have discussed the Premium angle as well.
Hi, I was trying to calculate Total margin required using SPAN calculator. My question is whenever I am checking margin for any Buy (either CE or PE), margin required is shown as zero. Why is this so?
Sir supose nifty was at 7820..i bought 7900ce with premium of 90…nifty has reached 7860 day high premium at 150 can i squre off my position and book profit..or do i need to wait until nifty to toucch7900 to book profit..
You can certainly book profits and get out of the trade.
What about Exercising the option. I dont see it anywhere. As you said we cant exercise the option untill its expiry date. How can you square off before the expiry date.
It is assumed that you wish to exercise the option if you let your ITM option expire (meaning you do not square off the position on expiry).
Just no where I have seen such a simple and wonderful tutorial to teach Options. Excellent!!!! Keep Rocking!!!! 🙂
Merci Beaucoup …meaning ‘thanks a lot’ in French!
🙂 🙂
I don’t see our beloved Sir, instead I see an EDHEC grad here 😀 😀
Ah, EDHEC is very close to my heart! It helped me see the financial markets from a completely different perspective 🙂
🙂 🙂
as u advised me earlier, I am on the way to pursuing cmt and cfa now.
these give me a huge insight to develop how financial market works. And my every aspiration started from this varsity module.
It’s beyond my words how much I respect and how much Zerodha, Varsity, You, Nithin Sir means to me ??.
Thanks for the very kind words, Arijit. We feel privileged to receive so much love and respect 🙂
In the given example, even if the price increases from 2026.9 but stays below 2050, loss of 6.35 per share occurs.
Won’t it make more sense if one buys futures (cover/bracket) instead of options?
I’m asking this as it was mentioned that options are more attractive choice.
(I appreciate your efforts, plz dont kill me)
Well the whole deal with options is that there is protection on the downside and we clearly know what is the loss in the worst case..since loss is pre defined, hence the preference of options over futures.
Also, I suppose between 2026 and 2050, the loss is being minimized as we approach the breakeven point.
And don’t worry, I will not kill you 🙂
Hi ,
Just a quick query.what all factors affect the open price of a option. Is there any technique to guess it. There is a huge gap in previous day close and present day open. Which we don’t see in equity.
The opening price of an option depends upon how the underlying opens….and this really depends on the overnight news flow!
Having said this, do note certain illiquid options do tend to gap up/down.
Hello Sir,
I want to ask you that suppose I bought 2 lot Nifty 7900CE @ 80 and holding it till expiry. Now on expiry day Nifty is trading @ 8000. that means I can execute my contract since I am in profitable condition. but I could not understand how to execute the contract? I mean what happens on expiry day? Do ‘executing the contract’ means selling 2 lot that I have been holding ? Please clear my doubt although looks silly…!!!!
Sooraj – In a profitable situation like this you can choose to let the contracts ‘expire’ (meaning you do nothing) and the exchange will ensure you are settled to the extent of your profitability. In other words if you are supposed to get Rs.100 as profit, exchange mechanism will ensure you get this money to your trading account.
Alternatively if you want to go ahead and sell it yourself, you can do that as well.
Okkkkk…..You mean I just have to do nothing and let it expire if I am in a profitable situation….. got it..
Thanks a lot Karthik Sir…
You are really doing remarkable job for beginners like me..keep it up…God bless you..!!
Yes Sooraj. Although if you have bought an option and it is profitable, it makes sense to square it off yourself just before expiry to avoid high taxation. Please do read through this to understand this better – http://zerodha.com/z-connect/queries/stock-and-fo-queries/stt-options-nse-bse-mcx-sx
Right Karthik Sir, I even don’t keep contract until expiry.. I usually hold them for 1 or 2 days…because We can never be sure what happens next in market….!!!
Some perspective 🙂
Hi Karthik,
I want to ask, I purchased CE 8100 @6.80 with 28JAN expiry.My order type is “NRML”. Now NIFTY is going down NIFTY is @7640, so obvious CE 8100 becomes 5.90. So am in loss right now. But till expiry I have time & hope NIFTY will gain. Suppose NIFTY will trend to 7800/7850 on date 18 JAN, Call which i bought become to 10. So I would get profit of Rs 3.20 per lot. At that moment on 18 JAN can I sell the call option directly or shall need to convert from order type “NRML” to “MIS” and then sell?.
am confused on this. Please assist.
Yes, you would be in profit of Rs.3.2 (in case the option goes to 10). You can square it off from the position using NRML…no need to convert to MIS.
Hi Karthik,
I am beginner in Option trading.
This is really a good material for beginner.
But I have a doubt that when will I make profit? Means when premium goes up OR strike price goes up.
Please clarify. Thanks in advance
When premium goes up. Strike price will not move like premium. In equities you have choice of many stocks like Infy, SBI, Reliance & so on… while in Options if you take one stock e.g. infy which trading at 1160 right now….it has strike prices with a gap of 20 rupees….1180, 1200, 1220, 1140,1120,1100 like that…..each has different premiums…..all the strike price have two options again Call (CE) & Put (PE)…..so if you are bullish on infy you can buy call 1160 or 1180 or above and if you are bearish you can ‘BUY’ put options 1160,1140,1120 & below. farther the strike price…moneyness changes….and so the option greeks also. e.g. now u r bullish on infy and bought 1160 call option….if spot price of infy moves up from 1160….its premium will also move up…. provided it is ATM or ITM option and not so near the expiry.
Am i explained right Karthik?
Perfect 🙂
Strike price is a constant and it does not move. You make money on the premiums.
Ok thank you SHREYADR and KARTHIK. Now i got it that we make money when premium goes up and we lose money when premium goes down. right?
Your are right KASHYAP buy that is when your buyer of the option. if you are writer(seller) of the option, going down of premium is favourable for you.
very thank you SHREYADR to help me.
Perfect!
Well, that depends on your position. If you are long on options you make money when premiums go up…but if you are short (have written options) then you make money when premiums go down.
Now If I buy a lot of 800 of CENTURYTEX MAR 500CE at the Rs.16 premium (my total premium is 800*16=12800), after few hours premium is increased to Rs.20, so If I do square off at the profit of 20-16=4 Rs, how much total value I get?
20-16 = 4
4*800 = 3200 will be your profit.
If premium goes high and i am in profit as premium, but breakeven point is not reached then what happened? Am i in loss or profit?
If you are doing intraday then there is no concept of breakeven. For you to be profitable, the premiums have to move in your desired direction.
that means if i do BTST (or before expiry) then breakeven is applicable, right?
Breakeven is applicable for trades held till expiry, all other cases it does not.
ok now i have cleared my doubt. Thank you very much KARTHIK…
Welcome!
1) u r into gross profit of Rs.3200/- i.e. excluding brokerage n taxes.
2) Which break-even point you are talking about?
Hellow SHREYADR,
2) I am talking about, in the case of i have mentioned above example (CENTURYTEX MAR 500CE), if I have bought lot qty=800 premium=16 strike price=500. So my breakeven point value 500+16=516, right?. Now, after few hours premium goes to 20 and spot price is 510 then in this situation am i in profit or in loss?
Technically speaking 516 is ur breakeven point. but traders don’t trade like that…they just trade premiums….keeping target and stop loss in mind.
secondly premium will definitely rise from 16 to some upper value when spot price moves from 500 to 510….but it may not rise by Rs.10 (510-500) and become 26 (16+10) because of the option greeks comes into picture.
ok thanks…but i don’t know about option greeks. I have to learn about it.
Greeks are explained in this module, maybe that will help.
ok
Hi Karthik,
When I make a profit due to the increase in premium, i.e., when i buy a CE and later on sell that CE back for a higher premium before expiry, will it be like, I would be obliged to exercise my selling CE on the expiry date?
No, it simply means that you bought an option by paying a certain premium and sold it later for a higher amount and pocketed the difference. That’s about it. When you buy – sell before expiry then its just a play on premium…exercise of options is applicable only upon expiry.
Thank You So Much Karthik. So nice of you
Welcome!
Hi Karthik,
Is it possible to first sell a call option and then buy it back at a lesser premium making a profit
Yes, of course.
Thanks for the reply. So its like, we can short sell a call option
Yes, you can short a put.
Hi,
If I bought 2000 lot size of Justdial MAR 750 CE today with premium 25 (2000*25=50000). After few hours premium is 23. If i book loss then how much total loss i receive?
25-23 = 2. Your total loss will be 2*2000 = 4000.
50000 is premium so total loss is 50000+4000= 54000.am i right? Or loss is only 4000
You will have to consider the difference in the premium multiplied by lot size for P&L.
And If i leave this position for expiry, then what?
It depends on the stock price on the expiry date.
for example stock price is 780, then?
Then your profit will be 30, out of which 25 will get adjusted with the premium paid. Hence you will be left with 5.
5*2000=10,000/-.
Just an addition. There will be a large outflow of money as STT charged which will be [(780*2000)0.125%] = 1950/-
(Comparatively as other charges are very minimum, I’ll keep those out of calculation).
Sir, am I right?
I’m assuming you are talking about ITM option expiring. If yes, check the latest circular from NSE – https://tradingqna.com/t/no-more-stt-trap-on-exercised-in-the-money-options/18977
So no more STT trap.
Sir,I am new to f&o. My question is if I have to trade in options, should I have the entire
Margin for call buying or should I pay only the premium. For suppose if I want to
Buy bhel Apr220 call at 5 premium, if I have 50000/- in my trading account ,can I purchase 10000 shares with that amount or should I have the entire margin for buying the call option.
Pradeep – When buying options (either call or Put) you only need to pay the premium amount required. But if you want to short options (either call or Put), then you need to pay margin amount.
In your example the amount you will have to pay for 220 Call option is 5 * BHEL lot size.
Sir, if bhel 220 april (lot=2000) CE premium is rs 5. If a lot of bhel is rs35640. If I have 50000rs in my trading account. Can I purchase three lots with the amount that I have in my account or I should have
the entire marginal cost(3*35640) in my account to purchase the call.
Lot size of BHEL is 2000. Premium is 5, hence to buy 1 lot of BHEL you would need 2000 * 5 = 10,000/-. Since you have 50K in your account you can buy 5 lots.
Dear Karthik Sir,
I want to know about stoploss for option premiums..suppose I purchased 2 lots of nifty 7900 PE @ 56 with a stoploss 50 on BTST basis. later in the next day Nifty open gap up and Nifty premium opened @ 29 then what happens to my stoploss?? will my order get executed on 50 or 29?? Plz reply.
When you purchase a put option, you want the prices to fall, hence your SL should be higher than 56 and not below.
Sir you actually didn’t get me.. I mean I have 2 lots of 7900 Put options @ premiums 56..My intention is market would fall tomorrow so I held them so that premium go above my purchase price…and I kept my stoploss to 50..
but what happens is next day market opens gap up then definitely my premium would fall…and suppose gap up was so sharp that put option premium opened @29 then would my stopploss trigger @ 50..??
I hope you get me..
Sooraj – thanks for pointing this, clearly my mistake 🙂
SL has to be set everyday and cannot be carried forward. Meaning if I have set the SL at 50 today but by end of day the SL has not been triggered then it automatically gets canceled at market closing. The next day you will have to set the SL again….either by placing a Pre market order (http://zerodha.com/z-connect/queries/stock-and-fo-queries/pre-marketpost-marketafter-market-orders) or you can place the SL order after market opens.
Ok I got it…that means We can not carry SL overnight…pre market order is available in Pi but not in kite.. right??
Hi Karthik,
I have bought 8200CE at premium of 7(7*75 = 525 ), Now the premium rate is 14.
1. If i squared off now, theoretically i will get profit of 7*75=525. But technically there is no profit/loss, since my premium amount is tallied there(525 – 525 buying price). right ?
2. if i squared off at 15 i will get profit of 8*75 = 600 and technically 75(i.e., 600 – 525 buying price) ?
3. Let’s assume i will squared off at premium of 6. Is’t possible to squared off less than entered premium ? If yes, then will i get my premium amount back with calculation of 1*75 loss and 6*75 remaining balance ? Again if yes, i don’t understand logic here, If i squared off my position less than the premium which i bought then i will get 6*75 but if i am in profit premium of 15 i will got only 1*75 profit(i.e., (8*75 = 600) – (7*75 = 525 buying price) )… big confusion, pls clarify ?
You will be making a profit…thing about it as buying a stock at 7 and now its trading at 15…so you have more than doubled you money here. If you square off at 6, then you will make a loss….as you bought something at 7 and sold it at 6…so a loss of Rs.1.
Thanks for your prompt reply.
Let me ask one more question to get more clarity.
Bought at 7 and sold it at 6.. so a loss of Rs.1 –> yes i understood and here is my qus… is’t mean that remaining 6*75 will get credit into my account ? (because i read somewhere the premium amount is not refundable once contract made, so pls clarify).
Bought at premium 7 and sold it at 8, so a profit of 1.Rs. How much amount will get credit into my account, whether 8*75 or 1*75 ? (Again the same question, because of premium confusion).
Yes, the premium amount will be credited to your account. It will not be refunded if you hold it to expiry, but in this case you are trading the premium.
In first case you get 6 * 75 in your account…and in the 2nd you will get 8 * 75….the credit will reflect by end of day.
Thanks a lot and Thanks in advance.
Let me ask few more questions about expiry, (This confusion came, because the spot price and premium is not equally increasing in real time, as explined in this article)
I bought 8200CE at 7 when spot price is 7900.
And assume,
1) The spot price is 8200 or below at the time of expiry, then the premium will become big ZERO and i will get nothing, right ?
2) The spot price is 8200 or below, premium is something around 87 and i EXIT explicitly before the auto expiry, then i will get premium*lot_size, right ?
(Below qus, because of big confusion – who is the hero spot price or premium?, Please answer profit/loss and the corresponding amount)
3) The spot price is 8206 and premium is 100 at the time of auto expiry then what will i get ?
4) The spot price is 8206 and premium is 100 and i EXIT explicitly before the auto expiry then what will i get ?
5) Now fortunately the spot price hits 8300 and the premium is 160 at the time of auto expiry, what will i get ?
6) The same flow, spot price hits 8300 and the premium is 160 and i will EXIT explicitly before the auto expiry, what will i get ?
Hope, i am not confusing you 😉
1) If you buy 8200CE for 7, then you will make a profit only if the spot moves above 8207, below 8200 you will not get anything.
2) Yes
3) Spot influences premium. If spot expires at 8206, and if you continue to hold the option to expiry, then you will get only 6 as 6 is the true value of the option
4)100
5) 8300 – 8200 = 100
6) 160
So basically you can exit before expire , then you will get the last traded price of the premium. If you choose to hold till expiry then you will get the intrinsic value of the option.
SIR , WE CAN EXIT ANY TIME BY TAKING PROFIT OR LOSS ON ANY OPTION AND NOT TO WORRY ABOUT WHAT IS UNDERLYING SPOT PRICE OR THE STRIKE PRICE PREMIUM ON EXPIRY DAY.LIKE IF I HAVE CE+ 140, PREMIUM 5 AND I WRITE OFF CE- 140, PREMIUM 8, RS 3 * LOT SIZE IS MY PROFIT
Yes, you can exit it at any point in time. No need to wait till expiry.
I bought voltas 340 ce jun, its going down, now its below my buying price, i dont want to book loss, but confident it is bullish, but expiry of june month is coming near.
So question is can i hold on this option? since if i am bulish on this stock.
can i carry forward to next month expiry?
Yes, as long as you are convinced you can. But remember a wise man once said “Markets can be irrational longer than you are solvent”.
@KARTHIK,
@SARATH
What does carry forward mean ?? Selling june option for loss and buying next month option ?
It just means you sell/buy this month’s contract to buy/sell the next month’s contract. There is no P&L angle here.
Hey Karthik,
Awesome contents. Thank you for enlightening every nuke doubts.
On option expiry either CE or PE, the cash settlement takes place between buyer and seller. But in the case of premium how the settlement happens ?
Upon expiry, the premium of all ITM options are settled in cash. The value of the premium will depend on the intrinsic value of the option. Do note, all other options will go worthless.
My question was before expiry if we square off our position, our P&L would be the change in premium. How does the pay off depending upon premium take place ? Hope you get my query !
Yes, if you wish to square off the position before expiry then your P&L is basically the premium differential. The payoff before expiry would therefore depend on the greeks and the way they change.
On Equity, Buy on Less and Sell on High. Profit settles between buyer and seller counterparts.
On Option CE (square off before exercise) Buy on Less premium and Sell on High premium. Profit settles between option buyer and seller counterparts for the same strike price.
Correct me If m wrong.
Thanks
Absolutely, that’s the way it would work.
I CHANCED UPON YOUR SITE. I T IS WONDERFUL. iI COLD NEVER UNDERSTOOD FUTURE AND OPTIONS. I T MUST VERY USEFUL FOR THOSE WHO ARE IN STOCK MARKET AND ARE BEGINNERS. EVEN I FEEL ENCOURGED, .
Glad to know this Balbir 🙂
Sir, Completed this chapter again. And many questions are solved after reading Q&A section. Thanks for such wonderful effort to teach.
Welcome!
Hi,
I would thank you for helping us understand the tricks and trade of different trading mechanisms.
I have gone through zerodha varsity for call and put options. However need to brush up on delta, theta and other later chapters.
I am interested in placing an order for a buy call option for HCLT 28-jul CE, strike at 730, 1 LOT-700, underlying – 739.85, premium – 12.45.
So please clarify on the below points and correct me if I am wrong.
1.) The current premium is 12.45, so as per the guide will Zerodha be charging only premium multiply lot, i.e. 12.45 x 700 = 8715.
2.) So, as the strike is at 730, anything above 730 (ex. 740, 750) is considered a profit trade, and any below 730 then I tend to loose the premium i.e. 8715.
3.) Expiry for the above is 28-Jul, if for until 27th, the underlying is 750, can I square off or conclude the trade; or is it essential that I keep it until 28th itself, i.e. expiry.
Please help me on the above points as I am excited to know and educate myself.
1) Yes, premium amount payable is 12.45*700, and this is paid to the option seller, and not Zerodha
2) Yes, you will lose the premium as long as the spot remains at or below 730
3) Yes, you can exit the position whenever you want
Karthik avre, thanks for the confirmation. i missed out on HCLT, which made spot high of 747.
1 more question : Can we carry forward the contract(f & o) to next month. if yes than can you tell me whats the procedure.
You can buy Aug/Sept contract today and hold this till expiry, this is as good as a carry forward.
1.) but supposedly, say the Aug contract CE i had taken, did not meet the target, then can i carry forward this contract to september.
2.) for intraday or short term, as you have described in the later chapters that one can earn on difference in premium, say on the above case where the premium difference was 22.95 – 12.45 = 10.5, where 22.95 is current premium for the above contract. so the profit is 10.5 * 700 (1 lot)=7350. is that right?
Sir, pardon my questionnaire, its just that i want to know the concept thoroughly before jumping in. i am enjoying reading the chapters and respect the time you give to us by answering every queries.
Thanks again, Guruji of Zerodha.
1) No you cannot as the Aug contract expires in Aug. However you can close the Aug contract (or let it expire) and buy/sell the Sept contract. This is also called rollover.
2) Yes
Please feel free to ask as many questions as you want, you need to be knowledgeable before you place your first trade! Good luck.
Thanks,
Sir Couple more queries.
1.) in the above scenario if i wanted to hold CE sell contract for short term or square off – intraday, and if the premium is reduced from 12.45 to 10, and i had to close the contract then the loss would be 12.45-10 = 2.45*700(1 lot)=1715. is that right?
2.) suppose i am bearish on the stock for intraday, say on above scenario where the stock would have gone down from 12.45 to 10. Can i place PE option for an ATM strike. here the difference i.e.12.45-10=2.45*700(1 lot)=1715 is considered a profit.
Thank you for humble advise on option strategies in module 2, have read the option modules. need to go through strategies. i understand the above scenario is something you would not advise us newbies, however i understand and just wanting to clear some thoughts.
lastly, I am reading this chapters in july 2016, wherein this chapters were written a year back, your calculation were bang on when it was said “Nifty could be at 8600 with 40% chance in july 2016”.
Thanks again..
1) If you have sold the option, and the premium falls, then you make a profit and not a loss.
2) If you are bearish you can either buy a Put or sell a call option
Good luck and happy trading 🙂
Hi Sir,
I have a following doubts in options:
1) what is the maximum time allowed to buy call option buy on the expiry day? I tried to place a order at 3:28.it says rejected even though i tried to place a Market Order?, Please tell me order allowing time levels at Zerodha and Exchange side?
2)For an Instance, on the Expiry date (28-Jul-2016) HDFC 1400CE the Premium was at 0.40 at 3:28 and seller was also ready in the system at 0.40, Stock was at 1406 and closed at 1402.15, In this case if my 1400CE Order with premium of 0.40 executed means,what will be my profit and losses? since it has closed above strike price(1400), Will i get remaining amount (my premium is 0.40, Strike price is 1400 so 1400.40, stock closed at 1402.15, So the diff b/w 1402.15 – 1400.40= 1.75) or not?
I hope you understands my query,if not feel free to ask me again?
Please tell me your views on this please?
Regards,
SaikiranGarapati
1) Technically the order should go have gone through, did you have enough funds?
2) You will have the difference in spot and strike minus the premium paid as your profits….i.e 1402.15 – 1400 – 0.4 = 1.75
Thanks for your answer Sir,.
1)Can you tell me when closing price generally displays in the system and On Expiry day?
2) What price settlement will happen, Is it on LTP(3:30 PM on expiry day) or Closed priced on that day?
3)There are some cases i have seen at 3:30 LTP was some price and closed price was different So what will be reason for this? What transactions will happen in 3:30 to 4:00?
Please tell me your views on the above queries..
1) At 3:40 PM you will know the exact prices closing price
2) Closing price
3) The price you see at 3:30 PM is the last traded price, but at 3:40 PM you will get to know closing prices.
Thank you very much for your answers…May i know why there is a difference between LTP(at 3:30 PM) and Closing price? Can you give me one example?
Closing price is the weighted average price of the last 30 minutes, where as the LTP is just the price at which the last trade happened. You can find the example here – http://tradingqna.com/2512/how-to-determine-closing-price-in-f%26o?show=2512#q2512
Hi,
If i buy a call option at 3:28,If i do not square off,but closing is more than my strike price and premium,what percentage of fine exchange will put for that transaction?
There is no fine from the exchange for this. Why do you think exchange would fine you for this!
Thank you very much for your answers..I read it some where,That is y i thought ,there will be some fine..May be i am wrong..
If i do not square off,Exchange will charge STT on total traded value of my Option right? That is what i am speaking about…
Yes, but that is not a fine. It is a hefty STT that the exchange charges. More on that here – http://zerodha.com/z-connect/queries/stock-and-fo-queries/stt-options-nse-bse-mcx-sx
Sure, no problem.
Suppose yesterday I paid Rs 3500 as premium of option @0.05 lot size 6800. If after 1-2 days the value of the premium rise to @0.10. then in that case .Can i sell the option premium to get instant profit before expiry..? will i get net profit of Rs 3500 ..??
Yes, you can do that. No problem with that.
Will there be any kind of risk of loss like unlimited loss after selling the purchased option. Actually I m very new to option trading so kindly answer as simple as u can
No, when you sell an purchased option you are essentially closing the position. So you are out of the market.
Dear Karthik first of all thanks for making these complex things so easy for us. I have a quaestion here, suppose i create a sell position of call option of ABC comp, strike price 100 rs, primum 5 rs, lot 1 that consist 100 nos. So i will get 500 nos as premium to be credited to my account. and after 10 min if i find that there is no change in premium. So if i close my position on same premium after 10 min then what will be my profit? thanks
If you happen to buy it back at the same price i.e Rs.5, then you will have no profit no loss. Of course, you will lose brokerage and all the applicable charges and taxes.
He guys it was my first time buying an call option of JPASSOCIATE. I had bought the 15CE at 0.05 per lot which is going to expire this thursday. Any Idea what should I do since I couldn’t exit this position?
1) If I square it on the expiry day how much would I get?
2)If I just leave it to expire what would happen and how much would I get?
Gautam – if you read through the entire module carefully, you will realize the answers yourself 🙂
Dear sir, what is the actual thing we do when we say exercise an option?
Means in our bajaj auto example if before say 5 days before expiry apot price touched 2080 and if i say want to exercise option means what i have to do…do i have to purchase real shares to exercise it?
Second thing if when my call option ITM and if i sell it before expiry..then difference in premium is the only profit that i earned?
Exercise an option means that you hold the option which you have bought to expiry. You can choose to close your position before expiry this is just termed as booking your P&L.
All equity derivative contracts in India are cash settled – so it is not required to purchase shares.
Yes, you earn the difference in premium.
Hi sir,
Just having query
If today I buy call option in sbi strike price 300 price 1.60 exp 29dec 2016
If sbi move till 270-280 still I can square off this option or not?
Also we have to square it off at market price?
You can certainly square off, but by using limit orders.
Thanks KARTHIK great work
Can you please share any video link or any steps to square off above option in zerodha
Any option buy and then square of with zerodha ( video or ppt ) is great full
thanks
Check this – https://www.youtube.com/watch?v=S8fRxNaN-Pg&list=PLkxTRam6E2V_YYRSqzCjRq20fYPh9bkSL&index=3
Cheers!
Any option buy and then square of with zerodha is great full
thanks
I went through the entire module and was very confused although I understood around 40-50%. Read it the second time, things started becoming a little clearer than earlier because I made sure that I understood each and every line of yours but still had some confusions. I still understood only around 60-70%. Nevertheless, I took the pain to read the entire module yet again and guess what, it is like I knew Options right from the time I was born (lol). It is so much clear now. Thank you so much Karthik!
I have shared my experience so that other readers need not get disheartened if they don’t understand it the first time. Keep reading it again and again and I assure you that things will start becoming clearer in your head.
Khan, thank you so much for the kind words and the practical tip to readers here 🙂
However I do not want to buy the stock for delivery (yet) as I’m worried about a further decline of the stock. I did not understand this point and what is stock for delivery please explain and yes hatss off for simplfied explanation of all the topics of all the modules
‘Stock for delivery’ means buying the stock with an intention of holding it for many days/weeks/months/years. So what I mean to say is that I dont plan to buy the stock on delivery basis as I fear the prices may go down further, thereby giving me a notional loss.
can i close a option buy call before my expiry date
Yes, you can.
Hi Karthik,
STT, yesterdays(9/02/2017) appeal, i am confused, a person buys 3000 nifty 8622 call for .05 paisa at 3:20 p.m , how come he has thought, that before 3.30 his call will be bought by some trader, besides this , if he leave the entire lot unexercised , what was he expecting, exchange would bear the losses?
Please help me to understand this.
Regards,
MSP
What he did was very simple – at 3:20PM he estimated that Nifty will close above 8600, I guess at 3:20, spot was just shy of 8600…so he went ahead and bought 8600CE. As per his expectation markets did close above 8600…I guess at 8602…so his call options turned profitable (and therefore ITM). But unfortunately, he was not aware of the STT implication on ITM the options. So he ended up paying a huge STT, which was way above the profits he made. Check the implication of STT here – http://zerodha.com/z-connect/queries/stock-and-fo-queries/stt-options-nse-bse-mcx-sx
zerodha has currency buy call option know otherwise it has buy call option only for nifty and banknifity alone for trading
There are options on USD INR, Nifty, and Bank Nifty.
to find option premium we hake to multiply the lot size with ltp of corresponding strike price to get premium value
No, premium is a price that prevails in the market. Check the option chain.
the premium value is only the ltp value
Yes, since the premiums are traded, it has an LTP value.
option have lot size know
Yes, keeps changing as per market conditions.
Hello Sir,
I am new to the Zerodha Varsity and am following the chapters intensely.I must say you are doing a gr8 job of educating us that too for free.I have read a couple of books on options and watched lots of youtube videos but till now I wasnt able to grasp the topic.Reading ur chapters h has cleared many of my doubts.Keep up the good work and educate us on more and more successful strategies.Also i want to ask can I just be an options trader exclusively and make good profits with minimum risks(till now I was doing futures and cash and lost quite a bit}.Plz enlighten.
Shreya, I’m happy to know that you like the contents here.
You can choose to trade any financial instrument (equity spot, futures, options, commodities, currencies etc)…your profitability depends on your trading strategy and how well you execute the same.
try to explain me more detail about premium calculation profit and loss calculation
now i am buying a wipro contract of strike price 490 now the ltp is rs1.80 no of lot is 1200
if i buy 2 no of lot means i have to pay 2*1.80=3.60rs (or) 1200*2*1.80=4320
now if current wipro is trading at 500 means my profit will be =10*1200-3.6 (or) 10-3.6 (or) 10*1200-4320
It will be lot size * number of lots * premium, so in your example it will be 1200*2*1.80=4320
Your profit will be lot size * number of lots * (premium received- premium paid) and in your example it would be – 1200 * 2 * (10-1.8)
i.e 1200 * 2 * 8.2 = 19,680/-
thank you zerodha support for providing continuously for support
Cheers!
If for a particular series of option, there is significant change in the open interest every day but no major change in volume then what does this indicate?
Very unlikely, if the OI changes, so should volume.
sir,
if i purchase jswsteel 195 CE at 6 (3000*6=18000) and if stock price goes to 200 from 190 then how to calculate profit ?
If it goes to 200, then the premium will also increase. The difference between how much premium you paid and received times the lot size is your profit. Good luck.
Assume that if stock price moved to 200 then your option price also moved from 6 to 8 (But there is no guarantee like option price need to move along with stock price). Some time even if stock price touch the 200 option price will increase only .50 paise (i.e 1500/-)
Most of the times it does, but yes, not always. This is because of the volatility competent.
What is implied volatility? How we can use of it in real time? Can you give an example to understand.
Implied Volatility is the volatility expectation of the market participants. I’ve explained volatility in detail across 3 chapters, check this – http://zerodha.com/varsity/chapter/understanding-volatility-part-1/ and the subsequent chapters.
Karthik,
1.) What is the procedure of exercising my long call option on expiry day apart from letting it expire?( I want to know what order to place through the trading terminal) ?
2.) On any other day we can trade the premium but can we trade the premium on expiry day also?
1) Yes, you can let it expire as such and it will get settled by the exchange. However, if your option is ITM, I’d suggest you sq it off yourself. Check this – http://zerodha.com/z-connect/queries/stock-and-fo-queries/stt-options-nse-bse-mcx-sx
2) Yes, you can.
Hi Karthik,
What will be the brokerage charges in buying a call options?
Let’s say I buy a call option of Tata Motors at strike price 480 and premium for this is Rs. 20. In this case what would be total brokerage that I need to pay?
Tata Motors has a lot size of 1500, so you will pay a premium of 3000 (1500*20), for which the brokerage is a flat fee of Rs.20.Remember its 20 per executed order…it does not matter how many lots you buy.
Permit me for a bit of marketing here – Zerodha is the cheapest, technologically advance, and most customer friendly brokerage in the country. If you are not with us yet, please do consider signing up 🙂
That is Absolutely correct 🙂
Cheers!
Hi Karthik
On expiry day if I square-off my ‘in the money’ option then how I will calculate my profit:
1.) Difference between the premium
OR
2.)Max[0, (Spot price-strike price)] – Premium Paid
If you hold the position till expiry, then you will get the intrinsic value of the option, which is defined by the equation you have mentioned (applicable for CE). For PE it would be Max[o,(strike-spot0]-premium paid. Do note, if you are holding an ITM option, then it is better to square off the position just before the closing on expiry day. Read this – http://zerodha.com/z-connect/queries/stock-and-fo-queries/stt-options-nse-bse-mcx-sx
Hello sir ,
Sorry for testing you, but i got an problem about options trading
please have a read on this
Suppose date is 24/03/2017
Option – USDINR call option (Buy)
Strike rate 66
CMP – 65.4575
Premium 0.0100
Expiry 29/03/2017
Qty- 13 ????? (is this just 13 or 13×1000=13000) not sure about this
and here is the output of this trade
The premium was 0.0025 around expiry
so Karthik sir my doubts for you are foolowing
1. On expiry day near closing time a pop up window appearing in pi saying please close the ITM possitions for avoifing paying extra STT
What’S the meaning of that window .
2. If i want to choose buy currency CE and press F1 button then in QTY colum it is showing by deffault 1
Is this 1 qty or 1 lot (1000 qty)
3. Suppose i am in profit which is i am not just assume before expiry IS this mean this is due to inceease in premium say 0.0150,0.0200 or whatever u think so
OR
this is anything else otherthan increase in premium
4. If i choose to close my ITM option on expiry day before 5:00 pm (say 11:00 AM) what would be then
let option’s CMP IS 66.20
Will this exit on profit which was due to premium
or will exit at 66.20
and profit will = {13×1000(66.20-66.00)-(13×1000×0.0100)}=2470 Rs.
5 lets say i am not closing my position upon expiry
Will be forthcome
And what is this excess STT and how much extra is it
6. I am not closing my position because i assume it
This will wash out my profit on (66.20-66.00) right and limited it
To increase in premium
Actually sir this was my first ever trade in derivative segment
And i cloed my position yesterday morning having loss around
95 RS. . Iwas just testing my learning it was great experiance
Means -75% movement is this comon
Sir please guide me some tips to learn properly in this
Segment if you can
and last really reallt Sorry for forcing you to upload PDF
It was long way back you did not remember that day but i
Can please stay fit and healthy after all you need health
to teach us
Essay over……gud nyt
1) Read this to know why we pop that message, although it is not really applicabe for currency trading – http://zerodha.com/z-connect/queries/stock-and-fo-queries/stt-options-nse-bse-mcx-sx
2)Yes, 1 means 1 lot
3) I dont understand this statement
4) If you close the position, you will receive the difference in premiums (i.e between buy and sell price of premium) times lot size.
5) Read the link pasted in 1st point
We are working on putting up a PDF soon.
I know there is no STT on currency derivatives in india you can assume that STT pop up window question for stock or index derivative instrument..
Thanks for help
Yup.
Hi
I have query regarding exercise of options.
I will buy nifty call options exp 27 April at strike price 8800 premium 450.
Can I exercise at spot price before expropriation date.
If yes than what whoud be profit or loss pls clarify.
No, you cannot exercise the option before the expiry. However, you can choose to square off the position whenever you want. You need to be aware that both exercise and square off are two different things.
If suppose We brought some share @ 280 and after some day it increased to @ 300, can we sell then or have to wait till expiry. If in future share price fall like next day it fall @ 250 I mean to ask if we can sell off shares just like in Equity market?
Totally new into stock world, sorry if its stupid question 🙂
Buying shares is in the spot market, it has nothing to do with EQ markets. You can hold on to it for as long as you want. Even the futures contract can be sold anytime you wish, no need to wait for expiry.
quick question: can we buy 2000 call option when spot price is at 2026.90 ? if so, assume the price settled at 2012 upon expiry .. it is still above the strike price, what would be my P&L?
The option would be settled at 12. Your difference will be 12 minus the premium you paid.
also, what would the p&l if we choose 2010 as strike option, assuming the spot price ends same as above?
10 minus the premium you paid.
I need to understand the actual Calculation behind.. how Options are calculated…
according to attached screen shot.
http://prntscr.com/f1v9c0
Yesterday (27 Apr 2017) Nifty expired @9342.15 ..
PE 9350 @7.40 and CE 9300 @30.25
Calculation Theories Says
option value is = Time Value + Intrinsic Value
so Put price 7 is ok.. but CE should be 42 but it’s 30..
plz help in understanding it…
Thanks…..
You are looking at the last traded price, I’d suggest you check settlement price. It will be 42.15.
Sir where i can find this settlement prices?
NSE webiste. Goto the option’s quote page.
Sir i have searched for the data and found it.
but all the settlement prices in all the option whether in PE or CE is 0
screen shot is attached for CE 9300 http://prntscr.com/f25bqt and CE 9000 http://prntscr.com/f25b9s also. plz have a look
Yes, 0 indicates that the option expired worthless.
But It was ITM Options… how Can ITM option expires Worthless.
in that case if buyer doesn’t square off their position Before Expiry, their ITM options will expire Worthless??
really…
ITM cannot expire worthless. Exchanges will take the onus of clearing the ITM options on your behalf. By the way, you may not want to hold ITM option upon expiry due to STT reasons. Check this – http://zerodha.com/z-connect/queries/stock-and-fo-queries/stt-options-nse-bse-mcx-sx
I have searched and got another link on NSE, it’s bhav copy..
http://prntscr.com/f3nb1i
and Got the price Differences on closing basis Vs LTP..
so actual close was..
CE 9300= 38.45 and LTP was 30.25
PE 9350= 6.85 and LTP was 7.40
but not able to find actual reason behind why minimum price differences is still there according to Theory and actual closing.
and sir i had read STT trap previously and know why not to leave ITM position open @expiry.
Thanks for making all the tough theories easy to understand, and making them all available @ same place..
but now plz help me finding the difference between these prices why settlement is not according to theory?
is there any hidden charges or taxes?
The difference is because that there is a difference between LTP and closing prices. Closing prices is the average of the last 30 mins of trade.
what is bid price and ask price .if ltp rate on the nse option chain is not present means shall i can consider any amount as that contract ltp the minimum ltp value is
Check this for bid – ask spread – http://zerodha.com/varsity/chapter/the-trading-terminal/
No, you cannot consider any amount as LTP. If NSE is not displaying LTP, then it means there are no rates available.
Sir my query is not about the Differences between LTP and settlement price.
but the Difference between actual closing settlement price of CE 9300 = 38.45 which should be approx 42 as you also said in your earlier first comment.
is there any other hidden tax or charges ????
after all Option settlement price should be (Intrinsic Value) = closing price – Strike price
No hidden charges as such. I’m guessing it gets adjusted with taxes, but I myself need to confirm this. Will get back to you on it.
Sir,
Waiting for your Reply, Hope you will Reply soon……
Thanks
Sure, I will get back as soon as I can.
Sir, just a reminder, in case you forget …..
Sir it’s Almost one Month in waiting for your Reply..
🙁
Arun, there cant be any difference. If spot closes at 9340, the 9300 CE will be settled at 40.
Hi Sir,
I had purchased nifty50 9500 strike price at 39.67 (75 * 39.67 = 2975.25). The current LTP is 69(75*69=5175). So my profit according to premium is 2200. But what will be profit if I exercise my call on expiry day incase nifty touches 9600 with considering lot option in calculation. And how I will exercise my option in Kite ?
If you do not close your option position, then it is assumed that you are exercising the option. Upon expiry, you will be profitable only if Nifty is above the strike + premium paid, which in your case is 9639.67. Any price for spot below this, you’d end up losing money. Also, it does not make sense to hold the position till expiry (unless it is really deep ITM) for STT purpose, check this – http://zerodha.com/z-connect/queries/stock-and-fo-queries/stt-options-nse-bse-mcx-sx
Hi Sir,
Yes, we should not let option to expire itself, we should exercise it, but how it can be done from Kite on Web ?
And my position to be profitable it should be strike + premium:- 9500+39.67=9539.67, so suppose it crossed 9600, so profit will be this 9600 – 9539.67 = 60.33 and with quantity in lot consideration so calculation will be 60.33 * 75= 4524.75.
No no – point is, it does not make sense to hold on to an ITM option for STT reasons. If you hold on to it till expiry, then it is implied that you are exercising it. Your breakeven point for a long call option is Strike + premium paid, which in your case is 9600 + 39.67 = 9639.67.
Hi Karthik,
If you read the first question of WAQAAR again, strike price was 9500. So breakeven point is 9539.67.
If nifty reaches he will profit 60.33 per share.
You will start to make money once the spot price crosses the strike and also crosses the premium you’ve paid. So for example if the call strike is 100, premium is 20, then the breakeven is 120.
Dear concern,
I am very new to options as I have just started options trading I have some queries in my mind..hope u will answer
Sir if I buy nifty call option for strike price of 9550 at a premium of suppose 16 ruppes. And before expiry the premium value goes to say 26 rupees whereas nifty rises to 8475 from 9410. So in this scenario my strike price is not achieved but my premium went on rising … So can I enjoy the rise in premium by selling my position ? Can I get 10 rs proft for my positions?
Pls revert
Thank u
Yes, you can close the position and enjoy the increase in premium. No need to wait till expiry.
hello,
so in the above case explained above(bajaj auto) ,call option buyer will exercise his right and ,minimize his loss to 1.35 rather than losing 6.35 right?
This is just illustrating the fact that the buyer of a call option is taking a risk to the extent of the premium paid, in this case the premium happens to be 6.35.
Hi karthik,
I have doubt regarding STT
On expiry day one sms is sent by Zerodha “STT cost is 25 times square off ITM contracts………. ”
Let banknifty spot is 23000, I buy 1 lot call option strike price 23100 (otm).
I forget to close my position and banknifty expires at 23200. in this case would I have to pay 25 times stt.
Yes, if your option is ITM then you will have to pay STT. Check this – https://zerodha.com/z-connect/queries/stock-and-fo-queries/stt-options-nse-bse-mcx-sx
Still have confusion,
How ITM is considered, if at time of buying it is otm but nifty closes at higher value than strike price, then would it be considered as ITM?
A strike transitions into ITM or OTM based on the virtue of the movement of the spot price.
can i sell call option and can i buy put option?
Yes, you can. By the way, did you know if you buy a call and sell a put, you are basically creating a synthetic long futures position. Check this chapter for more info – https://zerodha.com/varsity/chapter/synthetic-long-arbitrage/
In the Option Chain on NSE, IV is Intrinsic Value. In the example given for Bajaj Auto above, how the value 35.22 is derived for strike price of 2000 In CE at Spot price of 2026.9 ?
The value of option premiums is market driven and is decided by the markets.
Error : option strike price based on ltp percentage. Please help
Sorry, can you share more information please? Thanks.
trying to put option order but getting following error
“exchg not enabled for this acct”
Guess you need to enable FnO segment in your account. PLease do call our support for this.
Hi Karthik,
Very nice explanation, i have started treading in options. Thanks:)
When you are planning to have this in Marathi language.
Happy to know that, Vishal. Good luck.
Not sure about Marathi yet 🙂
Hi karthik
Thanks for sharing the basics of option trading. its really helpful for novice traders.
One question i have is lets assume that i bought a option (CE) with premium of 2.55 and lot size of 3750. i paid a premium of ( 2.55*3750=9562.5).
But unfortunately it started falling down and assume current premium is 1. in this case i am currently experiencing a loss of 5812 and if i square off i need to take losses. so the balance money which i get back in this case is 3750 from exchange ( 9562.5-5812= 3750.5).
But in case if i hold till expiry date and let it get expired, i will lose 9562.50 along with other STT charges.
Please correct if i am wrong.
Thanks
santosh
You will lose the entire premium if the option expires below the strike. If its profitable, then you will also have to pay STT. Hence its always advantageous if you square off a profitable long option before expiry. More details here – https://zerodha.com/z-connect/queries/stock-and-fo-queries/stt-options-nse-bse-mcx-sx
We can see top 5 bids and offer prices in zerodha. Is there any way where we can see all bids and offer prices?
Yes, please click on market depth.
Hi Karthik,
Market watch shows only top five, I am looking for all offers & bids prices?
That is not available for now, Vishal.
Hi Karthik
Excellent series…just read one or two modules.
One question on what you mentioned above – “you will lose your entire premium if call option expires below strike”
Let us say I buy Nifty call option at strike of 10000 (current spot – 9800) at a premium of 1.5….now, let us say the spot increases to 9900 (still under the strike), wont the premium go up beyond 1.5 due to IV being impacted due to upward spot movement? And if the premium becomes 1.6 and even if spot < strike, I can sell the option at a profit of 1.6 – 1.5. Please advise if this is right?
Yes, you are right.In this case, you are trading the premiums and the P&L will be the difference between the premiums.
A follow up ques Karthik,
Assuming one will not hold the option till expiry, one is basically impacted my movement on the premium in the near term, which is impacted by greeks….in this case, can a decision to buy/sell an option contract (as you illustrated above) still be based on basic anticipation of stock price movement?
I ask this because it would take long for someone to master all concepts you have covered across modules here so should one wait till that time or trades based on stock price movements still work?
Yes, you can. In fact, most of the traders just trade the premiums and do not really hold the options to expiry.
Thanks Karthik…so in simple terms,
1. can one simply trade premiums based just on underlying spot price movement?
2. do the premiums, mostly move in consort with spot price (assuming the expiry is far and time decay is not very strong)?
3. how strongly does the spot price movement impact volatility or is IV factoring the future irrespective of current spot price movement?
1) Yes
2) More or less, yes. However, you should be aware that there are other factors that will affect premium
3) As strongly as the spot does, but with the element of time.
Let, I bought nifty call option(1lot) at a premium of Rs.50/- and sold that at a premium of Rs.60/- on any day before expiry, I would make a profit of 10*75=750??
If so, then what is the advantage of holding an option till expiry(taken strike price hit before or on expiry)
Yes, you will make that profit. By holding till exiry, you are essentially giving your option more time….maybe it can go from 70 to 80?
Is it not possible to buy real shares in demat account through option contracts ?
No, as of now the settlement is only in cash. No physical settlement in India.
I am a beginner in India what should we do to exercise option on expiry date. Will exchanges automatically settle the profit amount above the strike price?
Yes, the exchanges will settle this for cash.
Hello, Karthik.
Recently started reading options module. I have a query.
When the buyer of an option sells it (to gain a premium profit), after squaring off his position – is he free? Or does he become an obligated writer of the option?
Yes, after closing the position you do not have any obligation as you are out of the market.
Thank you, Karthik. One more thing.
While shorting a call/put option, the seller is compulsorily obligated to hold his position till expiry by earning premium only or he can square off his position like the buyer can to change his profit/loss scenario like shorting in futures.
He can square off his positions anytime he chooses to do.
Hi,
Thank you for educating free of cost. Very few do it. I have a query.
When I try to buy a call option there are two options in Kite platform, Normal and MIS. I understand MIS is intraday. So what is Normal? In equities, there are two options CNC or MIS. I always buy in CNC.
If I buy a call option today in Normal when do I get the delivery? Can I sell it on the same day if the price moves up? ( Sorry if the question sounds silly as I have never traded in options. Just trying to understand it)
Regards,
Nancy
When you buy an Option in MIS, the position is squared off at/after 3.20 PM. And if you buy using NRML(Normal), you can hold the option contract till expiry, which is last Thursday of every month for Equity Options.
There is no delivery for Equity Options in India and there will be a cash settlement on the expiry date.
Yes, you can sell the Option contract you bought under Normal also on the same day.
All order types are explained in the Kite User Manual in detail https://kite.trade/docs/kite/#product-types
Thank you for your prompt response. Can you clear another query of mine. Say I bought shares of a company at Rs 100 in CNC without putting any stop loss. After a few days the share price has reached my target and I sell it. This needs monitoring the market everyday. Is there a mechanism wherein I can tell the system in advance to sell the shares whenever it reaches my target say Rs 110?
Essentially you are looking at a feature called Price Alerts. Unfortunately, we do not have this feature, yet.
Okay
Can I do this in SL or SL-M. For e.g In CNC segment , at the time of purchase of 100 shares @ Rs 200 I put SL trigger price as Rs 220. Does it mean when the share price reaches Rs 220 the system will automatically sell the shares?
When you place SL, it is essentially a limit price. If you want it to certainly sell, then opt for SL M.
Thanks. In my above example, if I put SL-M price as Rs 220 and if the market price is Rs 190 will the order get executed ?
Not really, it will sell at any price after the stock breaches 220.
Thank you.
Can you please explain the basis to select exercise price for options. Say I am bullish on a stock which is currently trading at 100 rs. so at what exercise price should I purchase a call option ?
It is explained in the later chapters, Tushar.
sir
when niftyCE10200 26 oct 2017 reach to 0 what happen
That means the 10200CE has expired worthless. Buyer loses the money and seller retains the premium received.
can i place market order for buy or sell option?
Market orders is allowed only for Nifty and Bank Nifty. You need to place limit orders for stock options. If you want to send this as a market order, then do place the limit at a price higher (if you want to buy) or lower (if you want to sell). The order will get instantly if there is liquidity.
Hi Karthik,
I just want to know why the prices or deep in the money and deep out of the money are not displayed and traded. Ok i will try to explain myself with example. Let’s say i want to trade options of cipla, and i want to go long ( buy a naked call ). The closing price of cipla ( underlying ) on Friday was 640 and i’m intersted in buying a deep in the money call which is strike price of 540. But when when i try to open the option chain for cipla in NSE website, all the strike price below 550 till 450 have blank fields in it and show no data as if there is no trading going on all these strike prices. I’m not able to attach picture ( snap shot ) of the option chain in this comment session but i will appreciate if you can go to NSE website and see the option chain for Cipla and then you will understand my quesion.
My concern is what if i have a strategy of 2-3 legs where in i might have to buy/sell deep in the money options. How can i buy/sell those deep in the money options. I’m new to options so maybe i’m asking you something very basic. Even if i try to open the chart for these deep in the money option chain they don’t open.
Is the trading on options which are deep in the money or deep out of the money halted until the prices comes back to those price levels. Also how are new option strike price generated. Let’s say with the same example if Cipla ( underlying prices ) goes up to 700, then what happens to strike price of 600 ?? and when and how will be strike price option of 700, 720 strike price available ??
Not sure if i’m able to explain myself clearly but hopefully you get my question. I will really appreciate if you can clear my questions about how option strike prices are generated and is it possible to trade deep in/out of the money options.
Many thanks
Ron
Ron, the reason is simple, and you’ve answered it yourself 🙂
There is no one trading these options, hence no bid-ask…in other words, no liquidity in these contracts.
Hi Karthik,
Thanks for your reply. So what if in case i still have one of these option ( deep in/out of the money ) before expiry. How can i sell it ? For Example i have Cipla strike price 520 ( I’m long on this one ) and now the stock is trading at 650. So what happens to my 520 strike price call option. How can i sell it if there is no buyer ? What are my choices and what can i do in these situation.
Thanks again
The exchange has its own mechanism to settled all ITM options. In this case, you are entitled to receive in cash Rs.130/- from the seller, which you will. OTM options expire worthlessly.
hi karthik,
sorry to bother you again, but can you please help me know what is good for day trading Futures or Options. I know that it depends on person to person but if you don’t mind can you please let me know what is your preference if you have to day trade ( options or futures ? )
Also, i will apprecaite if you can let me know few advantages and disadvantage of futures and options for day trading.
many thanks
You rock and you help me make my decesions better.
Ron, it actually depends on liquidity. If the asset that you are trying to trade is liquid enough, then you can easily place market orders and not really worry about loss due to slippage. Having said that, I have a tendency to work with futures for intraday and options for overnight positions.
Thank you so much Karthik. One more thing how can i check liquidty of stock or future/options ?
Check section 9.2 – https://zerodha.com/varsity/chapter/nifty-futures/
sir i brought vedanta call option @320 strike price @the premium 11.60 now vedanta stock rate is 324 and premium 12.30 if i sell today can i get profit and how much?
You can sell it anytime you want. Your profit will be the difference between the price of the premiums… i.e 12.30-11.60 = 70 paise. Multiply 70 paise by the lot size to know your total profit.
Hi Karthik,
First, I want to thank you very much for doing a wonderful job. I have one doubt regarding ITM option.
Assume I bought one ITM option Nifty CE 9200 at 1068.70 when today’s spot price is around 10200. Total value comes around 80152 (1068.70 x 75). Assume option is expiring at 10100. Total value will be 67500 (10100-9200) x 75. So it is a loss from the value when brought (80152) even though spot price has increased from 9200. Am I correct on the above calculation or missing something here?
I checked randomly for ITM strikes (from deep ITM to slightly ITM). The total value when buying the option is greater than the value when options are expiring (assuming my above calculation is right). Also, I have noticed there are large premiums starting from 2000. What is the strategy behind holding those large premium options if on expiration the total value is less?
Thanks and Regards,
Srini
Yes, that would be a loss. Remember, when you bought the spot was at 10200 and now it declined 100 points to 10100. Along with the decline in spot price, there is also a loss in terms of time value. Both these combined leads to a decline in option premium.
Most option strategies are around ATM and few strikes above are below these.
Sir, i have a doubt.
If i purchase call option with expiry of “28th December”i.e next month (too much safer side) assuming nifty will go beyond 10500 (bullish perspective) with strike price of 10300 or 10350. Premium is around 160-175. Then what will happen with my contract on this expiry (30th November)? May be i am confusing in basics only. Sorry in advance if doubt is too silly.
And if i can continue with my contract after this expiry (30th November) and assuming premium goes to 250, then what will be my profit?
Nothing really happens on Nov expiry, Pratik. The December options will expire on 28th December. If the premium goes to 250, then you make 250-160 = 90 as profit.
Good luck!
Thank you Sir.. 🙂
Cheers!
I want to know the basics like how to book profit/loss since the item is still not in my hand (account) ? or how to exercise my agreement with the seller if I am in profit ? Do I need to make the full payment to exercise the trade ? Please explain.
The best way to get to know is by actually placing an order 🙂
I see.
sir i need a information regarding option trading. if i buy something, for example: if i buy federal bank nov 110 ce at 4 rupees and then if it’s value increases to 5 or anything, is that possible to apply stop loss in case of option trading because i tried but stop loss is getting rejected while i apply for options?
i want to track the profit actually.
If you are using Kite, then look at the P&L section, in Positions.
ok, is that we can’t apply SL in case of Options Trading. For the Target, we can only place either a buy trade or sell exit trade and not SL?
You certainly can, Ankur. I’d suggest you give a call to support to understand the process.
Yes, you can get out of the option anytime you choose. No need to wait until expiry.
and one more thing, if i buy some option at the rate of rs 4 and the next morning at 9.15 i place a selling order at rs. 5….as options take some time to open and before it opens, my selling price will be there…if that specific option directly opens at 6 then what price i will get in this case 5 or 6?
You will get it at 6.
ok, thank you
Cheers!
Please clarify my doubt
I bought Bank nifty call option @25 strike price is 25700
But on expiry day it closing price is 12.75 but spot Bank nifty closed above 25736
Now what price is calculating for me profit or loss
Please explain
You paid 25 as premium but the premium has declined to 12.75, so you make a loss of 12.25.
Hi Mr.karthik, I have doubt on this conversation,
Assume Mr. Mohan sold that stock option on the day of expiry ,then according to PL formula
(PL for call = (Spot price – strike price)- premium paid. Ie: PL= (25736-25700)-25 = 36-25 =11)) he should be in profit of Rs.11/-
Why and How he was in loss ?
And on the day of expiry regardless of current premium ,PL formula works or not.
Or do we need to consider premium also.
Please clarify my doubt….
If you have sold an option and the option expires worthless, then you would retain the whole premium! No loss here.
Sir,
How to place this order in zerodha
Tata Motor 400 option call CMP-30
Buy only above 32.50
Target 34/36/38
SL-28
Can I put this all in single order.
How can I put my order with above price compare to CMP??
You are essentially looking at buying above CMP and simultaneously looking at placing a target and SL order. This is possible with something called as a Stoploss bracket order, the same will be available with the new version of Kite, called Kite3.0.
Thanks
That mean this order will be as follows.
SL. BO
CMP 30
Price Box- 32.60
Target Price box- 3
SL-4.50
SLTP-1
My doubt this order on which price will execute CMP 30 or as soon as cross 32.60. That particular amount 32.70
Thanks
Yes, although I think you will have to increase your SL.
When will Zerodha enable SL-M order type for Options stock? How long it would take?
No market orders on stock options, Abdul. Stock options are still not liquid enough to absorb impact cost shocks, given this market orders can be quite disastrous.
In case if the spot price crossed strike price before expiry. How does the square off works? And if the spot price closes below strike price on expiry, I get nothing out of the contract?
You can just trade the premiums before expiry. For example, assume you bought a call option by paying a premium of Rs.25 and now the same option is trading at Rs.35, you can choose the square of the position and a pocket the difference of Rs.10. No need to wait till expiry.
As mentioned in the tutorial, we can square off the contract only if there is a buyer right? Example case of Chirag Gupta, he unable to square off because there won’t be any buyers for that contract. Since the spot price crossed the strike price there won’t be anyone who’s interested in buying it. What to do in this case?
Yes, liquidity is essential when you trade options. So, always look for ample liquidity so that you can buy or sell the contracts easily.
Ok, one more question, if I leave the contract which is under loss to let it expire, do I loose complete margin? Or just the difference amount?
If you are a buyer, then there is nothing much you need to do. You can leave it and let it expire.
Thank you 🙂
There is a lot more to know.
Happy learning!
Is it recommended to average out the contract if it is falling below the existing price?
Not advisable for one reason – in case the market or the stock goes down further, then your losses will mount.
OK, thank you.
Cheers!
Hi
I want to ask that suppose xyz has 1.50 premium-CE , Q = 800
So i need 1200(800*1.50) to buy CE option ..
How much fund needed to carry forward position for 1 week ?
Do i need only 1200 to carry forward or .. need more ?
Thank you
You pay the premium amount i.e 1200 and can carry forward this position till expiry or you can choose to square off the position whenever you want.
Thank you sir !!
Cheers!
HI,
Please reply.
I have 2 lots of 10500ce at 60/-
Market is around 10500. but LTP premium is 44/-
If the market closes around 10600 at the expiry.
Calculation would be like (10600-10500)-60=40
& 40*2lot (75qty)= 6000/- profit
Am i calculating correct or something missing here????
Yes, this is perfect.
ok. now i understand the actual meaning of breakeven point. if i go with simple premium difference then i am in loss of -16*150= -2400/- but excising the same at the expiry could be profitable of 6000/-
right sir?
That’s correct if you assume that market will reach 10600. If Nifty trades at 10500 only, your premium will continue to fall.
but remember, STT would be high if left to expire. calculation may looks like 0.125%*10500*(2*75)=1968
Sorry if this is already answered, pls answer if I brought an option as NRML today and if I want to sell it so can I place a sell order , would that square off the position?
Yes, that would square off the position. Remember, you can buy and sell the option anytime you need, no need to wait until expiry.
Hello Sir,
Query – If I buy an option and suppose it goes up by a lot. Now I have kept my trigger order for sell much above the bid price. What happens to the option on day of expiry? Does it get automatically squared off? do I need to pay extra money to exercise the option etc?
Kindly help!!
Thanks,
No extra money for option exercising. The option will get sold when your bid price matches the offer price.
If I buy call option of a strike price at say 2. so 75*2=150 I have to pay+20 as brokerage.
If I see on expiry day premium became 0.05, if I square off then I will get 75*0.05 = 3.75.
1.) Here again 20 will be charged as brokerage and also exchange related tax ?
2.) If I leave this I will loose all the amount, it is good to squareoff or let it expire ? ( leaving for expiry because of brokerage and tax > total amount ).
3.) If lots are say 50 then 3.75*50= 187.5, how much brokerage for this ?
I think you should check this for the exact details – https://zerodha.com/brokerage-calculator . I’d prefer to leave the option to expiry provided I’m convinced the option wont jump from OTM to ITM.
Hi sir
I have bought 10900 JAN18 NIFTY CE using NRML .
I want to square off my position now.
From Kite when I press exit button it asks how many shares to sell. If i press exit after that , will my position be squared off
or I have to change to MIS for Intraday square off ?
Thanks
Hi Nithin,
I have the basic but very important question for which I haven’t got the answer yet even after reading full options chapter.
It is mentioned above that,
“the call option is supposed to make a profit when the spot price moves above the strike price”.
However even if spot moves by certain amount and haven’t crossed strike price yet, the premium also increases for my selected strike. Can we book profit at this time(I am excluding premium paid,brokerage,tax for now).
E.g. Nifty spot at 11000,
Strike selected 11500 for Rs. 50.
Now if Nifty spot moved to 11200, premium for selected strike 11500 will rise to Rs. 150, let’s say.
Now there is a 300% return even if spot haven’t crossed strike.
I hope scenario is valid and realistic.
Thanks,
Ashish Gupta
Yes, you can book profits anytime. No need to wait till expiry.
Statement 1: You can buy a call option now and sell it within few minutes if you wish…so exciting an option is not a problem provided a counterparty is available.
Statement 2: Exercising of an option contract is the act of claiming your right to buy the options contract at the end of the expiry. If you ever hear the line “exercise the option contract” in the context of a call option, it simply means that one is claiming the right to buy the stock at the agreed strike price. You can exercise the option only on the day of the expiry and not anytime before the expiry.
The second statement last line says that you can ONLY sell on the expiry date but the first statement says you can sell at any time before as well.
i don’t understand the concept here. Can you please explain. Statement 2 is taken from the comments (by Karthik). Statement one is from the Module 5 (Chapter 2).
These are two different things, Dheeraj. Exercising an option happens only the expiry day, however, you can sell the option anytime you wish. Have explained this in several places under the comments section.
Dear Karthik,
in profit and loss table, for eg if Nifty option is bought at premium of Rs 45 if the premium increases to Rs 47, the profit will be Rs 2 with brokerage charges, break even happens after brokerage charges are met, why do we have to consider Intrinsic Value, and break even after the premium amount is met, please explain.
If you are trading the premium (as in buy and sell quickly), then only the change in premium matters. If you hold to expiry, then intrinsic value matters.
Can you tell the parameters of the studies in the Technical analysis of the first chart in this module?
Looks like a basic RSI, Moving average overlay on the price. I can also see volume chart at the bottom.
Hi Karthik,
I had bought Auropharma CE, expiry 22-Feb-18 at strike 640 for premium 29.5 (lot 800). So I squared off my open position when the underling was 575 and the premium was 0.45.
1. I am under the impression that if the trade goes wrong, as a CE buyer I will lose the entire premium ie, 800*29.5 = 23600
2. When I squared off my position, I received Rs 360, ie 800*0.45
3. In case I had squared off my position earlier, would I have still received the amount? For example, if I had squared off my position when the premium was Rs 10, I would have received Rs 8000?
Thanks.
1) If you have squared off at 0.45, then you have lost the entire premium i. 23.6K
2) Yes
3) Yes – you will receive the difference between the buy and sell value of the premium.
Hi, I have a query. Does Option pay-out work like Futures pay out too (end of day M2M principle) OR does it work like equity payout (upon exiting the position only)?
Your help is greatly appreciated.
Vidya
No, there is no concept of M2M in options.
Hi ,
I had bought PNB CE, expiry 28-Mar-18 at strike 110 for premium 1.90 (lot 4000).
1.I want to sell the CE before the expiry with premium of Rs. 3.5 . Will I receive the difference between premium 6400( 3.5-1.90)* 4000 at the time of selling the call option?
2. WHat if there are no buyers at the time of selling the Call option?
3. At the time of expiry is it compulsory for me to buy the market lot of the above share or else simply i can exit at whatever would be the position at the time of expiry?
1) Yes, you will receive the difference. Btw, congrats on the profitable trade 🙂
2) In this case, you will be forced to hold the option to expiry and wait for the settlement from the exchange
3) You can simply let it expire, but you will end up paying a huge STT. Its advisable to close all ITM option before expiry.
How much amount is required to buy a call option
You have to pay price * lot size (minimum 1 lot ) = total premium amount
price * lot size (minimum 1 lot ) = total premium amount
Price means premium amount per share or cmp of the share at the time of buying call option?
Depends on the premium for the call option. Multiply the lot size with the premium and you will know the money required.
Hi,
I want to know how I can find a stock option which is going up or down in current market or one day before (there is any screener or strategies to find out) pls guide me
That’s exactly what everyone would want to know my friend 🙂
HI If I am having a huge loss as a buyer of options CE, then does it make any sense to square off or should it let it lapse.. for example purchase jet airways ce at Rs 24 premium , but the current premium is less than Rs 1. Is there any additional loss if I dont settle.
I guess you have experienced maximum loss here, you will not have any further losses. Given this, you have no advantage by selling the option, rather, you may as well hold and hope for some recovery.
Thanks Karthik, in this case basically i should wait for the expiry ie 28th march. Am i right on that
Yup.
hi karthik
assume i buy option of IOC Strike price 220 rate of premium RS 1.10 expire date on 28/03/2018 ,
end of the expire date no one seller remaning what happen then the premium amount
Not to worry, the exchange will settle the trade on your behalf.
Dear sir/Mam,
In Call buy option once spot price move above the breakeven point profit stars and profit will be continued unlimited up to expiry date, now my question is, if spot price come back i.e reversed and crosses the strike price (down side), what will be the rate of profit/loss?
In such a case, the premium will also erode back. This really depends on the delta, have explained more on it here – https://zerodha.com/varsity/chapter/the-option-greeks-delta-part-1/
Thanks a lot, for providing so much useful information. I learned a lot about options from comment section only. Please clear my one doubt. Suppose I buy one lot in call option at premium of 10, strike price 300 and current price is 280. one lot contains 100 shares.
A.Before expiry the premium goes up to 12 and i book my profit i.e12-10=2*1000= 2000.
B.But after that as you told above on comments reply that we have to exercise option on expiry, so my question is.
1. After booking profit as per point A i.e is of 2000, now at the day of expiry the price of share go below 280. At that point did I loose something.
Subhash, after you sell or square off your position, you are completely out of the market. No need to worry about expiry or exercising the options.
Thank you very much, for clearing my doubt.
Welcome and keep learning 🙂
Hi Sir,
A general question to u that
why the stocks like HCC,PC JEWELERS r moving so drastically more than 20,30,40%(UP&DOWN) in a single day do they don’t have upper or lower circit limit ?
Plz clarify me.
thanks in advance.
Sravan, they are moving because they are in news these days. There is a fundamental change in these companies. Whenever such changes occur, such movements are quite common. Derivatives stocks do not have circuit limits.
Thank you sir,
In the above comments u mentioned u r doing a webinar on options,have u done with that if yes plz provide the link for that.
Thanks in advance.
Here is one, Sravan – https://www.youtube.com/watch?v=pVKfIxVw0Og&list=PLkxTRam6E2V_Kq5l-H4Xihh-nWgO6Z4d9&index=20
Sir,
is it possible square off in the money call option before expiry? i thought you can settle only on expiry day else one get only premium difference?
how will profit calculated if square off before expiry day?
eg: i buy call option for rs 50 premium ,strike price 11000 ,lot 150, now spot price 11200,few days for expiry what will my profit ? is it 150 *200 ?
Yes, you certainly can square off before expiry. No need to wait till expiry. To know your profit you just need to take the difference between the price you paid for the option and the price at which you squared off. For example, if you bought at 50 and sold at 75, then you make 25, of course, multiply this by the lot size.
Sir,
Thank you sir,i have 2 more queries,
1)is it wise to wait till expiry or squareoff before expiry for maximum profit when underlying moves in your favour and in the money??
is high STT applicable now?
2) does premium become equal to closing price -strike price on expiry day if its in the money?If not what would be premium on expiry day if spot price higher than strike price?
1) This is really dependent on the situation, Sai.
2) The premium depends on the intrensic value of the option. Have explained more on this later.
SIR PLEASE GIVE MI VARSITY IN HINDI
We will try and translate this.
Sir,
I’m new to OPTION and my question is like below,
What is happening to my account , when i forget the buying of below CALL OPTION and check my account on 15th JULY
NIFTY JUN 8100 CE @ 31.30
at expiry nifty reaches 8250
The call option has expired ITM, hence you will make a 250 – 31.3 = 218.7 minus all the applicable charges.
Noted Sir,
So on the time of expiry its not require to close the trade…NSE(ZERODHA) will automatically close the trade and send the profits to my account…isn’t it ?
Yes, you can let the position expire.
Dear Sir.
I f I want to sell any CE or PE in advance what is the premium required?
eg. If today I want to sell the Bharti Airtel June 370PE whose premium is Rs 6.95 and lot size is 1700 Nos. And Price in a cash market is 377.55 how much money is required to take this position?
You collect the premium when you write options, against this, you deposit a margin. The margin is similar to the futures margin. You can check the exact value here – https://zerodha.com/margin-calculator/SPAN/
Hi,
Just wanted to ask. If I purchase a LEAP with expiry on 2023 for nifty. Can you tell me what will be the liquidity like when I try to sell it sometime on 2023. Will I face problems because most likely by then it will be very very in the money.
I hope at least by 2023, the liquidity in Indian markets would have improved 🙂
hi my question posted here deleted …dont know how… i want to ask .. suppose a stock is running at 200 and i want to buy it when it comes at 205 …. for that if i am not able to monitor the screen regularly .. then how to do that … which thing i have to set so that when price comes at 205 it will execute my buy.Because in SL-M case it buys whatever price it is getting at that time .. no control of buying on exact 205…. Please resolve my query i am facing this issue ……
For this you need Good till cancel order, we should have this order type soon.
Karthik Rangappa says:
July 26, 2018 at 2:51 pm
For this you need Good till cancel order, we should have this order type soon.
¶
you need good ? means?
GTC = Good till cancel. This means the order is valid until it has been canceled.
Hello,
In options you cannot close positions before expiry so how come the OI at many occasions is negative? What does it imply?
Ansh
You can close the position anytime you wish, Ansh.
Hello Karthik,
This is from page 13
Here is an important point to note – you can
exercise the option only on the day of the expiry and not anytime before the expiry.
Hence, assume with 15 days to expiry one buys ITC 340 Call option when ITC is
trading at 330 in the spot market. Further assume, after he buys the 340 call option,
the stock price increases to 360 the very next day. Under such a scenario, the option
buyer cannot ask for a settlement (he cannot exercise) against the call option he
holds. Settlement will happen only on the day of the expiry, based on the price the
asset is trading in the spot market on the expiry day.
Ansh
Yeah, exercising an option is different from selling an option. You can sell an option anytime you want but you cannot really exercise anytime time. To exercise you will have to wait till expiry.
Thanks Karthik. so, if I am a call buyer (Index/European option) sitting on good profit may end the contract before expiration, only if the other party is ok with it.However if the other party is not interested then I can exercise on the day of expiry. In case of individual security/American options I can exercise my right before expiration. Is this correct?
This is from NSE website
https://www.nseindia.com/content/press/prs_derivatives.pdf
Further the Options are classified based on type of exercise. At present
the Exercise style can be European or American.
American Option – American options are options contracts that can be
exercised at any time upto the expiration date. Options on individual
securities available at NSE are American type of options.
European Options – European options are options that can be
exercised only on the expiration date. All index options traded at NSE
are European Options.
Options contracts like futures are Cash settled at NSE.
The buyer of the option has a right, Ansh. No need to think about the counterparty. Apart from that, everything else is right.
Dear sir, i have observed something very important, rather strange. Since the break even is said to be = Strike Price + Premium Paid, so let’s suppose that i buy a long call at strike price 11200 at a premium of suppose 200. So break even should be 11200 + 200 = 11400. So i opened the zerodha brokerage calculator & entered 75 in quantity, & 11400 in Buy price. Now theoretically even if nifty increases 1 point that is 11400+1 = 11401 i should have some profit but it’s showing a Loss of 1486.27 ,
Infact it is showing loss until nifty reach at 11421, whole 21 points more than break-even, so shouldn’t the actual formula would be Strike Price + Premium Paid + Brokerage exp. (stt, gst etc.)
Manas, the brokerage calculator shows the P&L based on the premium. It does not consider the strike. The one that you have explained is based on the strike price.
Sorry sir, i didn’t get that. Can you please explain it with the above figures..
Like suppose i buyed a long call at strike 11200 by paying a premium of 200 & afterwards it goes up to 11300. Then what should i enter in the calculator as Buy Price, Sell Price & quantity ( if lot size is 75 )
Let’s say you bought 1 lot of Nifty 11200 option by paying 200 as premium. Now Nifty hits 11400 and you sell this option for 430. You have to enter 200 as your buy price and 430 as your sale price. Don’t consider the strike prices (this is wrt the brokerage calculator).
Good luck!
Thank you sir for your time ?
Welcome, Manas!
Hi SIr,
I have heard about traders doubling their money after 2.30 on expiry day trading. As i was bullish on bank nifty today i tried placing a 28500 call @0.80. The order was rejected and I got this message.
RMS:Rule: Option Strike price based on Ltp percentage for entity account- across exchange across segment across product
Can you advice what went wrong. I could see huge volumes being traded. But I was unable to do this through zerodha.
Shyam, your order was blocked because we have restricted trading on OTM strikes on and near expiry. Check this article for more information
Dear sir, sorry to bother you again but it’s very confusing when just starting out with options. Today i saw ATM strike 11450 at a premium of 134.6 at 3:16pm. Now suppose if i go long in it & nifty increases some points & premium stands at 146 then can i square off & earn the 10 X 75 (lot size) = 750 profit or it will be possible only after when the break even is breached ( 11450+134.6 = 11584.6 )
Yes, you can square off the position anytime you wish.
Sir, i actually meant that will i earn that profit also, or it would be a loss as strike price is not breached ?
Manas, if you sell the option then irrespective of where the strike is (pre-expiry), you will receive the profit.
Thank you so very much for your time sir. Sorry to bother you again & again.
Not a problem, Manas. Good luck and happy learning.
hi
subject: need clarity
i buyed cipla call option strick price 320 aug 30 expiry
how to sqareoff
do i need margin to sell call option that i already broght
thanks
No margin required. Goto the positions tab in Kite, select the position, and click on exit. This will square off the option. If this is your first time, I’d suggest you call our support desk, they will be happy to walk you through this.
Good luck with the trade.
Dear Sir,
I have a query on buying a CE and below is my query:-
Lets suppose, infosys spot price today is 1408 and there are strike price available of 1390 and 1420. premium respectively are 25 and 15 Rs. what is the significance on profit if i buy 1390 CE by paying 25 rs premium and infy spot price starts going up and if infy start going down
Regards
Abhi
There is no straightforward answer to this because there are multiple factors which influence the premium 🙂
The % profit will be higher in 1420CE assuming there is more time to expiry. If the time to expiry is short, then 1390 CE would be better.
Appreciate your response,
consider we are on 20th and i am expecting to dilute my position on the day of expiry. considering the formula that is “P&L = Max [0, (Spot Price – Strike Price)] – Premium Paid” . If strike price is 1390 and spot price goes up to 1430 or 1440 . My profit will be
In case spot price is 1430 => Max[0, (1430-1390)] – 25=15* Lot
In case spot price is 1420 => Max[0,(1420-1390)] – 25=5* lot
and
now considering strike price is 1420 and in that case, loss will be “Max[0,(1420-1420)] -15 = 15”
now considering strike price is 1430 and in that case, loss will be “Max[0,(1430-1420)] -15 = 5”
Is my calculation above correct? In case the above is correct then in the money call of 1390 is more profitable ?
Regards
Abhi
Abhi, this is for a Long PUT option, right? If yes, its correct. Thanks.
No Kartik, above example i stated for long call, when spot price was 1408 i took in the money call option and purchase 1390 CE.
My bad, I meant Long Call 🙂
This is the intrinsic value of a call option, upon expiry.
P&L = Max [0, (Spot Price – Strike Price)] – Premium Paid
Sir is the closing price of current day would be the buy price for next day in a call option ? I mean that today i buyed a call option paying premium of 75 & it reached to 91 but i didn’t sold it as i was bullish on nifty. But the next day 91 was shown as my buy price & i was incurring a loss as premium went under 91 & not under 75. Why is it so ?
Varun, is this on Kite? Can you contact our Support Team? This shouldn’t have occurred, we’ll get it fixed.
just curios to know how does option market work in usa.Does it provides European syle option contracts same as nse or something else.
I think the options are American in nature 🙂
Hi Karthik Rangappa,
I checked today option chain (Underlying Stock: PFC 82.65 As on Aug 29, 2018 11:35:53 IST)
where the IV for strike 80 CE is showing as 105.79. what does it mean? as per my understanding it is supposed to be Max(0, Spot -strike) ie. ~ 2.65
why it is 105.79 what will happen if the buyer excercise the option tomorrow (assume spot remains 82.65) ?
Ah, IV, in this case, is Implied Volatility and not intrinsic value.
Oh.. Thanks for the clarification..
Good luck, Ranitt.
Hi Karthik Rangappa,
One more doubt.. for ex I buy few lots of call option. what will happen to this contract if there is no buyer for trading till expiry?
won’t I be having any chance other than exercising option or loosing the premium?
If the contracts expire ITM, the exchange will settle it for you. Else it will expire worthlessly.
Hi Karthik,
Firstly would like to congratulate you on the great work you’re doing.
I bought a Piramal Enterprise 3000 call option for September expiry. Now my concern is that all the calls above this price are liquid and moving but this call is not moving – its pretty illiquid, there were only 3 lots traded today –
I don’t understand how this is possible. Also should I hold this or exit it at whatever price (its out of the money – simply coz its illiquid even though the stock price has moved) – Do these kind of options become more liquid at the time of expiry?
Please advise.
Prashant, this is quite common. Stock options do tend to get illiquid. There is no guarantee that they get liquid towards expiry, but generally speaking, there will be some liquidity coming in towards expiry.
sir, lets consider a scenario that banknifty is at 28000 (spot price). Now i buy a weekly banknifty call option at the strike of 28300. i buy say 1 lot (40) at Rs. 40. Now as per the above calculation if banknifty doesn’t go above the strike means that means i will make loss of 1600 rs. but thats not happening. If price goes above 40 then i will make a proffit. can u explain this litle bit.
if my question is seems idiotic then forgive me. I am a novice in stock market. This chapter create some confusion about banknifty weekly option trading which is not getting match with what i did so far. please explain.
Yes, you will make a profit only if the premium price goes above 40. It is like buying a stock, you make money only if the price goes up beyond your purchase price. Btw, please feel free to ask your questions here, this platform is meant for all of us to learn.
Sir,
I am having a query about strike price.
Today Yes Bank closed at Rs. 317.50.
What are the repercussions, if I buy 27SEP2018 options at lower than today’s close price.
For example, 27SEP2018 Rs. 310 Strike Price Option is being quoted at Rs. 14.80 at the end of the day.
What will happen if I buy this option on 27 Sep 2018
(a) If the stock price moves up to say Rs. 340 (better than today’s price of Rs. 317.50) . While buying options, I have assumed that stock price goes down to Rs. 310
I request you to clarify on this point.
You will have to tell me which type of option you are buying, call or puts 🙂
If i short sell nifty futures in the futures market than can i hedge my position by buying call option. if yes than at what strike price it should be bought.
Yes, you can. Remember to hedge a futures position with options, you will have to short options in such a way that the deltas add up to 1, since the futures delta is 1.
I wish to enter options trading, i have a query if you could help,
Southbank result are near
Currently trading at 12
Its oct 16 Call option is at [email protected]
Now if i buy this and premium goes up to 0.25 but spot price of the option does not cross 16 . Will i make a profit by selling it at 0.25?
Ie 3314.1
Yes, you will make a profit if you manage to sell @ 0.25.
Hi,
I could see, the premium price is moving negative for same strike price both in call buy CE and Put buy PE. For instance infy on 17th Oct around 11 am,strike price 720 both CE and PE permium are trading lower. What does it implies.
It just means that the option premiums are cooling off with the reduction in volatility.
My understanding is for particular strike it should be either bullish or bearish. How come both goes negative. Can you please elaborate the term permium getting cooling off. I didn’t get it.
Volatility drives the premium higher. Higher the vol, higher is the premium. So when the volatility cools off, the premiums also cool off, and this is applicable to both calls and puts.
Sir, Today (24.10.2018) i want to buy SBIN nov 360 ce @ RS.0.10. Bid is taken by system of kite and also market price was Rs.0.10 too.
But not executing.please why it is happening? it is not rejecting but pending how?
sbin current price was 256
Saikat,
Check the Marketdepth for the scrip. Although the LTP was 0.1, there might not have been sellers at 0.1, your order will get executed only if a seller wants to match your price.
How the ltp and strike rates are defined/calculated?
LTP is market driven, strikes are decided by the exchange based on the price movement.
Hi Karthik,
In this module you mentioned if market will go up and the Spot price is above the Strike price at expiry, Call Option Buyer makes profit. Moreover, P & L statement would be difference of (Spot Price – Strike Price) – Premium. If there is a difference of 40 Points in Nifty (High) on expiry, is the profit for Call Buyer : 400 * Lot Size.
Regards,
Dheeraj
The profit will be 40*75*number of lot.
Hi Karthik,
I have completed Module 5 and revising it again to clear all my doubts. I have a doubt here. Before buying/writing nifty option i like to check the volatility so that i can get a range. Assume i am bullish on the market and plan to buy 11600CE and based on my plan which volatility should i take into consideration? Is it the IV of the NIFTY or India VIX or is it the IV of 11600CE?
Hope i am not confusing!
Thanks,
Ajeet
Ajeet, just for Nifty you can consider the ViX. For individual stocks, you can consider the historical volatility.
Noted. Your advise will help me indeed to plan the trade. I also wanted to thank you for the work that you have been doing through versity teachings and I wish you achieve success in all your endeavors. Thank you again for the quick reply.
Thanks,
Ajit
Thanks for the kind words, Ajeet. Happy reading and good luck!
Hi kartik sir,
1.Yesterday one of my colleague bought OTM bank nifty 26700 ce for 11/– and the price today went upto 280-290/-. Now I recall you had written about effect of theta how premium starts decaying and becomes worthless on expiry day trading. As such I avoided this trade . Also max pain was at 26300 .
2.Now I was also monitoring the 26900 strike. i was surprised to see premium rose till 100 odd rupees and it started falling and closed at 27/- at the end hour? How did this happen when the bank nifty underlying price closed at 26939
Where did I go wrong in my analysis? Also india vix rose after 2 pm. Doesnt this mean the premium should be falling ?
Shyam, there is a lot of speculative activity on Bank Nifty, weekly expiry. People buy these options like lottery tickets. Is this sustainable? I’m not sure. You may luck out a couple of times but overtime buying options on expiry day and hoping to get lucky is not a great strategy according to me.
Hi Sir,
Thanks for reply
But kindly advice why premium for 26900 fell when underlying closed at 26939?
It accounted for the STT value, Shyam. For bank nifty its roughly 32 points.
Shyam, there is a lot of speculative activity on Bank Nifty, weekly expiry. People buy these options like lottery tickets. Is this sustainable? I’m not sure. You may luck out a couple of times but over time buying options on expiry day and hoping to get lucky is not a great strategy according to me.
Can you explain why the strike price of 2000 was not selected. I understand that the premium paid is much higher , but the break-even is at a lower level which is closer to the present spot price?
Subrata, if the premium paid is higher, then the breakeven should be further right?
Hi, new to trading world. Sorry if the question is stupid.
Reliance is currently trading at 1100. It seems highly unlikely that it will breach the 1000 mark.
So if i buy the 1000 CE (108 premium) and hold it till expiry, and say it ends up near 1070 on expiry, will i make any profit?
It depends on how much premium you have paid. Suppose you pay 108, and the spot expires at 1070, then the premium will be 70. So you’d make a loss because, for an op[tion worth 70, you have paid 108. You will make a profit, only if the option is worth more than 108, which means the spot has to be 1108 or more.
Good luck.
Please confirm if my understanding is right-
If today on a 200CE of Yes Bank, premium is ₹8 and market price is 194, then people who are paying ₹8 premium are expecting by the end of expiry that the market price will be greater than 200+8=208 ?
Thats right, upon expiry their breakeven price is 208. However, the premium can go higher before expiry and the buyer can exit if he profitable.
Hi Karthik,
I am new to Option theory. What I would like to know is I am planning to do only Intraday trade with Options. So Can i do so the same like just buying Calls and selling the same on intraday depending up on the increase or decrease in Premium value?
Suhas, frankly I think its best to stick to futures for intraday as opposed to options. Options are best suited when you can give it some time because it has multiple factors (option greeks) influencing the option premium.
Good. But as you said in the middle of Options theory chapters, there is a possibility of making profit due to intraday change in the premium value of options 🙂
Yes, of course! But chances are higher when you give it time 🙂
Thank sir
Welcome!
SCRIPT ” INDIGO
LOT SIZE TOTAL PREMIUM PAID
PE STRIKE PRICE 1,180.00 PREMIUM PAID FOR PE 10.40 600.00 6,240.00
TODAY CLOSING PRICE 1,074.40 PE CLOSING PRICE 11.55
Possible value Premium paid instric vlaue LSIZE P&L
1,180.00 10.40 – (10.40) 600 (6,240.00)
1,175.00 10.40 5.00 (5.40) 600 (3,240.00)
1,170.00 10.40 10.00 (0.40) 600 (240.00)
1,165.00 10.40 15.00 4.60 600 2,760.00
1,160.00 10.40 20.00 9.60 600 5,760.00
1,155.00 10.40 25.00 14.60 600 8,760.00
1,150.00 10.40 30.00 19.60 600 11,760.00
1,145.00 10.40 35.00 24.60 600 14,760.00
1,140.00 10.40 40.00 29.60 600 17,760.00
1,135.00 10.40 45.00 34.60 600 20,760.00
1,130.00 10.40 50.00 39.60 600 23,760.00
1 WHAT I HAVE TO DO IF THE PRICE IS BELOW 1180
2 DO I NEED TO CLOSE MY POSITON MANUALLY .
3 AS I KNOW IF I CLOSE MY POSTION MY SELF SO I WILL GET PREMIUM DIFF.
4 WHICH ONE WILL MORE PROFITABLE A PE value which I don’t know what will at diff price.
5 PLEASE DO NEEDFULL, AS I TAKEN THIS TRADE FOR MY FUTURE REFRENCE.
6 AND I KNOW MY MAXIUM RISK IS 6240, BUT DON’T KNOW WHAT WILL HAPPEN PROFITABLE SIDE
Satpal, I find it hard to figure out the table here. Maybe put it on Google drive and share? Also, if you follow the excel construction used in the chapter, you will get the flow yourself.
I bought 1 lot nifty option call11200 at 60 premium, My queries are below.
1. If i buy one more lot with same strike price but premium 38, then it will show average value in position ?? ex: 2 lot avg premium (60+38/2=49 premium) right ??
2. If i buy 1 lot with different strike price ex: 11300 & premium 50; then it will show average value or different position ?
Pls clear my doubts.
1) Yes, that’s right
2) Different strike, different position.
Thank you so much Karthik….
Welcome, Vikash!
Thanks a lot for the information. Can you please answer one question: On zerodha how do I search for options? Say a call option of 10500 strike price expiring on 28th feb?
Swithin, on Kite;s marketwatch, search for ‘Nifty 10500 CE/PE’ and you will find it easily.
Thanks a lot for such a quick reply Karthik, much appreciated. Just one more thing, when I’m searching for it, it’s not showing me 10500 call expiring on 28th feb, why is that so..it’s just showing 21st feb expiry..also when placing the order, doesn’t it show the live rates on top like other platforms do? thanks once again for your support
It must be showing the weekly expiry option, scroll down and you will find the monthly expiry option.
Sir,
1.what is atm,itm,otm since you have used these words in the comments section so many times.
2.And should we place the stop-loss on strike price or premiums.
3.For initiating a trade in options should we look at options chart or futures chart for price action.
1) Explained here – https://zerodha.com/varsity/chapter/moneyness-of-an-option-contract/
2) Ideally, it should be on the spot price
3) Spot chart, if you ask me
Sir, but for for index there will not be volume confirmation on spot.
For index, you can check the futures.
HI.
very easy explanation. Makes understanding all the more interesting. Thank you for the same.
At the same time, I see that at a when the spot price is less, the premium paid is substracted, where as when the spot rice is more, the premium is added. Can you please explain the same in more details ??
Vishwadeep Verma
I’m not sure I get the context here Vishwadeep, can you please elaborate?
How can we attach screenshots from NSE if we have to understand something from the option chain ?
You can upload it on Google drive and share the link.
Can someone explain the meaning of all the columns present in the screenshot of the excel file?
Which excel are you reffering to, Jake?
I am referring to the snapshot of Bajaj Auto’s option chain given the article, having columns like ltp, bid ask strike price etc…
Jake, I’d suggest you look at section 9.3 onwards in this chapter – https://zerodha.com/varsity/chapter/the-trading-terminal/
2 days back opened zerodha account.
I have added 4000 funds to the account and tried to purchase banknifty 20 lot at 60 ptice, order is getting REJECTED. Tried many times with others as well. Can you please help me to place the order?
You need to have a little over 4000 to adjust for charges. I’d suggest you use this brokerage calculator to figure out the charges applicable – https://zerodha.com/brokerage-calculator
Hi i brought a call option ICICIPRULI 350CE, this has been expired ATM.. what will be the impact.
ATM and OTM options will expire worthless, Raju. So there is no value to it.
What is the max limit(no of lots) to buy nifty index options per trade.
I think it is 100 lots per order.
Thanks for you reply Karthik. One more question, I know there is brokerage calculator in Zerodha to calculate brokerage for Nifty options. I have confusion about that. Can you let me know in the calculator, do I have to input the no.of lots or total quantity to calculate brokerage? Please let me know the brokerage for Nifty options for 50 lots (50*75) in Zerodha?
That would be the quantity, so in this case, it will be 50*75.
Please define term
1) Exercsing Option
2 ) Square off option
Please use simple language so that I can understand the difference between them
1) When you hold a profitable option to expiry, then its called exercising.
2) Square off is when you close a position before expiry
Suppose I square off my position before expiry
Then can I say I also exercise my position
No, if you square off before expiry, you cannot exercise. This was possible with American option though…but NSE changed all contracts to European options few years ago.
in the above example, bajaj auto option,
spot price is 2026.9.
1. i buy call of 2200, i need to pay (125*.85) 106.25 and brokerage right?
2. spot price comes to 2150, what will be value of my premium? if a. 20 days are left b. 2 days are lefft? approximate please so that i can get a bit clear. (do i make profit if stock doesn’t go till strike price)
3. how to square off my position? do i need to sell? do i require margin to sell while squaring off?
4. what is exercising position? will it get sold automatically?
1) Yes, that’s premium plus the applicable brokerage and charges. For the exact details, you can check this – https://zerodha.com/brokerage-calculator
2) Hard to point the exact premium value, but you’d have incurred a loss here though
3) You can goto the positions tab and click on exit to square off. No need for margins when you sq off the position
4) Yes
So i make profits only when strike price is hit?
Yes, but if there is ample time to expiry, then you will experience a profit even before it hits the strike.
I find a very volatile stock. its at support price and can move up or down very quickly. if i buy call option and a put option, will it be profitable if stock moves in any direction? risk is limited to amount invested in buying call or put right?
Thats right. I think you are talking about a long straddle strategy. Check this – https://zerodha.com/varsity/chapter/the-long-straddle/
ohh thats a strategy. thanks for prompt reply. your work is appreciated.
Good luck!
Today I wanted to buy option BANKNIFTY 1th APR 29500 PE @ Rs.20 but order got rejected giving reason Strike price is outside the allowed range. Try strike closer to spot price. When I google it, I found that it’s because ZERODHA might be having OI of Rs.500 crores or 15% of the total OI. Does it mean I wont be able to buy option of my choice if ZERODHA is having more OI in market. Is there any way I can buy option without restriction of ZERODHA OI and at what price.
Santosh, yes, unfortunately, this is true. We do have OI restriction around weekly Bank Nifty expiry.
Hi, I want to buy YESBANK 250 CE(current value is 256) as of today at a premium of 11rs and the quantity(1750) on APR 18th
1. If the price becomes 268 on 25th APR can I sell it? or should I wait till the month expires? will I incur profit or loss?
2.What happens if I sell in a CE option? or buy in a PE option?(can you give an example)
1) You can sell it anytime you wish, no need to wait till expiry
2) If you sell a CE, you will receive the premium.
I’d suggest you read the other chapters to get a sense of how these options work.
Hello sir
I had bought 1lot of 2’000shares of INDIANB NSE 300CE@8 of expiry 25thApril2019.
The premium value went down to 0.7 by now.
The strike price by now is 265.
What to do,please suggest.
1.Should I buy 2more lots@ 0.7 to avg. the premium?
2.Will it be null by expiary?
3.By strategies is there any chance the premium price will go up to 4or5?
1) If you are bullish, then you should. Really depends on how comfortable and confident you are on the position
2) Your directional view has to pan out by expiry
3) No one can figure an answer for that 🙂
Sir as all Options are Limit based orders.There is no way to trail the profits right??
Except modifying the SL and target is possible once order is executed.
Yes, you need to keep modifying the order to trail your profits.
Sir,
1.How to find the regular MIS margin amount for nifty and banknifty weekly options when shorting either call or put.
2.currently BO/CO orders are possible for only options on stocks excluding nifty and banknifty right.
3.Will there be margin benifit for MIS orders on banknifty weekly options when we hedge by shorting both call and put OTMs.
How to find the required amount on hedging?
4.sir why NiftyIT weekly options are not trading.Any specific reason?
1) You can check this, Gautam – https://zerodha.com/margin-calculator/Futures/
2) This is allowed only for Nifty
3) Yes, you will have to use the margin calculator for this. But only monthly options Check this – https://zerodha.com/margin-calculator/SPAN/
4) Not many takers for this.
Okay Thank you sir.❤
Cheers!
I purchased 2 lot of Nifty 11250CE of 16 May 19 expiry @0.95. I did not square off on expiry on 16 May 19. Nifty closed on expiry I.e 16 May 19 at 11257.10(closing value) . My option become in the money. When I got contract note, it shows my position sell at Rs 0 and account did not credited the intrinsic value of Rs 7.10 – 0.95. I should get the profit of 6.15×150=922.50. Please clarify
Khilendra, that is because ITM options attract a huge STT if exercised, to an extent where you will end up paying much higher than the profits earned. Hence your option was not exercised.
Hi sir, my doubt is not related to this topic but in general options.. For a stock, each strike price has a premium and charts, do that charts are also moved upon SnR? I mean let’s say SBIN 360 CE premium is 3.60.. Can we see the chart of 360 CE and say 2rs is a support and 6rs is a resistance w.r.t history? Or simply the movement and premium changes is based on the underlying stock buyers and sellers?
And I’m asking this doubt because I see some members saying buy this call option and make SL at 6rs or 4rs.. How can they say that because the real supp is found in underlying stock only
Exactly, hence, for this reason, avoid looking at the option charts 🙂
Bala, it is best not to look at the charts of options. For trading options, always look at the spot charts. Take trading decisions based on that.
Hi Karthik,
Thanks for your replies on this thread.
What happens if I have not sold my option contract on the day of expiry?
Example: I have bought 12000 put @Rs.50 with contract expiry June 06,2019. The closing price was Rs.141.5 and I did not sold my contract. What would happen in this case?
This is not a problem as the exchange will settle this for you.
Will there be any fine for settling the contract from exchange?
No sir, no such thing.
I see that you have mentioned the profit for the buyer of the call option raises exponentially when the spot price is above strike price.
From the above explanations, I can see that
profit = SpotPrice – StrikePrice – premium (Assuming spot price is above strike price)
here Strike price and premium are constants. So, I see that profit is a linear increase wrt Spot price rise.
How did you claim it is exponential?
Am I missing something?
If it is linear, then for every 1 point increase in spot, the premium should go up by 1 point. This is not true, especially for OTM options. For these OTM options, for every 1 point increase in spot, the premium goes up many folds, hence the term exponential.
Hello, if I am buying a call option since I expect the price to go up, then why the yellow region in call option exists where the strike price is lower than the current market price, also why the premiums are so high?
You must be talking about the moneyness of the option, I’d suggest you read this module to get complete clarity on this, Sandip. Thanks.
I have read till chapter 6, I am having little trouble understanding this particular chart, my question is-
1) I will always buy the strike price which is more than the spot price for call option, so why strike prices lower than spot price is shown?
2)If strike price little below spot price was shown in yellow it can be said the option has gone now ITM but it was OTM before, but strike price till 1600 price exist which is too much below spot price. is it that the spot price was below 1600 when option started??
(currently reading chapter 7)
1) This should depend on time to expiry, delta, vega, and of course your directional view. So you cannot always stick to a single strike selection strategy
2) I’d suggest you read through all the chapters, towards the end you will get complete clarity.
Hello Sir, I am a trend follower or breakout trader and I am trading full time for last three years, that too only in nifty futures, thanks to varsity’s technical analysis and position sizing module, I have built my account from 14 lots to 20 lots in these three years. I am using a 15 min time frame, since my lot size has increased slippage has become a huge problem now, to solve this I have decided to buy monthly ATM options, while trading futures if I were to carry forward my position I used to rollover one day before expiry, in option buying I have decided to rollover 10 days before expiry to avoid theta decay. Usually my position days varies between few minutes to 2 months. My aim is to make 75% of futures points in options and to build my lot size to few thousands.
My strike selection plan
for long position:
if nifty at 11665, buy 11700 option contract
if nifty at 11625, buy 11600 option contract
I would like to know your opinion on my option buying decision, will my rollover idea work in options, is mid month expiry option contracts liquid enough to roll over ten days before current month expiry?
Is my strike selection for ATM option buying with delta of 0.5(approx) correct sir?
Mani, you seem to be sticking to ATM strike, which is good. I think Nifty and Bank Nifty’s mid-month contracts have decent liquidity to roll over. But the key trigger here is your identification of breakout. If this is right, then I guess rest should be fine 🙂
Hello Sir,
your such notes are so much useful to me. But u doesn’t explain about strike price of Options. Did you explain it?
Yes, Surakant, its explained here – https://zerodha.com/varsity/chapter/moneyness-of-an-option-contract/
Hello Kartik ,
what if i am having 10,000 in my zerodha account and i buy 10 lots of bank nifty options(CE/PE) depending on my view. While selling the options to book profit/loss, how much money should be there in my account? Can i sell all lots at a time or do i need to offload one by one lot?
Please help me to know the scenario.
Regards
You dont need to have money in your account when you choose to sell these options.
Sorry i forgot to mention here that i bought options at 10/- premium.
THANK YOU VERY MUCH FOR CLEARING THE DOUBT.
Happy reading!
Yesterday I buy dabur Aug 450 CE so premium is 1.80 and lot size is 1250 so if end of the expiry date spot Price taking strike Price that means spot price around 470 so complsury to sell a option call before end of the day or end of the of expiry
Sorry, Guru, I’m unable to understand your query. If you spot price is higher than the premium (upon exiry), then you are supposed to buy back as these are ITM option.
Hello sir,
Suppose i bought voltas CE 600 @ 15 and spot price being 602…if stock price moves to 605 still i will be able to make profit if premium moves to 18 but stock price stays below strike price+premium i.e.,(600+15=Rs.615)
Vineet, you can sell the option anytime you wish and pocket the premium. No need to wait till expiry.
I AM TRYING TO BUY YES BANK CALL OPTION SEP EXPIRY AT PRICE 2.60 QUANTITY 2200
BUT THE ORDER IS REJECTED SAYING…THIS INSTRUMENT IS BLOCKED TO AVOID COMPULSORY PHYSICAL DELIVERY. TRY NEXT MONTHS EXPIRY …..
HOW MUCH MONEY I REQUIRED TO BUY THIS CALL?
I’d suggest you check this -https://zerodha.com/margin-calculator/SPAN/
Sir can I buy Banknifty 25200 PE @20 rs if I have 3000rs. in my trading account?
Will I get leverage or I need full cash?
You will need full cash to buy options and carry forward the position.
Thank you for the great relevant content. I would like to know the chart setup on the 1st chart on this page of the bajaj auto. Could you please share the settings?
Thanks, Shivam. This is an end of day (or daily) chart with 21×10 simple MA with volume and RSI layover.
Sir,
Even, I went through all the question and answers and your valuable reading material, I don’t understand one thing that what happens on the Expiry date if the stock is trading much beyond the Strike price. Is it always the difference between premium paid at the time of purchase & on the day of expiry only profit.
Yes, its the difference between the premium paid the value upon expiry.
Sir, One more question. If we don’t sell options on expiry date, it will automatically be squared off either in loss or profit. Any fine for not squring off options on expiry date?
Yes, thats right. No fine as such.
My question is how can we derive profit based on
profit = SpotPrice – StrikePrice – premium?
When I tried to buy call, suppose SBIN NOV 330 CE where current spot price is 323.95. For 330 as strike price, I can see 6.15 as my premium.
Now if I go to zerodha, search for SBIN NOV 330 CE and click buy, I see the premium amount 6.15 to buy and not the actual spot price.
Which is as per your explanation that we invest only premium amount and expect SBIN to reach 330.
My confusion is, if I am buying and selling premium amount only,
how can we say profit = SpotPrice – StrikePrice – premium?
practically, I I go to square off, ultimately what I will see is I buyed at 6.15 and sell at 7.15 which gives me profit of Rs.1 per share.
now increase in premium by Rs.1 doesnt clearly mean my spot price increased by Rs.1
Then what is different here comparing it with buying and selling equity stocks VS buying and selling options premium?
Swaroop, if you choose to hold the position till expiry, then – profit = SpotPrice – StrikePrice – premium, is applicable. If you decide to buy and sell before expiry, then only the difference between the buy/sell premium matters.
Hello sir my question is.
I bought ce at 5rs. On 15nov and if on 27 nov ce is at 10 rs so i will sell and my profit is 5rs. But i didnt sell on 27 nov and i sold it on 28 nov which is experiy day so it will work as series of trades in options and give me different Between My selling and buying price or it will work like breakeven pont whre it should have to go higher than that point pls ans..
Sahil, what was the price at which it was sold. You’ll make the difference between the buy and sell price of the premium.
dear sir,
i have some query regarding OPTION CALL / PUT.
1) Sir suppose i buy BANK NIFTY 1 lot PUT option Strike Price @ Rs.31000 ——-premium trading @ Rs.370 and current BANK NIFTY market Price trading @Rs.31500.
if market fall down because of some correction or any other reason Bannifty go down to @Rs.31500 to @Rs.31050 and my premium Value increases from @Rs.370 to @ @Rs. 500 so i square off my position i will be in profits or whats to be happen otherwise i loss my money
If you square off, then you make a profit here, Anil. You need not have to wait till expiry to book profits.
Hello Karthik,
How is the Strike price calculated for any share , if it’s decided by the exchange then i have the following questions
1) how do i know which one to choose from the list of many call options for a product
2) If the Buyer has to decide the Strike price for any share , how does he derive the strike price at which the he can book the maximum profit
Thankyou In advance
It’s decided by the exchange, check this https://www1.nseindia.com/products/content/derivatives/equities/contract_specifitns.htm
1) This is dependent on how strong your view is. Explained later in the module.
2) This is the essence of options trading, you’ll have to learn and develop this over time 🙂
Sir,
I want to trade in F&O Segment. But the following message came at the time of giving the order-
This segment is not enabled for your account. To enable, create a ticket on support.zerodha.com
So, pl. do the needful at your earliest.
Mridula, your F&O segment is not active. You will have to call the support to get this activated. Check this – https://support.zerodha.com/category/your-zerodha-account/account-modification-and-segment-addition/articles/how-do-i-enable-trading-futures-and-options
Sir,
Many thanks for your quick reply.
Now, my question what is the min. amt. of investment for option trading. Suppose, at present the CMP of nifty put option for Feb 12100 is Rs. 150 and I have Rs. 15000 in my A/C. Can i buy it?
Moreover, could i use AMO in this segment?
The minimum about to buy is lot size * premium.
Nifty Lot size – 75
Premium – 150
= 75*150
=11,250/-
So you can buy the option with the amount you have in your account.
Hello Sir .
I have gone through all Zerodha Modules,Was a very nice Experience .
Sir if I’m long on stock and i have set stoploss, is it possible that stock goes down without hitting stoploss??
I mean what if market opens below stoploss Price??
Yes, this is possible Shubham.
Sir ,
One thing i just do not understand , why there is Multiple CE (call option ) shown which is even lower to CMP and shows with very high premium ,and if we buy it profit will go in which direction . Fo ex – If CMP of X stock is 450 and we buy a CE of 430 with a premium of 10 Rs . and we reach the strike price of 430 , will the premium increase or decrees . just dont understand why this doesnt call PE instead of CE if it going below market price , please help sir.
Sandeep, for any underlying there are multiple CEs and PEs. I’d suggest you look at the moneyness of the options chapter to get an understanding of this.
how can i get more strike price ?
Strike prices are decided by the exchanges, Prakash. Brokers cannot do anything about this.
Hi Sir,
Please clarify my doubt related to intraday option trading.
1.If I buy a call or put option and want to square off the position intraday before 03:20 PM. What is the process ? Is it similar to the intraday equity trading?
I mean we buy a stock and then place one target order and one SL order to square off.
2. I read that selling options require full margin . So if I place a target order and one SL order ( to square off my intraday buy position) , will it require full margin amount in my account to place the order.
I know I sound silly but I want to clarify before I start placing intraday order in Options. 😊
1) Yes, it is just like an intraday position
2) Yes, you can place a BO order (only for Index option) – https://support.zerodha.com/category/trading-and-markets/margin-leverage-and-product-and-order-types/articles/what-are-bracket-orders-and-how-to-use-them
Thanks for the reply.
Is it mandatory to place a BO order for intraday options trading ?
I use limit order sell and stop limit order sell to place my target and stop loss order respectively ( to square off my buy position).
Thanks in advance.
Not mandatory, Aditya.
I am new in trading..your varsity is really helping me a lot. So I must say thank you very much for your efforts. I have few doubts in my intraday trading with weekly options in Nifty only. ( I buy options and never sell only for intraday.)
1) I have confusion about which chart to use for option trading Nifty Spot or Nifty futures for intraday..? Right now I watch both of them but get confused because I see clear support and resistance in Nifty spot than Nifty futures but I also see that option prices react more to Nifty futures..I have to select any one of them so please suggest me based on your experiences in stock market.
2) Also in order to choose ATM options to trade, which strike price to be considered..?? Nifty spot strike or Nifty futures strike..?
Thanks in advance.
Glad you like the content on Varsity 🙂
1) You can use Nifty spot
2) The strike is only on the spot, not on future
I also who will people get to buy the CE or PE with 0.05 price and all the sudden the price will go high. How is this happening .
Second, we can buy only if someone is ready to sell their CE or PE, but who is the first person to buy it and how is it possible to do it.
Yeah, people buy (or sell) this as a lottery and hope that it clicks, nothing more to it 🙂
Thank you very much for your reply..!! I am also reading lessons from innerworth and always stay excited for new chapters…!!
Happy reading, Mishra 🙂
many times i tried to understand Futures n options but failed.
Thanks to u Sir & Varsity . Finally I’m getting there.
1 Question Sir.
Suppose I buyed call option by paying premium of 6rs.
At the date of expiry premium shoots up to 10 rs.
before expiry can i exit the position and make a profit of 4 rs ?
Yes, Abdul, you can do that.
Is futures (also options ) settled in T+2 cycle?
thank u sir
M2M credit and debits are settled on a T+1 basis.
Hello Karthik,
Is there a way to view strategy payoff charts in Zerodha ?
You can do that on Sensibull platform.
i know placing order in MIS in FNO will let me square off immediately .
my question is sir, after placed a regular order on futures or options (say longcall) can i square off my position immediately ( say after 10 mins ) ?
(doubt regarding settlement … ie T+1 )
thank u sir
Yes, you can do that Maajid.
Sir
In derivatives segment of stocks, apart from Futures and Options, are there any more derivatives ?
Thanks
Nope.
Sir
An option buyer (be it call or put) has limited risk but unlimited profit. In spite of this, maximum option buyers lose money. Most of the times profit is made by option seller (though it is limited profit). Why is it so? Is it because, out of three possible scenarios, two gets in favour of option seller or something other else ?
Thanks
Yes sir, thats the reason. Two scenarios favor the seller.
Today Reliance Spot price is 1217.75 but there is CE options to buy at 900 CE, Now looking at market scenario chances are less that REL will go that much down. So why someone is selling that option ?
Reliance is an example but there so many other stocks 99% will not fetch the price but still srike price is available , can you please explain.
Markets are at the end of day an ocean of different opinions, this is exactly why trades happen 🙂
Sir
I’m nifty call and put work. My result profit less. But loss.more. any platform available. Setting work auth. Buy sell.
Paying platform
You can try NSE Pathshala, they have a virtual trading platform.
Hello sir
I want to know that.
If nifty option is not showing its expiry date then what will be the expiry date ??? I want to buy nifty option in the first week and sell in to 3rd week . But i m confused because nifty option doesnt show its expirt date .
Buy the regular monthly option for this, Sahil. The expiry is seen when you look for the option in the Marketwatch.
Dear sir,
I have two questions, 1st if the spot price is higher than the call price, eg: sport price of ITC is 184 now and i am buying a Call option of 160 at 27. Then how would it will get executed?
And 2nd :Could you please explain why the price gets 0 when the expiry is near, does it mean that i am guaranteed to make a loss if i don’t sell my premium before expiry?
1) How will it get executed as in?
2) The price will head to 0 only if the option is worthless. Not all option premiums head to zero.
Hello,
Is it advisable to average the call Options for any given stock, whose stock price is coming down? If not,what should Call buyer do to mitigate the loss?
Thanks
Hmm, averaging down on a losing trade is never a good idea, Shravam.
Sir referring to my question asked above.
If Spot price is 180 and i am buying a call option of 160 while the price is above the strike price. Then its clear that i am going to gain profits right?
Hmm, no really. The premium you pay would be quite high anyway right. Also for you to be profitable, the from the time you buy, the spot has to move up a lot more higher.
Hi,
Let’s assume I bought the call “CENTURYTEX APR 500 CE” at the Rs.16 premium. This means I have the right to buy 100 shares of CENTURYTEX before the end of April at the price 500 per share right?
Now, by 29th of April, I want exercise my right of buying CENTURYTEX at the predetermined price. (which means I don’t want to sell the Option call at a higher price, instead I want to buy the actual 100 shares of CENTURYTEX @ 500). How do I do this? Who will sell this 100 shares of CENTURYTEX to me?
How’s this to be done in Zerodha Kite Website?
Thanks,
George
Yes, you do get the right to buy. While you can trade the premium anytime you wish, you can exercise the option only on the expiry day. So you’ll have to wait till 30th. Do check this – https://support.zerodha.com/category/trading-and-markets/margin-leverage-and-product-and-order-types/articles/policy-on-physical-settlement
Thank you very much, Karthik!
Welcome!
sir good evening i am new to zerodha while going through varsity option chapter.
i have a question,if my spot price go higher than call price than how to book my profit.
what is the next step on dash board.
please help explaining practical aspect
Assuming you are long, you can sell it just like you would sell a stock. That is a square off order.
SIR, I HAVE BOUGHT A CALL OPTION IN NIFTY APR 9300 ,PREMIUM IS 187 AT 10:00 AM ( I BOUHT MIS -CO ORDER) OF 1 LOT(75 QTY)
AT 2:30PM PREMIUM IS 210 THEN I SQUARED OFF AT 2:35PM BY ASSUMING THAT I WOULD RECIEVE PROFIT
IN MY PERSPECTIVE I WOULD GET (210-187)*75==1725 AS PROFIT (EXCLUDING BROKERAGES FOR INTRADAY)
SIR WHAT WILL BE MY PROFIT
WILL THAT BE SAME AS I CALCULATED OR DIFFERENT SIR?
Yes, roughly that the profit. Do check this for the exact numbers – https://zerodha.com/brokerage-calculator#tab-equities
Hi Karthik,
I wanna start trading in options. But before that I have few clarifications that I need, I hope you can help me with those.
Considering the Platform Zerodha. Suppose I buy Call option for PNB at strike 34 for May 31(Can I buy options less than the lot, if not why ?). Now let’s say I have bought a lot at 1.95 (Approx) and paid (1.95 * 8300). Now on 31st May will I get the delivery If the option is exercised ? or I will get the IV if it’s positive ? Can I sell these options prior to Expiry ?
If you let it expiry, then you will have to have enough margin to buy 8300 PNB at 34. More on that here – https://support.zerodha.com/category/trading-and-markets/margin-leverage-and-product-and-order-types/articles/policy-on-physical-settlement
Hi Karthik,
Firstly thanking you for this wonderful material to gain understanding of option concepts.
I have a scenario which is confusing me a bit, consider there are 3 market participants: A,B and C.
A is the call option buyer, B is the call option seller, now the trading steps are as follows,
1. A buys the option contract paying a premium of Rs.10 for 100 shares for a strike price @2000
2. B receives this premium amount.
3. A sees a jump in the premium from Rs.10 to Rs.12.
4. A decides to sell this option contract for a new premium of Rs.12 to pocket the profit.
5. C is looking to buy an option contract and finds the contract which A is selling to be an profitable/interesting one.
Now my question is,
1. For the contract that C is buying from A, will the strike price remain the same i.e. which A had bought initially from B the option contract for @2000?
2. Now as A buys and then Sells the option contract to C, will A exit the market?
3. Now will C and B be the new partners in the option contract? If Yes, the premium between both the C and B will not remain the same as B received a premium of Rs.1000 initially and C paid a premium of Rs.1200 to A to buy the contract. will not this create a conflict in P&L when they exercise on expiry?.
1) Yes
2) Yes
3) Yes, the premium situation for B does not c change
Sir, if i buy an option at 0.05 for 2000/- and if it expires without any movement, would i get any of my money back or would i lose entire 2000/- ?
No, you lose the entire 2000/-.
Hi,
Let’s say current Nifty is @9350 and I want to buy Nifty @strike price of Rs 9400@Rs88 premium and still has 15days for expiry. Now on the same day, I see premium shoots up to Rs 110/-, in this context:
1. When I sell the bought call, do I still make a profit? The reason being, it has not yet hit the strike price?
2. Should I actually wait for 9400+88 and anything above I will make profit?
-prashanth
1) Yes
2) No
Sir,
Today I buy call of nifty apr 9300 @ 161.7 (MIS order) and sell @ 167. (4 lot =300)
Then I again buy same @ 125, 1lot MIS order but dut to trading time limit I changed the MIS position to Normal.
Now second order showing buying price @ 154.36. which was buy @ 125.
Please explain how this possible.
Sorry I figured it out.
Glad you did!
I guess I am in bit trouble now, I want to buy call @ 125 but it is 154.36
Hi,
Today I bought Nifty call option @9300 for a premium of Rs 100, but in few mins nifty had crossed 9300 mark , also premium shot up and I could still see the premium is going up when the strike price has already been hit. Any reason someone would still buy a call option when they know Nifty has already crossed 9300? I mean everyone can just buy this and make money right?
Yes, as the option goes deeper ITM, the value of the premium increases.
Hi,
This is a bit confusing right, all the while we read that after strike price buyer starts making a profit. Now, in this case, why would there be a seller who would still want to sell an option of old strike price when the market price is higher than that. He knows in advance he is going to make a loss? Am I missing something here?
Markets is all about different opinions, right? If I feel that the markets will crash, I may as well write strike which have a higher premium right?
Hi,
This makes sense but aren’t the contracts made by NSE on different strike prices? In OI chart i still see a strike price of 7000 @2300 today when markets are at 9480 levels… I think at the end of the day it’s all about ppl sentiments in the market 🙂
Yeah, new strikes are introduced as and when markets move, which as you rightly mentioned is a function of human sentiment 🙂
Dear sir,
On 30th April 2020(today) the bank nifty while closing at 3.30 pm was 21481 but still the bank nifty ce with strike price 21500 expiring on same day had a value of Rs.33 even at 3.30 pm. Later the closing price of Bank nifty become 21534 based on weighed average method.
In the above case it seemed that the closing price of Bank nifty was predicted even before the closing bell so the call option with the strike price 21500 had the value of Rs. 33 inspite it being 19 points below the strike price.
How is it possible to predict the closing prices in advance?
The closing price is the weighted average of the last 30 mins, Rajath.
Hi,
I was looking at option chat and had few questions on the same.
1. Today, for 7th May 2020 expiry for 10000 strike price on the Option side I see a premium of Rs 63/-. Checking the same strike price for 30th Dec 2020, I see a premium of Rs 742/-. Why is there such a huge premium for very far contract options?
I mean ideally one can always be confident that 10000 strike is easily possible in 2 months with the current levels of nifty right?
2. I understand that there is a time factor that comes into play, but if I buy a very far option call, in this case, December @742 as and when the day progress, would the premium fall even if the nifty is inching towards this strike price?
3. As an investor, can they be smart to always buy far option contracts and play safe?
4. If the premium moves up for 7th May contracts, would also the premium move up for Dec 2020 contracts?
4. Like we have charts for stocks, where do I find all moving prices in a day for options?
-Prashanth
1) The difference in premium is attributed to the time value of money
2) The premium will decline owing to the time value, but if the underlying increases, the premium can go up
3) No, that does not work all the time
4) Sorry, I’m not sure what you mean by this.
Does the rules of options buying apply to company shares or its same for NIFTY and BANKNIFTY as well ? the maximum amount a money a buyer losses is the premium paid in CE ?
It the same across all options, Prathemesh.
Hi,
Had few questions on options chains:
1. Looking at 7th May 2020 option data, looking at one of the Puts for the strike of 8950, I see there is
Ask qty: 4125 (no of sellers are selling at this strike)
OI: 808 ( number of option contracts available)
1. If the number of contracts is 808, wondering how there are so many sellers?
2. Is it like one contract for one buyer One seller or many buyers and sellers for one contract?
3. If Q2 is the way, then when does one really run out of contracts?
-Prashanth
1) These are bids and asks placed, a trade occurs when a bid and ask matches
2) It can be any which way, no set rules
3) When these positions are hit – https://www.nscclindia.com/NSCCL/clr_sett/nsccl_eq_mf_psitions.htm
Hi,
Just trying to understand, for a future date Nifty 21sy May expiry, I see bid and ask prices but there are no contracts for most of the strike prices, but for Dec 2020 expiry, I see lot of contracts. Wondering how is this possible, will the system allow to place bids when there are no contracts? Can you please explain this a bit?
This is just a function of demand and supply dynamics, Prashanth 🙂
Also, what you need to see is spread between the bid and ask and how actively the contract gets traded.
In this module, one SS of bajaj-auto is given. In call option chain, LTP is decreasing as strike price is increasing, but after 2200, LTP is increased and same is also repeated at 2450. Why is this so? Bcz according to my understanding, for call, premium should decrease as strike increase and for put it’s reverse.
Yes, but that is only if you consider the delta of the stock. In reality, the premium is equally influenced by the vega and theta.
Hello Sir ,
Hope ua doing well,
Today I checked Bank Nifty monthly and Bank Nifty weekly expiry .
In yesterdays chart there was an uptrend.
weekly expiry had around 300 % growth
monthly had 72 % growth .
Why is that so ? Greeks coming into play ?
Ur explanation will be very helpful .
Thank U
Yes, the Greeks matter, especially the time to expiry 🙂
Hi,
Thanks again for replying potentially, just that as and when we get deeper more queries arise.
I had bought PE of Nifty@9200 for May 7th expiry @59. Today, being the last day of expiry and indeed Nifty went below 9200, I still see premium is not going up (which I didn’t expect). On the same lines last week Friday when markets rallied, I had bought a CE and indeed saw premium going up. Now I am confused coz thought today market is going below 9200, PE premium should have gone up. Can you throw some light on how to decipher this?
Hmm, are you talking about the weekly series or monthly? If monthly, then the expiry is only on 28th May. Given this, the fluctuations in premium are natural.
Dear Kartik,
Great Work! I am planning to shift to Zerodha Soon. I am using ICICI right now.
I need your help?
1. I purchased Option CE (Buy) of XYZ with a strike price of 300 for 20 (3000 quantity) Expiry 28 May 2020 and sold it next days at 22.50 premium with approx. 5000 profit.
2. The next day, I again purchased Option CE (Buy) of XYZ with a strike price of 300 for a premium of Rs.29/- (Lot size-3000) (Expiry 28 May 2020 )on 5 March 2020. On 6th March 2020, as it was not moving upwards, I sold it in a loss at 20 /- Rs.each. The rest of the premium was credited to my account after deducting loss, brokerage, and taxes.
My question is:
What will be my total liability or loss in the above two scenarios? Do I have to pay for something else? Actually, I read on many websites that if you sell an option prior to expiry, then at the time of expiry if a buyer wishes to exercise he can take the delivery of shares and the seller will have to pay the difference e.g. if the strike price on which I had purchased is crossed, I have to pay the difference to the stock buyer (Suppose stock price at that point will be 400, so the loss will be 400-300 = 100 i.e. 100 rs. per share x 3000 = 300,000). I am confused. Sorry for creating confusion, please reply.)
Also, so how come buying an option is safe? If losses will be like that?
In the first transaction, you make a profit of 2.5 per lot and in the 2nd you make a loss of 9/-.
The P&L is as per the difference in premium plus applicable charges. In both these cases, you are out of the market to have no open option at expiry, hence carry no obligation. Option buying or selling really depends on your strategy and how you apply that in markets.
Thanks, dear for your prompt reply.
Do you mean that maximum one can loose while selling a PURCHASED option CE on or before the Expiry date is PREMIUM paid?
Yes, when you buy an option, at best you can lose the premium paid for it.
Sorry Karthik one more question, please…
Is it the same for the “PUT” option also? The maximum one can loose while BUYING PUT is the premium paid?
MARGIN is for SELLING CALL AND PUT OPTION ONLY? SO RISK IS UNLIMITED. IN SELLING CALL AND PUT THE MAXIMUM ONE CAN GAIN IS PREMIUM PAID. IS THIS SELLING DIFFERENT FROM buying OPTION and selling it?
Please reply.
Thanks!
Yes, it is the same for both call and put options buying.
Hello Karthik Rangappa,
I bought BANKNIFTY 14th MAY 20000 CE(@ 223) yesterday but now its in huge loss(currently @ 2.30), can we carry forward this CE to next expiry date(21st MAY) so that we can have the time to wait for the market to raise and reduce the losses?
No, the contract will expire on the expiry date. You can continue holding the position by initiating the same position in the next month contract.
If I am buying Nifty CE of 8950 with Premium 242.50 when nifty is 9067 then should be the profit in such scenario?
The profit depends on multiple scenarios, including volatility, theta, and of course the delta.
Bank Nifty strike :- 19500(CE) Position :- Long (Bought this option)
Premium:-0.50( 1 lot=20)
Time:-15:25 (5 mins to expiry on THURSDAY) (Regular order)
Bank Nifty spot :-19504(@15.25)
Bank Nifty spot :- 19534(After expiry)
Profit= (20*34)-0.50
=680-0.50
=679.50
Is this correct Karthik.
Pls explain if NOT.
Yes, but you need to ensure 19504 is the settlement price. Also, do factor in the applicable charges.
Sorry,
Profit = (20*34)-(0.50*20)
= (680)-(10)
= 670/-
Now , is this correct
If not pls explain.
Thank u.
Yes, noticed that 🙂
I replied to your previous query.
Hi Karthik
Suppose i buy 10 lots of RELIANCE CALL 1500 option today, how many days i can carry forward this trade.
Thanks
Kedar
Till the expiry of the contract.
Thanks Karthik for quick reply.
From my past experience such trades are automatically squared off on next day(EOD) after buying. To carry forward such trades for duration greater than 2 days, do i need to perform some action from my side ?
Kedar
I think the next day was an expiry day. Otherwise, you can carry the position forward till expiry.
hello sir,
kindly clarify!
i bought one lot of nifty 10200 CE at a price of 193 on 06 june 2020 which is showing its expiry date on 25th of june 2020 but at the end of day on 6th june itself all my shares got sold automatically. why that?? can you please explain…Thanks
I’d suggest you check the contract note and then call the support for this. Thanks.
Dear Karthik,
You explained nicely.
I have a very simple question.
Lets say I buy NFO Nifty 9000 CE at INR 100. [75*100=7500 as invested value]
On expiry ( Thursday ), Nifty was at 9500 . The premium value declined to 0.05.
What will happen to my profit or loss.
Is it decided based on Premium value on expiry (if I have not squared off myself) or based on strike price.
1. My loss is -7500 or I get profit of [(9500-9000)-100]*75=30,000.
Please explain to me, as even nifty is very higher than my CE strike price, I used to sell in fear as premium price approaches to zero.
I will wait for clarity.
9000 CE is in the money if Nifty expires at 9500, so the premium will be 500 and not 0.05. So you are entitled to a profit of Rs.37,500/- minus applicable charges.
Respected sir
If i buy itc put current market price 201 (2400 lot*1) 195 strike price put @5 and if it does not reach the strike price and my premium value
Increases to rs 8 but the market price is 196
Will i get the benift of 3 rs * 2400 if i sell it at 8
Yes, but it should be above 195 on the day of the expiry.
If i buy nifty 10500 ce @ 200 premium
And it does not hit 10500 for 2 days
The next day on opening nifty opens @ 11000
How will i benifit
Will i get huge premium profit say 200 to 700 that is 500 extra on premium
Or any charges
What will be the profit or loss
With the drastic move in the underlying, the premium also changes. Your P&L will be the difference between the buy and selling price of the premium.
If i buy nifty 10500 ce @ 200 premium
And it does not hit 10500 for 2 days
The next day on opening nifty opens @ 11000
How will i benifit
Will i get huge premium profit say 200 to 700 that is 500 extra on premium
Or any charges
What will be the profit or loss
Can i sell or can i wait for 11300 for more profit
If it reaches 11300 will i get the benifit
Sir i m getting out in that trade with 3 rs * 2400 lot size
As u r saying it should be above 195 on the day of expiry
If i close the trade tommorow
Will expiry matterrr to me
Expiry will matter if you hold your position to expiry, else what matters is the difference in the buy and sell value of the premium.
Hello Sir
Spot Price 100
Strike Price 110, Premium 5
If the strike price goes to 105, the premium increases, so we sell here and make profit of diff premium amount.
But why is it said the break even is only if the price goes above strike+premium price ?
Yes, but the strike price does not move, what moves is the spot price. Breakeven is that way because you need to recover the premium paid right?
My bad.
Spot Price 100
Strike Price 110, Premium 5
Assuming the spot increases to 103rs, there will be an increase in premium of 1 (just assuming) so i can square off with Rs. 1 profit and not wait for the spot to go above Rs. 105. Right?
Yes, you can do that.
hello Karthik, appreciate yours effort .
one query
while excising the contract if option is in ITM so my profit will be
= spot price at expiry – strike price ?
spot price at expiry – strike price + intrinsic value in ITM * lot size
Spot price at expiry – strike price is the intrinsic value of a call option Raj.
Dear Karthik,
I thought I understood things in correct way. Alas! I did not. Something is miss.
I am considering 11 June 2020 as example to have a clear idea.
Options: NIFTY 11th JUN 9900 PE
3:00 PM —- [Nifty 50 spot :9911] premium price : 3.47 rs
3:11 PM —- [Nifty 50 spot :9888] premium price : 4.76 rs
AS PER YOUR POINT, and my understanding premium should be at least (9900-9888)= 12 rs?? Is not it?
Please help me to decode this. I will eagerly wait for your clarifications.
You need to take the settlement price, which is the weighted average of the last 30 mins. 9888 must be the last traded price. Check this for more info – https://support.zerodha.com/category/trading-and-markets/trading-faqs/articles/ltp-doesnt-match-close
If a trader is optimistic that the price of a stock will increase, then why not trader directly buys the stock instead of options? Why trader did not go for futures but opted for options?
It is just that the futures and options are leveraged and offer a better ROI. But yes, it is really up to you to figure if you want the additional leverage or not.
Hi Karthik,
I’m new to option play & Ive traded in Zerodah.
Ive traded with Jun 25th expiry:
10900 Buy CE @ 20.0rs
10800 Sell CE @ 46.9
Say I win this by market closing below breakeven assume 10000.
What are the charges if I leave till expiry? Please explain with detail of charges for above exapmple.
Awaiting for your valuable response.
Thanks,
Trilok
The chances depend on how the underlying moves. You have set up a bull call spread here, have discussed this in details here – https://zerodha.com/varsity/chapter/bull-call-spread/
Hi Karthik,
I am very knew to call options and have been going through this material for last couple of days. I am trying to map my understandings to live data. I understood now how call buy options work but have got this query. for example, take the case of
TCS JUN 2080 CE, the premium today is 21 and the spot price (I think it is underlying value) of TCS is 2044. My question is what will be the value of the premium once the spot price reaches to >=strike price. How to understand the buy call option if the spot price is more than or equal to Strike price. Please explain.
Thanks,
Venkat
It is hard to estimate the exact price of the premium, considering the fact that there are several moving parts to option premium. However, in all likely hood, the premium will at least move to 30 or 35, if not more.
I have bought call option on 20th may 2020 of 400 shares Indusind bank at the premium of Rs. 15, strike price 480, expiry was of 25 June 2020 now I have sold this all on 03rd June when Indusind share price was at 440 Rs. And premium was at Rs. 23.10 so whether I have made profit or loss in this trade??As strike price was not reached….
You bought at 15, sold at 23.1, so you made a profit of 8.1 in this transaction.
So what I will receive in return is 23.10×400. Or 8.10×400…Means I will get premium amount also in return or it is non-refundable….
Yes, 8.1 is your profit, you make 8.1 * 400.
sir,
stock underlying price – 110
spot pice premium
80 1
90 1.5
100 1.75
110 2
120 7
Everyone expect that stock underlying price will increase so everyone start buying CE 120 @7
But i predict that it might go down
As per my prediction I bought CE 100 @ 1.75
And sooner stock reach 102 , and everyone pridicting that it will reach 100
then sir will premium increase or decrease?
Rajat, if you expect the stock price to go down, then you need to buy a put option and not a lower strike CE. You’d have made a profit if you had bought say a 100 PE.
Sir understood the topics..
But my query is to be break even the spot price should be greater than strike price but my experience is on 23rd June I purchased 1lot Bajaj finance 3200 CE at 9.25 rs and spot price was around 2930 at the end of day closing the call moves to 30rs & spot was around 3109.. so my profit was 250*30=7500 minus the premium of 2313( 250*9.25) so total 7500-2313= 5187… but as per you I should be making profit only when spot was above strike price of 3200 CE but I made profit without spot price reaching strike price …. how is that happen…. and also how different strike prices which are higher than spot prices having low premium gives superb profits without spot prices reaching them….?
Kindly explain…
Ravi upon expiry you will make a profit if the spot is higher than strike, but you can also trade the premium before the expiry. Remember, the premium changes every minute so as and when the spot approaches the strike, the premium increases and you make money.
Hey Karthik, I need a clarification. If I place an MIS order (buying/selling call/put any kind) in options, will I still need to pay/recieve premium? or it is just like any other intraday trading?
Yes, but this is an intraday trade and will be closed by EOD.
Hey Karthik, Thank you for your teaching.
Could you please elaborate on liquid options , means how to identify which are iliquid options strike price and how it affects its my positions.
Sagar, to understand liquidity, you need to understand the bid-ask spread. If the spread is very narrow, then it implies that there is liquidity. If the spread is wide, then it implies the liquidity is not much. Order placement is an issue if you are trading illiquid stocks.
Hi Karthik. Im new to options. have few questions. Kndly requesting to answer.
Let’s say on July 1 , I have a reliance stock which is currently trading at 1500. For a 1500 strike price the premium is at 75.
1.Assume I buy a 1475 Call option ,at a premium of 77, and after buying the stock is trading at 1510.Assume my premium for 1475 call option comes to 80 rupees.Now, will I automatically make a profit of 3 rupees for the lot size of 2000.Is that a easy way of making profit if I choose to buy a call option at a strike price less than the traded price so that I end up in getting profit.Also, for the second case, if the stock price moves to 1490, and the premium decreases to 78 rupees , I will still get profit of 1 rupee . Plz provide explanation and correct me if, I am wrong.
2.Now , assume I get a 3 rupees profit in buying a call option.Im confused at this point.In the zerodha live trading video , the user chooses to exit the option and chooses a premium price, say 80 rupees, since we bought at 77.The user chooses “Sell” option in the platform to book profits. But to sell an call option , we need to have margins. Correct?.But my intent is to just make profit of the call option,without having margins in my trading account, also without taking the delivery of reliance stocks on expiry.Is there a way out?.Plz explain.Also , going by the concept,Now we have 3 rupees profit, I am just choosing to exercise the call option here.So what does exercising the call option actually mean?.
3. Also for Put option buying , if the Stock price falls from 1500 to 1400 where my Strike price is 1450 , I end up with profts as my premium price would have got increased.If I exit the Put option, in zerodha , again the platform is asking me to click on “Sell”. But to sell an put option , we need to have margins. Correct?.But my intent is to just make profit of the put option,without having margins in my trading account, also without taking the delivery of reliance stocks on expiry.Is there a way out?.Plz explain.
1) Yes, thats right. As and when the price moves higher the premium increases for the call option. The simple rule is to figure at what price (premium) the option is bought and at what price you are selling the same. The difference is what you make as the buyer of an option. However, things get a little complex when you consider time and volatility. You will understand this as you progress through the module
2) Thats right, when you buy, you have to sell to close the trade and book your profits. Without selling, you will not be able to close the position. Yes, you need margin to sell the option, but this is only if you decide to sell first and then buy back later.
3) Same as above. You have bought an option, you have to sell it to close it. Margins are not required to square off the option.
Why I can’t see weekly expiry dates on Zerodha Kite (nifty/bank nifty)?
You can. I’d suggest you call the support for this, they will help you with it.
Thanks for the response Karthik..Since the ” Sell” button was present in the zerodha platform ,while trying to exit the call option, I thought we would require a margin to sell off.
Reliance 1500 call option – 75 premium.
What happens if I don’t press ” Sell” button, while exiting the option till expiry.
So in my question, what does it mean to exercise the option,if I have bought reliance stock.
On which event, do I need to take delivery of reliance shares.
So can we say that the value of 1500 call option will decrease as we are closer to expiry.
What should be the ideal time to buy a call option and square off the call option.
You just have to leave the option to expiry. When you leave the option to expiry, it means that you intend to take or give delivery. However, closer to the expiry, you get into the physical settlement mode. So do read this quick note on the physical settlement – https://zerodha.com/varsity/chapter/quick-note-on-physical-settlement-2/
Hi I bought an European Call option june 29th as Follows:
Indusind Bank JUL 550 CE
@ 20.0 rupees one lot of 800 shares (so appx 16000 rupees has been paid as premium)
Now on jul 2nd the premium rises to Rs. 22 and my P & L shows profit of 1600 rupees.
Now if I exit (square it off) at that point then my profit will be 1600. But what will happen to my premium amount of 16000 that i had paid while buying the option. Will it be lost or I will get it back in full? or will I get some part of it back bcz of time decay.
Or simply I’ll get my entire premium back s well as my profit of 1600 rupees?
If you exit you will get the premium plus the projected profit/loss.
Dear sir, I got confused regarding the calculation of P&L. The below question is posted in this thread.
I have bought call option on 20th may 2020 of 400 shares Indusind bank at the premium of Rs. 15, strike price 480, expiry was of 25 June 2020 now I have sold this all on 03rd June when Indusind share price was at 440 Rs. And premium was at Rs. 23.10 so whether I have made profit or loss in this trade??As strike price was not reached.
This is your answer to the query : You bought at 15, sold at 23.1, so you made a profit of 8.1 in this transaction.
But according to the formula he should have made a loss of -15 * lot size right?
P&L = Max [0, (Spot Price – Strike Price)] – Premium Paid
P&L = Max [0, (440-480)]-15 = -15 Rs
Pls clarify sir
That formula is true if you hold the position to expiry. In this case, since you sold it before the expiry, you make the difference in premium, which is 8.1.
I understand that premiums are considered for p&l before expiry. But if I see from option sellers point of view , even though spot price is less then strike price , due to increased premium option buyer is making profit. Does it mean option seller is making loss even though spot price is less then strike price.
Karthik, Hello
On July 6, 11:20 AM – Nifty Spot price is 10750.
Nifty August 11500 CE is trading at 140 Premium. Nifty September 11500 CE is trading at 75 Premium. If someone is not too sure if Nifty spot would cross 11500 but believes premium for September would certainly go high before September and trader will be positively square off Nifty September 11500 CE before 24-Sep-2020.
The question is theoratically – Nifty August 11500 CE should be trading at a far lesser premium than Nifty September 11500 CE, Is it correct? Why premium for July has never gone above 55, premium for August never gone up beyond 120 but premium for September trading at 140 currently! Delta, Gamma, Vega seems out-of-line theoretically or is it to do with the currant market dynamics and fluctuations?
Or possibly, I am missing something crucial here!
When there is a lot of time to expiry, the effect of volatility is also high. Think about it – higher the time to expiry, higher is the chance of the option flip-flopping between ITM and OTM.
Yes, all greeks play plus the impact of demand and supply also have a major contribution to the premium values.
Hi Sir,
I have few questions regarding option trading orders :
Suppose I want to buy tata steel 325 PE @ 10 is it possible to buy at market price ?
is it true that If CMP of above stock is @10 and want to buy at 10.50 then I need to place SL order only ?
limit order doesn’t work to buy option above CMP ?
suppose If i am in profit is it possible to exit at CMP in option ?
while placing normal order we get to see set target and set stoploss how to use it exactly ?
Can you please share link of tutorial of these videos ?
above questions may sound silly but its important to know before trading as loss can be severe.
Thanks,
Sanket
No, you will have to place a limit order. However, place a limit at a higher than CMP and it will behave as a market order.
Yes, if you want to buy at 10.5, then place a SL buy.
Works.
Normal order? Can u please specify which order type?
All our video are here – https://www.youtube.com/channel/UC59YUBhNLMkS2Q8NBWBGHAA
Thanks for your reply sir.
while buying option there are two types of product Normal and MIS.
In Normal we get to see set stop loss and target how exactly that works in option buying ?
Second question is If I bought tata steel 325 PE @ 10 and CMP is 10.20 then it is possible to exit at CMP (10.20) ? For that which order need to use Limit order ?
Sanket, check this – https://support.zerodha.com/category/trading-and-markets/margin-leverage-and-product-and-order-types/articles/what-are-stop-loss-orders-and-how-to-use-them
Hello Sir,
Today, Suppose If I buy NIFTY 10000 PE 23 rd JUL expiry option. If NIFTY 10000 spot is not in the trading(buying) range next week. Then, will the option which I bought today gets squared off automatically?
If the spot is not less than 10,000, then the option is worthless. Hence there is no need to worry about squaring off the trade.
Sir ,all mutual funds can be used as collateral. I have mutual funds in zerodha account. But they do not show pledge option. Please clarify. Thanks
We don’t have the option to pledge MF as collateral yet. Hopefully soon.
When One buys an option he has to pay the premium for the option. I came to know that one has to pay the Ask price to buy an option. Does it mean that option premium and Ask price same? Please correct me if I am wrong.
That’s right, you buy option premiums, the price of that is based on the ask price.
Sir, in zerodha margin calculator in expiry column, only monthly expires are shown. Weekly expires are not shown for NIFTY and BANKNIFTY. Why sir.kindly explain. THANKS.
Margins are approximately the same. We will be updating the page soon.
Is it mandatory to have Sufficient balance in our trading account that can buy the full lot at strike price on the day of exercise ?
Yes, thats right.
THANK YOU SIR
Welcome Monu.
It means, if I buy “x” stock options at strike price of 100 & the lot qty is of 1000 nos. So on the day of expiry I’ll have to have 1,00,000/- amount in my trading account, What if i don’t have that?
Ain’t it possible to buy them on margin and sell them very next moment?
Yes, you need to have that. Else the position will be squared off.
Sir I am in a bit confused. I have a few doubts. Please clarify it.
Q1) If I want to buy a call option I have to look for the ask price to pay the option price. Then why have you considered Last traded Price here to pay the option premium?
Q2) (Please correct me if my understanding is wrong). For a particular strike price , the ask and bid prices are dynamic. these values keep on changing based on underlying security price movement and demand of the traders.(Please correct me).
Q3) How the LTP is determined? The last trade could be a buy or sell. So is it the Ask price or bid price of last trade?
Q4) Is LTP value dynamic?
1) If the contract in question is highly liquid, then Ask price and LTP are similar
2) Yes, that’s right
3) It is a function of demand and supply
4) Yup, changes every second.
Really love the way how you explain things 🙂 I got a doubt btw
I’ve bought both Nifty Put & Call options Yesterday.
While checking on today morning at 8.58 AM, I can able to see that there is a change in the prices of my options.
I know time decay will decrease the option price over time, but one of the options prices is increased!
How options price gets increase after the market closed?
Also, Is “After-market options trading” is available in India?
Thanks 🙂
Shri
These are pre-market quotes, so don’t read too much into that. Btw, option prices can increase the next day, this depends on the overnight news flow which impacts the underlying stock and therefore the option prices.
Hi Karthik,
Today weekly CALL option NIFTY 23rd JUL 11200 CE was trading at 16Rs around 15:25pm and spot was around 11230 and finally NIFTY closed at 11235.85
So I like to know If had bought 11200 CE before expiry say 4 lots (300*16 = 4800 Rs ), I would have made a profit of
around 19 points per share (11235 -11200 – 16(premium)) = 5700 Rs approx excluding brokerage and other transaction charges.
Total Gross profit of 800Rs in just 5 mins. Is my understanding right ?
As I type this query (15:49pm), I’m seeing Nifty closed at 11215 as per official site which previously showed 11235.85 just mins ago (15.35pm IST) , but Kite graph is still showing 11234.6 as last value. No idea what’s going on.
So, I will keep my points in question as assumption. Lets assume Nifty closed at 11235.85. then my understanding of profit is right ?
That’s right, but you need to factor in factor in all the applicable charges before arriving at the price. The difference you notice is because 11235.85 was the last traded price and 11215 was the closing price of the day.
Closing price = weighted average of the last 30 minutes of trading.
Thank you Karthik _/\_
Happy reading!
Hi.
please accept my congratulations in keeping the language very simple and easy to understand 🙂
Now, i am confused regarding IV. You say IV = Spot price (-) Strike Price.
But looking at the charts of RIL today, i.e., on July 25, 2020, I find difference. The spot price for RIL is 2148.4. Not at strike price of say 2000, the IV should be 2048.4 (-) 2000 = 48.4, and at strike price of 2020, the IV should be 2048.4 (-) 2020 = 28.4, where as the NSE data gives a figure of 49.89 and 49.83.
There are similar differences at other strike prices also..
Pls clear my confusion.
Vishwadeep
IV can refer to 2 things – Intrinsic value of an option and Implied volatility as measured by %. NSE is referring to the Implied volatility 🙂
Hi ,
i have a doubt i bought a call option of nifty 11300CE july expiry and sold same day .if nifty go beyond 11300 on expiry i will meet any loss
No, you will make a profit as the CE option makes money when the underlying price increases.
Dear Sir,
How to find the LOT size of a stock for a particular strike price in option chain?
Dear Karthik,
What is meant by position being squared off.
Thanks in advance.
It means that you close an open position. For example, if you are long, by square off you sell the position. If you are short, by square off you buy the stock back.
Hi Karthik,
I went through all the topic under this series (And have grasped most of it). Great, great fan of your teaching method.
Correct me if i am wrong,
Basically, its a game of premium. We will ultimately be trading (making profit/loss) in options by the fluctuation in premium price (with Greeks playing at the background).
Example: Lets assume if the spot price is 950 and I buy a CE 1000 for premium 20 (Lot size- 50). Assume, within the next 2 hours the price of premium is 22 (Current Spot is 960) and I decide to book the profit then it will be 2 Rs (22-20) * 50 (lot size) = 100 Rs. So where is the play of break-even point?
As B.E =Strike price + Premium, so B.E = 1000+22=1022, where as the current spot is 960.
If you find the above example confusing, please clear it with an example of any stock/index wrt buy and selling withing a couple of hours (same day or max +1 day) . As theoretically it makes sense but practically its a bit confusing (specially if we look wrt buy and sell in a short span). (Please make sure to mention – spot,strike etc at time of buy and sell)
Eagerly waiting for your response sir!
Thats correct Shamz, eventually it all boils down to what price you pay and receive for the premium.
Correction: As B.E =Strike price + Premium, so B.E = 1000+20=1020**, where as the current spot is 960
Noted 🙂
i have one doubt . who create contracts for specific strike price levels. as a seller can i create my own strike price ? for eg. create sbi
contract for sbi august @ 205.30
This is the job of the exchange to create standardised contracts.
Hi Karthik,
W.R.T my question (July 31, 2020 at 8:23 pm, 1 question above) Thank you for clearing my doubt, but I am still bit unclear about the B.E point. With the example i quoted will you please explain me the scenario, how the B.E point works w.r.t intraday/+1 day after we initiates the trade. You can use any of your example as well to explain this concept. This will surely give an upper edge!
I’ve lost that query, but have you tried using Sensibull? It helps you with these BE calculations quite easily.
Hi,
I did checked Sensibull with before coming up here 🙁 (Its not having the background working which I am seeking for)
Neways, I will post it again for you.
“”Example: Lets assume if the spot price is 950 and I buy a CE 1000 for premium 20 (Lot size- 50). Assume, within the next 2 hours the price of premium is 22 (Current Spot is 960) and I decide to book the profit then it will be 2 Rs (22-20) * 50 (lot size) = 100 Rs. **So where is the play of break-even point?**
As B.E =Strike price + Premium, so B.E = 1000+20=1020, where as the current spot is 960.
If you find the above example confusing, please clear it with an example of any stock/index wrt buy and selling withing a couple of hours (same day or max +1 day) . As theoretically it makes sense but practically its a bit confusing (specially if we look wrt buy and sell in a short span). (Please make sure to mention – spot,strike etc at time of buy and sell)””
—
Apologies for getting back again, but this is the only glitch in my understand. As being an engineer with financial background I am bound to seek for mathematical perfection or else i crash 😉
Hey Shamz, I got what you are saying. Breakeven point comes into picture when you hold options to expiry. If you are doing a short term trade, then it does not matter. What matters is the price at which you are buying versus the selling price.
Concept entirely clear! Thanks a ton for guiding me.
Omw to create fortune!
Good luck and hope you find your fortune fast and smoothly 🙂
Hi Karthik
Suppose there is an option contract with only one trade.
On Day1 Ajay buys CE & Vijay, the counterparty, sells CE.
Now on Day2 if Ajay sees profits and wants to square off, then would it be mandatory for Vijay to exit? And if Vijay is adamant not to square off his position, then Ajay has no other option but to wait until expiry?
Thanks.
No, its not mandatory for Vijay to sell. He has the comfort of holding on the position till expiry. Btw, the situation you described is also how illiquidity is created in the market. The more number of people transact, the higher is the liquidity in the market.
Thank you for this chapter 🙂
Qn 1) While options trading, where we should keep our Stop loss ? Should SL be kept as per Spot price or as per Premium price ( since you told Premium price also varies based on different factors )
Qn 2) Taking the same example of Bajaj Auto, What if we BUY Call option where Strike price is already less than Spot price ? under such scenario if market moves up, then more profit can be seen at expiry.
And in the option chain for bajaj auto shown above, why the premium price for 2000 CE is way higher than (almost 6x) 2050 CE premium price ?
1) I generally prefer to look at the spot and place trades based on the spot prices. Apart from this, I also keep an eye on volatility and time decay.
2) This could be a function of volatility and delta. Remember, each strike has different volatilities.
Let’ say we have a call option “NIFTY AUG 11000 CE”. Today is 15th Aug, still days away from the option’s expiry.
Nifty is currenty trading at 11,178, which means the strike price has already reached. What happens to this option now? Can people still buy it? Why is it still appearing in the list?
Yes, people can still trade the option. In fact, one can trade right upto the expiry.
I bought a call option at 13 of August series. It is now trending at 5. I am in lose. can I transfer the same in September series. If yes then how
There is no transfer as such. You will have to square off the August position and initiate the same position in Sept contract. But there is ample time to expiry. So why would you want to do that?
Simply superb Karthik.
You are great
Happy reading!
Hi Sir I need a small clarification suppose I bought a call option of 10 rupees and next day I sold it at 8 rupees and the strike price is high than spot price can you tell me what is my total loss here whether I will loose my whole premium
The P&L will be the difference between the buy and sell price i.e. 10-8 = 2.
Hi Sir one more doubt suppose I bought one option call of SBI at 6.2 strike price 192..5 and today the premium price is 7.2 and price is 194.5 and for expiry I have 10 days still if I sell it today will I make profit or else I need to calculate premium amount in strike price can you please. Explain here
Yes, you can. The P&L will be the difference between the buy and sell price i.e. 7.2-6.2 = 1.
Thanks Sir
Welcome!
Hi.
I bought BankNifty 2 lots of 25 shares at 41.28/- the strike price is 23600 and the expiry os 27 August 2020. Suppose if the premium drops from 41.28 to 35 then what will be my loss?
And if strike price doesn’t reach 23600 then what will be my loss. Please help as i am new to this and mistakenly bought Options.
Thank you
Your loss will be (41.28-35)*lot size. If underlying does not reach 23600, you will lose the entire premium i.e. 41.28.
Hi Karthik,
I have the below confusions:
1. Selling a CE (after you buy it) V/s Shorting a CE are same?
2. Is there any obligation to pay after I sell CE/PE (after I hold it)?
3. Can I consider the analogy is same for Options and stocks, except the expiry?
4. If I only buy CE/PE, max loss I can make is the premium*lot size, which means the money I spent on buying will be Zero, not beyond right ?
Thanks in advance!!
1) No these are two different things. Selling is call after buying is called squaring off the trade, shorting CE is initiating a fresh position
2) YOu need to have margins in your account
3) Analogy compared to?
4) Thats right.
Dear sir,
If exm I buy bank nifty call at 250 and in second day I sell at a price of 300 so all 50 point profit is my or any breakeven point there. Sir please help to answering
Yes, you make 50 in profit here.
@Karthik,
Thanks for your reply.
On point 2# Is there any obligation to pay after I sell CE/PE (after I hold it)?
You replied: You need to have margins in your account
Please clarify my understanding:
For CE buy:
For XYZ share of 1 lot* 10 stocks*10 INR premium = margin required is 100 INR
and then for selling…nothing is required..just sell the holdings of 1lot*10stocks
and same for PE
Is the understanding correct?
Thats right Abhishek.
Hi sir ,
Please explain what happens in this scenario . CMP = 2400 , STRIKE = 2500 , PREMIUM = 5
I bought the stock with a premium of Rs.5 when market price is 2400 , later market price was 2450 ( above the price when i bought the stock but below the strike price ) . Will i get profit or loss in this scenario ? .Obviously my stock value increased so i should be getting profits but intrinsic value will be 0 for an price below strike price. Im confused here. Please clarify it
You will make a profit if the premium too has increased and you decide to sell.
Do people buy options in MIS ( intraday) ?
If I am strictly trading on premiums, should I do MIS or NRML orders?
Yes, MIS is only for additional leverage.
Even though it doesnt cross the strike price , just increase in premium is enough for making profits?
Yes, thats right. However, this has to be before the expiry.
Sir, I am new to option trading totally new and i want to know that if we buy/sell CALL or PUT, then must we buy mandatorily both or can we buy or sell any one i.e CALL or PUT. Considering as a new candidate pl. answer.
Where can i get or study call and put options?
YOu will have mandatorily close both CE and PE. YOu can study here only on VArsity.
Sir,
If spot price is 11500, and I place strike price at 11400 and premium is 140. If 11500 goes down to 11450, Will I be in profit or loss and if spot price moves to 11600 that how much will be my profit.
You need to see how the premiums are moving, your profitability depends on that.
Sir, will the option chain get longer (i.e new strike prices added) until date of expiry?
No, the option chain will consist of a designated set of strikes.
Sir, I have a basic doubt about LTP and lots.
Is the LTP amount for each share in the lot or for the entire lot? i.e. if LTP is Rs.10 and lot size is 100, will I pay just Rs.10 for one lot OR 10×100=Rs1000 for the lot?
Upon expiry, if spot price is higher than strike price, eg. Spot price=1500, strike price=1400, lot size=100, will I get only 1500-1400=Rs.100 OR (1500-1400)*x100=10000?
If I get only Rs.100, then what is the purpose of having a lot size?
LTP is on a per-share basis, hence it will be 10*100 = 1000.
hi sir i have learnt lot from you. really grateful to you you made futures and options very means very very easy.
Sir i have one query regarding exercising an option is concern.
1. on expiry day option Premium becomes zero right end of trading hours?
2. Say i brought ITC 190 CE on expiry it is trading 230 +. do we needs to exit explicitly(I read if we exit its matter of premium dereference ) or no needs to exit .. Here i dont want my Premium difference profit .. will it automatically take care of our profit after 3.30PM? – Here i am concerning on options profit not premium difference . what i have to do . when i have to exercise an option. is their any timing for that or after market hours options going to expire after that it will take care of my profit…how this will work…i have full of confusion about this please clarify in your way ..thanks a lot sir
1) Yes, but only for OTM options not ITM
2) Sumanth, this is an ITM option, hence this will result in physical delivery. You will get to buy the stock at 190.
Above you have explain that if I buy @2050 with premium of 6rs then price have to go 2056 which is Break even or we can say no P/L after that on 2057 i got 1rs profit. But what happen if I Buy ABC company call option @100rs strike price with 5rs premium of lot size of 100 share and sell it @101 and now premium is 6rs. I am in loss or Profit, from above calculation I got loss of 100rs
If you buy at 5 and sell at 6, your profit is 1. If you hold till expiry, then the spot has to move past the strike plus premium that you’ve paid.
Sir as you explained, Buyers of the option contract has limited risk as it losses the money to the extent the premium paid. But as I buy the call options of specific strike rate, when the spot price goes below the strike price, my losses also increase beyond the premium which I paid for that call option. Losses doesn’t stopped till the premium I paid. In real life trading, limited loss theory of call buyer is no applying. Please explain. Thanks in advance.
No, once you’ve paid the premium, you do not lose more than the premium you’ve paid. Your maximum loss is restricted to the premium you’ve paid.
hi
suppose, in case I buy call a option at certain premium and on expiry the spot value of share is lower than my strike price but my amount of premium is higher than I originally paid at the time of entering the contract, then should I still exercise my contract considering profit or loss?
Yes. YOu can also sell the option and pocket the difference between the buy and sell value of the premium.
Hi
Few queries here.
1) suppose I am call option buyer, then at the time of exercising my contract, I have right to buy shares at predetermined premium value at which contract was entered, right?
2) while entering the contract the call option buyer pays margin to the option writer for exercising contract at future date. Then at the time of exercising contract do the call buyer needs to pay again any amount for exercising right to buy or the margin payment was final?
1) Yes, thats right
2) The buyer will have to ensure they have enough margins to buy the stocks.
With increase in the price of underlying option premium also increases, but here in the example you kept it constant(6.35).The reflection of change in premium can’t be seen here.
That works on a continuous basis, becomes tough to explain this if you don’t account for it as a step by step basis change.
Am trying to buy banknifty in zerodha,,bt it Reject my order by showing that this order is not allowed in ur account.. Why???gmail
THis is because of the OI restriction.
Hi Sir, I am very new to Options and learnt everything from Varsity.
1) For intraday Buy of Stock Options (top gainers and top losers) is it enough if I add the list of Nifty50 companies to the Market Watch.
2) Can I add all the 50 companies automatically in Kite or do I have to add them manually?
3) If the companies of Nifty50 change, do I have to change manually in Kite MarketWatch?
Thank you very much for your amazing help sir.
1) Yes, that is good enough
2) YOu will have to add this once
3) Yes.
Good luck, Shriram.
Dear Sir,
Please guide me on following..
Spot price is 11800.
Suppose I executed 2 trades having strike prices 11500 CE and 11800 CE.
Spot price changes to 11900. Whose delta change in premium is more? 11500CE OR 11800CE
The rate of change of delta depends on the gamma. I’d suspect the 11800CE if there is more time to expiry.
Dear Sir,
Pls guide me for this trade.
Spot price is 11800 on moday
Strike price for same week expiry is 11400 having premium 400.
On Tuesday premium is 300 and spot price is 11700.
On Wednesday premium is 200 and spot price is 11600.
On expiry till 3:00 pm it’s shows premium 50 and spot price is 11550. ..I have done nothing with this. trade. May be automatically squared off… What is my loss?
Thanks in advance.
Vidyadhan Gedam
Are you long or short on this? If long, you will lose the premium paid, if short you will lose the intrinsic value of the option.
Hello sir, today TATAPOWER at 59.15 spot price, TATAPOWER DEC 58CE was 0.00(minus 100%),while TATAPOWER Nov 58 CE was at 2.8. Inspiteof the fact that TATAPOWER DEC58CE is in the money,and its value should be higher than Nov 58CE.At what price we can buy such options, whose value becomes zero. Thank you sir
Deepika there is no liquidity in the scrip I guess.
Hello sir,
Wanted to know one thing
Does in the money call or puts option premium get decay on the expiry day?
All options time decay, Jay. Does not matter if its ITM or OTM. But the rate at which it decays differs based on the moneyness of these options.
Thank you for your efforts. Which is very much helpful . I cleared all my doubts. Expect how the Premium amount is decided
Premium is a function of the greeks interactions, it is a tricky concept, have explained in the subsequent chapter.
Ex: I bought Nifty 13100 CE at 65 per share for an Option expiring on 3rd December.
Now after expiry the Strike price is 13134 but per share value is 33.80.
How to calculate the P&L, is it then better to exit if the share price is going down irrespective of strike price.
Please clarify.
33.8 could be last traded price, you need to check the settlement price, which would be 34. I’d suggest you exit the position just before the expiry.
Thanks for the response Karthik. I exited when it had reached 70, so luckily didn’t incur the losses. But my question is even when we are sure that option is going to achieve the strike price which in this case was 13100 and yesterday it crossed it marginally, however the price against which one would have bought the share might be going down.
So is it critical to also keep the share price as a factor to decide the exit if its going below the price we bought while the strike price might be positive.
Of course, whenever you trade derivatives, always keep the spot price in perspective.
Dear Sir , you are doing marvelous yeoman service to gullible investors, I have an query regarding my recent purchase. I bought 2 lots 4000 shares each of Canbk on spot price 108.70 for strike price 110 Dec20 CE with premium 6.15. Yesterday at the time of closing it was on 112.8 and showing the profit of 17500 but I didn’t took. I need to know the real time profit which we usually in see in app’ Is what actually we get after settling break even or it may turn even into loss after final calculation (Treat selling before expiry)
Raj, the profit you make is equal to the difference between the buy price and sell price of the premium multiplied by the lot size.
Can I trade with only CE for my whole life? What if I’m not interested in PE for trading in my whole life?
Sure you can. There is no compulsion to learn or trade puts 🙂
I want to buy sbi cmp Rs.270 for long but i want to buy it cheaper than than current market price(Rs. 250 if goes down)explain with buy call option and put sell option.
Sorry, I didn’t get the context Gourav. Can you add more details, please?
Hello Sir, just a small correction that the profits are not exponential but linear. Exponential numbers form a curve on graph whereas linear numbers make a straight line as show.
I understand I have used the word ‘exponential’ quite loosely here, but the intention is to convey that the profits increase many folds 🙂
Hi sir
As this is clear that in call option buying our profit starts after the break even point.but what if premium increased in compared to the premium paid at time of call buying?
how does an increased and decreased premium affect a call option buyer’s P/L?
What if spot price doesnot increase and premium increase before the expiry.
Please explain thoroughly
The breakeven point comes into picture only when you consider the expiry in perspective. Otherwise, your P&L is proportional to the increase or decrease in premium.
I HAVE TATA MOTORS DEC CE 190 AT 2.0 PREMIUM PRICES. CAN I CONVERT IT INTO JAN CE??
Nope, you cannot.
How to select call options
Depends on what you intend to do with it.
Thank you for the wonderful insights. A small doubt.. If i purchase CE which has an expiry after a month at premium at 50 and the very next day sell it at premium 60 to book a short profit. Will my contract of CE purchased end?
Yes, you can square off anytime you want.
Hello Karthik, thanks for the explanations. I have a doubt, say for example I buy RELIANCE 2000 CE by paying the premium of 20000 rs. I know my maximum loss will be 20000 if this option will not work. But after 2-3 days, I decided to sell this option assuming that it will never execute. My question here is on selling it after 2-3 days will I lose the whole premium or will I get something back?
You will get back the premium, to the extent of what the premium value is.
Thanks for your reply, so my whole premium will not get zero. Is there any tool or calculator where I can check about the amount I will get?
The premium can goto 0 upon expiry and the contract is worthless.
Dear Sir,
I want to know, how can be the premium price increases near to expiry date?
If there is time decay, Is there any possibilities premium price can move higher?
Is there any reference where I can see time decay price for next day.
Thank you
Theta decay is just one fact, right? At any given point there is n number of factors acting upon the premium.
Hello Karthik thank you for response. I will tell you one scenario.
Suppose 7 days back I bought one OTM call option whose premium was 50. Now today the same OTM call option is 15.
Is there any chance this current OTM premium (amount 15) can go higher to 50 before current month expiry ? (If underlying price is moving to near to OTM strike price).
What factors is most important to increase the premium. Thank you.
Yes, but this clearly depends on how quickly the underlying is moving along with factors like volatility and time to expiry.
Hello sir, BHARTIARTL Feb570 CE is 42, while BHARTIARTL FEB 580 CE is 43,why it is so and why 570 call is not going up with underlying,while other calls are moving. Thank you sir
Happens due to liquidity issues.
Thank you.
Hello sir,
In the example mentioned in this chapter, on expiry day suppose bajaj Auto’s spot price is 2070, then Intrinsic value for 2050 CE Buy will be 20 Rs. and the premium paid while buying is 6.35 Rs. So net profit is 20-6.35 = 13.65 Rs.
1) Now as per the option greeks, when spot price moves in our favour (increase in this case), premium also increases. So, on expiry day what will be the premium considering that 2050 CE contract expired as ITM ?
2) Will the premium on expiry be same as Intrinsic value of 20 Rs or will it be different ?
3) And the difference between the premium paid and premium gained (while square-off) will be the profit, am I correct ?
Vaishakh, the option will have a higher value and not 6.35, it will have a value of at least 20.
1) As I mentioned, on expiry, 2050CE will be 20
2) Yup
3) That’s right.
Ok sir, Thank you vey much 🙂
Good luck, Vaishakh!
If I buy a call option of strike price Rs 700 for premium Rs 20 and on the expiry the price is Rs 750, this means that there is a profit of Rs 30 [(750-700)-20], now do I get this Rs 30 in my zerodha account, or do I get the shares at the cost of Rs 700 and if I get those shares when does the buyer of the call option has to deposit the margin to do so.
If you sell it at Rs.50, then you get the profits, if you hold to expiry, then you will get shares at 700.
Sir I have purchased 30500 bnd call @30 rupees premium but it goes down but when I go to sell it @26 it says margin required 84000 rupees I have only 7000 on my account. Is margin required to sell a already buying call?
This must be because you have other open positions in your account. Hence the margin requirements.
if i hold option ce on buy side and sell at exipiry day b4 closed is thr any extra chared…
No, all applicable charges are explained here – https://zerodha.com/charges#tab-equities
For non expiry payoff graph
if today is 10th of Feb and Expiry is on 25th of feb.
dor greeks calculation
Days to expiry is 25 less 10 = 15
or 25 less 10 plus 1 = 16 since i have to consider the 10th feb also..
and the T+0 line is drawn with 15 days . since you are looking what payoff will look like on EOD of 10th feb..
please correct me if im worng..
You can look at 25-10 = 15 days.
Hello Karthik, First of all I would like to thank you for answering all the questions and for providing excellent content on this site. You are doing and excellent job for market noobs like me.
My question is about option contract that is expiring months away. Adani enterprise is currently trading at 783 when I looked at the option contract of 800 CE expiring 29th April, it has no LTP and no ask price, just a bid price of Rs. 0.05 with lot size 2000 on NSE website. I thought options are bought at LTP or premium price, but since this doesn’t have any LTP, how can this be bought? I am confused by this bid and ask price. What does this bid price of Rs. 0.05 means? That someone is bidding to BUY IT for Rs. 0.05? but presently no one is selling it since there’s no ask price? Am I correct?
Thank you in advance!
This happens when there is no liquidity in the market, which means no buyers and sellers. YOu can pretty much quote any price within the execution range and hope for a fill.
Thank you for your reply!
Just one more question. So if I qoute the price, it would be shown as bid price, right? And also are options bought at LTP or ask price? Coz if they are bought at LTP, then what’s the point of ask price? I’m sorry if my questions are too stupid, I started reading about it all just yesterday.
It is best if you place limit orders to transact in options, Prateek. In which case you trade at an expected price and not really get taken back by market orders (traded at LTP).
Thank you for clarifying my doubts! It’s better to play safe!
Good luck, Prateek!
i bought Bank nifty on 16th Feb Avg 121*75 , i was travelling and i checked today the Bank Nifty price is 14, it showing loss of 8000
what will happen in this case , i am not able to exit now because if in sufficient funds , do i wait for automatic expiry, what will happen in this case, this is my first transaction in bank nifty
I am new to Options Trading and learning via Varsity. I have some doubts and would like to clarify here. Thanks for your efforts to answer the query.
Consider, I buy NIFTY FEB 14800 CE @ Rs. 60.00 Premium. Since lot size is 75, total margin required is 4500. The CMP of Nifty 50 is 14700.
Q1: I don’t sell the option and hold till expiry. What does it happen in this situation? I read that physical settlement does not happen to Indices. So I am confused what happens to my Call option when the price of the index increase/decrease on the expiry day?
Q2: The underlying index has reached 14850 before the expiry. Now what should I do in this case? Should I hold the options till expiry? I don’t think I should sell the options since it has already reached the price of 14800.
Thanks!
1) That’s right, no physical settlement. The option will be cash-settled.
2) Depends on your view, if you expect the index to increase, then maybe you should hold. If you fear a crash, then sell and book your P&L.
Regarding the first question (I buy NIFTY FEB 14800 CE @ Rs. 60.00 Premium. Since lot size is 75, total margin required is 4500.) Can you please clear my doubt for following 2 scenarios:
1. Spot price at expiry is 14700. And I hold the options till expiry. So I would incur a loss in that case. What will be my loss value? Is it only the premium amount paid or (Difference in Strike price and spot price)*lot + Premium?
2. Spot price at expiry is 14900. And I hold the options till expiry. So I would get a profit in that case. What will be my profit value? Is it (Difference in Strike price and spot price) – Premium? So, (14900-14800)*75 – 4500? Am I correct? Thanks!
1) Yes, you will lose the premium amount only
2) YOu will make 100*75 = 7500 minus applicable charges.
Sir I want to know,if weekly ITM(for example nifty 4 mar 14800),does not move fast with underlying in comparison of monthly OTM(nifty mar 15300).If happens sometimes or not.
Deepika, they move differently given different expiries.
Sir,
I bought 1 lot (75) of Nifty 15350 CE 10 March 2021 expiry. I bought at 66/unit. Total premium paid approx around 5k. As of end of day today , it is at a price of 20/unit. To minimize my loss , I want to square off. But I am asked to deposit an amount of 112000/-. Why is that so ?
Mehul, did you have any other open position at that point?
Were you able to square off? and minimize the loss?
Hi sir,
Can you help?
If i bought a buy CE for strike price 100rs premium 5rs, the spot price was 80.
then i exited the option at premium of 7rs, the spot price was 90.
So, in this trade I will exit. and I will be profited with 2 rs. Right?
Thats right, you will make a total profit of Rs.2, minus the applicable charges.
Yes, I had another position open. It was NIFTY 14000 PE 10 March 21 expirty (2 lots)
Hence the requirement for margin. YOu should cancel that order and then exit and then place the order again.
Oh ok, I was not aware of it. But I wonder why that should be the case. It can be treated as 2 separate orders right? That is one that I have already taken a long position with 15350 CE 10 Mar and another as open order for 14000 PE 10 Mar.
Anyway, thanks a lot for the clarification. It really helps.
Margins work on a portfolio basis, Mehul and not on an individual position basis.
Can I convert call to shares since I don’t want to realize the loss which is incurred due to buying of call?
Yeah, for this you have to hold the stock option to expiry and take physical delivery of the same.
Sir, i bought MIS Banknifty 18 march 34800 PE @ 347 and sold it on same day @ 400. I got 1305₹ profit. But the trade is not shown in report history or even in portfolio. Pls help. Thank you.
Do check the trade book and contract note, Yash.
Can I convert a call option into shares at the expiry or before?In fact what happens to it when it expires?a call option is a option to buy or sell,Right?but option for what?
No, you can do that only upon expiry. PLease do read through this, you will figure this out 🙂
Good afternoon
Respested sir I like to know about your Accuracy ratio
Accuracy ratio as in?
So in the example where you explained the breakeven point, assume at expiry the spot is slightly higher than the strike price but has not reached the breakeven point, in this case the buyer will still exercise the option in order to decrease the loss, right?
That may depend on the exact price, based on which the buyer may decide if it is worth exercising the option (after considering costs).
sir if out of the money expiry is Rs2, then to calculate the total profit we have to multiply 2 rupees with total no of shares, right?
Yes, you need to multiply with the lot size.
sir, I do covered strategy that is buy futures n sell OTM sell. so suppose I longed futures at 740 n sold OTM call of 790CE at Rs.16(my target as well as resistance) but the price resisted at 760, sir should I have to roll over to 760 CE from 790? sir please let me know your explanation.
That depends on how strong your conviction is on the trade, if you are fully convinced, then yes, you should rollover. Else you should not.
sir but if it resisting at 760 CE, can I already short it from 790 CE strike I am already in? Pardon me for the trivial question sir, I have just begun with options.
Already in as in?
Sir suppose I have longed futures at 740 n shorted OTM call at 790 CE, if the prices resists at 760 should I roll over to 760 or I can stay at 790 as well to short?
I won’t be able to comment on that, Vishal. The decision to stay long or cut it depends on how strong your conviction on the trade really is.
Hi, want to ask, what is the diff. in ask price & bid price?
diff. between ask qty & bid qty?
Which quantity are we buying on a particular strike price? Is it ask or buy qty?
Please check section 9.6 – https://zerodha.com/varsity/chapter/the-trading-terminal/
Sir, If I buy or sell a call option NRML
Then, can I exercise it before expiry? or mandatory to hold till expiry?
No, to exercise, you must hold to expiry.
Can Zerodha Kite allows me to buy PUT and Call Option in USA based company?
Nope, not possible.
Hello Sir,
I bought some call options let say ANKNIFTY 22nd w APR 31100 CE at 465 on 20th April. Also I created a GTT FOR STOP Loss at 425 triggered price and sell price also at 425. The stop loss was triggered and then I sold the call option for let say 350. But in the GTT section, it still shows that GTT in status triggered. Evn though in my Positions I do not have any more options. Should this not be removed? GTT says expiry on 23rd April. I hope this does not get executed again. Please reply urgently.
That means your position is squared off right? Do check your positions tab.
Thank you Karthik, Yes , I do not see any open positions. But the GTT is still there. It says the expiry date as 23rd april. But on the Zerodha website it says,
“A GTT order is valid for a period of one year from the date it is placed. If the trigger is hit and order is placed to the exchange, the trigger is deactivated. Deactivation takes place regardless of whether the order is completed at the exchange.” So it was triggered but not executed. So it should have been cancelled the next day? Should it not be removed from the GTT page also ? I am afraid, can it execute again, on its own?
You mentioned that the contract expired right? Either ways, I’d suggest you speak to the support desk for this.
Assume I’m a buyer of a call option. On expiry, the strike price I bought is OTM. Now all ITM strike prices should compulsorily be physically settled on expiry, right? But what if I want to exercise the option even if the strike price I bought is OTM on expiry……is it allowed? I know it does not make sense, just asking for knowledge
No, that’s not possible. YOu don’t have a right to exercise a contract that has no value.
very clear narration. excellent piece of write-up. many times, one mathematical formula is worth a thousand words.
Happy learning!
Why stock options can’t be bought or sold at the market price??
While you can, but we don’t allow them because these are illiquid.
if incae I buy an option, and seeing the profit i.e. the strike price getting higher I sold it the same day, how will the transaction be treated
That would be treated as an intraday trade, Mohit.
sir If I have to buy options. There is no need to buy as many sizes as we can afford
By size, I assume you are referring to lot sizes. Yes, you will have to transact in the multiples of lot sizes.
Bank Nifty is currently around 32000 (16th May 2021) and I expect it to go above 33200 by June Expiry. If I buy an ITM CE for June expiry how will it get affected in terms of time decay. I am planning to by 31500CE June expiry which is around 1700 INR right now.
What are the cons of buying ITM CE for long term for next 2-3 months, considering time decay works against CE unlike PE ?
If your target is June, then you can buy a slightlt ATM option since there is a lot of time value Mayank. Why deep ITM?
If tomorrow the Nifty Bank Index falls, then we get to CE or PE
Yeah, even if it increases you can get 🙂
Can i do option trading in a daily basis (intraday). I it possibly, how? What is the logic or process behind this?
Yes, you can. Logic is based on your own thinking about the market 🙂
Hello Mr.Karthik,admiring your great work,in sharing vast informations, updates, Stock related datas from A to Z in your Varsity Modules.You are doing a great work for zerodha.Being associated with Zerodha in the last 5 years, what i admire the most is you ppl are Educating public to make money rather than conventional brokers who does the opposite.Great work, feeling happy to b a part of zerodha’s family!!!!
Thanks for the kind words, Siraj! I’m glad that you liked the content on Varsity. I hope you continue to like it 🙂
Hi Mr. Karthik,
On 28.05.2021 I bought NIFTY2160315450CE, Qty. 75, Buy Avg. 100.9, Buy value: 7,567.5, Sell Avg. 107.9, Sell value: 8,092.5. So my net P&L is Rs. 525 and realised P&L is Rs. 464.
In my contract note and in my Zerodha account I could see I received the realised P&L only. What about my total premium of Rs. 7567.5 (which is also the Buy value)? Will I receive that buy value in my account or I lost it already?
Please clarify.
Pradip, I’d suggest you speak to the support desk about this.
Please note that the expiry of this contract is on 03.06.2021. I bought it and squared it off on the same day 28.05.2021. This was my first trade in options and so very confused. Unless this fact is clear, I’m unable to take further trades in options.
Thank you!
Karthik,
I spoke with support desk, but they did not give any clear answer. In my account I received only the profit amount of Rs. 464. But what happened to my total premium of Rs. 7567.5?
When will I receive this amount? The support desk told me that I have received the profit amount. That I already know. Why is no one giving a proper answer?
It should be in your account the same day. I don’t know if you had any other open position. Hence its important to speak to support or create a ticket for this.
I understood the concept of the call option and I have a quick question.
By buying a call option with the strike price way beyond the current price, one can always profit, right? For example, the NIFTY is at 15650 as of today. I am going to buy a call option of 14500 for next week’s expiry. Considering only one week’s time there is a very very high chance of the market not going down below it. So the probability of me making a profit is very high. Maybe the premium might be more, but the probability of making a profit is very high.
Why not everyone follows the same strategy and makes consistent profits? Am I missing some concept here? Please let me know.
Manoj, there is nothing like always profit in the market. Your profitability depends on the premium you buy at and the premium you sell at.
Dear Karthik Rangappa,
Thank you for the lucid explanation with examples. It is amply clear now. But one comment. In you key take aways form this chapter the point no.5.
The left of the equation would have been P&L rather than IV. am I right.?
Thats right, my bad 🙂
Hi Karthik,
Like futures can option be sold before expiration date. I read somewhere in the above article that it can only be sold on expiry date..
Yes, you can sell it anytime before the expiry.
Kotak bank 21 june 1840 ce at 49.35. At the end of expiry does it mean that the break even point should be 1889.35?? I mean to ask that to stay at no profit no loss at the end of expiry the spot value should be 1889.35??
Should breakeven point be considered while buying a call option even if we have a short term target??
Thats right, your profits will increase only after strike + premium.
To continue on my query…why will a spot price of 1889.35 at the end of expiry not give me profits and rather become my break even point??
Because your breakeven is at strike + premium.
Hi Karthik, your articles are to lucid to escape any doubt. still our mind can have foolish issues. I have read most of your articles and cleared my queries, your articles are like reference guide. My query is, how will be the P&L for a call option buyer, at say 5 strike ITM? for example, if reliance is 2200 spot now, and i buy 2100ce, how would be loss if spot goes down at 2100?
It will be tough to get the SL here Sandeep since there is also a component of time, so based on the time left to expiry, the premium varies and based on which your P&L will vary.
Why more money is required to buy equity options?
To buy options, you only need to pay the necessary premium. No margins required.
I bought NIFTY JUN 15750 CE at 30.50 and sold it at 42.50. The lot size is 300. I made a profit of 3600 . My buy value is 9150 and sell value is 12750. I’m not able to see the profits in my funds section. What should I do?
Did you have other trades? Please call the support desk for this.
I appreciate the effort that’s put into creating this good tutorial. However repetitive reference to Futures (some other tutorial) sticks out like a sore thumb. Why do you have to do that? This reference has zero value actually, doesn’t add anything to the current tutorial, instead only confuses someone who hasn’t gone through that tutorial yet.
Thanks for the feedback Ravi. The idea is that the person reading this follows a sequential approach of learning Futures first and then jumps to options, considering that Futures is easy to learn.
Dear Sir
I bought Jindal Steel CE 430 of 29 July expiry at a premium of 4 and sell it if it reaches 5, am I making a profit of 1*2500=2500 or losing RS 10000 I,e 4*2500 as the said stock is trading at 397
You bought at 4 and sold at 5, so you make a profit of 1.
In one word ,simply outstanding clarification of the Call by Karthik.I personally want to meet him and want to request him to be my teacher for option and sharemarket understanding because his knowledge is very high and i am a big fan of it.
Karthik sir,if you have your email id please share with me so that i can be in touch with you for my queries regarding option jargons.
The service provided by varsity and especially by Karthik sir is simply outstanding. Five Star rating from me.
Thanks for the kind words, Rupesh. I’m glad you liked the content. I’m fairly active on Varsity. So whatever your queries, please post here. I will try and resolve it here itself. Thanks.
Sir, If I buy suppose irctc 2000 ce and sell after half n hour and I want to buy it again on same day after 1 hour, is it possible?
Yes, that’s possible Yogesh.
Dear bro.
I purchased NAM INDIA 425 C.E july expiry at price 8.5 rs.
2 times i missed to book profit as i forgot to place GTT SELL ORDER.
Now the stock is moving somewhere 398 rs and my premium has gone down to 2.15 rs from 8.50 rs.
9 days lefts for expiry.
Should i wait till expiry.
Or what?
Thanks.
Its simple Kaushal, if you are still bullish and expect NAM to move higher than 425, over the next 5 days, then stay put, else there is no need to hold the option.
I know that karthik.
I am looking for the probability of increase in premium if NAM INDIA stock moves up.
What if it reaches the level 415 rs, 420 rs, And even 425 rs (Which is my strike price) ???
Can i calculate or atleast estimate the increase in premium with increase in Stock price(Spot price) to above mentioned different levels ???
I am a beginner in options trading. In my first 2 trade i made handsome profit just on the basis of checking VOLUME, VOLATALITY, O.I, AND, 20 DEPTH.
I have been reading your articles for past few days after checking and searching through many other sources available online.
Your way of explaining things is awesome. Its very simple and at the time Very Unique. I am making hand written notes of some important topics.
Thanks.
Kaushal, the stock is OTM. YOu can do a few things if you still feel bullish about the stock –
1) Sell OTM Puts (although I’m not a fan of selling puts)
2) Sell 425 CE and buy 400 CE
3) Buy futures
Hi,
I had bought a lalpath labs 2700ce(itm) at 190 of 250 quantity. Cmp was at 2800 levels. A friend had bought 2900ce at premium 97. I calculated breakeven to be 2700+190. Friend’s breakeven should be 2900+97. Cmp at 2888. He claims to have made a profit by selling at 147 bought at 97.
So breakeven doesn’t matter? What am I missing?
You would be relieving me off a tremendous headache if you could answer.
Thank you.
There are two things, Thulasi –
1) Holding on to the options till expiry and exercising it
2) Trading the premiums actively
Breakeven comes to the picture when you intend to hold the option expiry. But before expiry, you can actively buy and sell the options. Your P&L depends on what price you buy and sell the option (like your friend did).
Sir,
I brought 4000 lot of usdinr 73.5pe 6th August at 0.0025 on 3rd August what happens if I failed to sell those before expiry and is it in the money or out of the money how much I can get back
It depends on the settlement price of USDINR. If its OTM, the option will expire worthless.
How many times can i buy a call option for one strike price in a day
As many times as you’d want.
can the premium increase for the same strike price, after i have brot it ?
Yes, it can.
I have a doubt regarding trading options intraday.If I have 50k rupees in my trading account,how many times can I trade nifty options of the same and different strike prices with the same amount.Will there be any margin penalty for the above situations?
You can trade the strikes as many times as you wish. No restriction on that.
Karthik Sir, Good morning. Need a clarification.
1. There is lot of confusion among option traders regarding whether we have to consider the spot price or future price while calculating the Intrinsic value. Suppose I want to check the time value for a given strike say 16700 of Nifty fifty which is ITM for PUT. I am considering Nifty 50 Spot. This helps me to check whether the time value on 16700PE ITM PUT is more or Time value on 16700CE OTM Call is more. Using this info I will decide whether to write call or put. Requesting you to kindly clarify please sir. In your write up you have mentioned that to calculate Intrinsic value we have to consider Sot price.
Warm regards.
Premakumar Kootagal Sanjeevaiah
Since index spot is not traded, you can consider Index futures as reference. For stocks, you can consider the spot.
how to buy 16700 ce 30 sep expiry
Please check the marketwatch, load the scrip, and hit the buy button.
Sir if I buy Nifty sep 18000 CE at 15 and hold it
1.When will it expire?
3. Do I have to pay premium everyday till the expiry?
3. If I make a profit on or before expiry will my profit include all my premium I had paid?
1) On the expiry date i.e. the last Thursday of the month
2) No, the premium is paid only once, i.e. at the time of buying
3) Yes.For example, you can buy an option at 20 and sell it at 25 before expiry.
For a retail investors buying CE or PE is better than selling because in Selling option he may lose all the money.
Question no 1 : if somebody incurred a loss of 1 lakh in selling options but he has only 2000 Rs in Zerodha account so how Zerodha will recover the money from customer.
Question no 2 In option trading which one is better intradey or delivery.
Question no 3 why 90% retails investor (including myself) regularly incurring loss in trading. I am alive in market because 90% of total amount I have invested in top 6 companies of NIFTY 50 with BUY on Dip strategy.
Question no 4
Why it is too much complicated that a science doctorate with mathematics background is unable to snatch profits. It means it is only an organized loot by big investors.
1) The max loss allowed from the risk management system will be 2000. But there will be situations (when markets move rapidly) where the loss will be higher than the margins, this is the risk that the broker will have to manage. Eventually, the client is liable to pay the broker.
2) I personally prefer delivery
3) Most option traders enter the market without fully understanding the risk, hence.
4) Human emotions is beyond a science doctorate 🙂
THANKS Karthik for such details document with example.
I have a query-
If Bank Nifty’s sopt price 37000 and I buy call @ strike price 36500 and on expiry spot price goes to 36700 then what will be the P&L?
Then the option is ITM with 200 intrinsic value. Your profit will be 200 * number of lots * lot size.
Thanks Karthik, for making it clear.
Happy trading, Rupali.
i wanted to ask how can i buy next week’s option on the present day, like i know the literal way of doing it, wanted to know which options among overnight or nrml , ioc etc to choose.
If I buy WIPRO OCT 640 CE @29 (1 Lot 1600)Today and sell @30 on today or Tomorrow, so my profit is 1600
Q1) Here I will get 1600 profit and there is no obligation before expiry of Oct month cycle right?
Q2) My amount will reflect after T+2 right?
Q3) Can I sell option first and buy later in intraday?
Q4) Is there any other obligation in that question scenario?
1) Yes, thats right
2) On T+1
3) Yes, you can
4) No obligation.
If I took overnight position : Ex: WIPRO OCT 640 CE for 1 lot, I can sell before oct 28th ? or after also?
Is this monthly one, how to identify weekly one?
Yes, you can sell anytime on or before the expiry.
Hello Karthik,
I bought 1 lot of HDFC 740 ce at 20.15 ,lot size 1100.Currently the spot price is 709 and the value of my call is now 8.90.
i have a few questions:-
1.what if the spot stays at the same place at the time of expiry,will i lose my total capital of 20.15×1100?
2. In order to get breakeven,how much should my spot price of the stock move now so that i breakeven at 20.15?
3.when i bought the call at 20.15 ,the spot price was 735.so will it mean that if the spot price right now goes to 735,i will break even again?
sir,i find it confusing to understand how premiums behave and what value will they be later.how understand what their value will remain?
1) Yes, assuming you hold the position to expiry
2) Strike + premium
3) Yes, that’s possible considering there is enough time to expiry
Premiums are a function of many things, Ajit. You need to spend time observing the markets and eventually, you will figure this out 🙂
Current HDFC spot price in market is 2814. I think the stock price will go up and want to buy a call option.
What is better/difference between the below two options.
1) 2850 CE at a premium price of 37.75
2)2900 CE at a premium price of 24.6
So if the stock price goes up as i expected the premiums also goes up in above two CE option.
So taking 2900 CE option is better as the premium is less than taking a 2850 CE?
please confirm if my understanding is correct.
Yes, usually the call option premium increases when the stock price increases. The extent to which the premium will move up depends on the extent to which the stock price moves.
The rate of increase of premium will be same for both 2850CE and 2900CE???
Again, that depends on the time to expiry.
If I buy WIPRO NOV 800CE on Today (Any date in October), Is it valid until November 25th(Next month) last week Thursday?
Yes, provided you buy the November series expiry.
Can I buy November 2021 CE or PE Option in October and sell in October itself if I get profit, so in this case no obligation to me after selling in October itself?
Yes, you can do that. No obligation after you square off the position.
This contract will be physically settled on expiry if it turns ITM and requires additional physical delivery margins. You can trade the next expiry if you wish to avoid this.
When I am buying WIPRO OCT 700CE @2 Rs of 1 lot (1600), I am getting above message, but maximum my loss will only 1600*2 =3200 even it go zero or 28th Oct month expiry day if I am not squared of right? what is that mean physically settled means, do i need to purchase 1600 shares at 700 rupees?
When you are long CE, physical delivery obligation mandates you to take delivery of the stock. This means you need to have sufficient margins in the account to buy the stock.
in that above case: If I squared of before 28th Oct (month Expiry) may be around 26th with loss of 1 rupee, then I will born only that loss , so no other physical delivery on expiry right?
Thats right, no physical delivery.
Hello
Is it possible in Nifty option with zerodha
If Nifty 18000 CE is trading at say 120rs and it’s going side ways ,so I have to buy this call option at 135rs ,how to place order in that case , please help
A regular limit buy order, right?
If I buy nifty Nov 18000 CE or PE, Overnight position?
1) What will happen if I didn’t close the position before month expiry?
2) What will happen it goes zero or minus? my liability only that amount which initially paid for that Lot?
1) The position will be settled by the broker upon expiry at the settlement price
2) Minus won’t happen as option prices cant go below 0. But if its zero, then the option is worthless and you will lose the premium paid.
if I buy CE or PE contract overnight position and want to sell on same day?
1) Do I need to convert to Intraday?
2) or directly click exit and give sell price?
3) What is the process to convert intraday to overnight? Is there any varsity material links on this?
1) No
2) Click exit and square off
3) YOu can check this – https://support.zerodha.com/category/trading-and-markets/margin-leverage-and-product-and-order-types/articles/how-to-convert-mis-to-cnc-nrml-and-vice-versa
Hi Karthik, Please can you clarify,
1) When Physical delivery is mandatory in options? Is there any details in Zerodha?
2) Bank Nifty and Nifty has Physical delivery after expiry?
Thanks
1) You can check this – https://zerodha.com/varsity/chapter/quick-note-on-physical-settlement/
2) No, indices are cash settled.
Hi Sir, you’d mentioned that the Profits rise exponentially above the BE point. However, it seems to be a linear increase as seen in the graph.
Is ‘exponentially’ just a phrase to indicate rising profits or do profits actually rise exponentially (y=a^x)?
I think the word exponential should not have been used. You are right 🙂
I would like to know how to trade in F&O on Zerodha platform (laptop or mobile). What is the step to invest. I don’t find any option of doing that
Sitesh, I’d suggest you call the support desk, they will guide you with this.
I have Infosys shares at 2300 per share, and I sell it 2400 for 100 rupees profit , and same day it went to 2350 again, so can I buy again using position tab to get the 50 rupees profit instead of 100 and keep the same shares? if yes, so i Need to maintain any money in my account to close the position in that scenario?
The sell and buy trade that you do will be treated as an intraday trade. The shares will remain intact in your demat. No need for extra money.
How can we match the nifty strike price chart with nifty chart?
Sorry, dint get that query. Can you add more context, please?
Hello sir, hope you’re doing well. I am an options beginner with zerodha and my query is regarding placing orders. When I place market orders, it tends to get filled away from my desired price and when the difference gets multiplied by the lot size, we lose a significant amount just getting in and out of the trade. To help this I use limit orders but during gap ups or gap down openings, my orders usually don’t go through. Are there any alternatives to this or a better solution to my problem? Your two cents about the same would really be appreciated.
Thanks and regards,
Sharon.
Limit order helps you with slippage, but there is nothing much you can do to prevent from gap opening risk. One thing that helps is having a spread position instead of naked positions.
Hi sir,
I have question regarding options buying. I am bullish on nifty, if I buy 17200CE @ 154rs. Theoretically my breakeven point is 17354, if nifty went above of 17354 then only I make profit but practically when we buy option and in few minutes if nifty move to 17250 then after also I started making profit. Why this happens??
There is any differences in theory and practical??
It depends on how long you keep a trade. Check this chapter – https://zerodha.com/varsity/chapter/options-m2m-and-pl/
i buyed call option for nifty 17200 dec 2021 on expiry of 2 lots at 6.20 but as badluck it went to 3.5 and when i was trying to exit it was asking their should be margin of 180000 in account that i didnt got can anyone please explain me
I guess you had a few other open positions Sushant, that’s why.
Sir, I wanted to buy a call option for intraday how should I buy and sell in a day
And is there any call options within 10k rupees
Buying and selling is easy. Click and buy/sell just like the way you trade stocks. Which option etc, I won’t be able to help 🙂
Exercising an option is only on the day of expiry. What does it mean. Suppose we bought and sold any CE before expiry then what does it mean exercising an option is only on the day of expiry. Is any thing us required to do on expiry date if option already bought and sold before this expiry date.
Exercising the option is different from selling the option. I’d suggest you read this – https://zerodha.com/varsity/chapter/options-m2m-and-pl/
For buying nifty50 option, how the expiry date and strike price to be determined? Also how to determined the price at which it is to be sold. I am new to trading and also to zerodha and will appreciate it very much if you kindly advice in detail through my mail id.
Swarnali, this depends on your expectation. Based on your view of the market you can select the strike and expiry series.
Hi Karthik
I bought a lot (25 ) banknifty strike price is 38300 at premium 237.5 and sell at spot price 38440 at premium 350 .
how much profit I have made & it’s right thing to do can i sell when my premium price is up from my brought price.
Anshu, the profit is the difference between the buy and sell premium price multiplied by lot size minus charges applicable.
Hi Sir,
If I bought IEX Jan 320CE and before expiry it become 0.05
1) In this case I will loose all the money right?
2) In which case it will become zero? Please suggest all the scenarios, so that many traders will get the benfit.
3) when we need to take physicals delivery?
Please can you help on these queries in detail,
Thank you so much you help always
Kavitha
1) Yes, since the option is worthless
2) The option is worthless, so you lose the entire premium paid
3) Only if the option is in the money.
Only if the option is in the money.then need to take physical delivery?
When I took it is otm, but came in itm category, in this case I sell my position, so no physical delivery?
If i didn’t sell since it is zero, still need to take physical delivery even though I took otm and closednin itm?
Kavitha, upon expiry, if the option is ITM, then it attracts physical delivery. Not otherwise.
I took NIIT Share 10 days back with price 490 and to day I sell it for 507 in the morning, later that share went 489 or 491 range, in this case what is the steps need to follow to close the positions?
1) Is it just exit from position with giving desired price to buy?
or
2) do i need to convert position or any other steps need to follow?
Nikhil, yes when you click on exit, your position will be closed (provided the order has gone through the exchange).
If I am in the money on expiry day for a call option I bought and I don’t close my position with a profit, will I be forced to buy the whole of the underlying stick which can run into lakhs. Or zerodha automatically squares it before the eod?
Yes, if it’s a stock option then your position will have to go through the physical settlement. Check this – https://zerodha.com/varsity/chapter/quick-note-on-physical-settlement-2/
At two places in the article, you mention that the profit increases exponentially. The profit actually increases linearly.
Yup, ‘exponentially’ is the wrong choice of word I suppose.
Hello Karthik sir, Thank You for this great content.!!
Happy learning!
Hi Karthik, I was hoping you could help me with a few silly questions and am thanking you beforehand for taking up your time on a Sunday Night.
1. Reliance Spot closing @2478-21stJan(Friday)_Expiry27thJan. Assuming my speculative view is Bearish:
2500PE BuyRate@51 (250qty) should be 51*250=12750 but the premium calculated in KITE terminal says 37290 as Margin Required for
the given strike.
(Also, In the Buy Order window-2500PE “Margin Required” here implies Premium to be paid since it is an Option Buy correct and not an
Option Sell?)
2.Physical Settlement applies only for stocks and not indices UPON EXPIRY of an ITM Call/Put (Option Buy/Sell) and Stock Futures.
Now UPON EXPIRY here “PRECISELY” means @ 3.30pm on Thursday27thJan or is it 3.20pm, since Thursday27th is an Expiry Day from
9.15am to 3.30pm market time.
3.What I mean to understand is,
Assumption – If I trade the premiums of the current expiry Intraday on either Monday24/Tuesday25/Thursday27-Expiry day itself,
then even though if I choose to trade the premium of an ITM Strike and close the trade before 3pm or 3.20pm on either of the days
including the ExpiryDay27thJAN mentioned above before 3.20pm then will that lead me to a physical delivery obligation since the strike
being chosen to trade is ITM.
4.In layman’s term Trading the Premium means buying @50 and selling @60 and profiting the 10 points difference on either Call/Put
Option Buy be it 15 seconds from placing a Buy Trade or 15 minutes or even after a day.
So in Trading the Premium, the concept of Strike+PremiumPaid for a Call Buy and Stike-PremiumPaid for a Put Buy to arrive at profit or
loss scenario does not apply as that is true if the bet is held till the contract expires on the last minute of the Expiry day. But if I am
Trading the Premium then immediately(say right after 5 seconds of placing an Option Buy Order I can exit it even at a 1-2 point
profit/loss. Please help me in understanding this part if I misunderstood the concept.
Best Regards,
Siddharth
1) That’s right Siddharth. The additional margins is for physical delivery. You must have got a nudge saying so right? More on that here – https://zerodha.com/varsity/chapter/quick-note-on-physical-settlement/. Yes, the margin required means the premium payable to the seller.
2) It means the settlement price on the expiry day. The settlement price is the weighted average of the last 30 mins price. Yes, physical settlement is only for stocks, not indices
3) No, physical delivery is applicable only if you hold the position to expiry. Not if you close before that. Even if you close at 3:25PM on expiry day, no physical settlement for you.
4) That is right. More on this, in this chapter – https://zerodha.com/varsity/chapter/options-m2m-and-pl/
Hi Sir,
1) if I buy Nifty Feb or March CE or PE contracts in This month January, then expiry is feb last Thursday (for Feb) and march last Thursday (for March) only right, Those Feb and march Nifty options will not expiry in January and continue in respective month and expiry in that month only right? I am I correct
2) If I buy Nifty Jan 17400 CE at 100 for 1 Lot (that is 50*100=5000) and not closed this Thursday, so it will settled on last traded price on Thursday (Loss or Profit) and no need to pay anything again right?
Thanks
Venu
1) Thats correct Venu, the expiry of the series is always in that month only.
2) It will be settled on the basis of the settlement price on the expiry day. The settlement price is the average of the last 30 mins of trading on the expiry day.
Sir,
I took one Lot Nifty options at 200 Rupees and now it is trading at 350 Rupees.
1) Can I create GTT with Stop loss 360 Rupees (more than bought price ) and target Price 500 Rupees?
2) Second question is can I change stop loss always more than bought price and more than present trading price?
Thanks
Venkat
1) Yes, but please make sure the price is within the price range – https://support.zerodha.com/category/trading-and-markets/trading-faqs/f-otrading/articles/what-is-f-o-execution-range-and-why-do-some-open-orders-outside-f-o-execution-range-get-cancelled
2) Yup
I bought Nifty CE 18000 @ 150/- premium. on expiry nifty was 18300. but due some problem i could not sell the contract before expiry. now will i loose all premium paid or i get automatically 300 X lot into my account so that i get profit of 150x lot. will the exchange close automaticaly and credit the amount
Thanks in advance
Regards
That’s right. This option is worth 300 upon expiry, so you will get 300xlotsize.
Thank you for your reply to my previous querry.
would like to have you view on whether it is good to buy same strike price contract when premium reduces instead of raise after some time lapse to average out. that is to reduce average premium paid for two contracts so that chance of going to profit increases
You can, as long as you are convinced about the direction. I’d personally prefer to trade another strike, maybe closer to the ATM.
does the concept of breakeven point apply if you don’t hold the option till the expiry date? if you sell your option before the expiry do you get your premium back?
No, it does not. When you trade before expiry, what matters is the difference between the buy and sell price of the premium.
Superb….. Excellent examples for easily understanding…. Thank you thank you so much
Happy learning!
Sir please guide me in option Buying and selling of stock on expiry day
E.g if on expiry day(as premiums low on expiry day) I bought SBIN CE strike price of 520 at premium of Rs 2(CMP is 510) so as day goes the when premium goes to 8 as stock price increases to 522. So my question is Can I exit the position at anytime before market close and book profit or I can’t as option is ITM? Please guide. Same applicable in case of loss?
Yes Satish, you can book profits (or losses) anytime during the expiry. No need to wait till expiry.
Hi Sir,
If I brought Bank Nifty or Nifty or WIPRO CE contract with Overnight (NRML), Options Intraday will close at 3-25PM Right?
Can I sell options contract on same day between 3-25PM to 3-30PM which took as Overnight? or I must close before 3-25PM?
Thanks
Venu
You can, but I don’t think you’ll make anything at that point.
I would like to understand the procedure of selecting the strike price for ce & pe in regards to nifty and bank nifty, how does one determine which price should be selected
Mansoor, I’ve discussed this in the chapter itself, right? Request you to please check the chapter again.
What if I have bought a call option of certain stock at any target price (suppose 100) and during the expiry day I’ve to sell my call and stock hasn’t reach 100 (as I assumed) also no buyer is available then what should I do? How can I sell my options call ?
Please suggest.
In that case, the option is considered worthless and hence no physical settlement.
Hi Karthik, Thank you for helping me with my previous query dated 23rd-Jan-2022.
I need your help and expertise to understand something related to trade execution, large quantity option buying of near atm strikes(+/- 3 atm strikes with good volume) and associated slippages.
1. Assuming on 14th-Feb-2022 @ 11.15 am I had a speculative bias towards the downside in Bank Nifty- BNF Spot-37456 @ 11.15 am.
Around 11.21 if I had decided to Buy 37500 PE @ 490 “with the volume for that particular strike at the particular time being 5Lakh+”
trades then would I be able to punch an order of 6000 quantity (1200*5) and be sure of getting my PE BUY Order filled instantly with
the least slippage since the overall traded volume stands quite high. (6000 Buy Order < 5 Lakh Traded Volume so order fill at the
desired price should perhaps not be a problem right?)
What would be the average slippage in this situation and in general while trading a near atm strike or +/- 3 atm strikes in Bank Nifty.
2. Assume my plan was to enter 37500 PE BUY @ 490 around 11.21 am-hold for 20/30points i.e. 510/520 and square it off. This particular
trade closed @ 530 around 11.30. So what are my chances of punching a 6000 quantity size and making a 20+ points profit
minus the slippage and all the other charges combined.
Is it possible or will the cost and slippage eat away the 20 points gain more or less. (i.e. will the cost of trades like these in general
outweigh the profits made?)
2. Since Nifty and Bank Nifty are quite liquid and the near atm strikes carry decent trading volumes then does an order size of
6000-12000 quantity in Bank Nifty and 18000+ quantity in Nifty be filled instantly and not incur vast slippages that I may have
otherwise not factored in or misunderstood.
Please do provide your insights into this as it is much needed and kindly do correct me if I am misunderstanding or missing something.
Best Regards,
Siddharth
1) There are quantity restrictions on a per order basis. But I’d suggest you use this instead – https://support.zerodha.com/category/console/portfolio/holdings/articles/what-is-a-sticky-order-window-in-kite-and-how-can-i-use-it
2) Its possible to lose 20 points via slippage, you need to be careful with order execution. You can easily overcome this by placing sticky window + limit orders. Check this – https://support.zerodha.com/category/trading-and-markets/margin-leverage-and-product-and-order-types/articles/what-are-limit-and-market-orders (the last part of the article).
3) Both these contracts are liquid, you may get fills soon.
Hi sir, can a option buyer and seller can close their position before expiry date. their is any obligation.
Yes, they can. No need to wait for expiry.
Dear Karthick, First thanks a lot this excellent blog and illustration, really enjoying learning about options and thanks a lot for this amazing work .
I’ve the below silly question help me that my understanding is correct or not
For example Assume TCS Spot at Rs.1000 and I’m buying the call option 1500 CE at the premium of Rs.10
Its is 500 point away from the spot price and Also, I’m buying and squaring off on the same day
say I bought at morning at the premium of Rs.10 and on afternoon the premium was Rs.15 and I squared of that position
So, my profit would be the premium difference
And also breakeven point is not considered if we are selling on the same day right ?
My doubt is how we are getting the profit here, I’m betting that stock will move above Rs.1500 but say as for today it moved Rs.1100
so I’ll get the profit for that 100 points as a premium difference ?
Thanks for your time.
Prabhu, in this case, you are only buying and selling the premium. As good as buying a stock at 10 and selling at 15.
Hi,
Can I buy and sell call option many times a day?
Thanks.
Yes, you can.
Let’s keep Strike price and spot aside and also the expiry.
I bought a call option @rs10 premium, lot size is 100, i paid 1000rs.
Now the premium is @ 12rs and I want to sell @12 what will be the profit?
You bought at 10 and sold at 12, so you make a profit of 2.
Sir i want count our profit and lose how
Hi I wanted to know if we buy 8600 PE at 15 ,75 quantity is the minimum required so how much I have to pay to get those shares and what ij case if it goes down to 5 rupees what will be the total loss .. can u pls reply on this as it will be really helpful
Its simple, the amount you have to pay while buying is lot size * premium, and while selling its again lot size * premium. YOu make a profit if you buy at low premium and sell at high premium, loss otherwise.
So I am confused a bit here, as a option buyer is my profit calculated on increase and decrease of my premium prices or increase and decrease of actual underlying stock.
Its the increase/decrease in premium. But the premium itself changes based on the changes in the spot.
Thanks a lot
If suppose i paid a premium for a particular stock for a particular strike price as 20 and if the premium goes to 16 and I excerised the option , so will my loss be 20(the premium paid)+4(loss)=24 ?
You will lose the difference between the buy and sell premium i.e.20-16 = 4.
sir i want to ask that if the CMP is 2030 and we bought the call option of the strike price of 2050. if CMP goes to 2040 we still can make profit? as options premium increases with the respect of CMP.
Yes, you will most likely make a profit, but not guaranteed. For example, if its too close to expiry then you wont.
Sir, can option buyer (both call & put buyer) exit their positions before expiry date (in case of intraday, weekly & monthly)?
Yes, they can.
Hello Karthik,
If we buy call option higher than the spot price. Then what would be my profit
case 1 :- before expiry :
if the spot price is more than strike price as well as premium also increased by certain amount, after selling the call option?
case 2 :- after expiry
again, if the spot price is more than strike price as well as premium also increased by certain amount?
case 3 :- after expiry
if the spot price is less than strike price and premium increased by certain amount?
Anupam, the easiest way to think about it is by calculating the intrinsic value of an option. After expiry, in the option has an intrinsic value, then the premium = intrinsic value. Else it will be zero.
If i buy call option in normal order can i sell on dame day if
Yes, you can.
Just to be mathematically correct, profits start to increase linearly after spot price moves above strike price – not exponentially
Thats right, Prashanth.
Hello sir,
What happens if I bought a stock call option and next day it gets split?
The option gets adjusted so you wont have any drastic P&L.
Sir kindly tell me simple calculation for profit or loss when I buy a nifty call option or put option and sell before expiry and before it reaches strike price
Exp.
1) buy nifty 16000 call option at premium 80 (1 lot of 50 )and sell when spot price is 15900 and premium price is 85 before expiry day
Think of it as buying and selling a stock. So the P&L is the difference between the buy and sell price of the option premium. In this case, it is 5.
For ex . If I bought reliance option in the first week of June in respect that price will rise but it reverse price get down .
So here I want to know that till what period I can hold option of reliance ?
You can hold till June expiry.
Means Thursday of last week of June.
Should be ok.
Sir, Simply amazing and really appreciate the efforts you are putting in. Really getting to understand the concept of Option unlike seeing numerous youtubers. I feel like I am gaining the content which is priceless. Your explanation and specially question and answer section really provides better clarity regarding concept discussing in the theory, open new horizons of knowledge regarding the topic and real life example is a gem.
Thanks for the kind words, Ajay. I hope you continue learning on Varsity 🙂
Sir, if I buy call of Same strike Price of 1 lot(50qty)for 6 times will my p&l multiply on the 6 th trade ie I mean to say on the 6 th trade will I face big loss of around 500 to 600 just after opening the trade. By multiply I mean will i face loss for 300 qty(1 lot bought 6 times). It happened to me in an app.. Does it happen in zerodha too
Loss happens only when the price moves against your expected direction, Arindam. The number of lots wont increase.
Hey! I’m not sure if you meant it technically or figuratively but you might want to correct the line where you say that the profits increase “exponentially”. P&L is a linear plot and varies “linearly”.
Thanks, Anurag. I will fix that.
Sir, If i bought any stock at a strike price of 100 CE with a premium of Rs.10. The stock traded at 85 and the spot price goes upto 95, premium also increased to 12. If I exit the contract before expiry what will be the profit or loss?
You will be in profit. In this case, a profit of Rs.2.
Sir If I bought Nifty50 at a strike price of 17300CE(50Lot) premium of ₹200 but stock goes against me and fall upto 16800,premium became ₹80.At that point i.e before expiry if I Exit this contract then what loss incurred? The whole premium or just (200-80)*50?
You will lose (200-80)*50, assuming you square off your position at 80.
Thanks for ur help Sir..🙂
Happy learning 🙂
What if I buy a call option and couldn’t sell it on the day of expiry, what would be my max loss in the case that the premium amount has goes down from x to 0.
In that case, you will lose the money paid as a premium, Sumit.
I bought any option and sold it at higher price.
Again when I want to buy at lower price it gets averaged buying Why.
That is because you are buying the same instrument multiple times. The buy average will change.
This gold was here in my backyard to learn options and i was roaming around 100s of YouTube videos and many paid tutorials 🙂
Thank you !
There is more on Youtube as well – https://www.youtube.com/playlist?list=PLX2SHiKfualFiusiT9G5uE9jU3vetvW2x
Happy learning 🙂
I bought NIFTY17900. CE . weekly options on Friday at a cost of Rs. 108 . On Monday can I sell on Rs. 120 even if NIFTY is rallying around 17800- 17850 .
Will I get back my premium amount that I paid or it’s not refundable.
Yes, you can square off your position, no need to wait to expiry.
Hi,
I have 2 query:
1. I have buy a put of 40500 with a premium of 380 on friday and sell the same at 425 with 45 Rs profit on premium. Can i gets profit or loss if the strike price even not touched break even point.
2. I have bought call of 40400 with a premium of 475 and sell it at 550 with a profit of 75 rs on premium. Can I get the profit or loss if the strike price even not touched break even point.
3. If we buy any ITM option call or put amd sell it at profit on premium on the same day can I get the profit or loss.
1) Yes, you can.
2) Yes, you can.
3) Yes, you can.
Please check this chapter – https://zerodha.com/varsity/chapter/options-m2m-and-pl/
As per the chart of Bajaj Auto in Chapter 3.2, I understood that the striking price should be Rs. 2026.90 and the chosen option price at Rs. 2050 by paying a premium of Rs. 6.35/=.
but you have mentioned the striking price of Rs. 2050 in all the calculations, which gets me confused.
Please clarify.
The strike price is 2050. 2062.9 must be the spot price.
Sir
Wow..! Just marvellous..!!
Appreciate. Not bothering for space you let us make understand these complexities as smoothly as possible.
Thank you Gentleman. May God bless you.
I cannot break mathematical barriers, you get 10 on 10.
Accept my regards please.
Thanks so much for the kind words, happy learning 🙂
Sir, you have said that options contracts are cash settled in India. so when the spot price is at 1990. the option buyer will suffer a loss of 60+6.35 premium paid right? so how is it only limited to the premium paid? clarify this
Krishan, please check the chpater on the physical settlement. Now only index options are cash settled, stock options are physically settled.
so sir you are saying that stock options the buyers loss is limited only up to premium price. but index options loss will include diff between underlying price and strike price along with premium loss, if underlying price is below the strike price
No, it is the same for all option buying. But I’m not sure if I understand your query fully.
hlo sir
my doubt is can the spot price decrease to any level till the risk is limited that is the premium.
example – strike price is at 8500 the spot decreases to 8000 till my risk is only the premium which i paid multiply by share lot.
Yes, thats how it works for call option buyers.
Can I buy VEDL DEC 300 CE at different time points …to average out the premium paid…just we do to average with stocks?
Yes, you can.
How do I calculate payoff diagram for two calls if both has different expiry ? is BS formula used in it ?
You can use Sensibull’s platform to visualize this, Bruce.
How do I calculate total payoff & breakeven in case I have two legs both with different expiry ?
Nikunj, please check Sensibull platform, they will give you the splitup.
if on 17th Nov 2022 i bought BAJAJ AUTO CMP 3647 call option at the strike price of 3600 @0.35/. for a lot size of 250, expiry date is 24th Nov 2022. if closing price on 24th Nov 2022 is 3900 then what will be my profit??
1.) is it Max[0, (3900-3600)]*250 = 75000( incl. premium paid)???
2.) If there is change in IV = 0 and premium charges are unchanged on expiry date then what will be the P&L?
1) Yes
2) 0
What if i bought a call option and there is no call option seller till the expiry date then what will happen to my order??? will i be in loss or it will be rejected by the system stating that no seller available.
The exchange will settle the contract for you.
Thanks for the insight. I want to understand how to calculate the open price of an option stike at 9:15AM. For e.g. if previous day Bank nifty (BNF) closed at 42500 and suppose the call option price of strike 42600 closed at 150. The other day in the morning, at close of pre market at 9:07 AM, BNF opens at 42600, then what will be the opening price of 42600 strike call option? How do we calculate this?
The opening price, and for that matter all prices in markets, are driven by the supply-demand factors. While you can predict if the opening will be positive or negative, it will be nearly impossible to predict the open price. Think about it, if you can predict the opening price, then you can predict pretty much every other price in the market right?
Suppose Yesterday ( Monday ) I have bought 1 Nifty CE / PE Lot
now ledger balance is NIL
Next day ( Tuesday ) I sell it out
Now Can I Buy back that Particular Nifty CE/ PE On The Same Day ( Tuesday )
OR
Any Other CE / PE Against The Square off trade Value ( Tuesday )
Yes, you can Nilay.
In which case premiums price up and down?
Is Premiums prices changes or it will fixed?
Premiums changes as and when the market condition changes.
I have made 4 Bank Nifty 43200 CE of 1 lot each at varying intervals during intraday trading sessions by first buying and then selling. Even though I have sold each one at a higher market price, I have eventually ended up in loss. Please explain?
I’m not sure about the details, but going by what you say, it could be the charges. Do check the charge list here – https://zerodha.com/charges/#tab-equities. Maybe you should call the support desk and enquire.
Hi
I buy a call
To exit the call
What is the margin
The amount required in the account
Example
I have 10k
I buy call ce
using 5k
Now I want to exit
More money is to be added to account.
There is no margin required to buy a call option, Rama. You only have to pay a premium for it.
sir how to decide stop loss and target in option buying, as we have to keep in delta, theta & volatility. Its easy to mark levels but how to figure out SL n target for option contracts.
For stoploss and target, I’d suggest you take the help of tools like Support & Resistance to identify these levels. Do apply these on the spot market and see what levels you get. Use that to setup trades in options.
Yes sir, suppose Bank nifty spot is at 42250, and i am planning a call buy of 42200CE or 42100CE (slight ITM , delta 50-55%), Target is 42350 and SL of 42150 which i marked on index chart or fut. Now that we know if the market goes up by 100 points the call premium will increase by 50(50% delta) and vice versa. So let’s say i had bought the call option at 100 rupees, should i keep SL at 50 and target at 150?
Yes, it’s good to have a SL. But the exact level you need to place a SL depends on your risk appetite.
sir,
I have a question, that if a person bought the call option at the extreme ‘In the money’ end with the highest premium and stock price does not fall below to that price, can he loss the money.
Yeah, the ITM option also has time value baked in, which the trader will lose on.
Hi Karthik,
I am really so confused about calculation of P&L of an option. what you have explained even everywhere I see same calculation i.e.
P&L = Max [0, (Spot Price – Strike Price)] – Premium Paid
but my experience in option buying is different, means that is not actual P&L i get when I trade in options.
for example-: I traded BANKNIFTY call option of Strike price of 42000
Buy BANKNIFTY CE 42000 at premium of 1123.50 on 1’st Feb during 12:45 candle (considering 5 mins chart). at this moment BANKNIFTY was trading at 41590.30.
In next 2 candles of 5 mins chart, BANKNIFTY was reached at 42011, but at the same time my options was reached at 1350.
So according to Formula P&L = Max [0, (Spot Price – Strike Price)] – Premium Paid my P&L should be as below,
Expected P&L = Max [0, (42011-42000)] – 1123.50…..-1112.5, which is actually loss.
but my P&L was in very good profit as below,
Actual P&L = 1350 (Option price at 1 PM) – 1123.50 (Buy price at 12:45 PM)……226.50, which is around 20% of profit.
So please clarify my this doubt, why option calculation is different in theory when actual movement is completely different.
Thanks,
Gaurav
Gaurav, please check this, hopefully it should address most of your concerns – https://zerodha.com/varsity/chapter/options-m2m-and-pl/
So,
IV = Spot Price – Strike Price
If we put values in that formula for:-
Spot Price= 2026.90 (highlighted in blue)
Strike Price= 2050.00 (highlighted in Red) then,
IV = 2026.90 – 2050.00
= -23.1
So, the answer is -23.1 as you said IV is non – negative number.
But in the Image it says IV is 25.01.
Please Explain it, how did happen?
IV is either a positive value of 0, as I;ve explained in the chapter. There cant be -ve IVs.
Sr in the above Option Chain that you have posted, how the Intrinsic Value of 25.1 is derived, one with the strike price of 2050 ?
As you said IV = Spot price(2026.90)-Strike Price(2050) so the value is coming in Negative.
Rohan, IV is either a positive value or 0. It cant be -ve.
Yeah I got that the IV cant be negative, my question is how that “25.1” is derived in that strike price of 2050 in Option Chain pic you have shared
Ah, ROhan, that IV in option chain refers to Implied Volatility. The IV we are talking about is intrinsic value 🙂
Ohhhhkay, I’m so sorry for that I didn’t knew, I thought both were same, but anyway, Thank you a LOT sir for explaining all this Technical Analysis and this Option series beautifully 🙂🙏
Happy learning, Rohan 🙂
Hi sir,
My question is I want to buy a script which is 17300 PE at market price which is 57.05 for which I required a margin approx 2875(50 lot size ) But when I am goin to sell that same script at same price it’s showing 98221 rupees. My question is why it’s showing such a big amount while sailing and why small amount while buying ? Kindly replay to this question sir .
I guess you have another position already?
After going long on a call option, can I put a target and stop loss at the same time, the way we do it in intraday…?
what happened before expiry my premium went 0 then strike price increase after 0 , will I get benifit?
No, the strike price won’t increase. Zero implies that the option has 0 intrinsic value.
Dear Sir,
P. clarify:
Example: I buy Nifty 18700 call for premium Rs 200 monthly expiry, when Nifty is at 18680 level. Is the latter is what is called as spot price at that time? Secondly, if Nifty goes up to 18720 and then premium goes up to Rs 220, am I not making Rs 20 profit X 50 (one lot) = Rs 1000? Or, is profit available only after Nifty spot prices goes up to the strike price of 18700 + 200 (premium paid) that is, 18900? If this is the case, then don’t you think chances of making profit are very less. Is it not better to sell for a small profit like mentioned above where premium goes up by Rs 20 and even though spot price is below the total of spot price + premium?
Yes, that is the spot price (18680). Yes, you can profit that 20 gain, provided you sell at 18720. Do check this chapter – https://zerodha.com/varsity/chapter/options-m2m-and-pl/
Hi Karthik,
I just started reading about “Options” on Varsity and the concepts are explained so wonderfully that I want to follow them as practice. However I read through an article in ET today and it seems the companies are slowing moving away from F&O. What are your thoughts please?
The article is – Exit from F&O segment could mean more upside for stocks
Read more at:
https://economictimes.indiatimes.com/markets/stocks/news/exit-from-fo-segment-could-mean-more-upside-for-stocks/articleshow/100950013.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst
Kamal, that article talks about a stock being listed under F&O segment and then exit from there. Nothing much from a trader’s point of view.
Hi Karthik sir,
First of all thank you for Responding to the query that I had in Technical Analysis on Twitter , few days back.
I have just completed reading Futures module on Varsity, now I am diving towards options.
I am currently reading the 2nd chapter (Basic Option Jargons).
In that section I found the sub topic “Exercising of an option contract”
I am having little confusion in that topic,
You wrote “Here is an important point to note – you can exercise the option only on the day of the expiry and not anytime before the expiry”
Here exercising refers to as an option buyer claiming my right to buy the asset at that price as per contract on expiry.
so if I buy a call option of Hindalco JUL 440 CE today by paying premium 12.70 rs with a lot size 1400 and the expiry is on 27th July. That means my break even price is 452.70 Rs. Now hindalco’s underlying price is 446.95. So if the underlying price increases , the premium for that will also increase.
My question is that :
If I purchase that Hindalco JUL 440 CE AT PREMIUM 12.70 Rs and next day Hindalco opens gap up at 449 rs. The premium will also increase , let’s say the premium becomes 14.70rs.
1) Can I square off that 440 CE position and book the profits, (14.70-12.70) = 2 Rs *1400 qty = 2800rs and The premium that I have paid 17,780 rs , will that be added with 2800rs (2800rs + 17,780)= 20,580(14.70*1400) Or I have the only option to square off the trade on the expiry day only if the price gets above the Break even.
Yes, you can square off the position anytime you wish 🙂
Do check this – https://zerodha.com/varsity/chapter/options-m2m-and-pl/
After reading this chapter numerous times and going through the comments. I am most likely to understand the concept of Stock options buying (choosing to buy at a specified price of yours ranging with the strike price, and taking delivery on expiry or let it go). But most traders I think they trade stock option premiums (Buy premium at low and sell it at high) , not stock options until expiry and taking delivery of it . If I am wrong with my thinking , please rectify me sir.
Thats right, most people end up trading options just for premium differentials.
Can I buy one option with two different premiums separately?
Like ITC jul410 CE one lot at 22 and one lot at 18.5
Yes, you can. Your average cost will come down to the average of 22 and 18.5.
Thank you Karthik Sir
Happy learning 🙂
If you were to buy call european of ashok leyland you’re certain that you’ll make a max loss of x amount if the market didn’t go up upon the expiry(last thursday of month).
But for sure you would have made profit if you bought stock and took long position as you’re certain it is a fundamentally strong company and any decline after your stock purchase would cancel out when market starts to rally(go up)?
So I was wondering why didn’t you buy stock delivery from that perspective?🤔
There is nothing called as certainty or for sure in market, they are all odds at play 😉
Hi,
How to map Nifty Fut price with CALL Options premium price on respective ATM Strike price? Is there any formula? Is there any way to correlate that day current Nifty Future Opening price with its ATM or ITM Strike price to map?
Ah, you will have to get the time series and plot it using some program. Or you can do a side by side comparision on chart layout. I’d suggest you call the support desk, our agent can explain this.
P&L = Max [0, (Spot Price – Strike Price)] – Premium Paid
Can You please Give an example on Nifty 50 using this formula,
I was calculating it but my answer were not satisfied
plz help me
Give me your example, will try and help you with that only. Also note, this formula is applicable for contracts upon expiry and not when its during the series.
First of all thank You so much for reply Sir ❤️💕
P&L = Max [0, (Spot Price – Strike Price)] – Premium Paid
I bUY 1 lot of NIFTY 50 PUT @40rs premium Paid
Spot price is 19000
Strike Price is 19050
As per Formula P&L = Max [0, (19000 – 19050)] – 40
[0, (-50)] – 40
What happened further idk please explain
Ahmad, here goes –
P&L = Max [0, 50]-40
= 50-40
=10.
Mistake is you are considering spot – strike, which is for call options. For put it is Strike – Spot.
Sir,
I am new to options…i uderstood that buying and selling options all are based on the premium only and trading options also based on premium only just like equities at market price, these strike prices and expiry dates are just factors effecting the premium….Please do correct me if I’m wrong
They are not just factors, but rather they are key parts of an options contract.
One question sir
if I buy a call option of a particular stock and the price of that stock goes up after a while and then if I decide to exit before expiry will I have to pay the complete premium even then
Sir here it is written you start making profit when the spot price is above breakeven point but I have recently made profit in oil 155ce Jan expiry and I have seen the spot price is lower than breakeven point can you explain where I am not understanding the things clearly
The Profit or Loss situation I’ve explained is assuming you hold the position to expiry. The P&L could be different based on when you sell before expiry.
If I buy 45900 PE at 225 and stock price is 45825 …and next day stock goes up …can 45900 PE price rise …?
Yes, the price will fluctuate based on the movement in the underlying.
Edit requested: The profits after breakeven point increase linearly not exponentially.
Makes sense 🙂
If I feel that Nifty will rise in next 2 months. Should I focus on premium or spot price ?
Will i benefit if spot price and premium value both increase?
You can buy in the spot, Darshan.
I want to buy Kotak bank mar 1950 CE at 1.85 whose 1 lot size is 400 how do I buy more than one lot of above ?
You just increase the quantity to two lots, thats it 🙂
Hi,
If we are settling the differential amount only, neither the seller nor buyer owns the underlying asset, then how does it work?
like in the case of a property seller owns the property till the buyer buys it and the ownership gets transferred, but here the same is not happening. What is the underlying mechanism here? As in the equity market when I buy a share I own it. It’s confusing me to my core.
regards
vaibhav
The way settlement works has changed. Share move from sellers to buyer’s demat account. Check this – https://zerodha.com/varsity/chapter/quick-note-on-physical-settlement-2/
if i buy delivery option of nifty 23000 of 6 june expiry at 1st june can i hold it till 6th june till it’s expiry ?
There is no physical delivery from Nifty. All index options are physically settled.
Hello Sir, if I make a profit of say Rs.1000 by squaring off my option before expiry, what would be the applicable charges to be paid and the net amount to me?
You can simulate all charges from here and figure how much exactly you will be charged – https://zerodha.com/brokerage-calculator/#tab-equities
Sir, I am planning to buy SBIN JUL 870 CE 1 LOT(750) @ 24. I understand that I need to pay the premium amount to enter into the trade. But I am confused about how much I need to pay while exiting the trade? Do I need to pay 870 (strike price) x 750 (qty of 1 lot) if I decide to go ahead with the buying?
Can you please explain with following example?
Considering that the stock price has gone to 900 and the trade is ITM and inside expiry. While exiting the trade how much will I need to pay?
Paresh, you only need to pay Premium * lot size, in this case 24*750 = 18000.
Sir,
Please clarify my doubt.
Now bank nifty at 51295.
The premium for bank nifty 48400 CE is at Rs.2350.
In this case IV value is 51295-48400 = 2895
So I buy this option and sell it instantly assuming no change in underlying bank nifty, then am I entitled to receive profit of Rs.2895-2350 = 545.
After deducting brokerage charges I will receive balance amount.
Am I right or missing anything here? Please clarify.
Yes, thats right Vignesh. Your profit or loss is the difference between the buy price and sell price minus the charges applicable.
Thank you for your response sir.
In that case, I see in option chain the price of premium is went down by -19.92%. can you please clarify what this implies?
It just means the premium for that particular option is down by 19.92%. Thats it.
Sir if BN 51500ce trading at 500.now i want to buy that option at 550 then simultaneously place the traget at 600 and stoploss at 500.is it possible to place these three orders at same time?
You can do it via SL by setting target and SL%. See in the GTT section.
Hii,
I have read this module carefully and as you mentioned above that IV in case of CALL option can be defined as Spot Price – Strike Price. But while building my option strategy i saw that IV value is showing different. It was not as per the above formula.
The Spot – Strike formula is as on expiry, not during the series. During the series, it will be [Spot-Strike]+Time value.
hello sir,
suppose any call option has been buyed on thursday for next week at premium of 10 rs and on the expiry thursday due to market volatility its price 20 rs, but till 3.25 pm i could not sell it, will it be exercised automatically and the profit be credited to account or entire premium which i paid will be lost during squareoff time..
Depends, if its stock option then there is a physical delivery and its cash settled if its an index option.
Can I buy a call option which has already crossed the strike price, and still the expiry is there for 15 days.
say for ex
CMP 780 current Premium: 18/unit
Strike price 750 (premium : 11/unit)
I am new to this field, kindly apologize if it is a wrong question.
Yes, you can. When you buy option, you need to justify as to which strike, what price, and what outcome you expect. As long as these are taken care off, it does not matter which strike you are buying.
as you have mentioned exponential profit if price increases from strike price, isnt that linear growth?