Module 5 Options Theory for Professional Trading

Chapter 1

Call Option Basics

483

1.1– Breaking the Ice

As with any of the previous modules in Varsity, we will again make the same old assumption that you are new to options and therefore know nothing about options. For this reason we will start from scratch and slowly ramp up as we proceed. Let us start with running through some basic background information.

The options market makes up for a significant part of the derivative market, particularly in India. I would not be exaggerating if I were to say that nearly 80% of the derivatives traded are options and the rest is attributable to the futures market. Internationally, the option market has been around for a while now, here is a quick background on the same –

  • Custom options were available as Over the Counter (OTC) since the 1920’s. These options were mainly on commodities
  • Options on equities began trading on the Chicago Board Options Exchange (CBOE) in 1972
  • Options on currencies and bonds began in late 1970s. These were again OTC trades
  • Exchange-traded options on currencies began on Philadelphia Stock Exchange in 1982
  • Interest rate options began trading on the CME in 1985

Clearly the international markets have evolved a great deal since the OTC days. However in India from the time of inception, the options market was facilitated by the exchanges. However options were available in the off market ‘Badla’ system. Think of the ‘badla system’ as a grey market for derivatives transactions. The badla system no longer exists, it has become obsolete. Here is a quick recap of the history of the Indian derivative markets –

  • June 12th 2000 – Index futures were launched
  • June 4th 2001 –Index options were launched
  • July 2nd 2001 – Stock options were launched
  • November 9th 2001 – Single stock futures were launched.

Though the options market has been around since 2001, the real liquidity in the Indian index options was seen only in 2006! I remember trading options around that time, the spreads were high and getting fills was a big deal. However in 2006, the Ambani brothers formally split up and their respective companies were listed as separate entities, thereby unlocking the value to the shareholders. In my opinion this particular corporate event triggered vibrancy in the Indian markets, creating some serious liquidity. However if you were to compare the liquidity in Indian stock options with the international markets, we still have a long way to catch up.

M5-Ch1-title

1.2 – A Special Agreement

There are two types of options – The Call option and the Put option. You can be a buyer or seller of these options. Based on what you choose to do, the P&L profile changes. Of course we will get into the P&L profile at a much later stage. For now, let us understand what “The Call Option” means. In fact the best way to understand the call option is to first deal with a tangible real world example, once we understand this example we will extrapolate the same to stock markets. So let’s get started.

Consider this situation; there are two good friends, Ajay and Venu. Ajay is actively evaluating an opportunity to buy 1 acre of land that Venu owns. The land is valued at Rs.500,000/-. Ajay has been informed that in the next 6 months, a new highway project is likely to be sanctioned near the land that Venu owns. If the highway indeed comes up, the valuation of the land is bound to increase and therefore Ajay would benefit from the investment he would make today. However if the ‘highway news’ turns out to be a rumor- which means Ajay buys the land from Venu today and there is no highway  tomorrow, then Ajay would be stuck with a useless piece of land!

So what should Ajay do? Clearly this situation has put Ajay in a dilemma as he is uncertain whether to buy the land from Venu or not. While Ajay is muddled in this thought, Venu is quite clear about selling the land if Ajay is willing to buy.

Ajay wants to play it safe, he thinks through the whole situation and finally proposes a special structured arrangement to Venu, which Ajay believes is a win-win for both of them, the details of the arrangement is as follows –

  1. Ajay pays an upfront fee of Rs.100,000/- today. Consider this as a non refundable agreement fees that Ajay pays
  2. Against this fees, Venu agrees to sell the land after 6 months to Ajay
  3. The price of the sale( which is expected 6 months later) is fixed today at Rs.500,000/-
  4. Because Ajay has paid an upfront fee, only he can call off the deal at the end of 6 months (if he wants to that is), Venu cannot
  5. In the event Ajay calls off the deal at the end of 6 months, Venu gets to keep the upfront fees

So what do you think about this special agreement? Who do you think is smarter here – Is it Ajay for proposing such a tricky agreement or Venu for accepting such an agreement? Well, the answer to these questions is not easy to answer, unless you analyze the details of the agreement thoroughly. I would suggest you read through the example carefully (it also forms the basis to understand options) – Ajay has plotted an extremely clever deal here! In fact this deal has many faces to it.

Let us break down Ajay’s proposal to understand some details –

  • By paying an agreement fee of Rs.100,000/-, Ajay is binding Venu into an obligation. He is forcing Venu to lock the land for him for the next 6 months
  • Ajay is fixing the sale price of the land based on today’s price i.e Rs.500,000/- which means irrespective of what the price would be 6 months later he gets to buy the land at today’s price. Do note, he is fixing a price and paying an additional Rs.100,000/- today
  • At the end of the 6 months, if Ajay does not want to buy the land he has the right to say ‘no’ to Venu, but since Venu has taken the agreement fee from Ajay, Venu will not be in a position to say no to Ajay
  • The agreement fee is non negotiable, non refundable

Now, after initiating this agreement both Ajay and Venu have to wait for the next 6 months to figure out what would actually happen. Clearly, the price of the land will vary based on the outcome of the ‘highway project’. However irrespective of what happens to the highway, there are only three possible outcomes –

  1. Once the highway project comes up, the price of the land would go up, say it shoots up to Rs.10,00,000/-
  2. The highway project does not come up, people are disappointed, the land price collapses, say to Rs.300,000/-
  3. Nothing happens, price stays flat at Rs.500,000/-

I’m certain there could be no other possible outcomes that can occur apart from the three mentioned above.

We will now step into Ajay’s shoes and think through what he would do in each of the above situations.

Scenario 1 – Price goes up to Rs.10,00,000/-

Since the highway project has come up as per Ajay’s expectation, the land price has also increased. Remember as per the agreement, Ajay has the right to call off the deal at the end of 6 months. Now, with the increase in the land price, do you think Ajay will call off the deal? Not really, because the dynamics of the sale are in Ajay’s favor –

Current Market price of the land = Rs.10,00,000/-

Sale agreement value = Rs.500,000/-

This means Ajay now enjoys the right to buy a piece of land at Rs.500,000/- when in the open market the same land is selling at a much higher value of – Rs.10,00,000/-. Clearly Ajay is making a steal deal here. Hence he would go ahead and demand Venu to  sell him the land. Venu is obligated to sell him the land at a lesser value, simply because he had accepted Rs.100,000/- agreement fees from Ajay 6 months earlier.

So how much money is Ajay making? Well, here is the math –

Buy Price = Rs.500,000/-

Add: Agreement Fees = Rs.100,000/- (remember this is a non refundable amount)

Total Expense = 500,000 + 100,000 = 600,000/-

Current Market of the land = Rs.10,00,000/-

Hence his profit is Rs.10,00,000 – Rs.600,000 = Rs.400,000/-

Another way to look at this is – For an initial cash commitment of Rs.100,000/- Ajay is now making 4 times the money! Venu even though very clearly knows that the value of the land is much higher in the open market, is forced to sell it at a much lower price to Ajay. The profit that Ajay makes (Rs.400,000/-) is exactly the notional loss that Venu would incur.

Scenario 2 – Price goes down to Rs.300,000/-

It turns out that the highway project was just a rumor, and nothing really is expected to come out of the whole thing. People are disappointed and hence there is a sudden rush to sell out the land. As a result, the price of the land goes down to Rs.300,000/-.

So what do you think Ajay will do now? Clearly it does not make sense to buy the land, hence he would walk away from the deal. Here is the math that explains why it does not make sense to buy the land –

Remember the sale price is fixed at Rs.500,000/-, 6 months ago. Hence if Ajay has to buy the land he has to shell out Rs.500,000/- plus he had paid Rs.100,000/- towards the agreement fees. Which means he is in effect paying Rs.600,000/- to buy a piece of land worth just Rs.300,000/-. Clearly this would not make sense to Ajay, since he has the right to call of the deal, he would simply walk away from it and would not buy the land. However do note, as per the agreement Ajay has to let go of Rs.100,000/-, which Venu gets to pocket.

Scenario 3 – Price stays at Rs.500,000/-

For whatever reasons after 6 months the price stays at Rs.500,000/- and does not really change. What do you think Ajay will do? Well, he will obviously walk away from the deal and would not buy the land. Why you may ask, well here is the math –

Cost of Land = Rs.500,000/-

Agreement Fee = Rs.100,000/-

Total = Rs.600,000/-

Value of the land in open market = Rs.500,000/-

Clearly it does not make sense to buy a piece of land at Rs.600,000/- when it is worth Rs.500,000/-. Do note, since Ajay has already committed 1lk, he could still buy the land, but ends up paying Rs 1lk extra in this process. For this reason Ajay will call off the deal and in the process let go of the agreement fee of Rs.100,000/- (which Venu obviously pockets).

I hope you have understood this transaction clearly, and if you have then it is good news as through the example you already know how the call options work! But let us not hurry to extrapolate this to the stock markets; we will spend some more time with the Ajay-Venu transaction.

Here are a few Q&A’s about the transaction which will throw some more light on the example –

  1. Why do you think Ajay took such a bet even though he knows he will lose his 1 lakh if land prices does not increase or stays flat?
    1. Agreed Ajay would lose 1 lakh, but the best part is that Ajay knows his maximum loss (which is 1 lakh) before hand. Hence there are no negative surprises for him. Also, as and when the land prices increases, so would his profits (and therefore his returns). At Rs.10,00,000/- he would be making Rs.400,000/- profit on his investment of Rs.100,000/- which is 400%.
  2. Under what circumstances would a position such as Ajay’s make sense?
    1. Only that scenario when the price of the land increases
  3. Under what circumstances would Venu’s position makes sense
    1. Only that scenario when the price of the land decreases of stays flat
  4. Why do you think Venu is taking such a big risk? He would lose a lot of money if the land prices increases after 6 months right?
    1. Well, think about it. There are only 3 possible scenarios, out which 2 indeed benefit Venu. Statistically, Venu has 66.66% chances of winning the bet as opposed to Ajay’s 33.33% chance

Let us summarize a few important points now –

  • The payment from Ajay to Venu ensures that Ajay has a right (remember only he can call off the deal) and Venu has an obligation (if the situation demands, he has to honor Ajay’s claim)
  • The outcome of the agreement at termination (end of 6 months) is determined by the price of the land. Without the land, the agreement has no value
  • Land is therefore called an underlying and the agreement is called a derivative
  • An agreement of this sort is called an “Options Agreement”
  • Since Venu has received the advance from Ajay, Venu is called the ‘agreement seller or Writer’ and Ajay is called the ‘agreement buyer’
  • In other words since this agreement is called “an options agreement”, Ajay can be called an Options Buyer and Venu the Options Seller/writer.
  • The agreement is entered after the exchange of 1 lakh, hence 1 lakh is the price of this option agreement. This is also called the “Premium” amount
  • Every variable in the agreement – Area of the land, price and the date of sale is fixed.
  • As a thumb rule, in an options agreement the buyer always has a right and the seller has an obligation

I would suggest you be absolutely thorough with this example. If not, please go through it again to understand the dynamics involved. Also, please remember this example, as we will revisit the same on a few occasions in the subsequent chapters.

Let us now proceed to understand the same example from the stock market perspective.

1.3 – The Call Option

Let us now attempt to extrapolate the same example in the stock market context with an intention to understand the ‘Call Option’. Do note, I will deliberately skip the nitty-gritty of an option trade at this stage. The idea is to understand the bare bone structure of the call option contract.

Assume a stock is trading at Rs.67/- today. You are given a right today to buy the same one month later, at say Rs. 75/-, but only if the share price on that day is more than Rs. 75, would you buy it?. Obviously you would, as this means to say that after 1 month even if the share is trading at 85, you can still get to buy it at Rs.75!

In order to get this right you are required to pay a small amount today, say Rs.5.0/-. If the share price moves above Rs. 75, you can exercise your right and buy the shares at Rs. 75/-. If the share price stays at or below Rs. 75/- you do not exercise your right and you do not need to buy the shares. All you lose is Rs. 5/- in this case. An arrangement of this sort is called Option Contract, a ‘Call Option’ to be precise.

After you get into this agreement, there are only three possibilities that can occur. And they are-

  1. The stock price can go up, say Rs.85/-
  2. The stock price can go down, say Rs.65/-
  3. The stock price can stay at Rs.75/-

Case 1 – If the stock price goes up, then it would make sense in exercising your right and buy the stock at Rs.75/-.

The P&L would look like this –

Price at which stock is bought = Rs.75

Premium paid =Rs. 5

Expense incurred = Rs.80

Current Market Price = Rs.85

Profit = 85 – 80 = Rs.5/-

Case 2 – If the stock price goes down to say Rs.65/- obviously it does not makes sense to buy it at Rs.75/- as effectively you would spending Rs.80/- (75+5) for a stock that’s available at Rs.65/- in the open market.

Case 3 – Likewise if the stock stays flat at Rs.75/- it simply means you are spending Rs.80/- to buy a stock which is available at Rs.75/-, hence you would not invoke your right to buy the stock at Rs.75/-.

This is simple right? If you have understood this, you have essentially understood the core logic of a call option. What remains unexplained is the finer points, all of which we will learn soon.

At this stage what you really need to understand is this – For reasons we have discussed so far whenever you expect the price of a stock (or any asset for that matter) to increase, it always makes sense to buy a call option!

Now that we are through with the various concepts, let us understand options and their associated terms

Variable Ajay – Venu Transaction Stock Example Remark
Underlying 1 acre land Stock Do note the concept of lot size is applicable in options. So just like in the land deal where the deal was on 1 acre land, not more or not less, the option contract will be the lot size
Expiry 6 months 1 month Like in futures there are 3 expiries available
Reference Price Rs.500,000/- Rs.75/- This is also called the strike price
Premium Rs.100,000/- Rs.5/- Do note in the stock markets, the premium changes on a minute by minute basis. We will understand the logic soon
Regulator None, based on good faith Stock Exchange All options are cash settled, no defaults have occurred until now.

Finally before I end this chapter, here is a formal definition of a call options contract –

The buyer of the call option has the right, but not the obligation to buy an agreed quantity of a particular commodity or financial instrument (the underlying) from the seller of the option at a certain time (the expiration date) for a certain price (the strike price). The seller (or “writer”) is obligated to sell the commodity or financial instrument should the buyer so decide. The buyer pays a fee (called a premium) for this right”.

In the next chapter we will look into a few finer details with regard to the ‘Call Option’.


Key takeaways form this chapter

  1. Options are traded in the Indian markets for over 15 years, but the real liquidity was available only since 2006
  2. An Option is a tool for protecting your position and reducing risk
  3. A buyer of the call option has the right and the seller has an obligation to make delivery
  4. The option is only given to one party in the transaction ( buyer of an option)
  5. The option seller is also called the option writer
  6. At the time of agreement the option buyer pays a certain amount to the option seller, this is called the ‘Premium’ amount
  7. The agreement happens at a pre specified price, often called the ‘Strike Price’
  8. The option buyer benefits only if the price of the asset increases higher than the strike price
  9. If the asset price stays at or below the strike, the buyer does not benefit, for this reason it always makes sense to buy options when you expect the price to increase
  10. Statistically the option seller has higher odds of winning in an typical option contract
  11. The directional view has to pan out before the expiry date, else the option will expire worthless

483 comments

  1. jagadeesh says:

    Hi Sir,
    Options is like greek and latin to me. Thanks for the analogies. It’s getting a bit clear now. 🙂

    • Karthik Rangappa says:

      Good to know that Jagadeesh 🙂

      • dinesh mohan says:

        can ajay call off the agreement before 6 months if and after he gets confirmation that the highway project was a rumor?

        • Karthik Rangappa says:

          In the options word, he can. However, in this particular land example he cant I guess 🙂

          • Mahesh says:

            Hi Karthik,

            Can retail investor like me buy put option in OTC? if yes how..

            i have a account with zerodha..

            Thanks

          • Karthik Rangappa says:

            No, all derivative contracts are routed via the exchanges. You cannot enter into an OTC arrangement, even if you do, it would not be regulated hence quite dangerous.

        • Devayani says:

          What benefit would Ajay get by calling off the deal before the expiry of 6 months?
          I guess nothing.
          He will instead wait for the whole 6 months for any chance of the highway project

      • Dipak jaishee says:

        Can i square off before the expiry…say after 5/6 days ..its way above the strike price i bought..can i exercise the ryt to buy ..within 5/6 days..

        • Karthik Rangappa says:

          You can book your P&L anytime you want, but you can exercise your option only the day of expiry.

          • Raja Sekhar Puligadda says:

            “You can book your P&L anytime you want, but you can exercise your option only the day of expiry” – can u elobarate more? By the way, do we have any mobile app version of learning? Thanks. Super useful!!!

          • Karthik Rangappa says:

            Raja, squaring off a position simply means you book your profit or loss as per your convenience. You can do this anytime you open a position. However, if you decide to hold the position to expiry, then it is deemed ‘exercised’ and instead of you squaring off the position, the exchange will do it for you.
            As far as the app is concerned – coming soon 🙂

          • gaurav mittal says:

            AS you are saying that options are exercised on the day of expiry then same applies app to future too ?

          • Karthik Rangappa says:

            Yes, it does.

      • Akbar Khan says:

        Hi Karthik,

        I bought a call option at a premium of Rs. 5 and sell the same at a premium of Rs. 8. Please confirm it ends here and I will not have any exposure or action to be taken at the time of expiry of the option.

        Or I will have two position at the expiry, buy and sell the underlying assets at strike price
        Akbar

        • Karthik Rangappa says:

          It ends here, Akbar. You have bought and sold a contract and therefore out of the market.

          • Shuyi says:

            Kindly clarify if I can square off the deal much before the expiry date of six month because of a hypothetical situation like thid.supposed state govt has agreed to start the said highway project but it I’d at the fag end of its tenure and i am pretty sure that a new government will come to power and it will cancel the project.So here I want to take chance during the window period as the land price is already high.so my question is whether I can execute the deal any time within six month because I know that the price will come dow in six months and I cannot afford to wait that long.please explain……

          • Karthik Rangappa says:

            Yes, in the options market, you can square off the position whenever you wish, no need to wait till expiry.

    • Sanjay says:

      Sir, can you please explain implied volatility.

  2. Saurabh says:

    Finally we started with Options! 🙂

    My first question Karthik is this: I checked NIFTY options on NSE .. turns out the expiry date dropdown contains dates till 26th Dec 2019. My questions are:

    1. Why is it then that you have mentioned that like futures there are 3 expiries available?

    2. The dropdown value on the NSE website does not contain all months expiries – after 18th May 2015 we have 25th June 2015 followed by 24th Sept 2015 and then 31st Dec 2015. What happened to the other months? For 2016 to 2019 only June and Dec contracts are available. What happened to the remaining?

  3. Nilesh says:

    Dear Sir,

    As usual, nice and simple explanation…I am not trading in options as I could not understand it well. Now, I think I am clear. Thanks for this.

  4. Ram says:

    Share Spot Price=>67
    Buy call 90 [email protected] of 5(Deep OTM option), Target on the same day
    If the premium increase from 5 to 8 can i exercise the option?
    Whether profit will be 3(8-5) or -2(8-5-5)
    can u clarify the profit based on premium not SP?

    • Karthik Rangappa says:

      You can exercise the option only on the expiry day, however you can book your profit due to the increase in premium. Your profit will be 8 – 5 = 3 per share.

      • RP HANS says:

        Sir, thanks for the easy concept on option. What I understand we can square off any position in option too before expiry date if profit is decent or stop loss set is triggered, in liquid stocks. Only the thing is that we have to pay the brokerage twice. Is it that we can not put SL for options?
        One more clarification I want to get is that the options are exercised means we have buy the underlying asset or the price difference will be adjusted in cash in case of the share market?

        • Karthik Rangappa says:

          You are right – you can square off anytime you wish…if you let the option for expiry there is no brokerage…otherwise you need to pay twice. But with Zerodha, your brokerage is so low anyway 🙂

          All options upon exercising is cash settled.

          • ashit says:

            I read somewhere if option exercise by exchange then we have to pay a huge penalty. What do u mean by exercise the option

          • ashit says:

            That means we can square off at any point of time (before or on expiry)
            1. Before expiry we have to pay the brokerage twice.
            2. On the expiry no brokerage but we have to do it by our own
            3. Else exchange will exercise that option on our behalf and charge huge penalty.
            1 confusion i have here is
            Exercise the option on expiry day means square off the option on expiry day?

          • Karthik Rangappa says:

            1) No, why do you think you have to pay brokerage twice?
            2) Brokerage is charged
            3) Not a penalty, it is STT

            To exercise, you just let the position run and do not close it.

      • SHIV PAL says:

        Sir , Is it exercising of option and booking of profits are different things ?

        • Karthik Rangappa says:

          Yes they are. Exercising of an option is done upon expiry whereas profit/loss booking can be done anytime after taking the trade.

      • chaitanya says:

        Is there any specific process on zerodha to buy a XYZ stock at strice price or exercise the options. OR a normal stock purchase transaction on expiry day will be treated as exercise? For ex : I have INFYTECH May 980 CE and if I want to exercise INFYTECH stock on exipry day. what is the process to do so?

      • Santhosh says:

        So in this example, when I book profit at 8 before the contract expiry date, will I get Rs 8 or Rs 3? If I get only 3, I would lose Rs. 2 when exercising the option on the expiry date. Is this analysis correct?

  5. krishnan says:

    As usual Karthik at his best starting with options…only concern is the time taken to upload other chapters..: (…hoping to see other chapters at the earliest.Thanks once again Karthik for your splendid efforts…

    • Karthik Rangappa says:

      Thanks Krishnan, it takes a bit of a time to upload chapters (apologies for that)..but we will put our best efforts to ensure the wait if worth your time 🙂

  6. NARSIMHA says:

    sir,when will u give OPTION CALC.OPTION STATEGY IN PI

  7. Rohit Agrawal says:

    Hi Karthik!! I have been following the lessons for 3-4 months now and heartfully thank you for them.. I wait for the each chapter to be published with great enthusiasm.. I found your TA chapters very helpful and easy to understand.. It would have been great if beginners like me could have had a paper trading platform where they could try their hands before with TA based trading..

    • Karthik Rangappa says:

      Thanks for the kind words Rohit. It is gratifying for us to know that people are indeed benefiting from these modules. We don’t have a simulator as such (for now), but I agree its a good idea. We try and do something about this.

  8. kieron says:

    Karthik sir
    Thank for Ur valuable effort
    Waiting for Ur other valuable chapter about option trading

  9. NARSIMHA says:

    sir,when we trade options&follow TA as u suggested should we follow the strike price of optioin we r in r the ta of spot

  10. NARSIMHA says:

    sir,i read link on option cal as u suggested,its useful&when can we use the same in PI&BENIFIT

  11. NARSIMHA says:

    sir.why is B.NIFTY options so volatile some times even then NIFTY,as others say why should not we trade stock optioas &even with good liquidity exp-detail

  12. Natesh says:

    1. What’s the Margin Requirement for Protective Put Options Strategy ?

    For Ex – Assume that i’ll buy 1 Lot Tatasteel Fut at 300 and i’ll also buy 1 lot Tatasteel 300PE at 10.00, now since my trade is hedged, how do you calculate margin requirements.
    Also, since Futures are MTM Calculated, does 300PE will offset the losses of futures on MTM basis.

    Awaiting for your reply

    Thank you

    • SaikiranGarapati says:

      Hi,
      Superb Explanation Karthik…Really it is great help full to beginners like me…Thank you very much for making educated us about all these things…

    • Karthik Rangappa says:

      I would suggest you try out Zerodha Margin calculator for this – https://zerodha.com/margin-calculator/SPAN/

      Since 300PE is out of the money option you will not get much margin benefit, however if you select in the money option (330 PE) there is margin benefit for the same. In fact the margin to buy 1 lot Tata steel is approximately 20K, add to this 300PE, you get about Rs.200/- margin benefit, however instead you buy 330PE the margin benefit is close to 7k and hence only 13K is required for the futures trade.

      No, futures M2M losses cannot be offset by gains in Puts.

  13. iyengarnsv says:

    If some one tells buy infy @ 2200 equity since shortage of funds can we buy Call option Infy 2200?

    • Karthik Rangappa says:

      Generally speaking buying a call option should not be an alternative to buying in spot market. However if the decision is to buy Infy for a short term (few days) then maybe one can explore the idea of buying the call options.

  14. Vidhyalakshmi says:

    Hi Karthik. I can’t thank you enough for the amazing content and taking the time to answer all our questions. I have a couple of questions today(unrelated to options):
    1. What is the Bank Nifty’s beta…as in its relationship to the Nifty? There is such a relationship between the two indices, right?
    2. On sites like moneycontrol.com, you often have various “expert opinions.” I try to reconcile some of these opinions with my own TA on the Nifty charts. Today, I read this…”The 5-6 percent downside seen in the Indian equity market is not a full fledged correction, it would be a correction only in case the market goes down 10 percent.” What is this 10% number based on? Fibonacci Retracements?

    • Karthik Rangappa says:

      As you may know Beta of Nifty Index is 1 because Nifty is a market portfolio. However Bank Nifty beta should not be considered as 1 as (based on market portfolio theory), the reasons for this are as follows –

      1) Beta for market is defined as 1
      2) Market is defined as a portfolio of stocks which represents as many diverse sectors as possible
      3) Nifty represents 21 different sectors which are of meaningful size and presence in India
      4) Hence Nifty is a true market portfolio, therefore its beta is 1

      Given this, Bank Nifty on the other hand, even though is an index , it cannot have a beta of 1 like Nifty. This simply because it is not a market index. Bank Nifty is just a representation of the banking sector, which is a subset of Nifty. Hence for this reason it makes sense to calculate beta of Bank Nifty. If you have gone through this chapter – http://zerodha.com/varsity/chapter/hedging-futures/ in section 11.6 I have explained how beta is calculated. Request you to go through the same.

      With respect to your 2nd query – generally speaking in a strong bull market the perception is such that they call a correction as a ‘correction’ only if its 10%. But this is not set in stone, their guess or estimate is as good as yours or mine. In fact nothing is set in stone when it comes to market. So please keep an open mind and adapt to events and markets as it evolves.

      • Pramod says:

        But this is not set in stone, their guess or estimate is as good as yours or mine. In fact nothing is set in stone when it comes to market. So please keep an open mind and adapt to events and markets as it evolves…….
        Very True….We should never listen to anyone on Tv…trades should be done only according to TA….

        • Karthik Rangappa says:

          Absolutely, it always makes more sense to develop your own thesis rather than depend on someone else’s thesis.

  15. t rama says:

    SIR,
    You have mentioned in the above chapter that“ sellers/writers have more probability to win, but the risk is unlimited. how to put SL.

    • Karthik Rangappa says:

      Risk is unlimited agreed, but statistically the odds of a loss occurring is limited :).

      • R.P. Hans says:

        I just want to know that buying a call or selling a put is same thing from the point of view that when market goes up you will be in profit. But how to select that buying a call is appropriate or selling a put? Same thing is for selling a call and buying a put.
        Is it not correct to buy a put rather selling a call to make loss limited?

        • Karthik Rangappa says:

          Well, this depends on the premium. If the premiums are too high then probably selling a Put maybe more profitable than buying a call. Else if the premiums are low buying calls may make more sense than selling a put. There are many factors that drives the premiums…we will understand all these shortly in this module.

  16. Ram says:

    How to plot OI, Change in OI and PCR Ratio indicators for Nifty options in PI?

  17. M ANANTHA RAMAN says:

    Nice to see that you have started option education series. Since option is complex I am sure most of us will be benefitted from This. Nice work, keep it up.

    • Karthik Rangappa says:

      Thank you, we too hope to benefit significantly from the interesting and simulating queries we get here 🙂

  18. Jeff Dsilva says:

    Hi Karthik, I am a newbie to options , In india when we trade options, we never buy the stock right? we just play with the premium we pay correct?

    • Karthik Rangappa says:

      Absolutely, all options in India is cash settled. I hope Varsity will help you understand options completely!

  19. T RAMA DEVI says:

    Dear Sir,
    Which is the better strike price to enter/buy an Option (In – Out – At the money call).
    Regards Rama Devi

  20. suvojit ganguly says:

    dear sir,
    i am new to options trading. i just want to know the difference between intraday and f&o.
    also in intraday how is the lot size calculated? is it fixed like options?

  21. Rahul Bajpai says:

    “If the stock price goes down to say Rs.65/- obviously it does not makes sense to buy it at Rs.75/- as effectively you would spending Rs.80 (75+5) for a stock that’s available at Rs.75 in the open market.

    Likewise if the price goes below Rs.75 it simply means you are spending Rs.80 to buy a stock which is available at Rs.75, hence you would not invoke your right.”

    In both the scenarios – in first scenario since the price is 65 – it is available in market at 65 and I will be paying 65 + 5 (premium which is lost in this option deal), supposing that I’m still interested in buying this.

    In the second scenario, I guess you mean that the price of the share is flat at 75 rs.

    • Karthik Rangappa says:

      The agreement is to buy the stock at 75, which is also called the strike price. So when the price drops to 65 – you still need to honor the agreement and buy it at 75.
      The 2nd scenario is supposed to be flat…will make that change. Thanks for point that out.

  22. S Senthil Kumar says:

    This is truly outstanding.. the simplicity of expanation and clarity is great.. keep it up..

  23. madhu nair says:

    is the options calculator on zerodhas nest plus a paid service? that is what i was told by one of your executives. i was also told to contact omnesys who is the service provider for the same. kindly clarify.

  24. AnilKumar says:

    Just finished reading the Futures module.Excellent narration.
    Is it possible to provide all the modules in a PDF format?

    • Karthik Rangappa says:

      Thanks Anil. We are working on converting these topics in PDF and iBooks. It will be available very soon.

  25. AnilKumar says:

    ok.I request you to add information about required certifications for making a career in the field of trading.

  26. ravi teja says:

    sir,
    for suppose i paid a premium of 8 rupees per share and lot size is 125. Premium increased to 10 rupees.so i executed the option and my profit will be 2*125=250(excluding charges). Am i right? please correct me if i am wrong

  27. Sumeet Nagar says:

    How we will come to know whether the options are trading at correct premium? They may be trading at high valuations are low valuations right? Is there any tool to find out that?

  28. jayadev says:

    Hi,
    Can you explain me please what is the “Premium” of a particular Option Strike Price? Please explain it with an example.

    Thanks.

  29. usha gupta says:

    we need a srvice to trade in options whether CE or PE. I do not like to avail of service and pay.Is there any method which i learn so that i trade in options profitably by my self. Suggest me a reading or explain yourself about how to trade profitably in options. I shall read all your chaptrs. I started reading your this site only today on 31St july 2015. usha

    • Karthik Rangappa says:

      Hi Usha – please do not pay for or opt for such services. They are all useless. Starting reading from chapter 1 and progress along…reading and understanding the subject is a 1 time lifetime effort…and after that you will never think of opting for such services.

  30. sarath says:

    hi karthik,

    what is the meaning of ” exercise the option only on the expiry day” i can’t understand, we can buy a option in the day and sell the option in same day and receive the premium same day and we can withdraw the money with in two days then what is option exercise?

    • Karthik Rangappa says:

      Sarath – there are two things here. One is receiving the buying and selling options on the same day (or anytime before expiry)…in this case you will receive or lose money as applicable. The other thing is buying or selling an option and holding it till expiry…if you do this, then it is deemed that you are exercising your options. When you excercise your options you will receive a settlement price (if any) as applicable.

  31. Manjunath says:

    Dear Karthik,
    Is there any chances of introducing options tool in PI s/w.

  32. usha gupta says:

    I trade in commodities and there we may or may not have profit but the turn over is in crores. i am a house wife and receive some interest from my Fixed Deposits and also trade in commodities.
    Do i need to fill ITR-4. What type of account data i need to hold for incometax purposes. Regards

  33. bharat says:

    Sir,I have gone through your TA it is excellent and superb, simple to understand with real time examples.One doubt remains in me regarding Support and Resistance and Trend Analysis.Can you please explain me with an example, what is Major Support area and Medium-Term Support area and Short-Term Support area? And how to differentiate between them?

    • Karthik Rangappa says:

      Glad you liked the modules 🙂

      If the stock touches the price action zone multiple times (3 or more time) across different time periods then that price action zone is called as “major S&R level”….else people just refer to it as medium term S&R level.

  34. sanjay says:

    What is meant by option will expire worthless on expiry.
    Suppose if I bought Nifty CE for strike price of 7500 and on expiry Nifty closed at 7700 level then whether the option buyer will get profit or not.

  35. sujay1803 says:

    dear Karthik please publish pdf version of option theory

  36. Nikhil Kumar says:

    Hi,

    I’ve purchased Eicher Motors 18000 PE call for a price of 295 on 14/09/2015,when the underlying value is at 18700, on 18/08/2015 the underlying asset value is 18200,bit still the option price went down to 200. Can you please clarify the logic behind option pricing.

  37. Shrikant says:

    Hi, many thanks for the above chapter. My question is:
    Nifty call @ 7800 bought at Rs 35
    On expiry nifty is 8000. The 7800 call option is trading at 175.
    I want to understand what the profit would be if I hold the option till expiry
    (A) 175-35 =140 or
    (B) 200-35 = 165

  38. Swapnil says:

    Shouldn’t it be Rs 65/- in CASE-2 last line “for a stock that’s available at Rs. 75/- in the open market.” ?

  39. rajeshksm says:

    Why no pdf version? Also why no chapetrs 6 to 10?

  40. Balamurugan Velayutham says:

    I read the article and its clear but I’ve query regarding buy call option with the below scenario,

    Share name : Voltas
    Lot size : 1000
    Strike price : 280
    Premium : 11
    Expiry date : 29-10-2015
    Break even point is : 291 (correct ?)
    If suppose I buy 1 lot (1000 shares) this on 22-10-2015, I will be paying premium 11000 and I don’t consider the brokergae things etc., and
    spot price is today 293.

    If suppose i square of this today, what will be my profit. As per my understanding that i’ll get the difference between strike price and spot price (293-280) * 1000=13000-11000 (premium)=2000. Is this correct or is the difference between the premium for this contract on this day for example if LTP premium for this contract is 12 even if the spot price is at 294 and profit will be (12-11)*1000=1000.

    Could you please clarify me. Thanks.

    • Karthik Rangappa says:

      The break-even calculation is right. Since you are closing the trade before the expiry your profits will be the amount of premium you pay to buy minus the amount of premium you received while selling it. So in this it would Rs.1000/-.

  41. Sanjiv says:

    Hello,
    I am trying to download historical option prices on NIFTY from below link.
    http://www.nseindia.com/products/content/derivatives/equities/historical_fo.htm

    I see that for options expiring in August 2013 and before, “no records” are available for strikes like XX50. We can get all the historical data for Strikes like XX00 (for example, call/put with strike 5300 expiring on 29 August 2013 data is available. But, historical data for call/put with strike 5250 or 5350 is not available on nse website for August 2013 and earlier months). After August 2013, all data including for strikes XX50 type is available.

    Is it by mistake that above kind of XX50 data is not uploaded on NSE website prior to August 2013? Or there is some other reason. Please help. Thanks.

  42. Yogesh says:

    My question is …… can we sell the option call any time before the expiry date or only on the date is fixed???????

  43. Shailey says:

    Would buying near intra-day premium’s low and squaring it off at high work for me?

  44. Shailey says:

    Karthik,
    Which ones less risky options or day trading?
    Can you please lay down the perks of day trading compared to that of options?

  45. Shailey says:

    Can options trading be considered “the next level” compared to equity trading?
    In day trading, the other day I made whopping 12% of my capital but today I lost 14% of it 🙁

  46. Shailey says:

    For this particular call option, to buy a lot, am I supposed to pay 131.85 or 131.85*75= 9888.75 ?

  47. MIlan says:

    hello sir,
    if price is ATM then why Call / Put Prices are different.
    i’ve sent one image for this

    • Karthik Rangappa says:

      Generally Call option premiums are more expensive than Put option premiums, this is due to the ‘Put Call Parity’.

  48. SSP says:

    Hi sir pls tell me how much margin i need to deposit to short a call option..?
    if Nifty Dec 8000 CE is trading on rupees 10.00 if i want to short a lot then how much margin i need to deposit,?

  49. suresh says:

    HI, sir
    I have read this module….its really superb
    my question is i short irrespective of put or call in illiquid stock and hold till expiry, the strikes wont open due to liquidity issue
    end of the expiry will I be in Profit ?

  50. suresha.ks says:

    Hi, Sir
    I want to check Implied Volatility Of Nifty so which one I have to watch ……India VIX or ATM Option IV of NIfty or any other charts?
    How can we consider It is high or Low? please reply

  51. SURESH.KS says:

    Hi, sir
    There are are different Iv in all strikes, according to Option theory when IV is high Option Premium would be high and vice versa.
    so at ATM IV is lower than OTM option, but premium is higher than OTM…..this statement is little confusion please clarify

  52. suresha.ks says:

    Hi, sir
    Please explain this Interpretation
    when Iv is high premium would be high and vice versa

    • Karthik Rangappa says:

      Volatility is one of the key drivers for the premium. Higher the volatility, higher the premium…vice versa. Suggest you read the chapter on Vega.

  53. suresh says:

    I got the -ve value of daily returns average……It may come -ve or +ve both are correct right?

  54. suresha.ks says:

    Hi,sir
    We are very great full to you for giving such precious informations.
    I have attended so many classes they taught only about some indicators after studied this modules I have got a lot of knowledge
    Initially I got loss but I wanted to be a Professional trader so I didn’t loose my hope and was searching for what I want to learn to become a successful trader, now really got the answer. Now confident level is increasing…….Thank you so much

  55. suresha.ks says:

    If you are conducting any classes please inform us

  56. Paschal says:

    Hi Karthik.
    I’m new to options. I have a query.
    Date 19/01 I take a call. Premium 1.2 strike price 95 spot 89. Exp 28/1
    On 20/1 can I sell the option. Premium shows 1.5 spot 89.5 but has not reached the strike price. Will I be profitable I.e. diff in premium * lot qty or will I be losing the whole premium.

    Also does premium go to 0 before expiery date.

    • Karthik Rangappa says:

      You can sell the option if you choose on the very next day and take home the profit i.e 1.5 – 1.3 = 0.2. There is no requirement for you to hold on to this till expiry.

      Far OTM options can end up having a near 0 premium value even before expiry.

  57. Paschal says:

    Thank you Karthik and also would like to say you have a wonderful module and you make learning very simple. Options sounded like greek when people spoke about it now it makes sense after reading first 3 chapters . Guess i got a long way to go.

  58. RajiSuresh says:

    Hello Karthik,
    I am a newbie just trying to get into the markets. I have been reading various articles and have just started going through your lessons. The explanations are extremely lucid. There are so many different ways and means of playing the markets that it really is confusing for a newbie just trying to figure out where to start and what to do or not to do.
    Basically I need to know the following:
    1. In Chapter 19 you have suggested that a beginner start with Swing Trading and then graduate to Intraday. (great advice for me)
    2. Should a newbie trade in individual stock (after doing required research as per your suggestion) or should one trade in NIFTY Index Lots
    3. Can a newbie start with Options as I found the concept interesting (But is it advisable to start Options as your first step in Trading?
    Would be much grateful if you could give me a clear Roadmap on what to start off with so that I can get a sense of direction !

    Rgds

    • Karthik Rangappa says:

      1) Yes, if you are new, please stick to swing trading (or anything which prompts you to hold positions longer)
      2) Nifty index to begin with and move to Nifty 50 stocks at a latter point
      3) You can directly start with options.. ho harm with that, but please be very clear about option’s payoff.

      • RajiSuresh says:

        Didn’t understand what you meant (3rd point) by “… please be very clear about option’s payoff.” Could you pls explain?

        • Karthik Rangappa says:

          Option payoff is non linear, unlike futures which is linear. This holds true for both option buying and selling. One needs to be aware of this along with its characteristics in its entirety.. only then one would stand a chance for a long and successful option trading career.

  59. Muthuselvan says:

    Hi Karthik,
    Plz suggest me regarding nifty index option that which strike price should I choose from related to spot price(otm,ATM,inm).I also want to know whether the premium of call option will get reduced nearing to expirydate, if it so can I exercise my contract and make profit out of it?
    Since i am a newbie to share market as a whole, plz clarify me about this.
    From where I can read your options lessons?

    • Karthik Rangappa says:

      Muthu – I’ve explained the entire thing over the many chapters in this module. Request you to kindly read through the same.

  60. Aiko says:

    The feeling I get from going through your modules is similar to someone bringing you a bottle of chilled water after knowing that you have been stuck in some desert for two or three days without any water or food. Keep up the good work. Now this is what I call the “joy of learning”. I pray for your well being.

  61. Aiko VD says:

    Thanks for the great work. I pray for your well being.

  62. Ramanaidu says:

    Hi Karthik,

    Its very impressive exaplanation abt options . but sad thing is i am going all these self explanatory materials after loosing more amount in Stock options by following so many advisory calls/tips and wasted some more money for their service .in last six months i am into F&O Segment and wasted more money .

    can u suggest me
    a) which one one is better ? trading in cash / Futures? which one minimizes the loss ?and can give better profit in intraday/positional ?
    2) Options selling is safe and better one than buying ?
    3) how can we calculate which strick price ( ATM / OTM ) we have to choose to get profits ?

    thanks in advance .
    Naidu.

  63. Saurav says:

    Option was not my cup of tea but thanks to varsity the way explain here now i understood.

  64. Krishna.K says:

    hi sir
    like futures, here in the options trading whether the buyer of the call option can exercise the option and exit before the expiry and book profits by selling shares in spot market OR have to wait till expiry. please clarify this doubt sir

  65. RAJU SHINDE says:

    I have completed all lessions now starting from one again.

  66. RANJITH KUMARAN says:

    Hi, i am new to option…. read your documents and able to understand a bit in my way…. I little bit understood the concept but i do not know how to implement like … say my prediction for the next week is that Buy at 8579 tgt 8618 and if short then short at 8529 with the target of 8491 now who me to place this in the option…… what to choose in CE and PE
    Need you support Mr. Karthik Rangappa

    • Karthik Rangappa says:

      As you read through this module, you will realize that we discuss everything with respect to strike selection. So my suggestion for you is you should read through the entire content and you will be clear on selecting the right strike.

  67. Rama krishan reddy says:

    I HAVE 1 LOT OF SBIN JUL 240CE WITH ME.I HAVA PAID RS 8000 PREMIUM AT 2.65 PER 3000 shares.IF ON THE LAST THURSDAY SBIN WAS TRADING AT 250/_ WHAT WILL BE THE PROFIT I WILL GET??3000*10=30000/_ OR 30000+8000=38000.8000 WAS THE PREMIUM PAID
    I HOPE U WILL SOLVE MY QUERY??

  68. RAMA KRISHNA REDDY says:

    The VARSITY MATERIAL IS AVAILABLE IN GUJARATI AND HINDI.I REQUEST YOU TO RELEASE IT IN TELUGU ALSO IF AVAILABLE.

  69. Wilson says:

    Sir,
    I just want to know how to exercise call option on expiry, whether it is automatically done broker or i have to do something.

  70. Wilson says:

    SIR
    I HAVE SOME DOUBT
    LUPIN TRADING AT 1730
    LUPIN AUG 1750CE AT 59
    LUPIN AUG 1700CE AT 84
    IF I BUY LUPIN AUG 1700CE AT 84, MY BREAK EVEN VALUE IS 1784
    IF I BUY LUPIN AUG 1750CE AT 59, MY BREAK EVEN VALUE IS 1809, THEN OBVIOUSLY I GO FOR 1ST ONE.
    MY QUESTION IS WHY THESE DIFFERENT OPTION ARE TRADING IN THE MARKET.

  71. Pandit Yogesh says:

    Dear Sir,
    The Hindi translation is word to word, by this approach it lost the message/meaning of the real intend of subject. Request to think about that please let me know if I can do it for you…Thanks

  72. avinash manglani says:

    sir my question is suppose i bought one future at 100rs and also bought 80 rs put (PE) and suddenly market crash and future goes to 50 rs so what will be my loss??

    • Karthik Rangappa says:

      That will depend on the premium of the put option. When markets crash, the put premiums tend to go up and therefore your futures position is hedged. The real P&L will be known when you know the premium for the Put option.

  73. jithin says:

    Karthik Clearly explained. I have a doubt, Is it possible to buy a premium today morning and sell it today evening (intraday) and if I’m profiting will I get back my premium that I paid at first ?

  74. thinesh says:

    What happens to premium of a call and put option if underlying prices move up? and What happens to premium of a call and put option if underlying prices move down?

  75. Thahazeeb says:

    I think you explain better in the comments section! I seriously learn more from the comments section.

  76. Lucky says:

    Hi Karthik,

    In case of Nifty options, is the underlying the Nifty 50 Index or the Nifty Future Contract for the month?
    Which one do you think is more appropriate for analyzing the positions to be taken in options contracts? Should I be indifferent between the two?

  77. Subbu says:

    Sir,
    Today I wanted to purchase infy CE and purchased 1 lot 1240 CE at 2.90. But immediately after this, mtm loss is shown as 2650. I purchased 2 lots of December contract. When I asked, I was told that this is due to bid ask spread. Bid is 0.05 and ask is 2.9.
    The reason why I purchased is because of low vix. Will the bid ask spread narrow down? Or to break even how much should the premium rise to?

  78. sonali says:

    i have bought call option of strike price 8700 ending 29/12/2016 but it shows “NIFTY16DEC8700CE” in my tradebook. Kindly tell me. I m confused with the date.

  79. Vatsal says:

    Is binary options trading discussed in the following chapters or modules?

  80. Vishal Oturkar says:

    Hi Karthik,

    After knowing above Call option basics , i think to deal with Future Trade is more suitable than Call option. i mean if we trade in future trade with Stop loss don’t u think it has same features like call option ?
    if future trade we can fix our loss with stop loss option , but here with call option we have to loose all Premium cost if we exercise wrong. what is your opinion on this.

    • Karthik Rangappa says:

      Well, both these instruments are very different. Remember, a buy call and a sell call works differently and has different pay off features. This versatility is not there in futures.

  81. SURESH says:

    hello Karthik,
    I have doubts about what are the way can I buy stocks in calls option,
    1) one person from zerodha said ” you can trade options before expiry date” ….. is it true????? if it is true why you not mentioned in pdf
    2)is it premium only taking role in calls option(buy or sell by using premium only) so what’s the use of strike price
    3) how I extend expiry date for my stock
    4)after I buy my stock on expiry day is that can I carry ….. or it should be sold on that day??

    • Karthik Rangappa says:

      1) Yes, you can trade premiums (before expiry). I have discussed this in multiple places, request you to please go through the contents

      2) Premiums are dependent on the strike. Both of them are closely interconnected, you will understand this better as you progress reading through the material

      3) You cannot do this. Expiry day is fixed by the exchanges (which is the last Thursday of the month)

      4) Stocks are not bound by expiry, only derivatives instruments are.

  82. SURESH says:

    first of all, thank you for clearing all doubt in here, In call option
    example: -on buy status:- sbi share lot size=3000 strike price= 250 premium= 2 expence=6000(3000*2)
    on sell status: – spot price =260 premium=5
    1)what is profit???? 24000(30000-6000) or 3000(9000-6000)
    2)if square off(on expiry day) by SEBI means which price they will take open high low or close price

    • SURESH says:

      3)on expiry day should i buy whole amount(3000*250)??????

    • Karthik Rangappa says:

      Profit will be difference between the premiums i.e 5-2 = 3 times the lot size. So 3*3000 = 9000 minus the brokerage and applicable taxes.

      • SURESH says:

        please answer me this questions tooo
        2)if square off(on expiry day) by SEBI means which price they will take for square off (open, high, low or close price)???

        3)on expiry day should i buy whole amount(3000*250)??????(lot*strike price)

        4)if profit is only recording premium means what is the use of spot price?????? and in maximum cases premium will be lowering on near expiry……………….

  83. Prakhar Srivastava says:

    Sir,
    Lately I have been trying to learn about options from various material and I believe that your’s content is absolutely one of kind;Truly enjoyed the explanation with the example.
    I have one question
    As mentioned in summary point 8, shouldn’t it be that option buyer benefits when the prices are greater than (strike price +premium)

  84. 9SR says:

    Dear Karthik,
    Do we need to complete/understand Futures module before we jump into Options.
    Regards

  85. lomas bansal says:

    hello,
    I have short sold 6100 PE of MARUTI at 89 rs, 30 march 2017. If I dont buy this option and closing price of maruti on 30 march is above 6100 for e.g. 6101. What will be my profit or loss?

  86. Ankit says:

    Hello sir,
    Thank you so much for teach us in this systematic and logical way it
    sir as i am reading through this module i have lots of misunderstanding one of such is this
    Suppose i short a OTM CE option say Delta at 0.275,strike 3100 and spot is 2975
    And premium for this is 17
    and 8 days to expiry a
    sir my question is that as we know when someone buy a CE for whatever premium
    he profits from increasing premium say if premium shot up from 17 to 29
    then his profit will be 12 points and have option to close or transfer his possition
    Before expiry and keep 12 points as profit but from SELLERS point of view is premium variables . I mean can he close his position before expiry and benefit from premium fluctuations or he has only two way to stay in trade
    1. stay in trade till Break even point (Assuming he does not want to loose anything)
    2. stay in trade till expiry and keep 17 as profit if option expires worthless
    Sir i want to ask you is there any other logic available to stay in trade except above two
    Or is seller can benefit in any other way .
    I have to say understanding options from sellers prospective is confusing for me may be due to i knew to options. Sir i request you please try to upload some extra supplementry notes for shorting options regarding their pay-off
    Lastly i cant explain in words my thanks to you for every thing you teach me
    Stay healthy and keep rocking…..?

    • Karthik Rangappa says:

      Ankit, the same is applicable for sellers also. They can write or sell option and get of the the trade very next minute or they can choose to hold on to the trade till expiry. The best way to learn this is by experiencing it once. I’d suggest you short an option, hold for few mins and close the position. Dont worry about the P&L, think of the it as a small price you’d pay for learning 🙂

      I’d be doing a webinar shortly on the same topic. Good luck and happy learning.

  87. Ankit says:

    Thanks for guidance sir…….

  88. Dear sir After call option buy there is also one more chance for the price ie CMP can be more than Strike price but LESS THAN strike + premium paid in which case if exercised then the buyer can MINIMISE the loss in the way of premium paid

  89. muthu mariappan says:

    Than you for the wonderful introduction Sir.

  90. jithin says:

    Sir,
    I bought a lot of nifty option, a premium of 130 rs per share for Nifty Jun 9350 CE . The premium has increased to 138 on the same day will i get a 138-130 =8 rs profit that is showing in the Position in Kite .
    I’m confused because the current price is “9353” which haven’t crossed the strike price+premium but showing 400rs profit in positions in kite, but the premium has increased from 130 to 138. Will i get 8 rs profit on the same day?

    Please clear my doubt.

    • Karthik Rangappa says:

      Your profitability of Strike + premium is applicable if you hold the position to expiry. However, before the expiry your profitability is the difference in premium. So yes, you can pocket the profit of Rs.8 by closing your trade.

  91. Ganesh Agrawal says:

    Dear Karthik, I just got to know about options. I trying to fully understand it. Can you explain by example “buy call” “sell call” “buy put” and “sell put” and what does put mean? Please.

  92. karthik says:

    Thank you very much! Understood clearly after lot of confusion.

  93. Amit Deshpande says:

    Hi Karthik,
    I have a query , Strike prize should be a price which is min. of what you think can reach
    E.g Jindal Steel is traded @ Rs. 125 & I expect Jindal Steel will touch 150 max by June’17 expiry,
    My question is should I by Jindal steel by paying premium for 150 or Should I buy Jindal Steel by paying premium for 140 ?

    • Karthik Rangappa says:

      Strike selection is a very tricky process. It is not just about the price, it also depends on volatility and speed at which the market moves. Suggest you read through this module to get a fair sense of how it works.

  94. Pratik says:

    Dear Sir,
    Who makes options or futures contract? The stock market or the respective companies? We know that companies releases shares in the market when they have requirement of funds. But who releases the option and future contract to be traded in market? or is it done by the trader themselves when they have a view?

  95. Chaithanya Kumar D says:

    Sir,
    In the example given above if Venu decides to settle the deal with cash instead of selling the land directly, Ajay will be getting 4 lacs and Venu gets to keep the land right?
    Now from Venu side, these are the calculations right,
    Amount received as premium is 1 lac
    Amount paid as a part of the deal is 4 lacs
    Now he still gets to keep the land and if he sells it to some third party, then he would be getting 10 lacs and subtracting whatever he spent earlier, he would be left with exactly 5 lacs. But instead if he choose to give away the land, he will get to keep only 1 lac and 5 lacs paid to him as a part of the deal. Now finally he gets to keep 6 lacs with him.
    Should this mean he should always sell the land instead of settling it with cash?

    • Karthik Rangappa says:

      He can choose to do that, this is an example to convey the concept along with introducing the concept of cash settlement. In India all options are cash settled, hence it makes sense to stick to cash settlement.

  96. mahesh says:

    why module 5 not available in pdf format for download????

  97. Chintan says:

    Hi,
    A question related to options traidng. For example, currently NIFTY 9900 AUG CE call option is showing in zerodha as Qty 75(LOT 75). So for example if i place a buy order of LMT price of 40 and Qty as default &5(LOT 75). How much funds will be required for this call buy transaction? Will it be 75*40(Rs.3000) or just Rs.40. Is the current price shown for the options for a single contract or for a single LOT(75 contracts)? Please explain the meaning of LOT and how its related to current quote price.

    Thanks

  98. Phani says:

    NO DOWNLOAD OPTION AVAILABLE

  99. Abhijit H says:

    Hi Mr Karthik,
    Why hindi pdf’s are not available for all modules? it was previously available, not showing since avataar is changed.

  100. Ranjan Malav says:

    Hi Karthik,

    I’m new to trading and learning a lot from these chapter. I have never done any transaction in options so wanted to get my following calculations clarified.
    Underlying- biocon
    View – bullish
    Spot – 357
    Strike – 380CE sep17 expiry
    Lot size – 1800
    Premium – 3.6
    Premium paid = 6480
    Next day
    Spot – 363
    Premium-4.5

    1. If I book profit on next day
    Profit = (4.5-3.6)*1800 = 1620(minus brokerage and etc.)
    2. If I wait till expiry and spot trades above strike say 383
    Profit (383-380)*1800 = (5400-6480)(minus brokerage and etc.)
    *383.6 will be the break-even point as you’ve mentioned.

    3. If I wait till expiry and spot trades below strike say 375. Premium must be trading at higher levels(compared to 3.6) since spot is near to strike price and I can book profit instead of waiting for expiry and go premium in vain. Is this reasoning correct?

    Anyone else who has sufficient knowledge can also clarify these things.
    Thanks.

    • Karthik Rangappa says:

      1) Yes, thats correct
      2) Thats correct again. 383.6 will be your breakeven
      3) The closer you get to expiry, the close should be the spot to strike. Say if there is 1 day to expiry and spot is at 375, then 380 CE is likely to trade below 3.6….my guess is maybe about 1 or max 2. You can use the B&S calculator to get the exact value – https://zerodha.com/tools/black-scholes/

  101. Ravi Kumar BA says:

    Karthik,

    Might be a lame question.

    Why is the IV for Call = Spot– Strike (why not “Strike – Spot”)
    and for Put=Strike – Spot

    Went through the Whole Module on Options and he “oppositeness” of the concepts in Call & Put are a bit confusing for a beginner like me…

    • Karthik Rangappa says:

      IV has is a positive number and should arise out of the difference between the spot and strike, hence they are the way, they are 🙂

  102. Vikram Ranganathan says:

    Ajay’s profit in the Call example is not plain Rs 400000/- . He had paid Rs 1L 6 months in advance . We should also consider Time Value of Money.Hence the Interest cost (opportunity cost ) should also be factored. Assume he can gain 20% by investing in equity per 6 months, he seeks to lose this profit by blocking his capital for the land purchase . So effective profit would be ( Rs 400000 – Rs 20000 which is Rs 380000. Again if he can put the 1L to much more productive use in other avenues say his business , profits would further reduce to that extent.

  103. Ravi Kumar BA says:

    Karthik,

    In F&O Margin calculator page when i try to calculate Options- CALL/PUT Buy the amount shown is Rs. 0 …Why is it so?
    is it that i only page the premium amount and no margins locked? ex: for Nifty CALL Buy at Strike X, if Premium is 50, then i pay 50*75 =Rs 3750. Is that all and no Margin is blocked?

    • Karthik Rangappa says:

      For buying options there are no margins, you only pay the premium in full. For example, if the premium is 50, there it would be 50*lot size i.e 75 = 3750. So with 3750, you can initiate the position.

  104. SHANTARAM PATIL says:

    Dear Sir,

    Very useful write ups provided by u. We could not even learn in class paying huge amount. Thanks for providing such detailed information.

    I have 1 querry i.e. If we get profit in CE will it be credited to our a/c with premium paid to seller ?
    Secondly If i buy a call at Rs. 8.50 for 870 strike price for lot of 1000 shares, and if next day for same strike price premium is going on for Rs. 9.00 per share the lot may be different i.e. 2000 and expiry date is same, can I sale it for Rs. 9/- and earn profit of rs. 1/- per share. Whether my premium also will be credited?

  105. SHANTARAM PATIL says:

    Dear Sir,

    Whether software for technical analysis is provided ? If so what is the cost .

    Also how to arrive at conclusion that based on today’s closing which Stock will be Bullish or Bearish. What categories to be applied.

    Thanks.

  106. SHANTARAM PATIL says:

    Dear Sir,
    At the outset correct me if I am at wrong:

    If i buy a call @ rs 8.50, lot 1000 shares, strike price is 470/-and expiry date is 26th oct.
    Premium will be paid 1000*8.50=8500/-
    So break even point for above is 470+8.50=478.50.

    suppose in above case on 26/10/17 on expiry day the situation is as below:

    date Spot Value premium Intrinsic value p & l

    26/10/2017 478.50 8.50 478.50-470=8.50 = 8.50(-8.50) =0

    If the above scenario happens on last closing day, whether option buyer will loose his entire premium of Rs. 8050/-he paid, or he will get back the same.

    Pl correct me if anything narrated above is wrong and pl explain about the situation of settlement.

    Thanks

    Shantaram Patil

    • Karthik Rangappa says:

      In this example, the option buyer will neither make or lose money. Of course, he will have to pay for the charges incurred like brokerage, transaction charges etc.

  107. SHANTARAM PATIL says:

    Dear Sir,

    Really thanks for your valuable guidance. U r taking so much efforts to make us learning and encouraging us for trading.

    Its very great. In coming times also I may I ask my queries. Pl need your help.

    Wish U HAPPY DIWALI SIR.

    Thanks & Regards.

  108. SHANTARAM PATIL says:

    Dear Sir ,

    I have gone thru your chapter Call Option.(CE)

    1. The understanding is that when u buy a call @Rs 470/- by premium @ Rs. 8/- Lot 1000 shares that means Rs. 8000/- premium to be paid. CE purchased on 3rd Oct. Expiry 26 Oct.

    2. When strike price goes beyod (470 + 8= 478) from 3rd oct your profits starts till closing date as of 26 th Oct.
    If it is below 470/- ( any price i. e 450/- as on expiry day) you will loose the premium.

    Is it right ?

    Now I have a question that I purchased a call @ Rs. 470/[email protected] Rs. 8/-lot 1000 expiry 26 Oct. by paying premium Rs. 8000/- on 3 rd of Oct. stock price is Rs. 465/-.

    Now the premium price for same lot , and price on 4 th of Oct expiring on 26 th Oct. is Rs. 11 and stock spot price ( market price ) is Rs. 462/ (decreased) or Rs. 467/- (increased.).

    In this (Decreased or increased situation) can i sell my option CE on Rs. 11/- and make a profit by Rs 3/- each share. ?

    Whether I will be making profit or doing wrong transaction and loose premium.?

    If profit made, profit and premium paid will be credited to my account on 4 th Oct or on 26 the Oct..

    Please advise on the matter.

    Pl forgive me if I have made any wrong statements above.

    Thanks & Regards.

    • Karthik Rangappa says:

      1) Yes
      2) Yes, breakeven for your trade is 478

      Yes, you can sell the option at 11 and make a profit of 8, no need to wait till expiry. Yes, you will get the profit credited to your trading account on 4th.

  109. SHANTARAM PATIL says:

    Dear Sir,

    Thank you very much for providing a very good guidance.

    Your essential guidance encouraging to do different type of Trading Carefully.

    Recently I am going thru your Technical Analysis Module which gives pleasure in reading and understanding. Your modules are as good as you are teaching in class, that much effective information is provided and hence a Lay Man like me can get understand the tricks of trading.

    Thanks once again Sir.

    Shantaram: 9987889301

  110. SHANTARAM PATIL says:

    Dear Sir,

    Can we purchase a CE For Expiry on 30th NOV 2017 tomorrow or day after i.e. on 25-26/10/17 ? If system Permits.

    Will there be anything wrong in it ?

    Shantaram
    Mob : 9987889301

  111. Waqaar says:

    Hi Karthik

    Zerodha Support Team is not replying to my email regarding incorrect data of FNO in Q-BackOffice. It is now 8 days and sent 3 email reminders. Can you please ask why they are showing so unprofessional behavior.

    Thanks
    Waqaar

  112. Waqaar says:

    #906818

    • Karthik Rangappa says:

      Guess, someone will get back on this Waqaar.

      • Waqaar says:

        Hi Karthik

        No one contacted me till now :-(. Sorry to say but very unprofessional behavior. I noticed one more issue in Kite. Please tell me where I am wrong.

        Time Instrument Type Quantity Avg Price
        12:28:55 CRUDEOILM17NOVFUT MCX BUY 1 / 1 3434
        15:52:13 CRUDEOILM17NOVFUT MCX SELL 1 / 1 3421 (Above transaction was squared off here)
        16:52:28 CRUDEOILM17NOVFUT MCX BUY 1 / 1 3429 (Latest Buy, not square off yet)

        LTP of CRUDEOILM17NOVFUT: 3440

        Now what will be my profit/loss ? Can you please please explain me ?

        According to me, my profit and loss will be below
        =3440 – 3429 = 11 ticks
        =11 x 10 = 110
        Profit : Rs 110

        Thanks
        Waqaar

        • Karthik Rangappa says:

          Since these are intraday trade, you lost 13 points in the first trade and now on the 2nd trade, you; ve made 11 points. So net-net you are losing 2 points.

        • Waqaar says:

          Hi Karthik,

          You replied below query but not mine. My query can be very silly for you therefore you may not have replied but I am Zerodha’s customer. I am still learning after studying all the theoretical now I am doing practical. And I am noticing bugs in profit calculation therefore asking you to clarify my doubt. In fundamental chapter you teaches never invest in company which don’t have ethics even with good financial ratio. Now I am stuck what should I do ?

          • Karthik Rangappa says:

            Waqaar – We really don’t look into who is Zerodha client and who isn’t. We answer ALL queries that come in here. Also, I guess I’ve your query on P&L. Please do check.

  113. Anil says:

    Hi Karthik,

    Really very nicely explained chapters, I am still going through the chapters.
    I had just a simple query regarding Bank Nifty.
    Bank Nifty as the name suggests is group of banks that decide Bank Nifty Index.
    I had checked various sites & all give different factors deciding the Bank Nifty & if one follows the Banks only
    it can not be correlated with Bank Nifty Level.
    Will you please indicate different parameters , stocks etc. deciding the Bank Nifty Level.
    Please suggest.

  114. rajesh says:

    can avilable all book in hindi

    • Karthik Rangappa says:

      Unfortunately not, Rajesh. Since I don’t know the language, it will be hard for me to validate the quality of the content. For this reason, its available only in English.

  115. Roshni says:

    The article is super and your patience in answering each comment here is commendable too.
    This is the first article I read on your site and am interested enough to start at Module 1, chapter 1!
    Thank you, Karthik, for your efforts in creating and maintaining this varsity.

  116. Rajesh says:

    If Ajay pays Rs.6,00,000 (1,00,000 as Agreement fee and 5,00,000 as accepted value) for land valued at Rs.10,00,000 then his net profit is only Rs.4,00,000. How it is 400% profit?

  117. Nachiket says:

    Can a stop loss be placed for options ? If yes does it remain valid intra day and we have to manually place it again next day or does it remain valid once placed till it is triggered?

  118. TANUJ TANEJA says:

    SIR,
    I WOULD LIKE TO ASK 1)WHAT ARE TRADING TIMING OF FUTURE AND OPTIONS
    2)CAN I BUY NIFTY OPTIONS FROM 9:15 AM
    3)OR I HAVE TO WAIT TILL 9:30 THEN HOW DOES VOLUME CHART SHOWS ACTIVITY BEFORE 9:30 IN DIFFERENT
    STRIKE PRICE
    I WOULD BE THANKFULL TO U .

  119. SUJAY KUMAR M says:

    I NEED SOME INFORMATION ON PE AND CE , SUPPOSE XYZ STOCK IS IN CURRENTLY IN BULLISH TREND , 1)THE THE CONTRACT NAMED CE GOES UP AND PE GOES DOWN , IS IT RIGHT . IN THAT CASE I CAN MAKE PROFIT EITHER BUYING CE NOR SELLING PE.
    2) IF I TRADE ON INTRADAY DOES THE AMOUNT GETS WASH OFF IF I AM WRONG SIDE OF MOMENT OR I INCUR LOSS BY PREMIUM
    DIFFERENCE
    3) IF I WANT TO EXIT IN PROFIT IS IT MUST HIT STRIKE PRICE

    • Karthik Rangappa says:

      1) Yes, this is generally the case – if the stock goes up, you make money by either buying the call or selling the Put.
      2) Yes, you will get residual value
      3) If the premium is more than what you’ve paid, then you can exit and book profits.

  120. Rajib says:

    well presented…….Thanks for such a nice writing.

  121. pratik says:

    Sir,
    1) Suppose i buy call of share/nifty at start of month at premium of Rs. x. Then is there are any chances that my premium value comes to zero? (i think if nifty spot or spot value of share sharply comes down then premium may come to zero) Am i right?
    2) What will happen with my contract in case premium comes to zero?
    3) And in next some sessions if premium again goes up then whether i will be able to square off my position? or contract automatically gets expired when premium comes to zero?

    • Karthik Rangappa says:

      1) This can happen if the spot decline wrt to Strike (in case of CE) or if the Spot increases wrt to spot (in case of PE)
      2) It will be worthless
      3) Yes, you can. In fact, you can square off anytime before the expiry

      • pratik says:

        Thank you sir for reply.
        Still little doubt:
        When premium comes to zero we called it as worthless and if i hold same then it will be “holding worthless contract”.

        Is worthless contract automatically squared off by exchange? or we can hold it upto expiry!

  122. rohan says:

    Dear Sir,

    I am newbie in option market . .. my query is

    assuming , Nifty 11000 is trading at 15CE.
    (Buying CE/PE only)

    1. Here margin required is 75*15 = 1125 right ?
    2. Is this margin required ” 1125 ” same in Day trade as well as SWING trade ?? I am confused .
    3. Suppose 1 day before expiry it is trading at 50 CE. then I am in profit , i.e = 75*(50-15) = 2625 ?
    4. Suppose 1 day before expiry it is trading at 5CE. then I am in loss , i.e = 75*(15-5)= 750 ?
    5. Suppose in swing trade , I am in loss in this contract and did not close my position on expiry ON 3.15pm.
    What happens to my position and also what are the TAX implication IN THIS EVENT ?

    Please Help !
    Thanks

  123. SHASHANK K says:

    Hello Sir,
    I have brought 10 lots of Nifty50 of strikeprize 10800 (Expiry – Jan 2018) with 37 prize, now its trading at 22, i have a question, what if market trends down and this prize goes to ‘0’, I may loose my 10 lots or it will in my account till expiry?
    And also if market trends up again till Jan 2018 my prize also goes up?

    plz guide

    • Karthik Rangappa says:

      Your P&L depends on the price of the premium. If it goes to zero upon expiry, then I’m afraid the value will drop to 0.

  124. SHASHANK K says:

    Thank you very much Karthik Rangappa sir.

    If it reaches to Zero before one month of expiry and again increases then?

  125. Sachin Singh says:

    If I’m a call option seller, and I see my position is going against me (market rising), can I square off (exit) my position? Or am I obligated to hold that position till expiry?
    Thanks!

    • Karthik Rangappa says:

      Both buyers and sellers of options have the flexibility to square off their positions anytime they wish, no need to wait for expiry.

  126. pratik jagtap says:

    Sir,
    Today I purchased HDFC BANK call option of exercise price 1860 in morning. And as per expectations price and premium goes up therefore i wanted to book profit. I was entering exit order at market price but everytime order was getting rejected. When we buy option we have right to exercise it any time then why my order was rejected? After entering exit order for minimum 100 times my sell order gets executed n i earned profit.
    So, please tell me whether i was doing any wrong process or there is something about call square off before expiry which i dont know.. 😛
    Sorry for asking silly problem..!

    • Karthik Rangappa says:

      Pratik, this is strange. What kind of error message did you get?

      • pratik jagtap says:

        Sir, I was not getting any error. But when i was clicking on exit position and sell option, immediately in notification “rejected” was coming. At end instead of selling at market price i clicked on limit price that time my order gets executed. i was also shocked.

        • Karthik Rangappa says:

          Ah, I get it. We do not allow market order for stock option, it has to be a limit order. This is because of the lack of liquidity and the associated volatility. Also, whenever an order is rejected, there will be a rejection reason which is displayed. That will give you the information.

  127. Savan Patel says:

    what if land price goes down by 50,000 then it means 50,000(1,00,000(Premium)-50,000) would be profit for venu ?

  128. sharmila says:

    Hi Karthik…..I have a few doubts regarding options buying

    1. Banknifty freeze qty is 2500 per order, on the day of expiry the premium’s are very low, so if I want to buy say 10k lots, do I need to place order 160 times or is there a way to place the order in 1 go?

    2. Is it easy to sell this huge qty on expiry day?
    3. What’s the max amount that can be traded by retail investors in options?

  129. Kamal says:

    Hello Sir,

    As you have mentioned in the module (Call Options), the loss is limited to the premium that we paid.

    For example:
    I bought a call option of Tata steel thinking that the stock will go up – Premium paid = 3000
    But the stock price did not go up. Infact it went down.
    Since the price went down, I did not sell the stock as i do not want to take more loss.
    The contract expired.

    In this situation, as per the module, i should be loosing only 3000 right?

    Or will i be loosing more money even if i do not sell the stock?

    • Karthik Rangappa says:

      The loss when you buy an option (call or put) is restricted to the extent of the premium paid. Hence, your loss here would be 3000.

  130. Ravi Kumar BA says:

    Karthik,

    I have noticed, during the course of some sessions, the Nifty/Banknifty options – almost all Strikes of both PE & CE both fall in value even tough Nifty/Banknifty itself has made a movement but sideways. Theoretically, when PE increases, CE should decrease and vice-versa. But both PE/CE falling for almost all strikes , i dont understand why? and how to deal as a trader during such sessions?

    Need your help!

    • Karthik Rangappa says:

      Options premiums have multiple forces acting on them simultaneously. The direction of the market is just one of them. I’ve explained this later in the module, suggest you read through. But the answer to your query is because of Volatility. Increase in volatility increases option premiums and vice versa.

  131. Umesh says:

    Hi Team,

    I need to execute the below orders
    1. Buy 1 lot of Bank Nifty options i.e. 25600 CE (let’s consider it is currently trading @ 100), hence I would need 4000 INR.
    2. Sell 1 lot of Bank Nifty options i.e. 25700 CE (let’s consider it is trading @ 60), hence I would receive 2400 INR.

    Based on the above details, I would need roughly around 1600 INR to execute those 2 trades, however the SPAN calculator states I need 59,000 INR for executing both of them.

    The maximum loss I can incur is around 1600 and the maximum profit is around 6400, then why do I need 59K? Is it a requirement from Exchanges?

    Thanks,
    Umesh V

  132. Shyam says:

    I bought Reliance 1000 Call at Rs. 15 when the underlying was quoting at 990. What would be my possible
    gain / loss on expiry if Reliance settles at ? Lotsize is 100
    •1015
    •1030
    •985

  133. jyotshna says:

    If I buy option for intraday MIS as order.
    If I don’t square off, will Zerodha square off between 3:20 to 3:30 ?

  134. Chintan Patel says:

    How/where to download this module in gujarati ?

  135. Sunil Kumar V R says:

    Hi Nitin sir/Karthik sir,

    Can we expect monthly unlimited plans for options traders or derivative segments? Because of this plan so many peoples are preferring to open account in ProStocks especially day traders.

    Hope you will come with some plans for day traders too like investors, there is no doubt about your services one of the best broker in India thank you so much for this.

    ಧನ್ಯವಾದಗಳು,
    ಸುನಿಲ್ ಕುಮಾರ್ ವಿ ಆರ್

    • Karthik Rangappa says:

      Sunil, multiple plans only confuse clients. We think one simple plan helps the client focus better on trades and not worry about brokerage 🙂

  136. Syed Quadri says:

    Hi,

    Can you please make a video series on “Options Theory for Professional Trading”.

  137. Syed Quadri says:

    Hi Karthik,

    thanks for the quick reply, appreciate if you can clarify below doubts for me. 🙂

    1)
    Assume i bought a call option of Nifty 50 index (Normal/CNC) on 10-Jan-2018 with a premium of Rs: 4.2. the contract is going to expire on 25-Jan-2018. as of 19-Jan -2018 the premium of option is Rs: 19.8.

    Now can i square-off my position at this stage or do i have to wait mandatory till the contract expire.

    2) can i Buy a CALL option / PUT option of any “stock option” in normal and close my position after few days before the expiry date? and if Yes i can, then do i have to pay anything extra apart from premium of the stock option which i bought.

    Thanks in Advance,
    Syed Quadri

    • Karthik Rangappa says:

      1) You can square off anytime you wish, no need to wait for expiry
      2) Yes, you can square it off anytime you wish. No extra charges for this.

  138. suman says:

    sir
    could you plz give us detailed insight on macro economy?

  139. Madhuri Devi says:

    so far i have only played around trades in option based on change in premiums? contextually how to exercise the option(right to buy or sell) upon expiry?

  140. Dilip Kori says:

    Please clear my doubt regarding options trading. Suppose, a stock is currently trading at ₹100 & say its 110CE is trading at ₹1. I purchase 1 lot of the same. In the next couple of trading sessions, the stock price goes upto ₹105. Simultaneously, the 110CE price also goes upto ₹5. Can I book profit by selling that 1 lot even though the stock has not hit the strike price?

    • Karthik Rangappa says:

      Yes, you can.

      • Dilip Kori says:

        Thank you, Karthik. Actually, I had purchased 1 lot of Federal Bank Jan 110CE for Rs.1.15. Two days later, it went all way up to Rs.4.30, but I did not square off my positions thinking that I could do it only after the underlying goes above the strike price. Finally, it expired worthless resulting in a loss.

  141. Chitranjan upadhyay says:

    If I buy any stock in option,and I want to sell in stock in profit,so I can wait for my expiry date or before I can book profit.

  142. Rayan says:

    “Well, think about it. There are only 3 possible scenarios, out which 2 indeed benefit Venu. Statistically, Venu has 66.66% chances of winning the bet as opposed to Ajay’s 33.33% chance”

    Logical fallacy.
    That’s like saying when I go back home there can or cannot be a million dollars under my pillow. So there is 50% chance of me finding a million dollars on bed.
    You have considered all possible outcomes equally probable.

    • Karthik Rangappa says:

      I get your point, Rayan. Perhaps I should have worded it better. What I really meant to say was – out of the 3 possible outcomes, 2 favor Venu. This gives Venu an edge, but like you mentioned, all the three scenarios have an equal probability of occurrence.

  143. Dhananjay Chaudhari says:

    What do you actually mean by exercising, karthik?

    • Karthik Rangappa says:

      The act of letting your option expire without squaring off is referred to as ‘Exercising’ your option.

  144. trader says:

    where can we get historical charts of expired option contracts?

  145. Narendra says:

    Hi Karthik:

    Many of the things regarding options are cleared now.

    I just have a query. Is it necessary for the option contract to cross the strike price to be in profit. Or we can book profit by squaring off on the same day or 2-3 days after if the premium is increased, but still the strike price is not reached.

    Eg –
    Purchased Put option of Nifty with a strike price of 10100 @67
    squared off at premium 102, but the strike price of 10100 is not reached yet.
    what will be my investment and what will be my profit here?
    And how to calculate profit after the contract crosses the strike price ??
    Please explain..

    • Karthik Rangappa says:

      You can book profits any time you wish. Not necessary to hold to expiry.

      Your profit will be the difference between the buy and sell price of the strike…i.e 102-67 = 35 points, multiplied by the lot size.

      • Narendra says:

        Thanks Karthik.

        All my doubts are cleared now regarding the calculation of profit. I am feeling more confident now.
        In the above position, I will be getting back 102*75 per lot after squaring off, of which 35*75 is my profit.

        Thank you so much.

  146. trader says:

    if we let an itm option expire when i am an option buyer, will i now be required to pay the high stt? how will my total net profit be like under the new rule?

  147. Trader says:

    Regarding the new rule of product suitability to curb retail participation in fno products will this be extended even to intraday stock trading with leverage (BO and CO orders) or is it limited to only futures and options?

  148. Barun says:

    Hi
    Just opened an account with Zeroda.
    please clarify
    I sell one lot of HDFC Bank Call Options (Fully covered, shares in Zeroda account)
    * Do i need to keep margin in cash, i guess 500 shares of HDFC Bank is enough?
    * when i want to end the position, i will just have to buy the same strike option at the prevailing premium and the trade is automatically ended. or i need to do something el

  149. johnson says:

    where can i locate the circuit filters and my limit calculation if i want a put option?

  150. sanjukta panda says:

    Hello,
    I am new to trading. I want to trade in Call and Put options. Kindly guide me How and Where to start.

  151. Neelkanth chaubey says:

    Sir pls have one module on option chain analysis.How to analyse the changing OI and Changing LTP in option change.

  152. Trader says:

    Since two days i.e 24/04/2014 and 25/04/2018 I am continuously trying to book profit or book new order in TCS (NSC) but order is not taking and says……. RMS:Blocked for OPTSTK MKT nse_fo broker- ZERODHA Remarks: Option Stock market orders are not allowed block type: ALL ******** So what to do in such a case.One thing I am not understanding whether this problem is only with me? or all Zerodha A/C holders? or in all brokers?, if yes this may happen to all brokers, then how OI and change in OI and volumes changes?

  153. Trader says:

    Dear sir,
    Today also I am trying place order / short cover in F & O since three days from 24/04/18 to till now but my order is rejecting showing RMS:Blocked for OPTSTK MKT nse_fo broker- ZERODHA Remarks: Option Stock market orders are not allowed block type: ALL, I am sinking under loss since three days, I am not understanding three days continuous block in F&O, Now What to do?

  154. Trader says:

    Dear sir,
    Why continuously three days block in F&O in TCS?

  155. Trader says:

    Dear Sir,
    From where do I get value of delta?

  156. suga says:

    great work, even NISM materials weren’t this level. 🙂

  157. Parimal C says:

    I am a beginner. Option call is nicely explained with examples and I think probably I understood. After reading your module , if i understood correctly , I thought that if the strike price is fixed very close to current price may be a few units more – it would be more safer for buyer’s point of view provided it is agreed by seller / writer . Now my query is , does the premium price a function of (difference of price between current and strike price) ?

    • Karthik Rangappa says:

      Thats right, Piramal. These are ITM options and they are the safest to trade when in confusion about strike selection.

  158. Ramanathan says:

    Hi,
    Thanks for your kind support and knowledge sharing… Your way of teaching is very good and easy to understand.

    ONE request from me… Shall we get it in MOBI format? so that we can download in our Kindle.

    Thanks,
    Ramanathan.

    • Karthik Rangappa says:

      Glad to note that, Ramanathan 🙂
      Kindle version is on the agenda, hopefully, we can do that sometime soon!

  159. pradeep says:

    Thanks karthik for this informative module and the even more informative patiently answered comments. This is the first I’ve read of options, so please help me clarify a few things:

    1. If I buy a call at a premium of rs 10 for strike price of rs 100, and I want to “square off my position” before expiry, the only hope I have is to hope that the current premium is greater than 10, and to sell the option at that price, right?
    2. Let’s say the underlying hits Rs 200 before expiry, so theoretically I could be making a Rs 90 profit if I actually got my hands on the underlying, but I’m still only able to sell at the current premium (and hope that the current premium “reflects” the 100->200 increase). The current premium could, in fact, be much lower than 100–not likely but possible. Is this correct?
    3. When you talk about liquidity, you’re essentially saying that unless the options are traded in sufficient volumes, the current premium wouldn’t necessarily reflect the increase in value of the underlying. Is this correct?
    4. There are no “defaults” on a call because the original seller has to upfront deposit cash while selling the option (or are there other mechanisms, or is it in fact possible for the original seller to default)? upfront cash seems not sufficient since original seller could potentially have unbounded liability.
    5. I’m interested in long-term nifty options, you said in some comment above that liquidity is a problem. Is the problem that finding a suitably priced option seller is hard, or that offloading it at short notice is hard, or that offloading it at all (when opportunity presents, and before expiry, at a suitable price) is hard? In other words, assuming large favorable movements in the index, is it that the full potential profit cannot be realized, or that there is a risk of getting no profits at all?

    Thanks much for your time!

    • Karthik Rangappa says:

      1) Yes, pretty much like buying a stock. You buy low and expect to sell at a higher rate
      2) If there is time to expiry, then chances are that the premium will be more than 100 here, so you’d have made a killing 🙂
      3) Yes, liquidity refers to the ease at which one can transact. Higher the liquidity, better it is
      4) In fact, no defaults in NSE on anything till date :). The margin deposit is a function of volatility, higher the volatility, higher is the deposit.
      5) In fact, the price is also a function of liquidity. Long-term options have low liquidity, hence prices are also skewed.

  160. Rahul says:

    Hi, I am a newbie to the stock market but understand the basics, i.e. how things work. However, I have absolutely no idea about F&O.

    I opened my account with Zerodha last week and have started trading Intra Day in NIFTY 50 stocks only earning paltry sums like ₹50-70 daily on 10k capital.

    Question- Since I’m really new into trading, should I stop reading this module here and focus on improving my skills in technical analysis and come back to F&O module say after 6months or 1 year? Or trading in F&O and trading in stocks are independent to each other?

    • Karthik Rangappa says:

      Rahul, I would say yes 🙂
      Spend time on learning and getting your foundation right before trading F&O. You can always get back to F&O when you are more confident.

  161. […] Call Option Basics – Varsity by Zerodha […]

  162. Trader says:

    Question 1 What will happen to the call option
    example if we buy a call option of xyz share spot price 100 and strike price 110 call purchasing price is 4rs

    and due to some bad news suddenly the share price starts falling and it is almost 40% down in a day what will happen to the premium of that 110 call option will it become zero ? or will the traders lose more money

    Question 2 if we buy a put of abc share expecting that the price will fall but it falls more than our strike price still we will be in profit and can we still hold that put buy position ?

    • Karthik Rangappa says:

      1) Yes, the premium too will drastically fall. I’d suspect the premium to crash by at least 50-60%, if not more
      2) Yes, you can hold the position.

  163. Ron Kalra says:

    Hi Sir, I will really appreciated if you can let me know how to place stop loss order for stock options. I have the facility to place Stop Loss Market order but that is too dangerous. What other choices do I have ? How can I make sure that my order is filled and with minimum slippage. Also I see the the bid/ask spread is too high for In the Money options. Let’s say for example I’m ( Long ) ATM call option and in 2-3 weeks time my Call option is Deep in the money and the slippage for bid/ask is very high, how can I sell the call option with minimum slippage ( before Expiry ). For Reference today ( 7th Aug 2018 ) BankNifty was trading at 11389 and the bid/ask for 9950 strike price Call option was 1436/1482 ( difference of 46 rupees ). Now how can I sell this call option with minimum slippage as 46 rupees is too high to loose. Will really appreciate if you can help me with this. Thank you very much in advance. Cheers

    • Karthik Rangappa says:

      Ron, you cannot place a market order in stock options with Zerodha. The only way to control slippage is by placing limit orders. Else, ensure you trade in options where the liquidity is high, hence low slippage.

      • Ron says:

        Hi Karthik,
        Thank you so much for your reply. But I’m still confused about the options which are deep in the Money. How can I sell ( if I’m long ) option like the example I refer. Once again the question is below

        For Reference today ( 7th Aug 2018 ) BankNifty was trading at 11389 and the bid/ask for 9950 strike price Call option was 1436/1482 ( difference of 46 rupees ). Now how can I sell this call option with minimum slippage as 46 rupees is too high to loose.

        Now in the above case how can I sell with minimum slippage ?

        Thank you in advance

        • Karthik Rangappa says:

          Ron, the only way to avoid slippage is to buy or sell at specific price, which you can do so by placing a limit order. If you place market orders, then there will be slippage.

  164. Ritesh says:

    Whats the difference between options and futures?
    can you explain with the concrete name of the instrument?

    when companies are named infosys fut etc, it is option and when nifty fut etc, its futures, is this true?
    how do i differentiate?

  165. Ankesh says:

    hello sir,
    i’m regular trading in option but lots of time i got loss due to not perfect technical analysis doing by tool in renko chart. so, please suggest me what’s tools and time frame good for intraday.

  166. Vinayak D says:

    Hello Karthik,
    Can you please through light on this, assume a situation where Nifty 50 is at 12000 (1st Sept 2018) and i have Long Call position on 13000 with 150 premium for 27th Dec 2018. I have 750 quantities so my total worth is 1,12,500 (750*150) as on 1st Sept. Please tell me that what will happen in terms of premium..need only rough numbers..if
    1) Nifty 50 went to 12500 on 30th Sept =
    2) Nifty 50 went to 13000 on 30th Oct =
    3) Nifty 50 went to 13500 on 27th Dec =

    • Karthik Rangappa says:

      Vinayak, you will not have Dec 2018 contract available in Sept. It will be available only in Oct. Anyway, estimating the exact value is difficult. But your profitability will be highest on 30th Sept and lowest for 27th Dec.

  167. Ron says:

    Dear Mr Rangappa, I have a question which I guess will be prefect if I ask you with example. Let’s say the Nifty 50 was trading at 11,570 and I want to write a put option ( which is deep out of the money say 10,500 ) and the bid/ask for this option is Rs2.60/2.65. Now we have 1 week left for the option to expiry, do you think it will work out.And if the nifty closes above 10,500 then I will get to keep the entire amount of 2.65. If yes, then why do I see less interested in these OTM option (which almost guarantees you 90% success in the last week of the contract ). A very stupid question then why not everyone sells these OTM options and make sure that they make some profit ( if not huge profits ). Thank you

    • Karthik Rangappa says:

      That makes sense, Ron. Most sensible people try and write OTM options and collect small but steady premiums. However, this does not attract the majority of the trading community as they seek quick and large profits (buy OTM options). After all, different opinions is what makes a market 🙂

  168. Gopal says:

    Sir
    Can I buy an ITM option?

  169. Sachin Singh says:

    Hey, regrading the physical delivery of derivatives, that doesn’t have anything to do with Nifty futures or options, right? I had sold Nifty Puts some time back, and they’ll be in profit tomorrow, I can leave it like that like before?

    Thanks!

    • Karthik Rangappa says:

      Yes, the physical settlement is applicable only to stock futures and options. Not the index futures and options.

  170. Vicky says:

    In the following comments i see people talking about, two ways to booking profit.1.increase in spot price and booking the profit. 2. Increase in premium, booking profit. I understood 1st one. Can you ellaborate on the topic related to premium and profiting.

    • Karthik Rangappa says:

      Vicky, you can book profits when you think the premiums have gone up, no need to wait for expiry. I guess this is what the 2nd point talks about.

  171. Himanshu says:

    if i buy a call option for bajaj finance (cmp @ 2000) for rs 6(strike price @cmp, weekly expiry) on 03/09/2018(monday) and bajaj finance cmp increases to to 2100 on 04/09/2018(tuesday), now can i book profit on tuesday or do i need to wait till 06/09/2018(thurday) for the expiry day to book P/L depending on whatever is the price of bajaj finance on that thurday?

    • Karthik Rangappa says:

      Himanshu, there is no weekly expiry for any other instrument apart from Bank Nifty. Yes, you can book profits anytime you’d want, no need to wait till expiry.

  172. Ron says:

    Dear Karthik,
    Please please please please help me with this problem that I’m facing with the holding period of LONG option. Even though I get the direction correct I end up not making money. I understand the time value factor but still there is something I’m not doing it correctly. Let me just explain my problem with live trade ( I still hold the position ).

    Yesterday that is 11/09/2018 I got KSCL put strike 600 ( LONG ) when the underlying KSCL was trading at 635. The direction was correct and I could see around 20,000 rs in my portfolio while the Underlying closed at 618. Then today 12/09/2018 the underlying KSCL went down till 606 and I saw almost 40,000 in my portfolio and I decided to hold the position. But later in the afternoon the underlying stock went up and the close for the day was 620. My portfolio now shows a negative value of 900 rupees.

    My concern here is that I buy ( long ) put when the stock was trading at 635 and now the stock is at 620 so which means my option should still have some positive value, why is it negative 900 rupees. My guess is the my option value should see negative value only if the underlying starts trading above 630-635 level. Although I’m still 15 points below the price that I got my option why do I still see negative value in my portfolio.

    I just hope that I was able to explain you with my problem. Also, I have a huge request for you to please advise me if it’s a good idea to hold a long position for 10-15 days or more or is it good to hold long position for short period like 2-3 days. I’ll really appreciate if you can let me know what’s your personal choice or opinion regarding holding period of long position ( naked call or puts ).

    Thank you very much in advance.

    Regards
    Ron Kalra

    • Karthik Rangappa says:

      Ron, I understand your concern. The problem is that we think about options in a linear fashion meaning, if X drop by 5%, my premium should be so much if x % bounces back then the premium should be so much. This approach is not correct when you are dealing with the options. Remember, the option premium is affected by not just the direction (delta) but also with the speed at which the direction changes (gamma), time (theta), and the volatility (vega). So when you see the option premium as say Rs.45, remember its a reflection of all these factors which affects the premium and not just the directional element.

      So in your case, the direction was in your favor, but time was not (15 more days to expiry), and going by your explanation, I suspect the volatility was high when you bought the option and it kind of cooled off when the stock bounced from 606 to 620.

      Also, when you are dealing with options, be quick to take profits off the table, especially when you are not planning an expiry strategy.

      Good luck!

  173. Ron says:

    Dear Karthink,
    One more question. For any security’s option I don’t see bid/offer for deep OTM or ATM option or for that matter for the next month contract. Bid/offer are missing in many cases, does that mean I can’t trade those contract. Also, can you please tell me why does this happen ?

    For Example :- I don’t see bid/offer for KSCL put strike 600 for October 2018. So, doest that mean I cannot buy next or far month contract if I want to buy that today ( i.e. in the month of September )

    Once again thank you very much for all you do for us.

    Best regards
    Ron

  174. karthik says:

    How to use a SL in Options as the BO/CO isn’t accepted for the stocks in Options?
    every order is getting rejected by doing so.
    please help me out.

  175. karthik says:

    How does this change Impacts in Intraday of Options?
    do we need to maintain the above mentioned Margins for Intraday as well?

  176. Ron says:

    Dear Karthik,
    Sorry to bother you again. Can you please let me know which is best and most reliable indicator for Volatility ? Also how should I check the volatility, Weekly, daily or the timeframe that I use for my trading ( 60 Mins, 15mins or 5 mins chart ). Let say I trade bank nifty or any individual stock using 60 mins timeframe but use 5 mins chart for entry and exit. So should I check volatility on daily chart or 60 mins chart or 5 mins chart ?
    Thank you once again for all you do for us. Really appreciate the time you give to all of us.
    Best regards
    Ron Kalra

  177. gaurav says:

    Hi Karthik,
    I would like to know the basic difference between square off and Exercise in Option trading. I tried finding in google but got many different opinions about it. so i would like to hear it from you. and is below line correct ?? i read it somewhere.

    “this exercise is not allowed on index based derivative position, as the same is excersied by the exchange itself only after the expiry of the contract”

    • Karthik Rangappa says:

      Square off is a term used to indicate that you are closing an existing position. You can sq off a position anytime you wish. Exercise an option means, you hold the position to expiry and let the exchange settle it for you.

  178. Pravakar says:

    Excellent explanation!

  179. Ron says:

    Hi Karthik,
    If I want to hold a LONG naked ( Put/Call ) for 2-3 weeks, which is the best options considering the Moneyness to hold OTM,ATM,ITM ?? I mean should I go for OTM, ATM or ITM options ??

    Also, is it same choice if I want to hold for 3-5 Days ? Or should I choose difference Moneyness.

    Thank you very much in advance

  180. Arun says:

    Assume a scenario where index (nifty) remains at same level for three consecutive days . In such scenarios what will happen to option prices? Will they rise or fall? Why?

  181. Yadav says:

    There should be a comma after ‘but not the obligation’ under the definition of call option..
    Uff..I had to scroll down a lot to post this bit…

  182. Pradeep says:

    Hello Karthik ,
    I am Zerodha account holder .
    Appreciate your work , Just two days old with options trading started of after going through your module .
    My question – If a stock spot price is 40rs if I buy call option with strike price of 42.5 with the premium of 4rs .
    1. will I be in profit if the spot price is 60 by expiry ?
    2. Should I book profit if strike price up by 6 rs or more ?
    3. Will the strike price premium will be more if the spot price moves by 50 % or 60 rs ?
    4. Even after spot price has been increased to 60 rs and my strike price is still 42.5 rs will the premium will become less than 4rs or More ?

    Thanks in advance !!!

Post a comment