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.
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 –
- Ajay pays an upfront fee of Rs.100,000/- today. Consider this as a non refundable agreement fees that Ajay pays
- Against this fees, Venu agrees to sell the land after 6 months to Ajay
- The price of the sale( which is expected 6 months later) is fixed today at Rs.500,000/-
- 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
- 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 –
- Once the highway project comes up, the price of the land would go up, say it shoots up to Rs.10,00,000/-
- The highway project does not come up, people are disappointed, the land price collapses, say to Rs.300,000/-
- 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 rumour, 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 –
- 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?
- 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%.
- Under what circumstances would a position such as Ajay’s make sense?
- Only that scenario when the price of the land increases
- Under what circumstances would Venu’s position makes sense
- Only that scenario when the price of the land decreases or stays flat
- Why do you think Venu is taking such a big risk? He would lose a lot of money if the land prices increase after 6 months right?
- 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-
- The stock price can go up, say Rs.85/-
- The stock price can go down, say Rs.65/-
- 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 from this chapter
- Options are traded in the Indian markets for over 15 years, but the real liquidity was available only since 2006
- An Option is a tool for protecting your position and reducing risk
- A buyer of the call option has the right and the seller has an obligation to make delivery
- The option is only given to one party in the transaction ( buyer of an option)
- The option seller is also called the option writer
- At the time of agreement the option buyer pays a certain amount to the option seller, this is called the ‘Premium’ amount
- The agreement happens at a pre-specified price, often called the ‘Strike Price’
- The option buyer benefits only if the price of the asset increases higher than the strike price
- 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
- Statistically the option seller has higher odds of winning in an typical option contract
- The directional view has to pan out before the expiry date, else the option will expire worthless
Hi Sir,
Options is like greek and latin to me. Thanks for the analogies. It’s getting a bit clear now. 🙂
Good to know that Jagadeesh 🙂
can ajay call off the agreement before 6 months if and after he gets confirmation that the highway project was a rumor?
In the options word, he can. However, in this particular land example he cant I guess 🙂
Hi Karthik,
Can retail investor like me buy put option in OTC? if yes how..
i have a account with zerodha..
Thanks
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.
With respect to scenario 3, my query is, if Ajay buys the land paying 500000, at least he would have a property worth of 500000 even though he pays 600000 (100000 + 500000). But if he chose, not to buy the land he still spend 100000 in return for nothing. Which is the wise thing?
Well, the idea is to focus on the pay off from the bet, and not really on the outcome of holding a piece of land 🙂
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
But it may slide down more than what ?
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..
You can book your P&L anytime you want, but you can exercise your option only the day of expiry.
“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!!!
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 🙂
AS you are saying that options are exercised on the day of expiry then same applies app to future too ?
Yes, it does.
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
It ends here, Akbar. You have bought and sold a contract and therefore out of the market.
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……
Yes, in the options market, you can square off the position whenever you wish, no need to wait till expiry.
Sir, can you please explain implied volatility.
Implied Volatility is the volatility that the market participants collectively expect.
Very good explanation with sample. Though it is my first attempt to understand, I am almost clear on what is option call.
Great! Thanks for letting us know and happy reading, Ravi 🙂
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?
Saurabh, glad you noticed it! For all stocks options the expiry is very similar to futures. Hence we have current month, mid month, and far month contracts. However for Nifty there are several different expiry options. If you notice, these are long dated options with expiry in 2016, 2019 etc…options that are long dated has a special name for it, its called ‘Leaps’. So if you are talking about Nifty 8800 Call Option expiring in Dec 2019, then that is a Nifty Leap contract. Leaps are good if you have a super long term view on markets. However the problem with leaps in India is that they are not liquid, there are hardly any trading activity here.
As far as your send queries goes, honestly I’m not sure why the contracts are so irregular. Guess I will find out the reason and get back to you on that 🙂
Can I trade nifty leap options in zrodha ?
But there is hardly any liquidity here – http://www.nseindia.com/live_market/dynaContent/live_watch/option_chain/optionKeys.jsp?segmentLink=17&instrument=OPTIDX&symbol=NIFTY&date=25JUN2020
hi karthik,
what is meant by this
10% interest rate is applied while computing implied volatility.
The interest rate is an input variable here – please note this is a critical input for implied volatility model.
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.
Glad to know this Nilesh, please stay tuned for more 🙂
Share Spot Price=>67
Buy call 90 Strike@premium 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?
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.
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?
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.
I read somewhere if option exercise by exchange then we have to pay a huge penalty. What do u mean by exercise the option
Yes, please do check this – http://zerodha.com/z-connect/queries/stock-and-fo-queries/stt-options-nse-bse-mcx-sx
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?
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.
Sir , Is it exercising of option and booking of profits are different things ?
Yes they are. Exercising of an option is done upon expiry whereas profit/loss booking can be done anytime after taking the trade.
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?
To exercise, you simply have to hold the position and let it expire. However, it may not be a great idea to let ITM option expire for STT reasons. Check this – http://zerodha.com/z-connect/queries/stock-and-fo-queries/stt-options-nse-bse-mcx-sx
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?
You will get the difference between the premium i.e the premium you buy minus the premium you sell at.
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…
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 🙂
sir,when will u give OPTION CALC.OPTION STATEGY IN PI
Will include it towards the end of this module. However check this link for option calculator – http://zerodha.com/z-connect/queries/stock-and-fo-queries/option-greeks/how-to-use-the-option-calculator
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..
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.
Karthik sir
Thank for Ur valuable effort
Waiting for Ur other valuable chapter about option trading
Thanks Kieron, we are working towards uploading the other chapters as soon as we can.
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
Selecting the strike price is a function of time, volatility, and expectation (on market movement).
OK thanks
Welcome!
sir,i read link on option cal as u suggested,its useful&when can we use the same in PI&BENIFIT
We will a plugin on Pi sometime soon in the future.
So in options at expiry.. if the holder exercises the right then the share are transfered or just squared off??
n can I buy shares from cash market and sell in F&O segment??
All derivative contracts are cash settled in India, hence the actual movement of stocks does not happen.
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
Nifty is a well diversified basket of stock with representation of nealry 21 sectors. Bank Nifty is sector specific index hence more volatile. You can trade stock options, there is no issue with that.
thanks
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
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…
Most welcome and we are glad you liked the content 🙂
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.
If some one tells buy infy @ 2200 equity since shortage of funds can we buy Call option Infy 2200?
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.
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?
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.
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….
Absolutely, it always makes more sense to develop your own thesis rather than depend on someone else’s thesis.
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.
Risk is unlimited agreed, but statistically the odds of a loss occurring is limited :).
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?
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.
How to plot OI, Change in OI and PCR Ratio indicators for Nifty options in PI?
That would be a bit tricky, suggest you email [email protected] for this query.
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.
Thank you, we too hope to benefit significantly from the interesting and simulating queries we get here 🙂
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?
Absolutely, all options in India is cash settled. I hope Varsity will help you understand options completely!
Dear Sir,
Which is the better strike price to enter/buy an Option (In – Out – At the money call).
Regards Rama Devi
It depends on the circumstance. We will discuss the same over the next few chapters.
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?
Lot size is fixed by NSE – suggest you start from this module http://zerodha.com/varsity/module/introduction-to-stock-markets/
“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.
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.
This is truly outstanding.. the simplicity of expanation and clarity is great.. keep it up..
Thanks for the kind words and encouragement! Please stay tuned for more.
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.
I’m sorry you got this information which is wrong. NEST Plus is free to use. Whom did you speak to? Can you please email me the details to [email protected].
Just finished reading the Futures module.Excellent narration.
Is it possible to provide all the modules in a PDF format?
Thanks Anil. We are working on converting these topics in PDF and iBooks. It will be available very soon.
ok.I request you to add information about required certifications for making a career in the field of trading.
Do have a look at this – http://www.nseindia.com/education/content/nse_pgp_others.htm#
Thank you.
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
Absolutely!
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?
For this you need an options calculator. We will discuss the same towards the end of this module.
Hi,
Can you explain me please what is the “Premium” of a particular Option Strike Price? Please explain it with an example.
Thanks.
Its explained here – http://zerodha.com/varsity/chapter/basic-option-jargons/
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
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.
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?
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.
Dear Karthik,
Is there any chances of introducing options tool in PI s/w.
Yes, we will have an option tool very soon.
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
Usha, everything answered in this module: http://zerodha.com/varsity/module/markets-and-taxation/
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?
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.
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.
He would make a profit of Rs.200 minus the premium paid.
It should be 200 + premium paid right? Since I am making a profit?
Premium has already been paid, so that is a debit.
On Expiry Date do we have two options ….one is to square off the position and second is to exercise the contract …..if we square off- the profit and loss is based on premium and if we exercise the contract – the profit and loss is based on the strike price,spot price and premiums. Is it right ?
please explain it with respect to an example.
thank you !!
Thats right, Shubham. Lets say you have 10500CE long which is trading at 150, while spot is at 10630…30 mins more to expiry. If you decide to square off at this point, you get 150. But lets say you decide to let it expire and you nothing changes in the market and the spot closes at 10630. The intrinsic value is 130, hence you will get 130.
Thank you very much kartik 🙂
Good luck, Shubham!
But Wont exchange Charge high STT as we are excercising ?
which will eat our profits ?
dear Karthik please publish pdf version of option theory
We will, just waiting to complete the Options Theory module.
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.
Liquidity is an issue Nikhil….there are hardly any traders trading 18000PE.
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
Assume Nifty closes at 8000, the you would make the ‘Intrinsic Value’ minus premium paid.
Intrinsic value = Spot – Strike
= 8000 – 7800
= 200
Premium paid = 35.
Profit = 200 – 35 = 165.
Thanks!
Hi Karthik,
1. Do We need to square off the position on expiry day to exercise the option or is it automatic if we are in the money?
2. Why is ITM option is not trading at intrinsic price on the expiry day? Why is it trading a little less than that? Is it due to higher applicable rate of STT on expiry day if ITM option is not squared off?
Thanks
Its automatic upon expiry, if you are long options contracts. However STT for ITM options is quite high, check this – http://zerodha.com/z-connect/queries/stock-and-fo-queries/stt-options-nse-bse-mcx-sx
Yes, usually traders account for a higher STT value.
Hi Karthik,
Could you please eloborate the above explaination in terms of the lot size of 75 and actual Profit earned . Thanks
Not sure which one you are talking about. Anyway, P&L is basically –
The number of points made or lost per trade * lot size.
On Expiry Date if the contract is 1) ITM then….one can square off the position by selling them before closing of exchange so high STT wont be charged.in this case how profits are calculated.
2) not ITM but trading at a premium higher than we purchased at… so will profits be based on only premiums ?how are they calculated.
if we exercise the contract by letting it expire and not doing anything ….. exchange will charge high STT for ITM options.
so what one should prefer doing ?
please explain it with respect to an example.
thank you !!
1) The P&L is as per the difference between your buy price and sale price of the premium
2) Yes, like I said, its the difference in premium
Yes, they do. It is best if you square off the position before expiry in order to avoid STT.
Shouldn’t it be Rs 65/- in CASE-2 last line “for a stock that’s available at Rs. 75/- in the open market.” ?
Yup, thanks for pointing out, will make the correction.
Why no pdf version? Also why no chapetrs 6 to 10?
No PDF because the module is still not complete. Chapters between 6 and 10 are there. Are you referring to the modules as such?
Yes I was referring to modules 6 to 10
Working on one module at a time…Module 5 just got done…starting 6th soon. By the way 7th module is complete…you may want to check that.
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.
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/-.
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.
Ahh…not sure Sanjiv. Suggest you touch base with NSE – Tel. No: (022) 25045300
My question is …… can we sell the option call any time before the expiry date or only on the date is fixed???????
Anytime you wish, no need to wait for expiry.
Would buying near intra-day premium’s low and squaring it off at high work for me?
Options premium does not really work like stocks…hence buying/selling near low/high point is not a great idea.
Karthik,
Which ones less risky options or day trading?
Can you please lay down the perks of day trading compared to that of options?
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 🙁
For this particular call option, to buy a lot, am I supposed to pay 131.85 or 131.85*75= 9888.75 ?
Yes, thats right.
Karthik sir,
I didn’t get you, 131.85 or 9888.75?
——>
hello sir,
if price is ATM then why Call / Put Prices are different.
i’ve sent one image for this
Generally Call option premiums are more expensive than Put option premiums, this is due to the ‘Put Call Parity’.
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,?
Option shorting margins is similar to futures margin. Check this – https://zerodha.com/margin-calculator/SPAN/
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 ?
Yes as long your option does not have any intrinsic value your short option position will make money.
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
Check on NSE website –
http://www.nseindia.com/live_market/dynaContent/live_watch/option_chain/optionKeys.jsp?symbolCode=-10003&symbol=NIFTY&symbol=NIFTY&instrument=-&date=-&segmentLink=17&symbolCount=2&segmentLink=17
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
Well, premium is a function of all Greeks and not just the IVs…so this should explain!
Hi, sir
Please explain this Interpretation
when Iv is high premium would be high and vice versa
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.
I got the -ve value of daily returns average……It may come -ve or +ve both are correct right?
Yes, thats not an issue.
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
Glad to know this 🙂 Good luck and all the very best for all your trades.
If you are conducting any classes please inform us
Unfortunately we don’t conduct physical classes. All our content is made available for free online.
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.
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.
As You Said… PROFIT = intrinsic value -premium paid. When calculated the profit is negative..
That means you are making a loss.
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.
Keep learning Paschal, this is the only way forward for all of us in markets 🙂
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
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.
Didn’t understand what you meant (3rd point) by “… please be very clear about option’s payoff.” Could you pls explain?
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.
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?
Muthu – I’ve explained the entire thing over the many chapters in this module. Request you to kindly read through the same.
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.
Many thanks Aiko!
Thanks for the great work. I pray for your well being.
Glad you are liking this, many thanks 🙂
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.
Here is my suggestion –
1) If you area beginner, I’d suggest you stick to cash positions and hold your trades for multiple days. However if you are particular about intraday, then derivatives is the best option. Also, to minimize losses you could try hedged position in options. We have discussed various strategies here – http://zerodha.com/varsity/module/option-strategies/
2) All else equal, option writing is considered safer. But then it depends on how and why you are writing options.
3) http://zerodha.com/varsity/chapter/re-introducing-call-put-options/ I’d suggest you read through this chapter to understand strike selection.
Option was not my cup of tea but thanks to varsity the way explain here now i understood.
Super, good luck Saurav 🙂
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
You can squareoff anytime you wish!
I have completed all lessions now starting from one again.
Good luck!
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
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.
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??
You will get 10 Rupee as profit, hence 30K minus 8K premium amount, hence 22K as net profit.
The VARSITY MATERIAL IS AVAILABLE IN GUJARATI AND HINDI.I REQUEST YOU TO RELEASE IT IN TELUGU ALSO IF AVAILABLE.
Sure, we will try our best to do this. Thanks.
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.
Its automatically done by the exchanges.
but then exchange will charge high STT…right ?
as we didnt square off the position ?
STT is from the Central Govt, not really the exchange. Yes, ITM options attract higher STT, so it is better to square off before expiry.
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.
These are different strikes Wilson! Different strikes trade at different premiums.
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
Hi Pandit – thanks for the offer, can you please write to [email protected] regarding this? Thanks.
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??
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.
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 ?
Yes, you can certainly do that. This is trading the premiums.
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?
Request you to read through this module 🙂
I think you explain better in the comments section! I seriously learn more from the comments section.
Thanks! Time for me to reflect upon this and improve the explanation in the chpater 🙂
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?
The underlying is Nifty 50 index, so it always makes sense to look at the underlying and develop your point of view.
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?
The strike is deep OTM, unless Infy raises dramatically the bid-ask may not really improve.
Sir, in order to escape significant time decay, I wish to buy options whose expiry is 45 to 60 days away. Under the Indian context, which options are liquid for even otm strikes? At least nifty?
Top few names like Nifty 50, Bank Nifty, Infy, SBI, ICIC etc. No liquidity beyond this.
Sir, how do we measure liquidity? Suppose I want to buy 20 lots. Then roughly what should be the minimum lots in open interest and minimum lots in bid and ask prices to be called as sufficiently liquid?
One way to look at liquidity is by looking at the bid ask spread and impact cost. Check this – http://zerodha.com/varsity/chapter/nifty-futures/ , section 9.2.
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.
It’s a December 2016 contract, can you share the NSE link for the contract you bought?
No sir, It is showing in Kite app Watch List, trade book and in holding also.
I need to check this.
same happend to me….on nse expiry date showing is 31-01-2019 and in kite when we add it in watch list its showing 18-01-2019….please check and let us know .
please check this and reply
Check which query, Shubham?
same happend to me….on nse expiry date showing is 31-01-2019 and in kite when we add it in watch list its showing 18-01-2019….please check and let us know
Will look into this, Shubham.
Is binary options trading discussed in the following chapters or modules?
Not yet. Btw, binary options are not available in India.
is trading through “IQ option” for binary options is legal or not in india?
Not really. Check this – https://tradingqna.com/t/forex-trading-legal-for-indians-i-want-to-trade-after-6pm/448
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.
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.
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??
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.
4) so should I sell it on the expiry day
YOu can sell it anytime you want, not necessary to hold till expiry.
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
3)on expiry day should i buy whole amount(3000*250)??????
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.
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……………….
They will take the settlement price (which is the closing price) of the asset.
Be careful of what you buy on expiry day, especially due to the STT trap on options. Check this post – http://zerodha.com/z-connect/queries/stock-and-fo-queries/stt-options-nse-bse-mcx-sx
Premiums is a function of spot price, they move according to how the spot price moves.
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)
well sir .I got my ans in chapter 3
Cheers!
Thanks Prakhar!
For a call option, yes, he profits when the premium is higher than strike + premium paid.
Dear Karthik,
Do we need to complete/understand Futures module before we jump into Options.
Regards
It is always better that way 🙂
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?
At 6100 or any price above 6100, you can keep the entire premium received.
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…..?
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.
do u conduct webinars too ? i was not aware about these ? could u please tell us when and how can we join them ?
I’d suggest you subscribe here, Shubham – https://www.youtube.com/user/zerodhaonline/videos
could u please explain profit and loss with an example of shorting a call option ?
You short a call @ 100, the price of the call goes down to 95, you make a profit of Rs.5. If the price of the call goes up to 105, you will make a loss of Rs.5.
thank you !!
Thanks for guidance sir…….
Welcome!
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
Yes, at all price points between the strike + premium paid, your losses will be minimized.
Than you for the wonderful introduction Sir.
Cheers!
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.
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.
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.
The whole thing is explained in this module, Ganesh 🙂
Thank you very much! Understood clearly after lot of confusion.
Cheers!
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 ?
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.
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?
Exchanges creates these contracts.
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?
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.
why module 5 not available in pdf format for download????
We are working on it, Mahesh.
OK thanks… I read options theory part 1 up to chapter 10. Its awesome!!! You are doing extremely good job.
Please provide rest of the module as soon as possible.
Thanks!
Most of the modules are in place already, Mahesh.
Dear Karthik,
I have a doubt with respect to call option. Does buying call option of South Indian bank today (12/4/19) at strike price of Rs 14 premium being 3.10, guarantee a profit as current market price is 17.35. Is so the case or have I understood call options wrong??
No, it does not guarantee a profit. Think of it as buying a stock…you bought it at 3, you will be profitable only if it moves higher right? So let’s say it moves above 3.1…to 5, then you make 1.9 as profits.
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
Lot is the minimum number of units you have to transact in. You will need 75*40 = 3000.
NO DOWNLOAD OPTION AVAILABLE
Except for this module, its available for the rest. This will be up next week.
Hi Mr Karthik,
Why hindi pdf’s are not available for all modules? it was previously available, not showing since avataar is changed.
We decided to take it down for a while as the translation was not accurate.
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.
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/
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…
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 🙂
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.
Well, I thought it was best to keep this simple – best way to introduce options 🙂
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?
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.
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?
1) Profits will be credited when you close your positions
2) Yes, you can book profits anytime you wish
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.
If you have an account with us, then you get access to charting on Kite. Check out more details on charting here – https://www.youtube.com/watch?v=5M232FaN5Ks&list=PLkxTRam6E2V-okv6gwQlt6dLTsn0v6CD1&index=10
You may also want to check out the module on TA for drawing inference on price movement – https://zerodha.com/varsity/module/technical-analysis/
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
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.
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.
Wishing you the same, Patil 🙂
Happy learning!
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/-premium@ 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.
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.
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
Thanks for the kind words, Shantaram 🙂 Hopefully, you will continue to like Varsity!
Happy learning.
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
Yes, you can. Nothing wrong.
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
Please do share your ticket number.
#906818
Guess, someone will get back on this Waqaar.
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
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.
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 ?
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.
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.
I’d suggest you check this. Everything about Nifty Bank is here – http://www.niftyindices.com/indices/equity/sectoral-indices/nifty-bank
can avilable all book in hindi
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.
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.
Thanks for the kind words, Roshni 🙂
Happy learning!
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?
Hmm…it would be 4L/6L, about 66%. Let me recheck the context. Thanks for pointing.
Hey
In the case that the land price remains 5L, Ajay should be neutral and not opposed to buying the land. In fact, the amount paid as premium should not factor into his decision on whether to buy or sell the land.
Then how would be accountable for that money?
400% is correct …. as he has gained 4 L by investing 1L only
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?
Yes, you can. It will be valid through the day, you’ll have to place it again next day.
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 .
1) 9:15 AM to 3:30 PM for Eq. Commodities go on till 11:30 PM in the night
2) Yes, you can
3) No, you can place your trades at 9:15 AM itself.
VERY THANK FULL TO U SIR THANKS ZERODHA TEAM .
Happy learning!
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
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.
well presented…….Thanks for such a nice writing.
Happy learning!
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?
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
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!
Yes, it will be squared off (settled) at zero.
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
1) Yes
2) This is the premium, once you pay, you can carry forward the position until expiry
3) Yes
4) Yes
5) The position will close and get settled based on the premium. Capital gains will be taxed based on your income bracket. Suggest you read this module on taxation – https://zerodha.com/varsity/module/markets-and-taxation/
Thanks Karthik sir .
But 1 more query ..
Assume 26/jan/18 is Expiry day for NF…
Today is 25/jan/18 .. . . Can I buy NF expiring on 22/feb/18 …today itself .?
or do i have to purchase on “next day ” of the current expiry date .
You can buy it today itself, Rohan.
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
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.
Thank you very much Karthik Rangappa sir.
If it reaches to Zero before one month of expiry and again increases then?
Possible. You anyway have the time until expiry up to which you can hold these contracts.
Ok Sir, Thank you
Cheers!
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!
Both buyers and sellers of options have the flexibility to square off their positions anytime they wish, no need to wait for expiry.
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..!
Pratik, this is strange. What kind of error message did you get?
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.
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.
Oh..! Got it.. Thank you Sir.. 🙂
Cheers!
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 ?
Yes.
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?
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?
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.
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!
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.
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
1) Yes
2) This requires upfront margins to be parked.
I’d suggest you read this chapter for more details – https://zerodha.com/varsity/chapter/bull-call-spread/
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
1) You breakeven
2) Profit of 15, so 15*100 = 1500
3) You lose the premium of paid i.e 1500.
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 ?
Yes, all MIS orders are squared off at the market by 3:20 PM.
How/where to download this module in gujarati ?
We have disabled the Gujrati and Hindi version as there were quite a few translation errors.
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
Sunil, multiple plans only confuse clients. We think one simple plan helps the client focus better on trades and not worry about brokerage 🙂
Hi,
Can you please make a video series on “Options Theory for Professional Trading”.
On the list of things to do, Sayed. Will do.
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
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.
sir
could you plz give us detailed insight on macro economy?
sir, it would really be of great help like The Great Recession, Economic Crisis, Bond Market in India , Inflationary Trends , etc.
This will require an entire module on its own, maybe sometime soon 🙂
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?
If you leave the option to expiry, that is considered as expressing your interest to exercise the option.
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?
Yes, you can.
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.
Ah, that’s quite sad. You can square off the position whenever you want.
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.
You can sell it anytime you wish.
“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.
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.
What do you actually mean by exercising, karthik?
The act of letting your option expire without squaring off is referred to as ‘Exercising’ your option.
where can we get historical charts of expired option contracts?
Unable to find the link.
I guess you did not understand my question..i want to know if it is possible to get the historical charts of expired option contracts..as in is there any website that provided such charts..becoz on kite after contract expiry the charts do not appear
Check this – https://www.nseindia.com/products/content/derivatives/equities/historical_fo.htm
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..
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.
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.
Yes. Good luck, Narendra!
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?
I’d suggest you take a look at this – https://tradingqna.com/t/no-more-stt-trap-on-exercised-in-the-money-options/18977
Upone expiry, if you exercise your option and If STT is more than intrinsic value, then zerodha will automatically lapse it.
You need to check this, Sandeep – https://tradingqna.com/t/no-more-stt-trap-on-exercised-in-the-money-options/18977
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?
That was just a draft, details and fine print is not out yet, let us wait for the final framework 🙂
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
Or do i need to do something more. please clarify
Thanks &Regards
Nothing really, you just need to have enough margins. You can use this for figuring out the margins required – https://zerodha.com/margin-calculator/SPAN/
1) Yes, to sell options, you need to have margins
2) Yes, that is correct.
where can i locate the circuit filters and my limit calculation if i want a put option?
Its available on Pi. Click on the snap quote of the instrument and you will get this info.
Hello,
I am new to trading. I want to trade in Call and Put options. Kindly guide me How and Where to start.
Suggest you read this module completely, its the best way forward. Good luck.
Sir pls have one module on option chain analysis.How to analyse the changing OI and Changing LTP in option change.
Its explained in detail in the subsequent chapters, Neelkanth.
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?
Market orders are not allowed on stock options due to liquidity issues. You can, however, place a limit order. You can read more on this here
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?
Already replied to your previous comment.
Dear sir,
Why continuously three days block in F&O in TCS?
Are you placing a market order in TCS options? If yes, Mkt order is not allowed in stock options.
Dear Sir,
From where do I get value of delta?
Check this – https://zerodha.com/tools/black-scholes/
great work, even NISM materials weren’t this level. 🙂
I’ll take that as a compliment 🙂
Happy learning!
[…] Call Option Basics […]
[…] Call Option Basics […]
[…] Call Option Basics […]
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) ?
Thats right, Piramal. These are ITM options and they are the safest to trade when in confusion about strike selection.
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.
Glad to note that, Ramanathan 🙂
Kindle version is on the agenda, hopefully, we can do that sometime soon!
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!
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.
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?
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.
[…] Call Option Basics – Varsity by Zerodha […]
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 ?
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.
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
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.
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
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.
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?
These two topics are very elaborate. I’d suggest you check this module for Futures – https://zerodha.com/varsity/module/futures-trading/ and this one for Options – https://zerodha.com/varsity/module/option-theory/
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.
I’d suggest you look at Candlestick charts with at least 15 mins frequency.
in which technical tool’s strategy?
Ankesh, you can look for this in Kite itself. More on charting here – https://www.youtube.com/watch?v=5M232FaN5Ks&list=PLkxTRam6E2V-okv6gwQlt6dLTsn0v6CD1&index=10
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 =
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.
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
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 🙂
Thank you so much Karthik, appreciated your reply.
Good luck, Ron!
Sir
Can I buy an ITM option?
Yes, you can buy any option which has liquidity.
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!
Yes, the physical settlement is applicable only to stock futures and options. Not the index futures and options.
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.
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.
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?
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.
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
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!
Thank you so much Karthik, really appreciated your quick response. One last question if you don’t mind, what is better to trade futures or options ( for both intraday and if I’m planning to hold it for a week or so ). What do you prefer personally to trade.
Thank you
Regards
Ron
I’d suggest you start with Futures, get comfortable with it before moving to options.
Thank you Sir, appreciated.
Welcome, Ron!
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
This is because not many traders are willing to trade these contracts, hence the liquidity is low.
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.
I’d suggest you look at this blog post – https://zerodha.com/z-connect/tradezerodha/zerodha-trader-software-version/bracket-orders-trailing-stoploss-sl
How does this change Impacts in Intraday of Options?
do we need to maintain the above mentioned Margins for Intraday as well?
I guess you are talking about the new ASM margins, suggest you take a look at this thread – https://tradingqna.com/t/margin-requirement-for-trading-f-o-is-set-to-go-up-in-4-phases-starting-14th-sep-2018/46588
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
Ron, I guess you should look at the Average True Range (ATR) for volatility. You can read more about it here – https://zerodha.com/varsity/chapter/supplementary-notes-1/. I’d suggest you look at EOD data.
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”
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.
Does the exchange settle the position without our intervention at the expiry date or do we need to take some action before or at the time of expiry.
No action required. However, its advisable you close the position before expiry to avoid things like higher STT – https://zerodha.com/z-connect/queries/stock-and-fo-queries/stt-options-nse-bse-mcx-sx and physical delivery obligations – https://zerodha.com/z-connect/tradezerodha/policy-on-settlement-of-compulsory-delivery-derivative-contracts.
Excellent explanation!
Good luck and happy reading 🙂
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
If the idea is to hold for 2-3 weeks, stick to ATM. Shorter-term like 3-5 days, maybe slightly OTM will also do.
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?
All else equal, the price of the option will fall owing to the theta decay.
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…
Ah, sorry that caused a confusion!
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 !!!
1) Yes, you will be highly profitable if the stock price reaches 60 🙂
2) This depends on your target and your risk appetite
3) Yes, remember the call option premium gains in value if the spot price increase
4) Certainly more than 4, in fact, it will be in the region of 20+
Thanks a lot Karthik !!!!!!!!
Welcome!
Hi Karthik,
I have an idea of options trading and I have not started trading yet. I am not sure how much I need to earmark for options trading. I can invest anywhere between 1-2 lakhs in options trading. I want to know whether this amount is enough to start trading or I need to put in more.
Depends on what you intend to do Sunny. Options writing requires more money than buying.
As options writers are winners for most of the time, I would like to start with options writing. It would be really helpful if you can throw some light on how much amount should an option writer start with options trading.
Option writing requires margin deposits, I’d suggest you have at least 80K for every lot of Nifty. Good luck.
Which are best news sources in india to keep track of financial economic market related news. personally what do you prefer .
Any good business postal should help. You can check https://pulse.zerodha.com/ , this aggregates all the news into a single portal.
Hi Karthik,
In one of the comments, you said that in order to simplify you ignored the TVM of Rs 100000/- that Ajay pays.
I understand TVM, but my question is – why deduct the profit he “could have made”. He knew his other potential earning opportunities of the 100000 and chose to buy the call option over others. Now, he can either make a profit from the call or a loss…why consider sometime theoretical in practical??
Thanks..
Sorry, I’m unable to get the context here. Alok. Can you share the link to the comment? Thanks.
The comment is – “Vikram Ranganathan says:
September 26, 2017 at 12:52 pm”
It’s about the first example in this chapter…
Ok, got it. I real life the option premiums don’t factor in this. In fact, this is the ‘opportunity cost’, if you think about it.
Hi,
But isn’t this what the Greek “Rho” refers to…Premium is the rightful property of the seller and isn’t he is free to earn any return based on his risk profile and not just the risk-free return?? so why give this benefit to the option buyer??
I mean, the option seller is already assuming unlimited risk, just in case the position goes against him…so isn’t it right that he gets to use his premium in any way he can to reduce that risk??
Thanks..
Alok, come to think of it, the premium is passed back to the option seller and he is free to reinvest that right away.
Hi,
i guess i am a little more confused now…😂probably will need to read more for clarity…Thanks for the prompt reply…keep up the good work!👍
Alok, yes please do read through. Meanwhile, I’ll be happy to help you further. Please do let me know. Thanks.
Dear Team, I think you should not only make a PDF of Options topic but also a PDF of all the questions and answers that are coming here, these are really a treasure for anyone to learn and take a dive . Thanks a lot for building this platform and the dedication you put to answer everyone’s query. I came across this only 2 days before and until then I was trying to figure where I can get detailed information related to Options wrt to indian market . Please do not stop and keep continuing 🙂
Request your assistance with the question please : When we open two contracts , Buy Call and Buy Put for the same strike price and when the Strike price moves and if in profit , I can square of my call contract . Will this end my contract for Put automatically or we have to manually exit the contract individually when there are multiple contracts. Am sorry if you have already covered this in any of the module . Appreciate your kind response . Also, need your help to open an account with Zerodha , please share a link for the same .
Awaiting for your response please
Thanks for the kind words, Guru. Really glad that you appreciate Varsity!
We are coming out with an app, I hope you will like that as well 🙂
Each contract you open, you will have to close it individually, Guru. One does not cancel the other.
Great to know about the app . Would be curiously waiting 🙂 . Please keep us updated .
Surprisingly I did not get any notification on the response . But please keep us updated us through any of the means related to the Varsity . All the best and thanks again for the response.
For updates, I’d suggest you keep a track on Twitter – https://twitter.com/zerodhavarsity
Hi Karthik,
I have some doubts regarding expiry. Please clarify whether my understanding is correct:
1) Buying Call Option — I bought a 500CE at 5 Rs premium, while the underlying is trading at 500. On the time of expiry ,
if the spot price is at 530, my option now is an ITM option and so I will be getting some amount, I think (30 * lot Size) is the amount i get, but I will be paying STT i.e
0.125% of (530* lot Size). This is what exercising of ITM Call Option means??
2) Buying Call Option — The same above scenario, but at the time of expiry, the spot price is at 490 and hence it’s an OTM option and I would be loosing all the premium i have
paid i.e (5 * lot Size). There is no more STT tax for the options which don’t have any value, hence STT is zero. –> This is what expiry of OTM Call Option means?
3) Selling Call Option — Since we already paid STT while selling, there is no worry of paying STT during the expiry, even if the stock/index expires ITM/OTM.
4) For put options, it’s the same as Call options.
Along with the above 4 points, please check below :
In the 1st case, one can happily sell anytime before expiry time, so that he will be getting a profit of (30 * lot Size) and need not paying higher STT of (0.125%) instead he would
be paying STT of (0.05% of selling side of the premium value) only.
In the 2nd case, when he spent (5 * lot Size) premium initially at (500CE strike,500 spot) and the underlying came to 490 from 500, then may be premium would have decreased to 2,
so he would be loosing only (3 * lot Size) + (0.05% of selling side of the premium value). Atleast the total amount of (5 * lot Size) willnot be eroded.
Please let me know if my understandings are correct?
Thanks
Srikrishna
While discussing about 2nd case (at the end), I mean that statement is valid only if he sells it before expiry.
I also have similar question.
1. If I am option buyer (either buy CE or buy PE) I need not to worry about exercising right? My understanding is I will lossing only the permium paid.
2. If my buy Option is about to expire in OTM, which is best option, either to cover it or leave it worthless.
1) Yes. However, if your option turns deep ITM, then you will have to worry about paying STT. Hence to avoid this you may want to square off the position before expiry itself
2) You need not have to worry about it if the option is expiring OTM.
Yes, I guess as much.
Srikrishna, I read through the entire query and yes, your understanding is correct.
Hi,
I have few basic questions.
1. Is Physical delivery is only on 48 stocks initially announced or any thing being added now?
2. If I am long on call option, which is ITM unable to squareoff, will it get exercised. Any ways to stop exercising to avoid STT.
It’s 46 , wrongly mentioned as 48.
1) There are more, please check this – https://support.zerodha.com/category/trading-and-markets/margin-leverage-and-product-and-order-types/articles/policy-on-physical-settlement?ref_query=physical%20settlemment
2) Yes, STT will be applicable. Its best if you sq off before expiry. If your option is close to expiry, then you can still get away by not paying expiry. Problem is when your option is deep ITM. In such a case, you have no option but to pay STT.
why premium of options do not move with same percentage as change in stock price. for e.g I purchased NIIttech (CMP1024) call option at Rs 39.75 on 27Feb18, then stock moved up and premium also went up to 42, but again stock moved down to original price but premium went down drastically. Again stock moved down compared to my stock purchase price and again gained its price(my purchase price) but premium still went down.
Can you explain this
#correction in date 27Feb2019
Pradip, you need to understand how the delta of an option works to understand the relationship between the option premium and the underlying spot. This is explained later in the module. I’d suggest you continue reading in the same sequential manner.
Why it is said that in selling option contract, risk is unlimited ? because option seller can set stop loss and limit his loss.
Well, by setting SL, you prevent the loss from occurring, without which it is unlimited.
Best method
How to use it effectively…
I want to ask that for trading in nifty weekly option intraday, which chart is useful..? Nifty spot or Nifty futures.?? My observation says that options reacts to Nifty spot more but for checking volumes, I need to check Nifty futures chart as well…but then looking as both makes me confused and I miss opportunities to trade. Please help me.
Jignesh, you should look at the spot data, but I do understand that volumes can be an issue. As a proxy, you can look at the futures volume data, but this is just a proxy. Over time, I’ve stopped looking for volume related information on indices.
Thanks for reply sir, may I know why you dont look anymore for volumes on indices…?? Just to be curious because I heard volumes play very crucial role in deciding direction of the trend etc..but its my own experience as well that volumes can trap you in bull or bear traps….
It does, Jignesh. Index volume is a problem for the very reason you’ve stated.
Thanks Sir for help…!! You are doing a very good job..!! I will consider spot data more precisely now..!!
Good luck, Jignesh!
In Option chain on NSE website there is column of open interest and volume. However there is always difference in numbers, for e,g in today’s i.e 28Mar 2019 data for Kotak Bank , Open interest for strike price Rs 1200 is reduced by 4000 but volume is only 17 . I presume Volume is also number of contracts.
Can you explain this
The volume is the number of contracts, but OI is the number of shares.
Thanks for clearing my confusion
Good luck and happy learning!
I need to understand call option
For Eg. Suppose I buy ITC APR 300 CE @ 4.05 and at the end of the month if I’m not able to sell what will happen.
Considering the share price of ITC is trading at 310 at the end of the month.
How will I know the premium of ITC APR 300 CE in Zerodha
Srinivas, in this case, the exchange will assume you want to exercise the option and hence this will be settled for you.
Exercise means exchange will sell/settle call option at particular premium prevailing on expiry day end and pay/ recover difference . Right?
Thats right.
I need some explanation for Option Chain. I have heard on business channel and You Tube videos like call short buildup and Put long build up. In option chain there is only increase or decrease in open interest either side i.e call or option. How to describe it ? for e.g if open interest for a particular price is increased in Call side , whether it is long build up or short build up, because when somebody has sold then some other has purchased.
Similarly on Put side when there is increase in open interest on particular price , whether it is long build up or short build up
Pradip, this “call short buildup and Put long build up”, does not make sense to me either 🙂
I really don’t know how they arrive at this. I see this as an increase in OI or decrease in OI. However, you can associate this with increase/decrease in price and make an estimate of how bullish or bearish the market is. But this is empirical in my opinion.
It seems various experts on TV business channel confuse retail traders
Caveat Emptor 🙂
Brilliant way of explaining the concept of Options.
I am new to Options though have traded Futures since quite a long time.
Overall, I loved the articles in Varsity.
Happy to note that, Nikhil. Happy learning!
Thanks for replying to any kind of queries.
I would like to know following. It is understood that Nifty index value is derived from underlying 50 shares however when there is heavy transactions in Nifty future and options , does it affect Nifty index.
On you tube or on business channels they mention call and put outstanding contracts and predict next level.
It is confusing for me since index value comes from underlying shares , how can future and option transactions of index impact it
No, the transactions on derivatives do not have an impact on the spot, Pradip. It is the other way actually.
Hi, in my studies as an investor, I have read of employee stock options ( which, it appears, isn’t great from an individual investors’s perspective) given to managers and other employees of the listed company. Is this “employee stock option” the same as options people deal with in the derivatives market, or something restricted for company employees? In other words, if the listed company is not included in the f&o segment, then can such a company still give “employee stock options” to its employees and managers?
Thanks.
Yes, the ESOP issued to employees is the same. This has nothing to do with F&O.
Hi, hope you are doing good ..
If I go to my watch list in kite and search for Nifty option, all I see is NIFTY 16 May CE with Various strike prices….
But 16th is not the last Thursday of the month, and what about put options I don’t see it… Or am I doing something wrong, please help.
If you want to see the monthly option, look up for ‘Nifty may’ and you will see all the strike across both call and put.
what does “The directional view has to pan out before the expiry date, else the option will expire worthless” mean?
Hi Karthik,
Are we going see any ebooks on Varsity?Back in 2015 I remember one chat, in which you mentioned about publishing ebook(s).
We have PDFs that you can download at the end of each module, Sambit.
Good morning Karthikji
Happy Guru Purnima to our loveliest teacher & mentor who taught us selflessly & taking pain to help us in reaching pinnacle of market understanding. U’d shown us to become someday on a road to self sufficiency & financial freedom, something no top education had directly taught us to make a living.
God bless you to long, successful & healthy-wealthy life 👍👍.
And last of all needs your blessings too 🙂
Hey Harsh! That’s a very sweet message! Thanks for the kind words, I’m super humbled 🙂
Sry to trouble u, I’d also commented on some corrections in my query in last chp on case studied. Not in rply section bt fresh question. kindly help me in clearing few doubts
Thanking you & once again Happy Guru Purnima to our fabulous mentor 🙂 🙏
I’m unable to find that query, Harsh. Can you please repost that?
Good evening Karthikji
Yes no need to repost, u’d answered my query in case studies sections. Very much thank you 😊
Just guess why I choose to wish u here that u yourself may not know?
Of all the chapters on options, the Ajay & Venu eg is the most important & beautifully crafted one, the baby steps to the advance world of options know how (I can bet most of who’d understood options on Varsity would definitely credit this chapter first, followed by next 5 chp that laid firm ground work)… without which options learning would have been an out of scope for normal people.
Thanks again for you being beautiful author 🙂
Thanks again for the super kind words, Harsh 🙂
Hi karthik,
Hope u r doing well. It’s being long time since I came up with my stupid questions 🙂
Just want to know what r the advantage and disadvantages of buying ( long ) call and put for the next month contract.
I might be totally wrong in saying this but I always think why can’t I buy next month call/put option with proper risk management. It actually gives me a lot of time to be correct for the trade to go in my direction. I can have a proper risk management and will to take the losses of x amount but rather than buying a current month contract I will prefer to buy next month. Assuming that the current month contract still has 15 days to expire. Which means if I buy next month then i’ll have 45 days
I will really appreciate if u can let me know what am I missing here. What r the disadvantages of following this method.
Many thanks
Ron
Ron, there is absolutely nothing wrong with it. In fact, I do this myself at times. The only thing to watch out for is the premium you pay. Since the days to expiry is more, the premiums can be quite expensive, so ensure you are not overpaying for it.
Hi karthik,
Thank you so much for your quick response. Can you please tell me what are the best possible ways to figure out if the premium is overpriced/expensive. How can I figure that out ?
Many thanks
Ron
You’ll have to use the B&S formula to estimate the fair value and then compare it with the market value to get a sense of how expensive or inexpensive the premiums are.
Dear Karthik,
My query is what will be the premium amount at the end of expiry? will it be 0 at end of closure?
For an example: Today is the BN Expiry Day. I have noticed that BN 28400 CE Aug 29th Expiry was trading at approx Rs. 55 (Premium) at 11:30 AM on 29th. At 3:30 PM same day today the closure premium was showing as RS. 45.35. Bank Nifty Spot is 27305 at 3:30 PM.
Just wanted to understand is 28400 CE expired worthless and entire 55 is profit for him or it will be counted only that difference in premium will be given to option seller?
Request you to provide some clarity to help understanding the logic?
Regards,
Selvam
Selvam, 28400 CE will expire worthlessly and its value will be zero considering the spot is at 27305. If you have managed to sell the option for a premium of 55, then you will get to retain the entire premium.
Hey Karthik,
Yesterday (10-9-19) in the evening while I was going through all the Nifty stocks to choose which ones to trade, I shortlisted TATAMOTORS as it had many bullish signals, I was just about to place the order but then I thought I should check the Implied Volatility and I found out that the IV was around 50, so I didn’t place the order and today tatamotors was up 10.21%. So my question is should one check the IV while trading options or not?
Thanks in advance 🙂
Yes, you should Ram. But remember, all greeks, including the Vega (and IV) should not be evaluated in isolation. You need to look at as a whole.
Hi Karthik! Had a question, ‘While analyzing a stock for trading should we also consider it’s sector’s chart too ? For ex: While evaluating Axis Bank should we also consider Bank Nifty’s chart?
Thanks in advance 🙂
Yes, that is a great practice to inculcate. I’d suggest you do.
What if I buy a call option say HDFC SEP 2100 (Assume lot size 100 and expiry date is 2 weeks long) @premium 25rs and I sell my position on next day @premium 28rs. Did I make any profit here? Or my profit would be depend on spot price on expiry date? please help
You can book your profits, Rahul. No need to wait till expiry.
Thanks Karthik!
Welcome! Good luck, Ram.
Hi karthik,
Tell me something about binary options, and how it can be traded.. Whether it is legal in India..!?
It is not legal in India. Binary options have 0-1 odds, can be fatal to your trading capital 🙂
Sir,
My query is that when I buy a call option there are four possibilities.
1) Spot price goes beyond strike price on expiry
2) Spot price still less than strike price on expiry
3) premium price may increase on expiry
4) premium price may decrease on expiry
Of the above four possibilities, in which one I will get back the entire premium amount paid (premium amount X lot qty)by me and in which one I get nothing?
Pl clarify my doubt .
rgds
1 and 3 you’ll make money i.e. assuming that the premium you get back is more than what you’ve paid. 2 and 4 you will lose.
Hi,
Say the stock price is 550. I have gone for a call option with a strike price of 650. And at the expiry stock moves upto 620. So am I going to get a profit or not?
No, because the spot is below the strike. For a call option to be profitable upon expiry, the spot price has to be higher than the strike plus premium paid.
Hi sir,
I am unaware of the Options trading and just a few days back I have seen a video on youtube where the presenter has mentioned that like from above example even though my strike price is 650, but stock has moved up from 550 to 620 there will be increase in profit for me because of increase in premium price. But I am currently in the 5th chapter of yours and I came to know about what you mentioned in the reply. Thank you for giving such an insight into Options by making it so simple for us.
Pratik, there are two scenarios here. Assume the strike is 650, the current spot price is 550…and it increases to 620.
1) If this happens on the day of the expiry, then it means that the 650 option has expired worthless hence, there is no profit for you
2) If this happens before expiry, then it means there is time for expiry, hence the 650 option will make you some money
So basically, you have to check the time left for expiry.
Hi Karthik,
Suppose I want to trade in Bank Nifty 17 Oct 29000 CE Price 100 How much Fund required for it ?
Sanket, the money required to buy an option is premium * lot size.
Wishing you Karthikji and your family and also to all our Zerodha families a blessed, prosperous, illuminating & Happy Diwali and New year 🎉 🎊 🎇.
God bless you for all ur endeavour 🙂
Thanks, Harsh! Wishing you and family the same 🙂
Hi,
i would like to know whether these varsity modules & chapters are available as a printed book?. If so, how to get them?
No, Sriram we do not have any printed version.
Karthikji has really given good explanation- In MS where I reside ppl frequently go i for same agreement such as Ajay n Venu r doing.
It is called “Sathekhat” in Marathi n is legal way often adapted by ppl who buy land or property.
Ex given to simplify somewhat complex derivative such as options, for newcomers by Karthikji is appreciated!
I’m glad to note that and I’m happy you liked the explanation 🙂
Very elaborate understanding on Call option.But every one of us be careful about the expecting huge profits for small investments it always a risky
On Reliance industries cmp is 1520₹ , In Jan futures contract the future price is 1537₹.
If i want to short reliance industries Jan futures contract tomorrow can i short it
I want to short it because the difference in CMP and futures price is in my favour ie. If i short now then the difference is 17 per share in a lot of 500
You can short or go long on a contract anytime you want. The profitability really depends on your view here 🙂
please guide me,If i sell 1 lot of Nifty option call @ premium 50 on expiry date, and at the end of day the value of premium is get zero , what was my profit/loss at the that day ?
Since you have sold, you want the price to go lower for you to make a profit. So if it goes to 0, you can retain the entire premium of Rs.50/-.
Hi,
After a long search on some good material which can explain this concept of Options, What I could really find in your article is phenomenal and simplistic is such a way that can clear the doubts very efficiently.
So thank you very much on this.
Still I have certain doubts on my side as
1. In the example of Ajay & Venu, the difference to Option and the example can be the possession of asset in reality till expiry. What I mean to say is that Venu possessed that land with him where as the option writer before putting on sell does not possess the asset.
In such case whether the deal takes place or not, Venu always have the land with him whereas the case in Option is different.
2. The chances of winning in this type of contract is more in favour of seller compared to buyer then why the retail investor more prefer to buy compared to selling an option. 66% chance of winning for seller compared to buyer.
3. What is the probability that the options contract will always convert into a trade deal?
Hope my questions are clear, in case not I can further elaborate. Thank you once again for nicest article.
3.
1) In the options world, these are all contracts, no one really owns anything, its all notional
2) Maybe because to sell options you need margins (higher outlay of cash), but to buy you only need to upfront the premium
3) I’m not sure about this
Good luck, and happy reading 🙂
Hi Karthik,
One query on the question you answered earlier.
Question: If a trader shorts (irrespective of call/put) a deep OTM and highly illiquid option and keep it till expiry, will the treader keep premium received?
You answereded as – “Yes as long your option does not have any intrinsic value your short option position will make money.”
Since options is “zero sum game”, question is – for a short position, if there’s no corresponding long position, how writer can keep premium?
Thanks.
The short trade goes through only if there is a trader on the other end buying the option. Assuming there are no other traders, the trade will be settled between the two.
Thanks Karthik for quick response. But still not clear. Since there’s no buyer in this case,
1) Will a trader able to write an option in the first place?
2) If yes, what will he get/loose at expiry of the option?
The exchange will ensure the trade is offset with the buyer. The buyer would have paid premium, so nothing more he can lose.
Hi Karthik,
Your no response prompted me to re-look at my above questions from silliness/stupidity perspective. I revisited Futures module and got my answer. Thanks for not answering my question as that way I was forced to go thru it once again.
If you want, you still help me with one thing. I’m not able to respond to a thread. “Reply” button in individual thread is not working for me. I tried Chrome and Edge browsers.
Thanks,
-Sachin
is there any risk with respect to physical settlement if I hold an in the money banknifty option contract till expiry? What about the troublesome STT rule for holding ITM contracts till expiry? Do you suggest to stay away from banknifty options on expiry day or can we trade them like any other day?
No physical settlement for Nifty and Banknifty. STT is applicable if you hold an IMT long option. You can trade them on expiry, but if you are new, I’d suggest you stay away till you get comfortable with trading options.
the recent SEBI margin rules for controlling volatility in market because of coronavirus at one point says in respect to index derivatives that
a. Short positions in index derivatives (short futures, short calls and long
puts) shall not exceed (in notional value) the Mutual Funds’ / FPIs’ /
Trading Members’ (Proprietary) / Clients’ holding of stocks.
b. Long positions in index derivatives (long futures, long calls and short
puts) shall not exceed (in notional value) the Mutual Funds’ / FPIs’
holding of cash, government securities, T-Bills and similar instruments.
1) So does this mean that if I want to buy a call option or put option in banknifty of 22000 strike whose current premium is valued at Rs. 100 then I must have an equivalent amount of 22,00,000 in cash in my trading account? How exactly is it going to affect me?
2) Also with respect to cash margin for intraday, how much of leverage in BO/CO will be provided for long or short of stocks (FnO stocks) in cash market by zerodha? Please help
1) Yes, but this rule kicks in post 500Cr of positions. Mainly for institutional clients
2) Given the volatility, it changes. Suggest you keep track of it here – https://zerodha.com/marketintel/bulletin/
I have at times noticed that after buying a call option which is OTM (not deep OTM) of Banknifty, the price of the option doesn’t not quickly increase even when the underlying Banknifty index is strongly rallying in the 3mins chart (I am an intraday trader mostly). Why does this happen?
This is because of the option premium is also affected by the volatility and theta of option.
Do we have video tutorial for same topics ??
No video tutorials, Shivi.
1. what is the meaning of “disclosed qty” displayed when you click on buy.How it is used?
2. For how long I can hold the stock through CNC?
Also please suggest a link for a video tutorial.
1) For disclosed qty, check this – https://support.zerodha.com/category/trading-and-markets/kite-web-and-mobile/articles/what-is-disclosed-quantity-feature-and-how-to-use-it
2) As long as you wish.
Hi Karthik,
You mentioned that around 80% of the derivatives trade is in options.
1. Is there a reason why options are more popular than futures?
2. Does taxation have any role to play in this? Noticed that STT is paid on traded value for futures while it is on the premium value. (I might be wrong on this though)
Thanks!
1) The payoff structure is very different. Also you can purchase an option for very little money compared to parking funds as margin to trade futures
2) Nope
Sir
In options, why the options seller is called as WRITER ? What is the logic behind this or it is only a legacy term ?
Regards
It is like the insurance underwriters.
Sir
The 2nd point of Key Takeaways of this chapter writes “option is a tool for protecting your position and reducing your risk”. By this, it infers that option should only be used for HEDGING purpose and not for making profits. Is it so?
Thanks
Well, thats the intended purpose, but ppl use F&O to speculate as well. Nothing wrong with it.
If an In the Money Option is exercised on expiry, what are the STT charges applicable on the same. Is it on the full value of the contract
i.e. Spot price x quantity or only on the profit made by me ?
For example : If I purchased Nifty Call option at a strike price of Rs.8500 for Rs.100 premium. On expiry date Nifty spot is at 8800.
If it is exercised on expiry, then whether STT will be payable on Rs.8800 x 75 (Nifty lot) or on Rs.300 (8800-8500) profit x 75.?
Thanks,
Check this – https://zerodha.com/marketintel/bulletin/230019/no-more-stt-trap-on-exercised-options-from-today
Sir
As per Warren Buffett, “financial derivatives are weapons of mass wealth destruction”. More than 80% people lose money in derivatives.
1. Do you think retail investors ( more appropriately small traders) should opt for these derivatives ?
2. For retail investors, which is better: trading in F&O or long term investment in stocks?
Thanks and regards
1) No, they should not, unless they are fully aware of the risk and complexity involved
2) Long term investments in stocks.
Hi Kartik,
[Hypothetical Scenario]
Suppose I have 100 shares of stock “X” at Rs 1800/share.
Lets assume CMP is 1100
I want to average it out by adding 100 More shares but right now I do not have the funds.
Would It be a good idea to buy a call option (let say 1150) of “X” available at a low premium with an expiry of 2 months to average my portfolio?
Assumptions:
1. I’ll have the required funds to purchase the additional 100 shares in 2 months time (ie. I’ll exercise my option).
2. During Expiry the Spot price of the stock “X” will be higher than the Call option price+the premium paid on it.
Kindly help in clarifying the same.
Thanks in Advance.
Not really Pranay, because at the end of it, you still need to have sufficient funds to buy the shares right? Check this – https://support.zerodha.com/category/trading-and-markets/margin-leverage-and-product-and-order-types/articles/policy-on-physical-settlement
Hi Kartik,
In point 1 above I am assuming that I will have the required funds just before expiry to exercise my option (that is take the delivery of the stocks).
So would it make sense then???
Also one feature request from my side.(If possible)
Since every comment requires the email id would it be possible to get an alert whenever you reply on it?
I had to search my question in all chapters in Futures Module to look for the question I posted and to check If I got a reply.
Thanks in Advance.
Alert is not possible Pranay, its just that the number of queries is so much that you yourself will feel that the email alert is spammy 🙂
Hi Kartik,
Kindly clarify on the 1st part of the response.
“In point 1 above I am assuming that I will have the required funds just before expiry to exercise my option (that is take the delivery of the stocks).
So would it make sense then???”
Also Regarding the Alert I was suggesting that it be sent only when a reply is made to one’s own comment.
Got it Pranay, I’ll check with the team if that is possible, but I’m not too hopeful.
Hi Kartik,
Thank you for the information.
Still waiting on your thoughts on the 1st part of the Query 🙁
[Hypothetical Scenario]
Suppose I have 100 shares of stock “X” at Rs 1800/share.
Lets assume CMP is 1100
I want to average it out by adding 100 More shares but right now I do not have the funds.
Would It be a good idea to buy a call option (let say 1150) of “X” available at a low premium with an expiry of 2 months to average my portfolio?
Assumptions:
1. I’ll have the required funds to purchase the additional 100 shares in 2 months time (ie. I’ll exercise my option).
2. During Expiry the Spot price of the stock “X” will be higher than the Call option price+the premium paid on it.
Thanks.
Yes, it would as long as you are bullish on the stock.
Hi Karthik,
If i buy a call option today and don’t square off before expiry date, do I have to take delivery by paying the amount as quoted in spot market? If I don’t pay what will be the consequences?
Yes, you will have to. The systems won’t allow you to carry forward the position if you do not have sufficient margins.
Hello, Your tutorials are very useful. thanks for your work.
This article should add more content on what is exercising options in details. I see lot of people in comments are asking the same. This article is not taking about this.
I suggest to add below content to artcle.
1. First of what is exercising in detail with example.
2. How selling before expiry is different from exercising options.
3. How to take stock (land) delivery after expiry. if it is not possible please add this to article.
I really appreciate you efforts. super work.
Yes, the entire concept of exercising changed, now is physical delivery. Will try and update this sometime soon.
If i buy stock option (not index option) and let it expire(no matter profit or loss)the do i need to take their physical delivery.
If yes how does that work out plz elaborate.
Thanks , karthik
Yes, that would result in physical delivery. Check this – https://support.zerodha.com/category/trading-and-markets/margin-leverage-and-product-and-order-types/articles/policy-on-physical-settlement
I would like to know covered call and put options. Which stock broker allows don’t charge money for covered calls and allow to buy or sell through options at expiry as per other foreign stock markets as per stock availability for covered calls and cash availability for covered puts. Please advise. Thanks. S.Shanmugam
You can initiate a covered call easily on your own. You don’t get a margin benefit for now, but hopefully soon.
Thanks for your reply. How we intstruct stock broker to go for physical delivery instead square off at the expiry in the case of in the money as we hold shares against covered calls. Thanks.
If you leave it to expiry, it is implied that you intend to physically settle.
karthik sir
i have one doubt is that if i buy an call option rs 100 with premium rs 5.0 and if it goes down to rs 90 .and if i squired off what will be the loss and how it will be exercised .if exercised what will be the loss??? please Explain me with one example of squre off and with Exercised.
regards
Ashoka
The premium will go below Rs.5. Your loss will be to the extent of the drop in premium. For example, if it drops to Rs.3. then your loss will be 2 multiplied by the lot size.
Hi Karthik,
As always, great tutorial. Absolutely love Varsity. Thanks for creating this!
Question: Doesn’t Venu also lose when the price of land decreases. It was 500,000 6 months before. Current price = 300,000 and fees = 100,000
So Profit / Loss = 300,000 – 500,000 + 100,000 = -100,000
So, in essence odds for option buyer = 1/3; odds for option seller = 1/3; and odds against both buyer and seller = 1/3
Ideally, this changes the range for price to =(CMP + Premium) : option buyer wins, Price in between : option seller wins.
That is assuming he exercises the right, considering the loss, he wont right?
IF I SHORT NIFTY CALL AND PUT OPTION FOR A I MONTH EXPIRY DATE AND THE PRICE COMES DOWN BEFORE EXPIRY CAN BUY BACAK THE SAME AND BOOK PROFIT AND QUIT
Yes, you can do that.
sir, i have watched so many videos and read so many blogs on option and future but at the last, I found that varsity is the best source of information. Zerodha and you did great work for a newbie investor . thank you for all of this
Happy reading, Mayank!
Hello,
I am bit confused with pay out part.
if i buy call for 10rs premium and lot size is 75, i would have spent 750 for premium.
so my doubts are :
scenerio 1 : After one day, if stock moves up and say now the premium is 15. and i decide to exit what will be my actual pay out.
15×75 = 1125 or 5 x 75= 375 ?
scenerio 2 : After one day, if stock moves down and say now the premium is 8. and i decide to exit what is exact amount that i will lose 10×75 = 750 or 2 x 75= 150 ?
1) Yes, that’s right
2) Yes, that’s right
Hi karthik, Thanks for the reply.
but i did not get the answer , please be kind and ans this one question please. in same scenerio as above.
> After one day, if stock moves up and say now the premium is 15. and i decide to exit what will be my actual profit.
1> 15×75 = 1125
2> 5 x 75= 375
Your profit will be the difference in the buy and sell premium multiplied by the lot size. So buy price of the premium = 10, sell price of the premium = 15, lot size = 75, so profit is 5 * 75 = 375.
Hello,
First of all if i buy a Nifty bank call option at strike price 20000 for premium rs 50/-. So the premium amount i need to pay for one lot of this is 20 x 50 = 1000/- at the time of buying. To proceed selling of this script there are two possible cases one is loss and another is profit. In both cases what are the margin requirements for selling??
1. If price of premium increases from 50 to 70 then i will get profit = 70 x 20 =1400 – 1000 = 400rs/-. Then after i want to sell this one lot at price 70/- and i will get 1400 rs. Please explain the margin requirements (required available fund in my zerodha account) to sell the script in this case?
2. If the premium of my already purchased 1 lot ( 50 x 20 = 1000) decreases upto rs 30/- then i will get loss of 400/- (present value = rs 30x 20 = 600 and already paid amount is 1000/-). In this case i am getting loss of 400/- rs. Then after i want to sell this one lot at price 30/- and i will receive 600 rs in my zerodha account. Please explain the margin requirements (required available fund in my zerodha account) to sell this script in this case?
3. If a margin ( required available fund in my zerodha account) is required then how could i know that how much amount will deducted from available margin for selling a call option which i have purchased already.
4. Overall i want to sell an option which i already purchased by paying the premium. In this case what are the margin requirements irrespective of profit and loss? I have performed this one time with nifty and at the time of selling with minute loss they said the margin requirement is approx 1 lack 40000. That is why i am confused. Please explain thoroughly?
5. IF all of the above mentioned 4 cases do not require margin. then in which case i require margin in my account.
6. On more problem i am facing while using zerodha F and O margin calculator. For example today is 10 June 2020 Wednesday and i want to calculate margin for week of 11th June 2020, 18th june. These two dates are not present in the margin calculator for any nifty option. it is only indicating date 25th june and above. why it is happening?? Why it doe not show dates of 2-3 upcoming weeks??
I hope u understand my all queries and thanks in advance.
1) Under normal circumstances, you don’t need margins to close an existing position. Only under situations you have an open pending order or have availed margin benefit, then margins will be required. This depends on the positions you have
2) same as above
3) For that, you can check the margin calculator – https://zerodha.com/margin-calculator/SPAN/
4) Like I said, under normal circumstances, you don’t need margin to close a position. YOu will need margins only if you have other positions/pending orders etc
5) You need margins when you are initiating a fresh short option position
6) On margin calculator, you can only see monthly contracts not weekly. However, margins for weekly is similar to monthly.
• Has only bse decided to change expiry day of weekly derivatives to monday from Thursday from june 29 onwards or nse too is going to do the same?
• If I initiate a protective put strategy (buy future and buy put option) on Banknifty for intraday then will I be allowed to set a stop loss if I use NRML? Or is it that I must exit both legs together compulsorily?
1) I’m not sure about this, no change in NSE for sure
2) You can use NRML, no issues with that. You can exit one of the legs, just that you won’t have a hedge.
Dear sir
Namaskaar
I want to know during option trade, on which should i rely more volume PCR or open intrest (contact) PCR?
Kindly enlighten me
– Prashant
A zerodha account holder.
Neither. You should trade based on candlestick patterns or based on greeks (vega, theta). Things like OI and PCR are only supplementary studies.
I wanted to implement a protective call strategy on banknifty, so i bought a ATM call and shorted banknifty futures. while using the zerodha margin calculator it was showing that the total margin required for this strategy was around Rs. 9000. but when i executed both legs of my strategy (bought the option first and then shorted the BNF future) my dashboard showed that i have used total margin of Rs. 17,421. Again after some minutes when I saw my dashboard on Kite it showed that total margin used has gone upto Rs. 18,660. so my twi questions are:
1) Why was more margin used up when the calculator showed only about half?
2) why did the margin used figure on Kite Dashboard suddenly increased after few minutes of taking the trade from Rs. 17,421 to Rs. 18,660?
1) Margin calculator does not show the option premium for the long position
2) This would be normal margin change when SPAN is updated intraday
Why option trading stoped on pi. ? Start it ? Your procedure to get otp and all that is not easy for everyone . Let each decide weather to trade or not . Do not do it .
Suppose i buy call option of bajaj finance (lot size 250) at strike price of 2500 at premium of rs 91rs/share. so total i need to pay 91*250=22750. if current price strikes to 2500 and suppose premium of my share increases to 150rs/share. so i will get total 250*150= 37500. My total profit will be 37500-22750=14750. is this right? And if i sold this call option before 5-6 days of expiry then i am out of it with my profit right? or i need to follow any process or something? And also my question is what is physical settlement which is happen before 2-3 days before expiry? Is that applied in my case mentioned above?
Thats right. Once you sell, you have booked your profits and are out of the market. No need to wait to expiry.
Ya as per you comment i am out of the market once i sold (before 3-4 days of expiry ). But after that they don’t do any margin block right? or do i need to worry about margin block and all?
No margin blocked once you are out of the market, Prathamesh.
Sir can i start options without studying futures ?
Yes, you can, Shivam.
Perfect thanks. Suppose now the month of June is going on. Can i able to buy July/August month Options(Call/put)? When they are open to buy/sell. Means if i want to buy July month call options then after what date in June i can be able to go for it? is there any fix date for it?
At any given month, three months forward will be available. For example, this is June, you will have July and Aug available, next month June will go, Sept kicks in.
Thanks for your valuable answers.
Happy learning, Prathamesh!
Hello Karthik,
1) Physical settlement is only for stock funds? Not for index funds(Nifty50, Banknifty etc)?
2)There is no STT for index funds?If we carry till expirey then?
3)Current month is june, i can be able to buy call options of july and august? How much months ahead i can buy? Also the premium of aug month is more costly than jun & July? Why?
4)Is lot size changes every month of stock funds? It changes everytime or it depends on respective company? For the month of June i can see TCS lot size as 250 but for the month of july its 300. How?
5)If i buy TCS call option, TCS JUL 2100 CE @premium of 65 with lot size 300. So i need to pay 300*65=19500. If price strikes 2100 or above my premium price will increase. I can book the profit any time and I am out of the market right? When the actual physical settlement starts in this situation? and in what case i need to pay STT? What if i carry this till the expiry (30th july 2020). Explain in brief considering this example.
Thanks in advance
1) Yes, only for stock futures
2) STT is applicable for index contracts as well
3) Yes, at any given point you will have two other months contract available besides the same months. But these are not very liquid, so you may find it tough to buy or sell these contracts
4) No, they remain constant. However, the exchange reviews the lot size regularly and makes changes if required
5) Yes, that is correct. Physical settlement is applicable if you hold the contract to expiry.
Thanks Karthik, as you said STT is applicable for index contract too. Can you please tell me how it is?
Also, considering above example of TCS, if my TCS share price is trading below 2100 and still i continued it till expiry then what will happen? Whats the next process?
Here is the list of all charges Patu – https://zerodha.com/charges#tab-equities
In that case, TCS option will expire worthlessly. If you are holding 2100 CE, then you will lose the premium paid for this option.
Magical !!
Happy reading 🙂
How to activate F&O trading platform, please guide.
Amrit, you can do this online with Console. Do check the details here – https://support.zerodha.com/category/your-zerodha-account/account-modification-and-segment-addition/articles/how-do-i-enable-trading-futures-and-options
Good day Karthik,
I have gone through all your modules, some even twice. As I can see with myself, most of the things i read I tend to forget and have to go back for revision. Also, there are unlimited avenues to trade / invest such as scalping, intraday, swing, futures / options, etc etc with unlimited strategies in each of them. After all that, markets will perennially remain unpredictable and best we can do is trade with conviction in our strategies and manage risks.
I have decided to focus on options for trading (maybe greed is at play here), and would like to read some books on the subject for more clarity and advance analysis.
Since you are a veteran in the markets and a teacher, please suggest a few books which in your opinion can give that extra edge.
Thanks,
Shashanka
I find the books by Sheldon Natenberg on options a classic. Please do go through it if time permits. You don’t need any other book.
Hello, Why i am able to see option prices of july expiry (30th july) is too high? For example, currently NIFTY JUL 10200 PE is @335 with lot of 75. Why is it so high? After 1st july the price of same will get down or it will remain high like this price?
That is because there is so much time value left, Patu!
If i buy banknifty Jul 21600CE @380 with lot of 20 with expiry of 2nd july 2020. If my premium increase from 380 to 500 i can book the profit? And what if i carry this till expiry? Is there any physical settlement for banknifty? if i carry till 2nd jul (expiry) and is trading below 380 then whats next? Coz i have only 2 days in hand.
Yes, you can book the profit. No need to wait till expiry. No physical settlement for this. Below 380, you obviously make a loss.
If i buy Reliance Jul 2200 CE with expiry 30th july 2020 @60rs with lot of 505. So my total investment would be 60*505=30300.. if premium increases to 80 then i can book my profit 80*505=40400.. so my profit is 40400-30300=10100. And if i sell in 2 days after buying then no need to worry about physical settlement right? Once i sell i can book the profit and i m out of market?
Thats correct Patu. You can sell anytime, no need to wait to expiry.
I can see circuit limits in options, does option actually stop Buying/selling when reached to these levels. Can I sell Option and be assured on overnight changes of events that circuit price is there.
Usually, once it hits, the circuit will be relaxed. But can’t really depend on that.
Yesterday i had fund of 30303 in my equity fund of zerodha. I buy call option reliance 1760CE @59.60 with lot of 505 with expiry 30th july 2020. My total investment was 59.60*505=30098. Bt after i bought, in my funds it is showing margin available as negative (-30303). How? Why it is showing negative?
This is utilized margins, hence.
Utilised margin ok. But that is not any margin block or anything i need to worry right? And once i sold my call option then i am out of the market?
Thats right, once you close all position you are out of the market.
1.What is the difference between selling call option and square off? 2.If i sold call option then it is called square off?
3.suppose today i buy siemens jul 1200 CE @45rs with lot of 550. So my total investment will be 24750. If it doesn’t strike to 1200 bt it strikes 1190 then i can book the profit?
4. If i buy call option on 1st july with expiry of 30th july. I can sell it on 3-4 july and book my profit with my increased premium?
5. Do i need to worry about physical settlement of i sold it on 3rd july?
6. Once i sold the position (call option) then m out of market? Or i need to go from any process?
7. What if i carry the call option till expiry?
8. Is there physical settlement for nifty index?
1 & 2) If you have an option position, the closing that out is called square off
3) Yes, provided you are happy with the P&L
4) Yes
5) No
6) No problem as long as you follow the physical delivery norms – https://zerodha.com/varsity/chapter/quick-note-on-physical-settlement-2/
7) Same as above
8) No
Sir, i am new to options, today while options trading, I bought a put option, but while exiting it was showing market orders not allowed for f&o which i understood why. So i was trying to place a limit order, but while placing a limit order it started showing that 5 lakh margin is required to sell this option when i didnt want to sell it but just exit from the position and also with market order was disabled so i was stuck.
I somehow loaned the money in the account just to get out out the position.
What did i do wrong? Or do we always need that margin just to exit?
Pls help.
Chances are you had other pending orders in the system, Neil. You should cancel that order and try placing the exit order.
Thank you SIr.
This is possible.
Is there a Zerodha support for urgent calls in which i could have gotten immediate response. This was the only place i knew.
You will have to call the support line Neil, that’s the only option.
Hello,
In 1.3, Call Option, case 3, if the price after six month remains the same as Rs 75, buyer need not buy. Then buying from open market he is going to spend Rs 75 plus the Rs 5 Premium already paid while buying. So any way expense is same, either buying from open market or the option, Rs 80. This is only for case 3.
Is this correct?
Expense is higher, right? He is spending 80 for something which is available at 75.
Want to start option trading but don’t hv any knowledge what will be the investment for that di you provide call
No service like that.
Hi Karthik,
Nice blog. Have couple of clarifications.
1. I had brought a CALL Option using NORMAL and is being currently listed under positions. When i tried to sell the same option again from watchlist, “Available Margin” required is being shown on sell screen. Should it not show only the difference (in case of loss) in sell screen ?
Please note that i was trying sell from watchlist but not from positions screen to exit it
2. What happens to the position if i dont exercise till expiry ?
TIA
– Karthik
1) Did you have any other open positions or pending orders in this system?
2) If you hold the position to expiry, then it will get physically settled.
1. I buy Reliance Jul 1860 CE with lot of 505. (On 1st july 2020) with premium of 60rs. So my total investment would be 505*60=30300. If my premium increases from 60rs to 80rs then my profit will be 20*505=10100 right? So i will get back total 40400 including my investment & profit right? In this case once i sold then i am out of market?
2. If i buy this on 1st july & sold this option when my premium increases before last week of expiry. In this case, do i need to worry about physical settlement, STT, margin block? Or this factors needs to consider only in expiry week? Not before that?
3.At the time of buying stock call option , I need to consider factors like ITM, OTM, ATM? Or i can buy it directly by paying premium?
4. I don’t need to worry of ITM, ATM, OTM if i buy call option on 1st july & sold anytime before last week of expiry?
5. Is there any other factors in this case?
6.On stock options only physical settlement is there?
7. If i trade on nifty options on weekly basis, is there any factors like ITM, ATM, OTM. What if i cannot sell till expiry?
8.Do i need to close the position from only position of portfolio tab by clicking on exit or i can also sold from clicking n selecting from my watchlist? Both are same right?
1) Yes that is right
2) No
3) You need to consider the ITM/OTM/ATM factor from a strategic perspective, otherwise, it is just about buying the option by paying the premium
4) Yes
5) No, just the premium
6) Yes
7) No other factors. These are fairly liquid
8) Yes, you can close the position from the position tab or the watchlist. Whichever is convenient for you.
Hi Karthik,
Really like and appreciate your various modules on varsity. They provide a very nice introduction and tutorial to financial markets to a new guy in the field like me.
I would like to point out some mathematical inconsistencies in your option blog (current & subsequent chapters). You mentioned: “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” which is absolutely wrong. Agreed there are three possible scenarios, but you CANNOT say they are equally likely and hence you cannot assign each of these a probability of 1/3. Infact, assuming a tick_size~0 (very small) i.e. a continuous distribution, it’s extremely unlikely that the price will remain exactly same, so practically there are just two scenarios: either the price will increase or decrease, and these will be equally likely assuming no other known factors at play. Thus, both guys have equal chances of winning, assuming no other known factors.
Thanks, Anon. Yes, another gentleman also pointed out the same thing and I do agree. I’m assuming readers would run through the comments and get that clarification 🙂
Good article…Thank you Karthik. Just a small clarification.
In the above article it is mentioned that all option contracts are cash settled. But I got to know from Zerodha support pages somewhere that from 2019 we have to take delivery of the underlying. If that is the case, please update the above article.
That’s right, we have this chapter on physical delivery and settlement process – https://zerodha.com/varsity/chapter/quick-note-on-physical-settlement-2/
Please correct the below sentence –
From
Only that scenario when the price of the land decreases of stays flat
To
Only that scenario when the price of the land decreases or stays flat
Thanks, will do.
Will there any risk of unlimited loss after selling a puchased option before expiry.
No, once you sell the purchased option you are out of the market. So no risk!
Hii Karthik sir,
While trading near a breakout region like at Support or Resistance, for confirmation should one be waiting for the Closing price of a candle or take posirion in between the session( i.e. before that candle closes) when the prices go beyond the suport or resistance ? Sometimes it happens that, if you wait a little longer for confirmation, the trend gets completed quickly only to realize that an opportunity is missed. This happens many time in intraday.
You can take the position as and when the breakout happens, but be aware that this could be a false breakout and hence could fall back into the range. So tight SL if you are trading the breakout before closing is required.
Can i be able to buy aug month stock options (Aug CE) in the month of july? If i buy reliance Aug 1860 CE with lot of 505 with premium of 56rs on (purchased on 29th july) And if my premium increases on the same day i can sell the aug month option on same day 29th july? Or i need to wait to start the aug month? In this case no need to worry about physical delivery, STT?
Yes, you can buy Aug contract in July and even sell it the same day you purchase. No need to wait till expiry.
karthik sir , you said options and futures are cash settled but now stock options are physically settled .How are they settled for options and futures if we dont squareoff on expiry , please mention and explain
Thats right, please see the last chapter in this module, we have updated and put a note on physical delivery.
Sir, If you remember 2 days ago I asked you about a problem related to equity curve of TCS for adjusted Bonus price. Now i am able to see the smooth curve after using better & accurate adjusted price data.
Question : In this example, a stock of 85 has been purchased at 75 with total buying cost of 80 to get a 5 Rs. profit. Instead of that if one simply buys Future at 75 & expects the price increase and after a while when it reaches 85, his profit is 10 Rs.
So, why to prefer options when Futures can give better profit ? Correct me If I am wrong.
If you are bet is on the direction, then probably you should trade Futures rather than option.
Can we have option chain for nifty and bank nifty in watchlist as separate watchlist showing all the available nifty / bank nifty contract to tarde?currently we need to search manually and add it in watchlist.
Other broker’s trending platform has this feature
I’m not sure about the technical challenges here but will share the feedback and get an opinion. Thanks.
Sir,
I bought 1lot of INDUSINDBK Aug 530 CE on 05/08/2020, during this time it touched twice the strike price 530 and came below the strike price again. Now if I sell at a price below the strike price before the expiry, will it
be counted previously touched the strike price and I will not loose the premium amount?
Very nicely explained….Too good. Only question does it all mean when we deal in options we deal in premiums in fact and make profit and loss according to change in premium?
e.g. i sell Nifty 11500 call @ 12 and buy it after two days @9 . So i got premium of 12 and paid premium later 9 so 3 is my profit?
That is correct.
1) Does it not matter to touch or cross the strike price?
2) If the buy/sell price is below the strike price then will profit/loss be the difference of buy/sell price?
1) Depends on CE or PE
2) Thats right.
Hi Karthik,
This is put in such simple words. Thank you very much.
Best Regards,
Shoubhik
Happy reading, Shoubhik!
Hello Karthik,
I have below queries regarding option trading.
1. Is Index options (Nifty,Banknifty) settled in cash? or does it settled physically?
2. What if I carry the index option till expiry? what will happen if it is ITM or OTM?
3. If I buy Reliance 1950 CE 1 lot when stock is trading at CMP of 2100. In this case, if my stock traded above 2100 level my premium will increase gradually right? and if before expiry my stock is trading at 1960 it will expire as ITM or OTM? If it expired as ITM. I will not loose the premium I paid? It it is OTM I will loose whole premium right?
4. In the above case what about physical settlement?
5. In equity, if I buy any share, can I sell it on same day? Or I can be able to sell after 2 days only after which is only in my demat account?
Thanks in advance.
1) Cash settled
2) OTM is worthless anyway, ITM will be settled
3) At 1960, this will be slightly ITM, the value of the option will be 10
4) Yes, this will be due for physical settlement
5) You can sell it the same day, provided the share is not listed in trade to trade segment.
But it expire as ITM so I will not loose my premium right. it is still above by 10 coz I purchased 1950 CE. Is it always safe to trade in ITM options? It will protect us from to expire as OTM?
Just because you’ve bought ITM, does not necessarily mean that you’d be protected. Remember, ITM can always transition to OTM quickly on a volatile day 🙂
Hey, i had a few options in my position and their ltp changed overnight. It was 8 am when i checked and the LTP has changed. How can the Last Traded price change overnight?
It cannot change. You must be seeing the updated closing price, which is different from the LTP.
How does the updated closing price change?
What is updated or adjusted closing price?
Although no i was checking in the ltp column in my positions. Even my P&L changed.
The weighted average of the last 30 mins is considered as the closing price for the day. This gets updated just after the market closes.
It is given in the lession guidance that one should buy call option if the price of a stock going to raise. Price of any stock is not unidirectional, as we know. Then why don’t I buy call option of a stock expecting it to fall, because I consider the company is good and I want to buy it at discounted price and hold?.
Are you talking about the underlying stock or its call option? Both are different.
I am talking about underlying stock. Can we buy stock in options trade, like land deal in the example.?
Yes, this is called physical settlement. All stock options are physically settled.
Hello Sir Even if price goes below 75 say 65 can I buy the stock at higher price according to the contract.
Yes, that is how the call option works.
How does the probability of Venu to win becomes 66.66% ?
Imagine the situation where the price of the land went down to 3 L 6 months later. If Venu had sold it off 6 months earlier, he’d have got 5 L. But Now he incurred a loss of 1 L because of the deal (1 L agreement fee + 3 L[current price of the land] i.e., 4 L)
3 possible outcomes, 2 favors Venu. So 66.66% in his favor. Btw, a gentleman here had reasoned out why the probability thing maybe wrong. I’d suggest you look for his comment as well.
very well explianed. the best article i have read so far to understand options.
Good luck and happy reading!
Hi Sir,
I want to know one thing. Does future & option market (position) affect the stock price in spot market? if its so why? becoz i know derivative market depends on spot price only.
It has some effect, but it is usually the other way round.
Option bought current stock price 10, strike price 15, premium paid INR 1 per share
After buying i see the stock price has gone up to 12 and now the premium is INR 1.5 per share.
I havent yet reached the strike price, but i square off the option for higher premium of 1.5 per share.
Am I still making profit by selling before strike price?
Is my understanding right?
Yes, you can sell at 1.5 and make 0.5 as profits.
Ia there a limit on the quantity of options one can buy or sell in a single trade?
Hmm, not really. What sort of quantities are you talking about?
1.Can i buy PE (put) anytime on nifty or stock options? If i am bearish on the same?
2.My actual question is suppose i want to buy put for particular stock option, is it mandatory to have the equity stock of the same?
3.Suppose nifty is trading at 12000 n my assumption is it will go to 11500 so i can buy 11500PE directly? Or i have to do have anything before that?
4.Once premium is increase can i square off the position anytime n exit from it?
1) Yes, you can.
2) No, not really
3) Yes, you can
4) Yup, you can.
Hi karthik ! you are a good teacher. good work
Happy learning!
can i buy a call buy option in morning at 4rs (lot) and when the price goes up same day by 2pm to 40 rs, can I sell that and make intraday profit?
Yes, you can.
Many time I have see the value of premium while trading is always more than the premium mentioned at the NSE site in option chain section, why this is more ? and what is the best time to buy the option on premium mentioned in NSE site ?
The price you see on the terminal, is real-time, on NSE website it is slightly delayed.
In a day, how many times I can buy nifty, bank nifty options (Index options)?
1. Suppose today I buy nifty 11500 CE, after I made profit i squared off the position. But after sometime I want to buy nifty 11500 CE again on the same day. Should I buy? How many times I can buy same strike price option?
2. As many times I can buy options in a day?Is there any limit?
3. Is it same for stock options too?
4. Considering new margin rule, the profit I made on intraday, I can’t use it for further trading as previous? It does not reflect immediately in my funds. It will be credited funds on next day?
1) There is no restriction on this, you can trade as many times as you want
2) No
3) Yes
4) Yes, as the P&L will be credited on T+1 basis.
Today I bought Bajaj finance 3450 PE at premium of 47rs with lot of 250 with expiry of 24th sep 2020. So I invested 11750 rs. After sometime my premium decreased to 40 rs. then I squared off my position to save my loss. In this case, my total loss was 1750 rs.
1.I already squared off my position so is there anything need to worry about margin block, STT etc? coz its very near to expiry and also cosidering factors ITM, OTM.
2. I am out of market in above case?
Thanks.
Yes, you are out of the market by taking 1750 loss. No further obligations.
HI Karthik,
I have bit confusion about Nifty options trading. Nifty is at 11000 .Suppose if i buy nifty call options at the money of premium 50. Nifty is at 11100 My investment here is 50*75= 3750. Suppose i close the position before expiry and nifty consolidated and closed at 11000, premium might be 20 or 10. so loss will be 10*750-750. i.e 3750-750= 3,000 is the loss. correct?
If i close the position after expiry and nifty is at 11100, as its in the money, how will the profit/loss will be calculated? premium is 10 after expiry.
Suppose if i sell nifty call options at the money of premium 50. Nifty is at 11000 My investment here is 50*75= 3750. Suppose i close the position before expiry and nifty consolidated and closed at 11100, premium might be 20 or 10. so profit will be 10*750-750. i.e 3750-750= 3,000 is the profit?
If i close the position after expiry and nifty is at 11100, as its in the money, how will the profit/loss will be calculated? premium is 10 after expiry.
Also let me know if there is any article regarding intrinsic value. i am not understanding when that is used.
The land analogy doesn’t take strike price into account. I had a minute of hard time trying to understand while Ajay made the contract at 500000 today, and later in the example the contract is done at strike price.
Let me recheck this Ronjan. Btw, the price at which the deal is struck i.e. 5L, is the strike price.
Hi Karthik,
i will sell two quantities of Nifty call option now at 11400. Also i will buy one quantity of Nifty 11200 and 11400 call option. I hope there will be limited loss for me and good profit. correct?
The 11400 long CE will offset one of the short 11400 positions leaving you with a one short 11400 CE and one long 11200 CE. This is a classic bull call spread with limited loss and reward.
Hi Karthik,
Have been into the market for quite many years though,
haven’t dared to take even a single trade in derivatives.
That is just because of lack of knowledge.
As I keep on referring to various sources of information on
the stock market,to turn it into knowledge, I found this page
of yours, which is very informative. It clears concepts, ideas,
doubts, etc; and the fear as well. Thank you very much for
the pains you are taking to enlighten the masses.
Kindly be ready to get bothered by me from time to time.
Sincerely,
Suhas
Happy to note that, Suhas! Bring them on 🙂
Hello Karthik, I am new to options trading, Please let me know the following…
1. Wipro OCT 29 380 CE, Lot size is 3200 and LTP Rs 17.85. Here premium amount is Rs 17.85 or 3200 * 17.85= Rs 57120 ( Guess I need to hold this amount as margin in my account but Premium I have to pay just Rs 17.85.??
2. My strike price is Rs 380 and went up to Rs 390 so I would gain 3200*10=Rs 32000??
3. My Strike price is Rs 380 and went down to Rs 370 before expiry, So my losses would be how much?? Is it Rs 32000 or just premium amount Rs 17.85 or something else happen ? Do I need to wait till expiry date irrespective of price goes down to any extent.??
4. Current Wipro price is 375 and my strike price is 390. So I will get profit only when it goes above Rs 390 ..right? What about Rs 15 (390-370) difference ? It means no loss no benefit. ??
1) There is no concept of margin when buying options. You need to pay the premium, which is lot size * premium, which is 57120 in this example
2) Your P&L depends on the premium. If the premium goes to 27.85, then you make 10*3200 as profit
3) Again it depends on the premium. If the premium goes to 7.85, then you lose 10*3200
4) It depends on the premium. Your P&L is the difference between the buy and sell price of the premium, multiplied by the lot size.
Hi Karthik,
I am beginner in options.
In above case Venu has land so able to sell it, but in stock market Even we don’t have underlying how are we able to sell options ?
If we sell options and keep still expiry what will happen ?
Can you please explain in detail
An option is a contract based on an underlying. The settlement for these options happen at expiry, that’s when you are required to either bring stock or cash.
Amazing content Karthik, kudos to your efforts and thanks a ton for answering all of our queries.
Let’s say if I sold 15th oct 11600 PE, premium 10 rs, 750 quantity.
Collected 7500 rs premium.
I kept the stop loss at 20 and exit the position.
It means no loss/profit right ?
But why its showing as 7500 rs as loss in zerodha profit and loss statement.?
You sold at 10, bought back at 20. Or you can think about it as bought at 20, sold at 10, the loss is 10 right?
lets say If I sell oct 11600PE – 25 Rs, buy 11500PE for 15Rs for hedging, what will be the maximum loss if market is not favor of the trade or gapup/gap down violently.
And Please suggest best accurate option profit/loss calculator.
I’d suggest you try the strategy wizard on Sensibull for this.
I am talking about option selling, at 10 I sold 750qty, i have collected 7500rs premium .
If I exit 750 qty at 20 then it should be no loss or no profit because received premium 7500 – loss 7500 = 0Rs.
But in zerodha Profit and loss calender showing 7500 loss even I exit the position at 20. Why ?
20*750 = 14000 is what you pay to buy back, 7500 is what you receive. So your loss is 7500 right?
Hello Karthik,
A silly question 🙂 Just sharing my thoughts please correct me if i am wrong –
Let’s take example (Option Buying & Selling) suppose BhartiAirtel strike price 500.
Qw 1) So at first option seller comes first in game with bid price 12 Rs per lot. & Option buyer buys at Rs.12.
Qw.2) So the option seller decide the option premium price.?
Qw.3) Can we interpret like if call option side premium is higher means it’s bearish sentiment ?
No, higher call option premium indicates bullishness.
For the first time, Options are now becoming clear to me. Very well explained. Hopefully, by the time I am through with the entire study here I would know much more than I do now. However, could you please explain one thing. Say I buy a Call Option at a Strike Price of 150. On the date of the expiry, the price is down. How much do I lose provided I have purchased two lots of 75 and the price on the expiry date is 120.
When you buy options, irrespective of CE or PE, the max you will lose is to the extent of the premium you’ve paid. Not more than that.
Thanks sir
Welcome!
1. Index options are cash settled? In single day, how many times I can buy call/put of index?
2. Is it mandatory to buy ITM options of Index. What if I buy OTM options? Suppose currently nifty is trading 12000 and if I am bullish on nifty.What if I buy 12500CE? It will be available at low premium price than 12000 CE then why would people go for ITM(12000CE) as it is available at high premium than 12500?
3. what will happen in this case if I buy 12500CE and index will go only till 12300. Still my premium will increase?
4. Is it also same for stock options ITM OTM?
1) There is no limit
2) No, there is no mandate to buy only ITM options
3) It may increase depending on time to expiry and volatility
4) Yup
1.Can I buy stock option any time CE or PE? Suppose Bajaj Finance is trading at CMP of 3600 and I purchased call option of 3700 @premium of 100rs.
2.Now the share price goes upto 3640. Then my premium increases from 100 to 120rs. So my total profit is Lot size*20. Is this right?
3.I can sell the position anytime before expiry when my premium increases if I am ready to book the profit of 20rs per share of lot size?
4.How many times I can buy stock options (Call/put) in a day?
5. Once I exit from the position when my premium increases then I am out of market? or do I need to worry about of STT, physical settlement?
1) Yes, you can
2) Thats right
3) Yes, you can
4) As many times you’d want
5) Thats right. All the applicable charges would be settled and the balance will be credited to or debited from your account.
1.Suppose banknifty is currently trading @27200 and I am bullish on bank nifty so I purchased Banknifty 27500 CE with premium of 50rs. So total investment is 25(1 lot)*50=1250. But I purchased OTM option still my premium will get increase if bank nifty is moving from 27200-27400?
2. And what if I squared off the position at 27400? In this case I will earn my profit and credited to my funds?
3. 27200 CE is having high premium than 27500CE, so I purchased 27500. Is it fine? or I need to buy only ITM, ATM options?
4. As per rules can I buy any options ITM,ATM,OTM on my risk?
5. Above scenario is same for stock options?
1) Yes, it is likely it will increases. Likely because it also depends on the time to expiry and volatility
2) Yes
3) Yes, but for you to make a profit, the underlying i.e. bank nifty should move up
4) Yes, you can
5) Yes.
I really appreciate the way the whole dynamics of options explained here in a lucid manner that anybody will be able to understand and I am sure as a new comer or a beginner will catch up with it within a short span of time. As I am a beginner I am thoroughly enjoying it and very eager to learn more as I proceed to the next level from here and I consider myself lucky that I found Zerodha where I am going through Options course in a systematic way learning every part of it and hopefully will start trading in F&0 on zerodha platform.
Happy learning, Santosh 🙂
Hi Karthick!
can one buy march 2021 option when in November 2020? I am asking this because i found contract in option chain in nse website..
thank you..
I don’t think these are liquid contracts, Ganesh.
Hi Mr.Karthik
After reading many articles from various sources on Options, I found your detailed write up on Stock Market related chapters, particularly on ‘Options’ is very useful. All aspects are covered in a very lucid manner focusing on the practical aspects. Thanks a lot.
Whether the materials on ‘Option Trading and Strategies’ are published as a book and available for sale?
Best Regards
M.Pari
Former Bank Executive
Manickam, thanks and I’m glad you liked the content. There are no hard copies, all the content is available online. However, there is a PDF at the end of the module, which you can download and print if you wish.
Hi Karthik, I need your assistance on the following 2 counts.
1. The buyer of the call option has the right but no obligation. In this backdrop how the following comment / clarification fits into?
QUOTE:
“Ranjit says:
April 26, 2020 at 9:04 am
Hi Karthik,
If i buy a call option today and don’t square off before expiry date, do I have to take delivery by paying the amount as quoted in spot market? If I don’t pay what will be the consequences?
Reply
Karthik Rangappa says:
April 26, 2020 at 9:07 am
Yes, you will have to. The systems won’t allow you to carry forward the position if you do not have sufficient margins.”
2. The comment section adds rich value to the stuff and throws light on vital aspects without the necessity to depend elsewhere. Is it possible to earmark selected comments as a filter and for future reference?
Thanks, yes, we are looking into how we can use the comments section better.
Excellent Explanation, Karthik Rangappa. Thanks you so much .
Glad you liked it, happy reading 🙂
Sir what do you mean by notional
Notional in this context is perceived value.
Expense incurred = Rs.80
Current Market Price = Rs.85
Profit = 85 – 80 = Rs.5/-
Sir can you brief how the above example of case1 is derived
I’ve tried to explain this in the chapter itself, Chandu. Can you please go through that along with the comments section once?
I got it sir.. Thank you😊
Good luck, Chandu!
Today 26 Nov 2020. thursday at closing 3:29 pm NIFTY was 13015.
13000 Call option was at 0.2
13000 PUT option was at 12.
Why was that so. PUT should anyway expire worthless. Any idea?
You should look at the final settlement prices, Saurabh.
Sir first and foremost thanks for these wonderful lessons. They helped me a lot!!! 👏🙏 I have one doubt that If I buy CE 100 Stocks of Rs.75 for a premium of 5 rupees of total 500. If the strike price goes high of 80, premium Rs.6 then to earn profit should I have 80*100 = 8000 in my Trading account to complete the transaction and earn profit?? This doubt occurs due to the explanation of Obligation to buy and stuff. Thank you sir!
Not really Samuel. You can choose to sell the option and profit from the difference in the premium.
Sir , I need to know that the difference of increased premium minus the premium paid at squaring off the position in options then why strike price comes into the picture ? I know I am just a new entrant but, won’t it possible that difference of premium be multiplied with number of stocks to ascertain the p&l.
The premium itself is dependent on the strike price. Based on the strike, the premium changes.
1.As per new margin rules for intraday, can I buy nifty/banknifty for intraday. Once my premium increases and I squared off the position will the funds credit into my account? or I need to pay any extra charges for intraday as per new margin rules.
2.What actually new margin rules are? In what type if trading I need to consider new margin rules?
Here is everything about the new margin policy – https://zerodha.com/z-connect/zerodha/bulletin-latest-at-zerodha/peak-margin-intraday-leverages-2nd-order-effects-dec-1st-2020
Hi, Karthik
Can you please explain the meanings of square off and exercise with examples in the options market? bit confusing
Thanks
Square off is when you exit an already open position. For example, you have a long call option, to square off you need to sell it. Exercise is to hold the option to expiry, it will be considered exercised if its in the money.
When I book profit in call option, my profit will be difference between premium. In this case what will happen to the premium I already paid??
YOu get back the premium when you sell right?
Well explained.
One clearly gets to know what options actually are…
Happy reading!
Hello Sir, Do we need to know previous module(Futures) to understand this module?
Not really, but helps if you would know.
sir u have completed whole process for opening account but i do not get user id after passing 48 hours time limit. so what i do to get user id where to complain
Aditya, please do drop ad email to [email protected] and that will automatically create a ticket and an agent will be assigned for this.
Hi @Karthik,
I have been an investor for quite a while and now after going through Varsity (which by the way is excellently compiled) I would like to use it to trade as well. In my case I would like to use the Futures and Options only to compliment my DEMAT account and also use it for covered calls and generate income from it. My strategy is as follows:
Identify fundamentally good stocks which I would like to eventually have in my Portfolio. Rather than buying it CNC, I would like to use the Futures & Options route. If it goes up in my direction I will book profits and if it does not, I would go for physical settlement and own the stock. I am not sure if this is a workable strategy. Please advise me on this and if so please suggest how to go about it.
Thanks and best regards
Girimon
It is, but the only problem is that you will have to maintain margin amount all the time, futures position will be subjected to mark to market, and you will lose out on corporate benefits if any.
Thanks. Is it also possible to use options for this strategy? If so can you guide me. Thanks.
Which strategy?
can we buy options before expiry when it stands above strike price ?
Yes, you can.
Hi Karthik,
What I meant was… How can we use options instead of futures.
With options, you will lose on theta value, so not a good proposition.
sir can we buy any share or option before 9:15am or we have to buy share or options one day before market closing at 3:20pm
No, you will have to wait for the market to open.
so we can buy only after 9:15am
Yes, thats right. But you can place a pre-market order.
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
Nikhil
That’s right, as long as you have squared off an open position, you are out of the market and nothing to worry about. In this case you make a profit of Rs.3.
sir if we take nrml trade and buy the call option at price 360rs and put the stoploss at 2%that means 352.8 and the next market opens gapdown then our loss is (360-352)x25=180 or can be more then this
That depends on the stop loss getting triggered and executed. If it does and you manage to get out of the market, then yes, the loss is restricted to 2%.
Can I buy and sell equity shares on same day? Or I need to hold to come it into my demat account?
Yes, you can.
Beautifully explained Karthik. I am new to FNO. Trying to get a grab on it. Will carry on with all your chapters as fast as I can.
Good luck and happy reading!
sir how to know which stock we can buy for mis because today when i placed order for chemcon they said you cannot buy it for intraday and i was waiting from long time to buy it
All stocks mentioned here – https://zerodha.com/margin-calculator/Equity/
sir today i bought apollo tyre near 186 and the margin used is nearly 9000rs and when i placed order for sell when it was at 186.7 they said margin required is 18000rs so if the price increases more tgan 186.7 the margin required to sell the share also increases from 18000 or not
Aditya, the margin increases as and when the volatility increases.
sir annual mantainance charge for equity account and commodity account is total 300rs or we have to pay 300 rs for each equity account and commodity account which means total is 600rs
Only 300. AMC is only for DEMAT account, not commodities.
I am from Lucknow. Any office or sales person / contact no in Lucknow to whom I would like to meet him personally
Here you go –
Mr. Rajesh Kumar Upadhaya
LGF – 8 Eldico Udhyan Plaza 2
Opp. to Dental Collage
Raibareli Road Lucknow 226025
sir today i bought idea for long term and kept the stoploss at 10 but the stoploss market order got cancelled so sir how to place the stoploss order for long term or i have to place the stoploss order daily or sir there is any charge for stoploss order
Please check this – https://zerodha.com/z-connect/tradezerodha/kite/introducing-gtt-good-till-triggered-orders
If I wish to end the contract in middle would I get my premium in return.
Yes, you will. The rate depends on the price it is trading at.
Hi,
What is the longest term for which you can buy a call option? Can you buy it for 1 to 2 years also?
Thanks,
Madhu
For now, 3 months.
Hi Sir, when will be bse stock options start in zerodha? Any chance of starting soon?
There is no trading volume, Prakash. No point offering that.
Excellent.
Hi. I’m new to options. Just want to clarify 1 thing. Can a call or put option be sold if there are no buyers ? For ex. Suppose I buy a Nifty 14400 CE when Nifty is 14400; then Nifty suddenly moves to 14800. There possibly wouldn’t be any buyers for Nifty 14400 CE since it would be in the money and too costly. How do I sell it ?
Ruben, you need a buyer and seller to complete the trade, without which the trade won’t go through.
For the trading day 22-01-2021
Nifty50: Decreased by 1.5%
So on that basis call option premium should reduce,but Nifty Jan 15500 CE increased and other 14500 CE and 15000 CE are decreased. what fundamentals should consider here for 15500 CE strike price ?
With the crack in the market, volatility to increases. With the increase in volatility, the option premium (both CE and PE) increases.
anyone pls share how option premium is calculated or which chapter i can find details on this, i will refer
Premium is a function of many things – demand, supply, greeks etc. You need to develop a holistic understanding of this 🙂
*check it out
sir when i try to place the buy order for chola fin 440ce they said blocked because of illiquidy while many other bought cholafin 440ce and made profit sir why this happened
Why do all options values(say premium price) gets to Zero on the expiry date?
Not all, only the ones which expire worthlessly.
1.I bought XYZ call option at strike prize 75 at premium of 5 with a lot size of 100, then I have to pay premium (5 x100) = Rs 500
2. If stock rallies, premium increases to Rs 8 & I squares off my position on next day means I get
(8 x 100) – (5 x 100) = Rs 300 Profit
3. If I hold the position irrespective of stock value, on expiry I have to buy the lot at strike prize of (75 x100) = Rs 7500 and converted it into delivery trades (here please elaborate the procedure)
Thanks a lot for very informative session of Q & A.
1.I bought XYZ call option at strike prize 75 at premium of 5 with a lot size of 100, then I have to pay premium (5 x100) = Rs 500
2. If stock rallies, premium increases to Rs 8 & I squares off my position on next day means I get
(8 x 100) – (5 x 100) = Rs 300 Profit
3. If I hold the position irrespective of stock value, on expiry I have to buy the lot at strike prize of (75 x100) = Rs 7500 and converted it into delivery trades (here please elaborate the procedure)
1) Yes, that’s right
2) Yes
3) If this is Index you are referring to, then there is no physical delivery for index. Check this for details – https://zerodha.com/varsity/chapter/quick-note-on-physical-settlement-2/
Only one expression after reading this article, JUST WOWWWWWWWWWWW, what a simplified approach, you are the best.
Thanks for the kind words, Siddeswar. Happy reading!
The best explanation I have seen for options ever. I have seen many explanations before but the analogies and the comparisons given here make it really comprehensible.
Happy to note that, Akilan! Happy learning 🙂
With respect to Shuyi’s comment on August 25, 2018 at 5:15 pm, I think the question is if he can exercise the option before expiry as the spot price has increased beyond strike price. Answer to this question is ‘NO’. One can square off the option position before expiry, in which case probably the premium he has paid has increased and he will get benefited from the profit on premium. But once he squares off his position, he is out of the game as he has transferred his contract to someone else for increased premium. In our example, it would be like Ajay passed the contract to someone else for more than 1Lac amount. He gets the profit on that amount.
Majority of questions are revolving around square off vs exercising the option.
1. When you square of the position, you are selling your contract to someone else for higher premium. So the profit is actually on the premium amount. E.g. You paid Rs. 5 and sold for 10 Rs. So profit is 5 Rs. per share.
2. When you wait till expiry date and exercise your option, you can actually buy underlying stock(lot) for the strike price and sell in the open market(probably same day) for the current spot price which will be obviously higher than the strike price. In this case, your premium amount is gone, but you get profit from difference in strike price and current spot price. Spot price should be obviously higher than breakeven point.
Thats right, Deepak. Thanks for pitching in. By the way, when you sq off, it is not necessary that you sq off for a profit, you can sq off to cut your losses as well.
Sir
Nicely explained.
Great
Happy reading!
Let say I am a call writer, for ATM will option Buyer execute the call option with premium loss. Can this be possible in Taking positions in nifty or nifty bank.
Sorry, I did not get this query. Can you please add more context? Thanks
Hi
Suppose i sell any options on any day in a month, like on 15th of month, In monthly expiry on last week, we need twice the margin on Wednesday and Thursday. i.e if margin requirement is 2lakh on last week of Tuesday, it will be informed to us to have 4lakh margin on Wednesday and if not, our position will be squared off.
I want to know will it be same for weekly expiry too. i.e if i sell any bank nifty or nifty options on Tuesday or Monday , do i need double margin on wednesday and thursday on weekly expiry for bank nifty or nifty? if it is 1lakh margin on Tuesday, will it be 2 lakh margin required on Wednesday?
Thats right, Kiran.
When someone suggests to short Nifty at 15000 and to buy Nifty at 14000, does it mean selling/ buying Futures or Options? Or we can directly sell/buy in the Index? Please enlighten me.
Thats right, especially with short Nifty as you can only trade Nifty in F&O
Hi,
Is the GTT option valid for intraday option orders? I bought 75 qty of Nifty Call option in the MIS segment at 32 Rs and placed a GTT sell order for 70 Rs. The GTT got triggered and instead of squaring off my call option quantity, it executed a sell order for 75 quantity in the NRML segment.
Please guide.
Thanks.
Yeah, GTT is long-standing order. You should have placed a regular SL limit on your MIS open position right? That would have worked.
Thanks for your reply. So even in case of NRML segment, I will not be able to square off a GTT order on the same day?
That you can.
Nicely explained with suitable example..thank u
Happy learning, George!
Hi karthik
Suppose if i buy any futures worth 5lakh, brokerage for next day or after some days, it will be 130 if i bought and sold shares at same price. i.e if i bought future price at 100 and sold tomorrow at same price of 100 or after 10 days, brokerage including stt it will be 130.
But if i buy same quantity(for 5lakh) with same price in equity for delivery, brokerage including stt is more. i.e if i buy any company cash price at 100 and sold at 100 after next day or after some days, brokerage including stt for 5lakh is 1130 which is huge. is there any method to avoid these brokerage?
Brokerage for Futures is 20 for buy, 20 for sell. Total 40 Rupees only. For equity, there is no brokerage. Please check the brokerage calculator for more details – https://zerodha.com/brokerage-calculator#tab-equities and here is a charge list – https://zerodha.com/charges#tab-equities
Love this option
Happy trading 🙂
Regarding the payouts of Veenu,
1) If the price of the land is 10,00,000 then payout for Veenu is Rs 6,00,000.
2) If the price of the land is 5,00,000 then payout is Rs 1,00,000
3) If the price of the land is 3,00,000 then payout (incase if he sells) is Rs 4,00,000. However, in the article it is mentioned that this case is favourable for Veenu. Why?
Thats the premium paid, right? Do check the terms of the agreement.
Hello sir, In finshots article on perpetual bonds, it is stated “banks were forced to add a call option alongside these instruments”, I couldn’t understand what that means sir. Does that mean the fund houses buy or sell call option? and
there is another statement sir “Most banks do exercise the call option, because if they don’t, every investor out there will automatically assume the bank is in deep trouble”.
It is quite confusing sir, can you explain how this call option works?
Call option here means to indicate the fact that the bond is callable, meaning it won’t go on forever, it ends at some point. With this thought, read the other statement, it may make sense now.
ok, but how can bank exercise call option, because there are the borrower here, isn’t sir? exercising power has to be with lender. Or is it like for this bond, bank voluntarily exercise the call option and payback the money they owe.
It works a bit differently with bonds. This does not have the same structure as the regular options in the derivatives segment.
The basics are clear to me now
Good luck!
please do Dark mode… please.
We have that on the app already.
If 99% of people is trading in only derivatives & only 1% is trading in underlying spot in cash market…..then that only 1% of people is moving the price up/down in the cash and also in the derivatives…..?
Hmm, thats not true Manoj. Where did you get the stats from? Having said that, yes a vast majority trade F&O and a smaller portion trade Delivery. But you cant consider it that way (i.e. 1% moving F&O).
These are some cool explanations on options concepts. I have a small doubt on call option.
In case 3, when stock stays flat even after one month i.e, contract price was 75/- for a token amount of 5/- and after one month still the stock price is 75/-. It is mentioned that the person will not buy shares as it doesn’t make any sense in buying for 80/- so he forgoes 5/- token amount. But here if even if he buys for 80/- he would get back 75/- forgoing a netvalue of 5/-.
From stock market point of view such as brokerage charges, etc..,. which would result in less impact in cost terms, i.e forgoing the contract or executing the contract.
Once again thanks for making this content and engaging through comments.
Yup, but that’s still a constant loss of 5 right? There is no question of foregoing, basically, the contract has no value, hence its considered dead.
I bought 1 lot of call option in nifty. Can I sell that lot before expiry?
Sure, you can.
i buy F&O April expiry can it is mandatory to square off position …why obligation debited from account? what care should be taken to avoid such thing?
You can sq off anytime you want, no need to wait for expiry.
During the expiry day the call option below the buy price and write off that loss, who will get that premium is it the money will go to the exchange or the option writer or to the company (of share belongs to company).
It will goto the option seller.
Can i take swing trades repeateadly in a single stock.
Would there by any problem if i trade for more than 10 lakhs in a single stock please answer.
I am your loyal customer.
Yes, you can. But do think through before doing so many trades, may not be a great idea.
Sir, Initially I was not aware about the basic concept of Call option Trading. Today you have cleared my basic doubts, your explanation is fantastic. Really you took me to intial education era. Thanks a lot. God bless you.
Sir can u provide zerodha varsity in telugu language. Lessons in pdf file.. Thank u
Will try and see what best we can do, Siva.
Hi Karthik! What happens exactly if I want to square off my position before expiry? ex: Let’s say i have bought a contract, the price has peaked 3 days into contract. I want to book profits but there is no new open interest. there is no new buyers for my contract as everyone knows price will go down tomorrow. how will my ‘sell’ order be executed? will my profits be deducted from the option seller’s account? and will his position will be closed as well?
YOu can choose to book profits or get out your option positions anytime you wish. There is no obligation to wait till expiry. The profit you make is the difference between the buy and sell price of the premium.
Thanks for the reply Karthik! but im still confused a bit sorry. i get the profit. but where does that profit come from?
I understand that if there’s a new buyer who will purchase my option, i will get the sell price. but what if there are no new buyers? what if no one wants to buy my option at that market price? so hypothetically will i be left with the option, unable to square off until the price comes down?
The situation you are describing is the one where there is a complete lack of liquidity and there are no buyers or sellers in the market. In such cases, you will not be able to get out of the position but upon expiry, the exchange itself will ensure you are settled to the extent of the real value or the intrinsic value of the option.
Hi Karthik, Hope you will respond to my query !!! _/\_
This is what happened in my case… I bought 14900 CE @211(here the break even is 15111) . Later I had exit the position at premium 247 but the Nifty was at 15103. Though the premium has increased, nifty hasn’t crossed my break even point. After exiting this position , I looked at my funds… the money was same as what ever I had invested. No gain , No loss!!! As I’m still new to options trading I didn’t understand what has happened here. Can you please explain!!
Sunil, the concept of breakeven (at 15111 in this case) is true if you hold the position to expiry. If however, you are trading, then the profit or loss depends on the difference in the price of the premium (which happened in your case). About the funds, please do check again.
Thank you very much Karthik. I got that doubt cleared now. I really appreciate you for taking your time and helping us with our queries. I would also like to convey, Varsity is a fantastic opportunity to understand stock market, which is actually giving us a perception while we invest or trade, rather to blindly gamble. All thanks to you.
Hope you and your family are doing fine! _/\_
Thanks for the kind words, Sunil. I hope you continue to learn and enjoy reading on Varsity. My family is keeping safe, I hope the same with yours 🙂
Is that a compulsion to sell the call option after i bought it, and what if i dont sell it, how much loss am i going to incur? Pls explain with an example
You can continue to hold the call option till expiry, there is no compulsion to sell it Taher. The profit or loss depends on how the premium moves.
Hi Karthik
It’s nice to read this article. You really made it very easy to understand. If there is any other chapter/article kindly add a link at the end of every chapter. It will make scrolling easy.
Thanks 👍😊
Not really, Nitay. This module and the next has everything related to options 🙂
hi sir i had a doubt options or futures for hedging a portfolio wouldnt it be options because we can step back if stock move is favorable .
You can use either, depends on the market situation, Gaurav.
sir if we buy option on positional basis so how can we place stoploss on positional basis
Now very clear. But it favors mostly the call writers.
Happy learning!
Thanks for wonderful tutorial 🙂
Happy learning!
I am confused of what this name mean.
Which name?
Hi, Thank you for providing such an easy way of learning Options. While I am still to explore the Greeks, I was trying to understand the premium prices in live market. I just observed that there are few call/put options where premium price is “0”. Please help me understand why was it showing 0. Is it due Nifty Leap contract or liquidity or some other factor.
It is because of liquidity or the lack of it, Ankita.
You have a made very firm statement that if the underlying price remains the same as that of its strike price, then the trader will obviously not buy the stock. But how does that really matter since the premium is already paid and is our loss/expense. If he is bullish on the stock at the time of expiry and thinks that the stock price will shoot up later, then can’t he buy the stock from this agreement? Will it not be exactly same as buying it from the market? Will there be some additional cost to this transaction in comparison to the spot market?
Its just that your cost of buying will be the premium you’ve paid + the stock price. So technically you are paying a lot more to buy a stock that is otherwise cheaper in the market.
Thanks for all the information. All I want to know that I am trading at Paytm Money and here when i try to buy any options lets say AdaniEnt 29 july 1000 call 1 lot(1000qty) the required fund is showing Rs. 500000(500 per share). As per example what is the premium in that case.
1.) If I square off the option will I lost my whole 500000?
2.) If the price of share goes to 1700 and I know it will go down after few time can I book profit from that? (What I understand is that if premium increase i can sell it at higher premium but what if share price go up but not the premium)
3.) I am getting many options like at 1000 call, 1080 call, 1020 call etc some have buyer and seller both but some don’t have any seller. Can I buy options where no seller is there?
4.) At the end of expiry how can I buy that share? Will I get any option to execute my option?
1) 500 per share is the premium? Are you sure?. Anyway, to buy the option you need to pay premium * lot size
2) Yes
3) Yes, there is no liquidity. But you need a seller for these options
4) Yes, the broker will help you get the delivery of shares.
Hi Karthik,
I understand when we buy option we just need the margin amount in our account. But when we square off the same position (either on same day or another day) are we supposed to have additional margins (as per the “sell options” margin figures shown in SPAN calculator) in our account?
If that is true and if we don’t have that much of balance in our account at the time of squaring off what will happen to our positions and what will be the consequences(ie. any penalty)?
Thanks
You need to pay only the premium amount to buy option, and to square this off you dont need margin, Bibin.
hello sir ,
recently few days back i planned to
buy -34000ce
spot 34042
34000ce price – 31
but it need to be more than 42 ( 34042-34000)
it was an expiry day
sir why was call option price was lower than intrinsic value 42 ?
Please check the settlement price on expiry, Rajat. Not the closing price.
Hi Sir
Should we know Futures before learning Options. They both are always called as F&O and hence asking this question.
Since Futures is more risky, thought of learning Options first.
Thanks.
Its better that way. Also, futures is easier to understand.
If I were reading the option theory from any curriculum books, then would never be able to complete it. Amazing content. Realized many of my trading mistakes after reading this.
Happy learning, Mayur 🙂
Dear Sir
I bought Jindal Steel July 29 430 CE 1 LOT(2500) @ 4.95
Rps and sold @ 5.5 what will be my profit and will I lose all my 12375 as Jindal Steel is 394.55 now as the stock has not hit the strike price
I guess I have posted a reply already to this.
66 % chances of winning by Seller and 33% chances of winning by Buyer .
Hi Karthik,
When you say book profit before expiry, does it mean we should sell that option? Thank you!
Yes, that’s right.
Wow great analogy! Understood it quite clearly! Thanks!!
Happy reading!
Great things are being unfolded, thanks for putting things in a very lucid manner. Keeping fingers crossed for further learning, Hope, it will be a great learning!
Happy learning!
Many queries are cleared by u .
Thanks a lot
Happy reading, Deepak!
If I buy Nifty or Nifty Bank call & put options and square off at the end of the monthly expiry ( 03:29 PM of monthly expiry ) .
It will go for physical settlement or will be considered as it’s out of the game with booking whatever the profit and loss it is. ? Or what is the process?
Since you have squared off before the market closing on expiry, this won’t be marked for physical delivery. Your P&L will be settled basis of the difference between the purchase and sell price of the option premium.
I have just started reading your articles. It did enlightened me.
How ever I would be looking forward a training for me and my daughter even if it is paid one
I would be glad to uplift my knowledge from a guru like you
I am not a bigtime trader.
Thanks for explaining the things in a lucid way , beneficial even to a lay man. Please clear me what if the buyer not able to afford the huge amount on the expiry date to excercise his option. Will the market square off and give profits without physical payment.
Once again Kudos on your knowledge about the market with a request to conduct training classes to the needy.
The position will be squared off if you don’t have the necessary margin/collateral.
Hi i am very new to options and just trying to understand and thus will take an example of today itself
Lets say i bought a IRCTC 3260 30TH sep CE at 156. Now the premium rises to 166. If I square it off does it mean i make a profit of 10x lot size obv minus brokerage and taxes etc
That’s right, you make 10 x lot size x the number of lots you hold. Also, there is no need to wait till expiry, you can exit the position anytime you wish.
Thanks for such a nice explanations
Regards
Happy learning, Om.
Option Trading word is new for me.. You explained it in a very simple and beautiful language..
Thanks a lot
Happy learning, Navin 🙂
Karthik : Wonderful style of writing. So far I have been acting on tips for options; profits are like 500 to 1000 and losses are like 3000…7000…. Therefore, the need to understand things a bit better. This chapter is written in an easy to understand way; and I commend you for that. I got a bit confused when talking about expiries at the end you brought in Futures expiry instead of options expiry. Some of the questions in comments are beyond me; but I am hoping to find answers in your other chapters, which is where i am headed soon. Bless you.
Thanks for the kind words, Pradeep. Just to let you know, both futures and options monthly contracts expire on the same day i.e. the last Thursday of the month. Hope you continue to like the content. Happy learning 🙂
Just started to learn Options and glad to know that I’m in a right place.
And the content is as usual very easy to understand (as I’m a slow learner).
Thanks a ton!!!
Happy learning!
In any worst case scenario is it possible for option buyer to loose more than its premium paid
Nope, that’s not possible.
Sir…
thank you so much for this new model and am very excited on this model and am clear on options trading.
i would say that this is my biggest dream is to look back and said I MADE IT…
What happens if I buy Nifty option 17750CE when spot price is above strike price,say 17850 on date of buy and I let it expire on expiry date ?
Most likely option will expire ITM, and this will be cash settled.
Thank You Very Much for valuable education. I love learning from Zerodha Versity
Happy learning, Gorakanth!
If I want to be seller I should be holding the shares right na sir
How to become seller
Not needed, you can short sell in derivatives without owning shares in your account.
Thank you for the simplistic explanation. It was a very confusing concept to me previously. Now it looks simple and easy.
Happy learning, Riddhi.
Hi Kartik, scenario 3 where the price of land stays falt say at 5lac, premium paid upfront is 1 lac if Ajay decides to buy from the open market he still would have to incur 5 lakh as 1 lac is already lost and if he exercise the option to buy from venu he will be paying same amount of 5 lac as 1 lakh is already lost , doesn’t matter if he buys from the open market or from venu as 1 lac is already lost
Yes, but the purpose was not to buy the land with an expectation that the price will stay flat. If that was the case, he would have bought it without waiting 🙂
Great Karthik, you made me understand Call Options so nicely. Would be in touch. Thanks
Happy learning 🙂
Dear Sir,
My question is that, yesterday I bought a Bank Nifty CE 36400@ Rs 164 premium ( 1 Lot – 4100), during session premium it went up, I sold the the same @ Rs 201. Pls note Bank Nifty was trading @ 36900 at this time.
As per my calculations I sold the same on higher price than buy price. In this case profit should be around 900Rs, which P&L was showing but today I found there is loss of around Rs 2400
Could you pls help me to understand the same?
Suraj, this trade will not result in a loss. Check this chapter to figure how to calculate the P&L – https://zerodha.com/varsity/chapter/options-m2m-and-pl/ , maybe you had other trades? Please check the contract note once.
Thank you very much for prompt reply
I am holding Nifty position since last two days Nifty CE 17300 and CE 17600 which has today’s expiry and currently in loss.
One more query, does it affect if premium is increased than buying price but option does not hit or breach the strike price?
Suraj, as long as the option is ITM the option will have an intrinsic value. The OPtion is worthless its its OTM. In case the premium increases, then you can choose to close the position before the expiry itself. No need to wait till expiry.
Hello Karthik Sir,
I am very new to options. Going through the basics of it.
I have few queries on call option.
Let’s say that I buy a stock option of XYZ company which has a strike price of 100. It has a weekly expiry. I bought on Monday let’s say.
Now the CMP of XYZ is 90. I pay a premium of 10 and buy 1 lot of 1000 of XYZ company stock option.
With this I invested 10k and the maximum loss that I can have as a call option buyer is 10k. Let’s say the stock price of XYZ company moves from 90 to 95 and the premium moves from 10 to 15. If I sell the call option at 15 will I make a profit of 5*1000? If yes then in which scenario a call option seller will make unlimited loss?
Please throw some light on this..
Yes, you can Rahul. The P&L is the difference between the buy and sell price of the premium. More on this here – https://zerodha.com/varsity/chapter/options-m2m-and-pl/
Kindly explain in very simple way : what happens on expiry date. Eg: i am option buyer n i hold 01 lot Reliance 3000 ce @premium 1 rs and its closing lets say @2800 and i dont finda buyer anymore .eventually my premium will go zero. Q: Do i need to buy the reliance lot in cash to fulfill the vayda (settlement) on expirey date 1515 hrs .. Or its simply end of trade, Whole my premium eroded is the eventual loss i make.
///Regards///
Thats right, by virtue of holding the option to expiry, you are entitled to buy the stock of Reliance.
Nice example and explanation. Very good analogy between land sale and options. Very informative.
Glad you liked it, Anjana. Happy learning!
Can i sell my weekly or monthly CE or PE before the expiry date…..?
Yes, you can.
Sir, if we trade in the options market, should we get back the premium we paid, especially in intraday trades in options?
Yes, when you square off a long position, you get the premium back at whatever is the prevailing premium rate.
Sir,
Video series for futures and options not available.
can we expect video series for F&Os in future?
Soon, Sriram. We are working on it.
Great example to explain this topic clearly.
Good explanation Mr.Karthik! Appreciate you take time to clarify every questions in better way. Thank you for all your hardwork. Excited to read your upcoming modules.
Sir your modules are really flaming me up …. Thnx for them ☺️
Happy learning, Chetan!
What is gray market ??
Hello,
In equity terms, if I have purchased option trade and waiting till the end and assume that my target is achieved then I have to buy those whole lot of any equity or I will get only premium amount?
Please clarify
If you hold to expiry, then you will have the physical delivery obligation. You will have to buy shares if long call and sell shares if long put.
I understood very well.. excellent examples..
Thank you Team
Happy to note that! Good luck.
I am an intraday options buyer and I intend to trade with a capital of Rs. 2 crore. I do only nifty and banknifty atm/slightly OTM option buying intraday. However, i find it cumbersome to prepare basket orders for each trade as I have to execute my trade very quickly and place stoploss immediately. so could you recommend some software/feature which options buyers like me can make use of to execute large quantities instantly. I am a discretionary trader whose trading decisions are entire based on technical chart patterns and I am looking for some help with respect to the execution only of my trades. thank you
We have the stick order widow which is very helpful while placing orders, https://support.zerodha.com/category/console/portfolio/holdings/articles/what-is-a-sticky-order-window-in-kite-and-how-can-i-use-it. Works for you since you mentioned that you trade just 1 or 2 contracts. Apart from these, there are a few more tools that are getting developed, hopefully we should announce soon.
Lets say I I opted for Call option of the stock for a strike price of 120 on 20th of the month and 27th is the expiry date, but stock hits 125 on 26th ,can I get the benefit on 26th itself or will I have to wait till 27th to see the profit or loss.
Yes, you can exit the option before expiry.
Came here very late i feel , clarity in explanation thanks
Happy learning!
Can we average out call Options ?
Yes, but not a good strategy if you as me 🙂
sir, today i bought banknifty 17th feb 39000 CE at price 277 but by some mistake market closed at price 160.
so please suggest about selling it with minimum loss.
sir, today i bought banknifty 17th feb 39000 CE at price 277 but by some mistake market closed at price 160.
so please suggest about selling it with minimum loss.
Avinash, how is that a mistake 🙂 I’d suggest you close the position on Monday morning if you are not comfortable holding it.
so can i sell it on monday morning if price goes above 160 or will i have to close my position with existing loss?
You can close the position whenever you want.
i mean do i still have the chances to square off my position with good profit ?
Depends on the price you buy and sell, Avinash.
when video lectures will come for this module??
Give us another 15 days max, please.
Dear karthik sir, i hope you are safe and sound.
I want to tell that you are doing great job by sharing this knowledge with us.
I want to ask that when you’re are going to upload video lectures of options any idea or any specific date sir?
Thank u
have a nice day
Thanks, Yash. Options videos are under final edits and review. We will upload in another 10 days.
sorry to asking that same question, i didn’t saw your reply.
thank u😀
No problem 🙂
Hy sir
when the videos of this module will get available to us.
Very soon, Arjun. Keep an eye on our social media channel to track the announcement.
sir youre doing great job.
thanks for your support in the comment section.
but sir i want to ask when the videos will come out of this module.
Happy learning! Kunsh, videos should be out in a few days.
hello sir
sir i am having great learning with your modules.
thanks for the support.
i want you to release the video lectures of all the modules.
Thanks, Aksah. We already have the video lectures, please check the home page.
Till when can we expect videos on options, it’s better to understand that way.
NExt week.
Thanks Sir,
The concept is so beautifully explained and narrated that i do not need to refer any further article for the basics.
Glad you liked the content! Happy learning, Kapil.
read this chapter today, very beautifully explained.
thank you sir for sharing this great knowledge with us.
regards
Happy learning, Yash!
Good evening sir
sir when will the video lectures of this module will be out
This week hopefully.
sir i want to ask something
respectfully
when video lectures will be out?? i remembered you said by 26 feb, and now 14 march
thanks
Today the first video will be out.
Well explained… Clear…
Glad you liked it!
NICELY AND BRIEFLY EXPLAINED …THNQQ SIR
Karthik tuse great ho
I tried to learn options from other places also but the way you explain is really wonderful.
Thank you so very much for taking all pains to explain in very simple way.
Thanks Munish 🙂 Hope you continue to enjoy reading the contents on Varsity.
why 75 strike price?
why not 67 itself?
67 strike is not available I guess.
Dear Sir,
What if I have bought HDFC CE at 25 and placed sl at 22, but next day market gaps down directly to 18.
Will my order execute at 18 or stoploss placed at 22.
Kindly answer on this.
The SL order is valid only for the day, unless it’s a GTT order. If its GTT, then its a limit order which will get executed at your specific price, provided the price is available for you.
Dear Sir,
Thank you for answering my query.
Can we place GTT OCO for weekly or monthly index and stock options?
What if gap down and gap up happens? Will GTT OCO orders placed on mentioned price or opening price of the market?
Yes you can. GAPS unfortunately will not be taken into consideration.
Excellent work great work.
Sir, sometimes I can use option read loud; how can I use this facility???
Sorry, dint get the context. Can you elaborate?
Please provide a training or workshop at low cost in options trading, as it is useful to all zerodha customers
This is the training material, Srinivas 🙂
hi sir
can we trade nifty22 may futures multiple times on SAME DAY example
1st trade : nifty may fut sell@15898
nifty may fut buy@ 15970
trade closed loss:72points
on SAME DAY
2nd trade
nifty may fut buy@ 15970
nifty may fut sell @15940
trade closed loss:30 points
on same day
3rd trade
nifty may fut sell@ 15930
trade open in position for
till expiry or 5 days according to setup
kindly reply
Yes, you can do that. Its called intraday trading.
but my 3rd trade is open in position for
till expiry or 5 days according to setup on the same day…can we trade like this
Yes, you certainly can. But not without backtesting it once 🙂
thanks for ur reply…
1.what will happen when i forget to close the nifty may futures position@expiry
2.wheather margin and exposure will increase day by day on last week of expiry in nifty may futures
if increase means how much percent…iam having open position one lot in nifty may futures
and the over all amount iam having is 187000=1lot nifty may futures..
once
again thanks for ur reply
1) It will get cash settled
2) Yes, it will. In case you don’t have the respective margins in your account, the position will be closed.
1.it will get cash settled means…it will autosquraeoff my position then profit or loss is settled to the parties
Yes, thats right.
talking about only nifty may futures
Yup, all indices are cash settled.
If the stock price stays at 75, why cant the buyer buy it? The premium 5rs is anyway gone so it doesn’t matter if he buys the stock at 75 from the option seller or the market right?
Your effective cost is 75+5, you have no advantage right?
Very good content. Thanks
Happy learning!
Can options be squared off on the same day of trade??
Yes, it can be.
Wow… Great explanation. It’s so simple and easy to understand your examples. Thanks for your documentation…
Happy learning, Sudarsan 🙂
Tks for information
How to select the Strike Price in Option and Stop Loss
Have explained that in other chapters, Paddy.
Pls specify in which chapter explained or link pls..
Tks..
Sir, Please help me understand the meaning of ” spreads were high & getting fills was a big deal”, in fourth para from starting.
It means, that the liquidity was tight and hence trading (buying and selling), was not easy.
Hello sir,when u say
“You can book your P&L anytime you want, but you can exercise your option only the day of expiry”
Actually I am bit confused here,what exactly is the difference between booking profit,and exercising option,as I thought both means same.
Thankyou in advance
Have explained this in detail here – https://zerodha.com/varsity/chapter/options-m2m-and-pl/
sir ,
if we trade in options we have to see underlying charts? ( for analysing)
for putting stoploss and target which chart we have to see…….underlying or options chart
I’d suggest the underlying chart.
can we sell t+1 holding stocks …
Yes, it’s called BTST, check this – https://support.zerodha.com/category/trading-and-markets/trading-faqs/articles/btst-meaning
Iski hindi pdf ka link h kya
Beautifully explained.god bless you.better than YouTube videos
Happy learning 🙂
The example given here made ideas clear behind call option and probability of profit ie 33.33
Thanks…
Good luck!
Hi Karthik,
1) If I square off for a profit before expiry then any action required from my side on this particular trade?
2) If I don’t square off, let the trade run and as you said it will get exercised on expiry what will be the profit?
1) Nothing
2) If the stock option expires ITM, it will be settled physically. You have to give or take stock delivery based on your position.
Hi sir, always wanted to learn about option trading, the first time i read the formal definition of options trading, it looked like a big red flag for me. But your examples made my thinking wrong. Thanks.
I’m glad you found the content easy to follow and understand. Happy learning 🙂
Thanks Karthik for this amazing content. Very useful for beginners. i have one basic question in my mind. Sincere apology if it a dumb question.
What is a company’s interest to participate in future and option trading? How do companies get benefited from F&O trading?
I mean if reliance is available for Option trading , What benefit reliance has a company ?
There is no direct or indirect benefit to the companies, Gautam. One advantage (for all shareholders, including the companies) is that they can hedge their holdings with F&O, that’s about it.
Also what is the consequences of MIS(Intraday) and Overnight in case of Option trading. what is Overnight/Delivery mean in case of Option trading ?
It just means that your position is now open overnight and can be carried over for multiple days (if you wish).
Very simplistic explanation on Call options.
Happy learning 🙂
Thanks
In Option-Chain different strikes have different IV. But Why? when VIX is the same?
How do they calculate IV? If we use Black-Scholes Model to calculate options prices. The Black-Scholes model requires five input variables: the strike price of an option, the current stock price, the time to expiration, the risk-free rate, and the volatility.
Out of five variables, four are easy to collect. but How do I know what is the IV?
for knowing the IV we need the Option price. for calculating options price we need IV. In an equation How is it possible to get two variables at a time?
I’m totally confused :confused:.
very nicely explained . nailed it
Happy learning, Varun!
Hi karthik,
how can we say that venu will be loss in all 3 cases? venus minimum profit is 1 lakh and in all the 3 case the deal doesn’t incurr any cash outflows from his pocket
Not in all 3 cases, right? Please check this again.
The concept is very clearly understood. But its confusing how to buy it practically
Bihan, you can check these videos for practical guide – https://www.youtube.com/watch?v=-mO0YOTcCiQ&list=PLX2SHiKfualFiusiT9G5uE9jU3vetvW2x
dear sir kindly help as i am not able to get this,
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!
Sure, Pankaj. Which part is confusing?
sir if the spot is trading at 67 and the same will be at 75 after a month then why should not we buy this today in options ?
As you buyer, you want to buy at a lesser price, right? So between 67 and 75, I’d rather buy at 67.
can you give the example of real world with option trading and both must be include premium profit and loss
I have included many practical aspects in the video series. Do check this – https://www.youtube.com/watch?v=-mO0YOTcCiQ&list=PLX2SHiKfualFiusiT9G5uE9jU3vetvW2x
I saw many people are buying option on expiry day in last mint also. But i did not understant how they square off their lots after market close.
It will end up as a worthless contract.
I would like to trade in options and future only after knowing the subject. Your this chapter is very useful. Now I have a clear understanding.
I thankyou for that.
Happy learning, Ajay.
Hello kartik,
My question is when and where to see(Buy Or Sell) Implied Volatility
You will have to develop strategies to trade volatility. For example, a short option is also a play on high volatility.
8.The option buyer benefits only if the price of the asset increases higher than the strike price.
If I buy a PE option with a Strike Price, it has to go below the strike price in order to make profits ?
Yes. Point 8 is valid for call option buyers.
Yes, at all price points between the strike + premium paid, your losses will be minimized.
By your above comments i didnt get it sir
Lets say you have paid 10 as a premium for a 100 CE strike. The market starts to move up, assume the expiry is 105…in this case your loss is 5. In case the market expires at 108, your loss is only 2.
My doubt is if I buy today (10 JAN) TITAN call options FEB 23 expiry (spot 2510) at lower strike price (2500) with ltp 90 because i expect it to do well in feb, if in case, it goes down, will i lose money daily (max loss 22500) in january or will the exchange wait till feb expiry day.
On expiry day in Feb, provided you hold the option to expiry.
So much grateful to you Sir. understanding option was like eating iron stone to me since many years. you have made it so easy to understand.
Thanks for the kind words, Dayanand. I’m glad you liked the content. Happy learning 🙂
Thanks for the nice and detailed explanation
Happy learning 🙂
It is in the news that NSE may extend equity trading hours up to 5PM and derivative trading hour up to 11.45PM. In such scenario whether option market would run up to 11.45PM ? I think technically it is not possible as option value derives from equity . It may be restricted to future trading only
Not sure, it will be both markets, I guess. Waiting for the details to come out.
sir is there any topic on currency trading like usd/inr? Or this option strategy can also works on currency trade as well? How currency trade differs from equity and option trade or commodity trade , actually i am interested in currency trade and want to learn all about currency trade like you teach in others topic.
You can look it up here, Neeraj – https://zerodha.com/varsity/module/commodities-currency-government-securities/
hi sir after technical analysis part i have directly jumped to option theory i left futures topic,
i want to ask that is it possible to learn option seperately except future , Are futures and options are interconnected to each other ?
i was thinking that in futures we need to have more deep pocket money because of margin also, so i wanted to do option trading except futures, can we? Or is there any kind of loss while left futures
Its better to at least skim past the Futures module Neeraj. It will help you understand options better 🙂
Suppose i placed order as Market option order till it did not get executed so now if i want to modify order as limit order so is the modification charges required for this one?
There is no charge for modifying an order. I’d suggest you look at all the charges here – https://zerodha.com/charges/#tab-equities
As you replied “Its better to at least skim past the Futures module Neeraj. It will help you understand options better ”
I want to ask that if i understand furture module before option it willbe easy to understand option then but i can not afford to trade in futures because it will take high margin and lot of money required and i have not that much so i skipped future module as option need some less money to trade as compare to future ,thats why i dont to to trade in future but yes in option so how can i read and understand future before option is there any important relation between both or they are seperate topic . I want to say is there any alternate that if i read and understand future module first and then go to option and after that if i want to take trade to learn and master it then can i do this in option directly or should i do future trade first
Neeraj, there are few concepts common to both futures and options. For example, the concept of margin applies to option writing and futures or the concept of lot size or the concepts of contract creation and expiry. So I’d suggest you spend sometime learning futures and then options 🙂
Yes sir i will do the same but i want to ask after understanding future first and then option , Can i go to practice trade on options directly except futures or is it compulsry to have trade in future first to learn trading
Yes, that you can do Neeraj 🙂
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?.
I wanted to understand in this example, if the stock is trading at 67, then why one month later, right to buy at 75? And why profit will be only after 75? Isn’t the profit should have when the stock price is above 72 (67 + 5)?
This is the structure of a call option, Shailesh. So assume the stock is trading at 80. Won’t you like to buy it at 75? I’d suggest you read this chapter and the subsequent chapters, you will fully understand how the CE is structured.
Squaring off process must be explained in detail
Check this – https://zerodha.com/varsity/chapter/options-m2m-and-pl/
Great detail,
1. Does call option buy has unlimited loss if not execute till expire?
2. For instance, if the current stock price is Rs 480 and i buy a CE with strike price 510 at premium of Rs 10. The stock price on expiry day rose to Rs 550 and my profit will be Rs 40 per share if i m correct. Then Is it possible that the premium of that expiry could be more than Rs 40. If yes, then On what basis i will get the final profit; differential in increment of stock price or premium.
3. Keeping the above hypothetical situation, If i bought an option (present share price 480) at a premium of Rs 10 which later rose to 550 on expiry day. Now i will execute the buy on expiry (as promised), shall i need to pay the entire share amount 540 or something else.
1) Not true
2) Yes, in this case the premium will increase.
I’d suggest you check this – https://zerodha.com/varsity/chapter/options-m2m-and-pl/
“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”
I think this ratio calculation is not correct.
Its like saying if I have a dice and I need 5 to win then my win percentage is 33.33 %
The set for the values being taken by the price is not correctly made for probability calculation in my opinion.
Perhaps, the better way to think about this is that Venu here has higher odds of being profitable…and you can ignore the numbers completely 🙂
Sir can u pls explain in detail
1. Suppose we buy call option with strike price Rs 100.
2. Premium paid Rs 10.
3. Lot size 75 shares
4. Suppose we bought 10 lot which means 750 shares for Rs 7500.
5. Now on delivery time if the CASH MARKET PRICE is Rs 180.
6. Then do we need to pay the entire amount of Rs 180 to square off or How much money do we require in our demat account to execute the trade?
7. And last, if the CASH MARKET PRICE is less than strike price say Rs 80, do we need to square off the trade or will it automatically squared off?
sir there is difference in index chart movement and option chart movement index moves later option gives move before index give in zerodha what is the reason of that.
Thats because option charts are premium charts, and the premium has many more factors that impact its price apart from the direction. Hence the difference.
Hey, Karthik! First of all, thanks a ton for putting out the content that you do. It is truly phenomenal. My doubt is if we just need two participants in a trade( Buyer and seller), then why have call and put options? Either call or put option in isolation should suffice right? One person has a bullish view and the other a bearish view. Hoping you could clarify this. Thank you!:)
Call and Puts give you two different ways in expressing your views on markets, Divyesh. Also practically, markets have many participants and each participant has a different view 🙂
Thanks for the Information.
Happy learning!
Hello Sir, My question is, what will happen if I don’t wish to exercise my right at options expiry.
Will i will incur a loss, if the spot price is trading lower than the strike price.As you said if you dont exercise your right the exchange will do it for you.
It depends on the moneyness of your option. If the option is ITM, then there is a physical delivery, else you can let the option expire worthless and not worry about squaring off the position.
can a person with zero knowledge on technical analysis do F&O?, or is trading is like starter for F&O?
Its better to know, TA before you dabble with F&O 🙂
Looks simple and understandable till now. Nice.
It will be going forward too 🙂
Hi Karthik,
Just an idiotic question 🙂
Why do we need a put option when you can buy or sell a call option (or vice-versa)?
Dhananjay, check this video 🙂 – https://www.youtube.com/watch?v=0CnHdzTE66s&list=PLX2SHiKfualEyD05J9JsklEq1JFGbG6qJ&index=1
How does it work if price of the stock goes above 75 but does not cover fir the premium let’s say price is 78?
Then you are in-between breakeven and profitability spot. Your loss keeps reducing as the spot moves towards breakeven spot.
Sir, since max loss is the premium paid, do we still need to exit or does it exit automatically after reaching max loss.
I mean, can the trade still run after max out if not exited.
The position will be deemed closes upon expiry, provided the option is worthless (no intrensic value).
Hi, I have a doubt in options buying – Can option premium go negative because I see green & red numbers for premiums too? Is the premium that I pay to buy an option is the maximum loss I can incur ? eg: I buy a lot of call or put for 3,000 and I didn’t set stop loss, I also lost my network connection & the market has headed against my intended direction let say.. about 120 points. here my loss is 3,000 (the premium I paid) or the entire loss (may be some 5,000 or something) to the extent that the premium has depreciated to the negative side (red numbers) (I don’t know if this happens, that’s my main doubt)
Thank you.
When you buy an option, the maximum you lose is to the extent of the premium paid. You wont lose beyond that.
Hello sir
My doubt is, I have listened so many times that at the expiry day, premiums become zero, is it true?
Yes, but only for out of the money and at the money options. Not for in the money options.
Dear Sir,
Please help me understand the break even price for crude oil put option.
While I am writing you this 7100 put call option as on Oct 24th 2023 is at premium of Rs 302 and the underlying price right now is 7032 for crude oil.
My understanding is when the my breakeven point will come at 7100 (strike price) – (minus) 302 (premium price) = 6798
This when crude oil drops in the put option to the price point of 6798 I will hit break even and post that any decrement to this price will me my profit. Is my understanding right.
And vice versa goes for call option that when the current price prices reaches to strike price plus the premium paid I hit breakeven.
Are there are other variables to be considered which I am missing on to calculate my breakeven price and can you share any breakeven calculator (if any available) to use further.
Regards
Breakeven as a concept is applicable only upon expiry. But you need to be clear that you can buy and sell options anytime before expiry, and if you do so, your P&L is the difference between the buy and sell premium.
Hello Sir,
It’s real reader friendly content to go through for the beginners.
My query is that when buying options are way cheaper, has limited risk and the same profit as Futures, why someone has to buy the Futures – that requires higher margin money than the Options? Thank you.
The risk profile for these are slightly different and each trader has his or her own preference. Based on that, they can choose which instrument to trade.
Thanks a lot for your quick and clear answer this helps
Sure, happy learning 🙂
as the ajay can buy the land at lower price ,we can buy the stock too at lower price.
Yeah, thats how it works in stocks as well.
Your examples and explanation is the finest example of content writing that I have seen.
Thanks for the kind words, Masood. Happy learning 🙂
Mam agar Current Market price 85 ki vajai 80 hi hota h toh pnl breakeven par aa jaayega na?
Expense= 75+5= 80
Current price= 80
Profit= 0
Agar expiry day wale din delivery se bachne ke liye sabhi sell krke nikal gye to premium down jayega?
Very well written. Thank you for explaining.
You mentioned that the seller has 66.66% chance of winning. However, for scenario 2, when the price of the land goes down to 350K, the notional loss for seller is 50k [500k – (350K + 100k) = 50k]. Isn’t that right? If the seller had sold the land in open market when the price was 500k, he wouldn’t have incurred this loss 6 months down the line. So, only scenario 3 is profitable for seller i.e. same chance of winning as buyer. Is it not? Please let me know.
Thanks,
Yogesh
What happens 6 months down the line would be speculative. The decision to buy or sell depends on the prevailing settlement price, right?
Hello Karthik,
Thanks for your reply.
In this example, isn’t the buyer’s decision to purchase tha land based on speculation (i.e. based on highway project)? I think, the buyer is using the prevailing price to calculate the likely profit. From a seller’s perspective, if he thinks the price would –
go up – better to wait than sell immediately
go down – sell immediately
remain same – sell or wait
Sicen the seller does not have the right, the decision to get into a 6-month agreement would be beneficial for seller only if the price remains the same. Is it not? Please let me know.
Thanks for your inputs.
– Yogesh
The seller’s opinion is that there wont be a highway project, so he is betting on that. Also, once into an agreement, the opinion does not matter as the seller is bound by the agreement.
Makes sense. Thanks for your prompt reply, Karthik.
Sure, happy learning!
Dear Karthik,
How high weightage stock like HDFC and ICICI bank movements affects Bank Nifty movements. For Ex HDFC bank is falling heavily or rallying, and this how we can predict bank nifty movements.
Even if I sell the call bought(after seeing the PnL in green) the contract remains unexercised till expiry how does that concern me?
That should not concern you as you’ve squared off your position and out of the market.
can you provide some books to learn from, as most of information in market is based on marketing of book and not actually the content.
Please read through Varsity. Zero marketing, only content 🙂
Sir,
If a buyer buys lets say 1,00,000 lot. end of the term, instead of exit from the option he wanted to convert the same to Delivery of stock. Is this possible? if so, in case of illiquidity who will sell the same.
Yes, thats the settlement process for stock options.
Very good information.veryknoledgebul abou call and put please give us advance information.about call and put options basics.and alsoall detailes of options.
Thanks, happy learning 🙂
Hello sir,
What if i buy put option and the underlying goes sideways?
Is the put option premium increase or decrease on expiry?
If the spot goes sideways, the option will lose value, regardless of call or put.
Finally a page where F&O is explained so clearly and easily! Till date I couldn’t find one channel where I could understand anything about options trading! Thank you so much
Thanks, and happy learning Ankita!
Karthik,
If most of options play is only on premiums, then why do we need to understand put and call. Will technical analysis be sufficient to trade premiums?
Call and Put options are based on premiums only right? I mean premium is what gives the option a value.
In Options is there only way to make profit by buying that stock at dexided price and then selling it later? Or if I will get more premium by someone can I sell that contract to that person.
It depends on so many factors, Rahul. No direct answer 🙂
Sorry let me rephrase, can i trade option premiums only using technical analysis?
Yes, you can.
hello karthik
On 4th july, the nifty 50 3min chart was rising from 12.pm to around 12.51pm steadily. but the ATM options CE were either stagnant or moving downwards in the slightest correction of the underlying. Why does this happen?
You are looking at 1 parameters (direction or Delta) and trying to figure its impact on the option price, but in reality there are multiple factors that will impact the price, not just the delta.
Ok thank you. can you please tell me how i can avoid such trading into such scenarios? what other factors do i keep in mind other than direction in order to ensure that the option price will move (which anyways happen most of the times) whenever there is movement in the underlying? i am an option buyer.
The only way to nail this is by practice, the more you do, the more you learn. But you need to remember that learning comes at a cost in Markets 🙂
Hi Karthik,
May I know the best time to place Market order and Limit order in option buying ?
It depends on market conditions and the stock/index you are trading. There is no one particular best time as such 🙂
Thank you Karthik for your response however what I have observed is that market should be placed when the volatility is less ..post 9:20 am is suitable since the volatility is extreme during 9:15 am .Is my guess right if not can you suggest for option buying on Index
Yes, vol tends to reduce post market but its not always a given:)
please give me paper trading link to do indian market stocks and options and crude and natural gas etc
There are no such apps.
9 out of 10 individual traders in FNO SEGMENT incurred net losses.
That 1 person took the efforts to learn and understand the risk and deal with F&O carefully 🙂