23.1 – Case studies
We are now at the very end of this module and I hope the module has given you a fair idea on understanding options. I’ve mentioned this earlier in the module, at this point I feel compelled to reiterate the same – options, unlike futures is not a straight forward instrument to understand. Options are multi dimensional instruments primarily because it has many market forces acting on it simultaneously, and this makes options a very difficult instrument to deal with. From my experience I’ve realized the only way to understand options is by regularly trading them, based on options theory logic.
To help you get started I would like to discuss few simple option trades executed successfully. Now here is the best part, these trades are executed by Zerodha Varsity readers over the last 2 months. I believe these are trades inspired by reading through the contents of Zerodha Varsity, or at least this is what I was told. 🙂
Either ways I’m happy because each of these trades has a logic backed by a multi disciplinary approach. So in that sense it is very gratifying, and it certainly makes a perfect end to this module on Options Theory.
Do note the traders were kind enough to oblige to my request to discuss their trades here, however upon their request I will refrain from identifying them.
Here are the 4 trades that I will discuss –
- CEAT India – Directional trade, inspired by Technical Analysis logic
- Nifty – Delta neutral, leveraging the effect of Vega
- Infosys – Delta neutral, leveraging the effect of Vega
- Infosys – Directional trade, common sense fundamental approach
For each trade I will discuss what I like about it and what could have been better. Do note, all the snapshots presented here are taken by the traders themselves, I just specified the format in which I need these snapshots.
So, let’s get started.
23.2 – CEAT India
The trade was executed by a 27 year old ‘Options newbie’. Apparently this was his first options trade ever.
Here is his logic for the trade: CEAT Ltd was trading around Rs.1260/- per share. Clearly the stock has been in a good up trend. However he believed the rally would not continue as there was some sort of exhaustion in the rally.
My thinking is that he was encouraged to believe so by looking at the last few candles, clearly the last three day’s trading range was diminishing.
To put thoughts into action, he bought the 1220 (OTM) Put options by paying a premium of Rs.45.75/- per lot. The trade was executed on 28th September and expiry for the contract was on October 29th. Here is the snapshot of the same –
I asked the trader few questions to understand this better –
- Why did you choose to trade options and not short futures?
- Shorting futures would be risky, especially in this case as reversals could be sharp and MTM in case of sharp reversals would be painful
- When there is so much time to expiry, why did I choose to trade a slightly OTM option and not really far OTM option?
- This is because of liquidity. Stock options are not really liquid, hence sticking to strikes around ATM is a good idea
- What about stoploss?
- The plan is to square off the trade if CEAT makes a new high. In other words a new high on CEAT indicates that the uptrend is still intact, and therefore my contrarian short call was flawed
- What about target?
- Since the stock is in a good up trend, the idea is to book profits as soon as it’s deemed suitable. Reversals can be sharp, so no point holding on to short trades. In fact it would not be a bad idea to reverse the trade and buy a call option.
- What about holding period?
- The trade is a play on appreciation in premium value. So I will certainly not look at holding this to expiry. Given that there is ample time to expiry, a small dip in stock price will lead to a decent appreciation in premium.
Note – the QnA is reproduced in my own words, the idea here is to produce the gist and not the exact word to word conversation.
So after he bought CEAT PE, this is what happened the very next day –
Stock price declined to 1244, and the premium appreciated to 52/-. He was right when he said “since there is ample time to expiry, a small dip in the stock price will lead to a good increase in option premium”. He was happy with 7/- in profits (per lot) and hence he decided to close the trade.
Looking back I guess this was probably a good move.
Anyway, I guess this is not bad for a first time, overnight options trade.
My thoughts on this trade – Firstly I need to appreciate this trader’s clarity of thought, more so considering this was his first options trade. If I were to set up a trade on this, I would have done this slightly differently.
- From the chart perspective the thought process was clear – exhaustion in the rally. Given this belief I would prefer selling call options instead of buying them. Why would I do this? – Well, exhaustion does not necessarily translate to correction in stock prices. More often than not, the stock would enter a side way movement making it attractive to option sellers
- I would select strikes based on the normal distribution calculation as explained earlier in this module (needless to say, one had to keep liquidity in perspective as well)
- I would have executed the trade (selling calls) in the 2nd half of the series to benefit from time decay
Personally I do not prefer naked directional trades as they do not give me a visibility on risk and reward. However the only time when I initiate a naked long call option (based on technical analysis) trade is when I observe a flag formation –
- Stock should have rallied (prior trend) at least 5-10%
- Should have started correcting (3% or so) on low volumes – indicates profit booking by week hands
I find this a good setup to buy call options.
23.3 – RBI News play (Nifty Options)
This is a trade in Nifty Index options based on RBI’s monetary policy announcement. The trade was executed by a Varsity reader from Delhi. I considered this trade structured and well designed.
Here is the background for this trade.
Reserve Bank of India (RBI) was expected to announce their monetary policy on 29th September. While it is hard for anyone to guess what kind of decision RBI would take, the general expectation in the market was that RBI would slash the repo rates by 25 basis points. For people not familiar with monetary policy and repo rates, I would suggest you read this –
http://zerodha.com/varsity/chapter/key-events-and-their-impact-on-markets/
RBI’s monetary policy is one of the most eagerly awaited events by the market participants as it tends to have a major impact on market’s direction.
Here are few empirical market observations this trader has noted in the backdrop market events –
- The market does not really move in any particular direction, especially 2 – 3 days prior to the announcement. He find this applicable to stocks as well – ex : quarterly results
- Before the event/announcement market’s volatility invariably shoots up
- Because the volatility shoots up, the option premiums (for both CE and PE) also shoot up
While, I cannot vouch for his first observations, the 2nd and 3rd observation does make sense.
So in the backdrop of RBI’s policy announcement, ample time value, and increased volatility (see image below) he decided to write options on 28th of September.
Nifty was somewhere around 7780, hence the strike 7800 was the ATM option. The 7800 CE was trading at 203 and the 7800 PE was trading at 176, both of which he wrote and collected a combined premium of Rs.379/-.
Here is the option chain showing the option prices.
I had a discussion with him to understand his plan of action; I’m reproducing the same (in my own words) for your understanding –
- Why are you shorting 7800 CE and 7800 PE?
- Since there was ample time to expiry and increased volatility, I believe that the options are expensive, and premiums are higher than usual. I expect the volatility to decrease eventually and therefore the premiums to decrease as well. This would give me an opportunity to buyback both the options at a lower price
- Why did you choose to short ATM option?
- There is a high probability that I would place market orders at the time of exit, given this I want to ensure that the loss due to impact cost is minimized. ATM options have lesser impact cost, therefore it was a natural choice.
- For how long do you plan to hold the trade?
- Volatility usually drops as we approach the announcement time. From empirical observation I believe that the best time to square of these kinds of trade would be minutes before the announcement. RBI is expected to make the announcement around 11:00 AM on September29th; hence I plan to square off the trade by 10:50 AM.
- What kind of profits do you expect for this trade?
- I expect around 10 – 15 points profits per lot for this trade.
- What is you stop loss for this trade?
- Since the trade is a play on volatility, its best to place SL based on Volatility and not really on the option premiums. Besides this trade comes with a predefined ‘time based stoploss’ – remember no matter what happens, the idea is to get out minutes before RBI makes the announcement.
So with these thoughts, he initiated the trade. To be honest, I was more confident about the success of this trade compared to the previous trade on CEAT. To a large extent I attribute the success of CEAT trade to luck, but this one seemed like a more rational set up.
Anyway, as per plan the next day he did manage to close the trade minutes before RBI could make the policy announcement.
Here is the screenshot of the options chain –
As expected the volatility dropped and both the options lost some value. The 7800 CE was trading at 191 and the 7800 PE was trading at 178. The combined premium value was at 369, and he did manage to make a quick 10 point profit per lot on this trade. Not too bad for an overnight trade I suppose.
Just to give you a perspective – this is what happened immediately after the news hit the market.
My thoughts on this trade – In general I do subscribe to the theory of volatility movement and shorting options before major market events. However such trades are to be executed couple of days before the event and not 1 day before.
Let me take this opportunity to clear one misconception with respect to the news/announcement based option trades. Many traders I know usually set up the opposite trade i.e buy both Call and Put option before major events. This strategy is also called the “Long Straddle”. The thought process with a long straddle is straight forward – after the announcement the market is bound to move, based on the direction of the market movement either Call or Put options will make money. Given this the idea is simple – hold the option which is making money and square off the option that is making a loss. While this may seem like a perfectly logical and intuitive trade, what people usually miss out is the impact of volatility.
When the news hits the market, the market would certainly move. For example if the news is good, the Call options will definitely move. However more often than not the speed at which the Put option premium will lose value is faster than the speed at which the call option premium would gain value. Hence you will end up losing more money on the Put option and make less money on Call option. For this reasons I believe selling options before an event to be more meaningful.
23.4 – Infosys Q2 Results
This trade is very similar to the previous RBI trade but better executed. The trade was executed by another Delhiite.
Infosys was expected to announce their Q2 results on 12th October. The idea was simple – news drives volatility up, so short options with an expectation that you can buy it back when the volatility cools off. The trade was well planned and the position was initiated on 8th Oct – 4 days prior to the event.
Infosys was trading close to Rs.1142/- per share, so he decided to go ahead with the 1140 strike (ATM).
Here is the snapshot at the time of initiating the trade –
On 8th October around 10:35 AM the 1140 CE was trading at 48/- and the implied volatility was at 40.26%. The 1140 PE was trading at 47/- and the implied volatility was at 48%. The combined premium received was 95 per lot.
I repeated the same set of question (asked during the earlier RBI trade) and the answers received were very similar. For this reason I will skip posting the question and answer extract here.
Going back to Infosys’s Q2 results, the market’s expectation was that Infosys would announce fairly decent set of numbers. In fact the numbers were better than expected, here are the details –
“For the July-September quarter, Infosys posted a net profit of $519 million, compared with $511 million in the year-ago period. Revenue jumped 8.7 % to $2.39 billion. On a sequential basis, revenue grew 6%, comfortably eclipsing market expectations of 4-4.5% growth.
In rupee terms, net profit rose 9.8% to Rs.3398 crore on revenue of Rs. 15,635 crore, which was up 17.2% from last year”. Source: Economic Times.
The announcement came in around 9:18 AM, 3 minutes after the market opened, and this trader did manage to close the trade around the same time.
Here is the snapshot –
The 1140 CE was trading at 55/- and the implied volatility had dropped to 28%. The 1140 PE was trading at 20/- and the implied volatility had dropped to 40%.
Do pay attention to this – the speed at which the call option shot up was lesser than the speed at which the Put option dropped its value. The combined premium was 75 per lot, and he made a 20 point profit per lot.
My thoughts on this trade – I do believe this trader comes with some experience; it is quite evident with the trade’s structure. If I were to execute this trade I would probably do something very similar.
23.5 – Infosys Q2 aftermath (fundamentals based)
This trade was executed by a fellow Bangalorean. I know him personally. He comes with impressive fundamental analysis skills. He has now started experimenting with options with the intention of identifying option trading opportunities backed by his fundamental analysis skills. It would certainly be interesting to track his story going forward.
Here is the background to the trade –
Infosys had just announced an extremely good set of numbers but the stock was down 5% or so on 12th Oct and about 1% on 13th Oct.
Upon further research, he realize that the stock was down because Infosys cut down their revenue guidance. Slashing down the revenue guidance is a very realistic assessment of business, and he believed that the market had already factored this. However the stock going down by 6% was not really the kind of reaction you would expect even after markets factoring in the news.
He believed that the market participants had clearly over reacted to guidance value, so much so that the market failed to see through the positive side of the results.
His belief – if you simultaneously present the markets good news and bad news, market always reacts to bad news first. This was exactly what was going on in Infosys.
He decided to go long on a call option with an expectation that the market will eventually wake up and react to the Q2 results.
He decided to buy Infosys’s 1100 CE at 18.9/- which was slightly OTM. He planned to hold the trade till the 1100 strike transforms to ITM. He was prepared to risk Rs.8.9/- on this trade, which meant that if the premium dropped to Rs.10, he would be getting out of the trade taking a loss.
After executing the trade, the stock did bounce back and he got an opportunity to close the trade on 21st Oct.
Here is the snapshot –
He more than doubled his money on this trade. Must have been a sweet trade for him
Do realize the entire logic for the trade was developed using simple understanding of financial statements, business fundamentals, and options theory.
My thoughts on this trade – Personally I would not be very uncomfortable initiating naked trades. Besides in this particular while the entry was backed by logic, the exit, and stoploss weren’t. Also, since there was ample time to expiry the trader could have risked with slightly more OTM options.
And with this my friends, we are at the end of this module on Options Theory!
I hope you found this material useful and I really hope this makes a positive impact on your options trading techniques.
Good luck.
Thanks.
now next module pl.
I am planing to short nifty CE -8300 . As per my calculation (1SD) for 15 days to expiary high is 8245/- & low is 7976/- (Daily Average is minus -0.02 & Daily SD is 1.02 %
I will be grateful if you check & confirm whether working is properly done or not.
Dhansukh – can you put up the step by step calculation? It would be easier for me to check. Thanks.
Karthik,
Greetings!
I read all your modules on options and I must thank you for such a great explanation, you are so gooooood at teaching, cant appreciate enough!
And I have one question, sooner you answer better it is, i want to know about long strangles, put/call buying should be equal in lots ..u said…but I find it little counter intuitive, please help me with below scenario –
suppose, one has to do long nifty strangles which are OTM, and put price is 20 and call price 4, so still one should go buy equal no. of lots ? or divide amount in 2 and allocate for puts & calls equally? or use counter-proportionality…like 1/5th amt for put – 20 rs and remaining 4/5th amt. for 4rs call?
and time horizon – till expiry
and risk — its fine both of them expire worthless
Thanks in Advance.
Please help…
Great Job Karthik Sir..I need to study 2 or 3 times to understand this better…Thanks again for educating us…
Most welcome 🙂
Awesome.. I thought you would be posting your personal trades.. Anyways its useful to find that there are always opportunities in markets, you need to find and execute them:)
These are trades done by Varsity traders…thought this would be more inspiring than posting my trades 🙂
Yes, markets are full of opportunities, you just need an eye to spot them.
Dear Sir,
Is it better to prefer short selling of both call and put options after neutralising Delta factor prior to announcement of major events etc. and square off the trade after volatality cool off in view of conservative trading. please advise. Thanks & Best Regards, R V N Sastry
Yes it does make sense. However before you initiate such trades I would advise you to paper trade for sometime. Thanks.
Hi,
Please go through the following article in my blog, the strategy has given about 10% return in 2 trading sessions.
Thanks.
P R Sundar
Will do, thanks!
Please link your blog please
Hi Karthik,
Really good strategic examples. It shows more light on our trading mistakes. Please give some more strategic examples.
Glad you liked them Ravi 🙂
Sir, does it make sense to buy ATM strike options (both) before the events before volatility shoots up?(Given that there is ample time to expiry). I personally observed premiums going up on trading sessions before state election exit polls few days ago.
Yes, but you will have to time this very well, else you’d be buying at very high premium valuations.
Thank you Sir, I observed that carrying positions overnight can lead to a loss, we have to buy and sell in intraday on the day before.
Not true, Palash. To carry a position overnight or close within the day really depends on your risk appetite.
karthik, very helpful efforts, thanks. could you help me to advise, where we will get historical volatility data for index and individual stock,
to back test our option strategy
Try here – http://www.nseindia.com/products/content/derivatives/equities/historical_fo.htm . Else you could even talk to NSE directly.
NSE dose not provide geniue data. Is zerodha provides historical tick by tick data of options for new learners ?
What makes you think that NSE does not provide accurate data?
Hi Karthik,
Read initial chapters, it was simple and easy to understand.the complex subject
Thanks a lot for the wonderful module.
Please convert then to PDF document , so that we can download and learn them offline.
Thanks,
Anand
Working on it, should be available soon.
Hi karthik,
Thank you so much for educating us. You are such a fantastic teacher. You have hooked me to varsity.
Waiting for next module eagerly.
Best wishes.
Thanks Sandeep. Please stay tuned for more 🙂
sir,v.good hopefully these education ideas will change my trading&life dramatically,i learnt lot from u &big thanks deep from heart &moreoverdaybyday iam becomming so confident that by learning so much iam seeing mkts lot more easier&want to do it in big way,and why dont we get pivot points (pi)in commodities charts,clarify.
Good Narsimha, I hope your trades improve and starts yielding better and better results.
Hi Mr. Karthik Sir…
I am new to Market and heard a lot that Market is just a gambling and common people should stay away from it. I also had lot of confusion and didn’t know solution…but let me tell you after reading lessons provided by you in such a simple way, I am not only able to understand market but also I have confidence to trade in the market. And now I can confidently say that market is not a gambling place…
I donot find words to convey my gratitude towards your efforts…..God bless you…keep it up…!!!!
Sooraj – Keep learning and developing. Good luck 🙂
Dear Karthik,
Efforts are excellent.Read books from US libraries and websites and my understanding got cleared after reading yours. Your efforts in book form and in YouTube can benefit lot of retail investors.Those who can bent upon collecting money.
Looking for your advise to get info on implied and historical volatility on scrips in chart form to use it in trading.
Great!
Thanks for the kind words…Good luck Rajendran 🙂
Heiken ashi candlestick charts provide better buy sell signals. If kartik sir can explain this concept as he has done other complex topics it would b really helpful..thanks again..
Vipul, I know some really profitable and consistent traders who rely completely on simple candlestick techniques. Anyway, I will discuss Heiken Ashi at some point, but the focus now is on the next module 🙂
Thanks sir, eagerly waiting for the same. Take care 🙂
Hi Karthik,
I have a query.How do i know whether the volatility of a particular contract is normal or high…i mean above what number is volatility considered high and at what number,volatility is considered normal.
Thanks
Calculate the historical volatility and compare it today’s volatility. This should give you a perspective.
Karthik, can we compare the option contracts IV to the IndiaVIX? More importantly, which is a better way to do comparison; Historical NIFTY returns or INDIA VIX. Waiting for your inputs!!
For a quick and dirty analysis you can compare the IVs to ViX….especially for the top 5 stock options. A better approach would be to compare the historical volatility to IVs.
Sir please tell me where can I find exact time of result on the result day for a particular stock.
As of today, this is your best bet – http://www.moneycontrol.com/earnings/
sirÏ as usual please make it into a pdf file. thank you
Working on it, may take a bit longer than usual as the module is quite big.
If using Chrome, Ctrl+P converts web page into PDF.You might be aware of i,just saying it.
🙂
Hi Karthik,
Thanks a lot for this wonderful chapter. It was an amazing experience to go through it and relate it to my strategies. Hope to see more thoughts from you… Enjoy… 🙂
Stay tuned Dhananjay 🙂
As you have completed the module on OPTIONS THEORY please upload the pdf file then.it is easier to read as pdf. thank you.
Great work Sir!!….Thank u very much
Welcome!
Hi Kartik,
Is there an option to download the modules as pdf, as was the case with earlier modules
Cheers
Baba
In sometime.
Hello Sir,
I think in the statement below the prices and profit made should be per share and not the per lot.
“Do pay attention to this – the speed at which the call option shot up was lesser than the speed at which the Put option dropped its value. The combined premium was 75 per lot, and he made a 20 point profit per lot.”
Regards,
R P HANS
Thanks for pointing this, will make the necessary corrections.
Sir, where can I find real time 5 min candlestick charts for free? (for TA)
You need to check out https://kite.zerodha.com/ its probably the best TA + execution platform in India…and yes, its free as long as you have a trading account with Zerodha.
Thank you Sir. But is there any source other than Zeredha Kite?
Suggest you check with http://neotradeanalytics.com/ for data. Also, have you checked Pi?
Thank you! Looking forward to start trading with Zerodha.
Please do, I’m certain you will like the experience 🙂
Also Sir, what are the requirements to use Pi, Kite & many such systems being a Zerodha trader?
All these systems and tools are given for free to all our clients. You can open your account with us here – https://zerodha.com/open-account
could you please tell me when this module be available in PDF format…
In sometime, we are working on it .
Have a bit of a doubt. Even though the strategy is delta neutral when it is entered into, it might not necessarily be delta neutral in the next few days because of the effect of Gamma, right?
Not really…in fact always add up the deltas…if its 0, then you have a delta neutral strategy.
Sir can you please explain delta neutral strategy in next module…. I mean it is explained on lots of websites and forums but after entering the trade in delta neutral strategy we have to make adjustments to keep the delta neutral so what all things should one keep in mind while making delta neutral and how often….
Of course, we will. Please stay tuned. Thanks.
Sir Why the NFO expiring on 26 Nov having name 15nov eg Kotakbank15novfutures expiring on 26 nov
Not sure…it seems alright for me – http://www.nseindia.com/live_market/dynaContent/live_watch/get_quote/GetQuoteFO.jsp?underlying=KOTAKBANK&instrument=FUTSTK&type=-&strike=-&expiry=26NOV2015
This has response to Prince “Karnatakabank15NovFeature” means 2015Nov. It is not the date. It’s year.
Thanks for the quick reply…. Really hats..off to your work … You are amazing … With lots of work i have hardly seen anyone on any forum replying to qweries so quickly…. This shows why zerodha is the best… Great people make a great company…?
Great customers help in building great companies 🙂
Sir,which is best way of putting sloss in indec optiond id it time based (3,5,7)r index going 2r3 strikes awayr simply leaving without sloss &waiting as options r volatile what makes sense pls elaborate
Sorry, cant really understand your query. Can you please be more specific?
sir,what i mean is if we fix target in option trading is there any significance of stop loss if it is how long r should we leave till expiry&wait our stategy to workout with good m.management&r r r
Please do have a SL and tgt in perspective and let the trade evolve, this is the best way to go about.
Sir,
How many chapters will be there in the next module? I mean to say, how many days will be required to know everything about option strategy?
Thanks
R P HANS
Not sure sir. Plan to have a chapter for each strategy. For example “bull call spread” will be 1 chapter. Idea is to cover as many strategies as possible.
One chapter for one strategy will be a great deal.
Sir, can you now it self tell something about following situation?
Suppose you buy 1 lot in future but it turn out to be not in favour and it price goes down. What are the salvaging choices available. Shorting CEs or Long on PEs or long on next month future? I know it is too early to ask but just one sentence answer if possible.
Thanks
Hans – best bet would be either buy a PE (assuming there is ample time to expiry) or short the next month futures.
Sir, Why do you say that selling PE will be havoc?
If i am shorting the option then we have to square off the same day or we can carry forward the position overnight?
You could carry forward the position, no issues with that!
When will be the trailer for next module will be released:) ?
The first chapter should be out next week 🙂
Hello karthik Thanks for your initiative it helps me like anything,
My doubt is regarding time frame in option day trading for nifty at the money and slightly out of the money options which is better 5 min, 10 min or else? I am using technical indicator and chart patterns to take call on buying put or call.
Thank you in advance.
Rahul – please do not look at intraday charts for trading. Ideas have to be generated beyond chart patterns just like the way these traders have showcased their trades.
Hello Karthik, Very nice article. It really helped a lot for people like me. However you are suggesting not to follow technical chart? (I am referring above your answer. If so what is the next step to become a successful option day trader?
Thank you, Regards,
Prabhakar
I was referring to option charts 🙂
Thank you very much for answering my query, It is so nice of you. However are you suggesting not to depend on chart for option day trading? If not what are the bet technical chart we need use for option day trading. Thank you, Regards, Prabhakar
Yes, looking at charts for Options trading is not really a great idea. You should ideally analyse the spot and take action in either futures or options segment.
1.In the case study 23.4 Infosys Q2 Result, the 1140 PE IV dropped to only 40% from 48%. Was it because the market perceived the spot to go down?
2.And in the immediately previous case you have mentioned that the Put looses value at a faster rate than the Call in case of an upside. Although OTM Put will have a lower Delta and the ITM Call will have a higher delta. I think I am missing something. Please help.
1) Volatility dropped because the outcome of the event was out and there were no more surprises pertaining to the stock.
2) This should be taken in a more generic sense – one option gains faster in premium value than the one the other one losing premium value. Which one gains and loses depends on the outcome and therefore the direction.
Hi Karthik,
Here’s wishing you and everyone at Zerodha – happy diwali and a prosperous new year..!! 🙂
Thanks so much Darshan. Wishing you and your family the same! Have a great Deepavali.
Wishing all Zerodha family and Varsity A Happy and Prosperous Deepawali 2015 and the year ahead.
R P HANS
Thanks you so much Hans – Wishing you and your family the same! Have a great Deepavali.
sir , as per NOV USDRINR FUT options ,
1) what IV is consider high & low for currency ?
2) if the dollar falls by 10 paise (0.1) [I LOSE 100rs. ] & if the dollar gains 10 paise (0.1) [ i gain 100 rs. ] …. simple futures trade .
i would like to consider what would happen if i GO LONG CE 69.5000 , PREMIUM
as per black & scholes calculator , considering spot at 66.20 ( on 12/11/2015 )
a) delta = 0.007 …. WHAT WOULD HAPPEN IF DOLLAR FALLS BY 10 PAISE OR RISES BY 10 PAISE ?
b) THETA = – 0.001 ….. WHAT WOULD HAPPEN IF DOLLAR FALLS BY 10 PAISE OR RISES BY 10 PAISE ?
c) RHO = 0.000 …… WHAT WOULD HAPPEN IF DOLLAR FALLS BY 10 PAISE OR RISES BY 10 PAISE ?
d) GAMMA = 0.0161 …… WHAT WOULD HAPPEN IF DOLLAR FALLS BY 10 PAISE OR RISES BY 10 PAISE ?
e) VEGA = 0.003 ….. WHAT WOULD HAPPEN IF DOLLAR FALLS BY 10 PAISE OR RISES BY 10 PAISE ?
3) for a newbie options trader will index options be better or currency options ?
1) You need to compare it with historical volatility
2) Yes
3) The premium would move at the rate of 0.007 paise for every tick movement…likewise for all the other Greeks.
For a newbie trader currency options is certainly not advisable. Please do stick to regular index options till you get accustomed to derivatives.
hi kartik,
how can i get get information related to major upcoming events for nifty a few days earlier to develop my my strategy for event????
The best way is to keep track of news and day to day developments. Although for US/UK markets there is an ‘economic calendar’ which helps you track this…nothing like this exists in India yet.
For keeping track of news you can even use – http://pulse.zerodha.com/
The next major events are RBI policy on Dec 2 and FMOC meet on Dec 15, 16..
Will these events impact more on India VIX?
Theoretically yes, it should.
In Chrome, Ctrl+P converts web page into PDF file.I converted all chapters in the same way.
I think better not to trade before results.The outcome can be like exit polls of TV channels.Go horribly wrong.
Recent Infy results was best example.
When we are getting this in PDF.. Sir..
Soon…meanwhile you can use ctrl+P to convert this to PDF..works on Chrome 🙂
Hi Karthik,
I would like to add another sentence in your appreciation for presenting the complex subject which a person with little knowledge of mathematics can understand and make use in real life. Carry on with the good work.
The module on ‘Option Strategy’ is showing a placard ‘Coming Soon’ for quite sometime now. When can we expect to get that?
Thanks,
Abhijit.
Module 6 is work in progress! 1st chapter is already out – http://zerodha.com/varsity/module/option-strategies/
Excellent!
Hi Karthik,
In Nifty options, does increase/decrease of volume (contracts) traded has any significance,if so how? In NSE site top 20 contracts traded, I was trying to understand, if a contract is in top, does it mean the premium is going to increase or decrease?
To some extent it does. In fact will be discussing a strategy called Max Pain, this should give you a sense of how you could use this info.
Is there anybody from Kolkata with whom I can consult about Options Strategy trading.Sir Please help me.I am available at 9432933066
None that I know..but you can always considering writing your queries here on Varsity! Will be more than happy to respond to them.
I am new and unable to use your Option Calculator.Where from I get Interest and Volatility ?
Explained here – http://zerodha.com/varsity/chapter/greek-calculator/
The explanation provided by the author is simply amazing! There is so much value in the explanation provided in these chapters. One can easily charge 10-15k for it. I sincerely appreciate your hard work, effort, and urge to explain the subject from layman’s perspective. Great work!
Thanks Abhay, glad you liked the content!
By the way, we plan to keep everything open and free 🙂
Before the major events(like RBI Policy, election results), will it be prudent to directly short india vix index before the event when india vix shoots up, or it will be more safer to short atm calls and puts of nifty and book profits after the event when volatility cools down?
I would prefer Nifty options simply because my experience of trading Nifty. Have not dabbled much with trading VIX…maybe I should give it a shot sometime soon 🙂
What about strike selection? If I am sure that the volatility will drop, what should be the ideal strikes that should be selected for maximum profits? Will ATM strikes gives maximum profits?
Sumeet, please check section 19.2 – http://zerodha.com/varsity/chapter/vega/ for some pointers on this.
Eventhough, I am trading options for 2 years, it was Re-learning(refreshing) experience for Me. I really appreciate the Effort you put in to Zerodha Varsity. It’s awesome n every chapter is explained as simple as possible with examples. Truly, Zerodha is a Class Apart.
Thanks Billa, glad you liked the content here 🙂
Karthik,
As you had said in your earlier chapters, P&L behaviour for put option comes out to be- P&L = [Max (0, Strike Price – Spot Price)] – Premium Paid
For that Ceat example, it comes out to be- -45.75,then how’s he making 7 ? Is P&L change in premium or the formula I just mentioned above?
Please don’t laugh at me, I’m a novice in options world.
Shailey – pls dont worry, you can ask as many questions as possible.
The P&L formula you stated is true only if the option is held till expiry. Otherwise you just take the difference between the premiums (buying value minus selling selling value). If you do that for CEAT you will get the answer as 7.
Thanks alot sir, you’re such a nice person.
pls… karthik sir combined all this chapters into a single Downloadable PDF file as you did with previous modules.
Surely, we will. Thanks.
Hi,
I would like to know more about Option OI (Open Interest). How is significant in finding resistance and support levels?
Please throw some light on it.
Regards,
Gautam
If you have any book in mind which would help in understanding the concept please let me know.
Would be happy to go through that.
Could you please reply to my above queries?
Gautam – I don’t see any query from you. Can you please post it again. Thanks.
OI is a simple concept and there are no booked dedicated to this. Have you checked this – http://zerodha.com/varsity/chapter/open-interest/
Replied to your other query!
PDF please ….
In a day or two please 🙂
sir,
“The 1140 CE was trading at 55/- and the implied volatility had dropped to 28%. The 1140 PE was trading at 20/- and the implied volatility had dropped to 40%.” when volatility drop premium also drop but here when volatility drop 28% and premium increase how its happen? please explain sir,
With the drop in Volatility the premium drops — this is the effect of vega on the premium. At the same time if the underlying also moves then there is the effect of delta. So this can clearly increase the premium.
Dear Karthik Sir,
Plz explain what is Put Call Ratio? How can We use it to predict market trend and how to calculate it? Is it really useful ? If yes then you can make a separate chapter on them. thanks..
Will make a separate chapter on this in the on going module.
http://zerodha.com/varsity/module/option-strategies/
Eagerly waiting for the same…….
🙂
hi, have question, lets say if I write, call option of nifty of 8000 @12.30, on monday that is 21-12-2015, and let say it goes down @1.05 on tuesday, can i clear by position. by buying same option? please help
Yes you can book profits, you need not have to hold the position till expiry!
sir,
expiry day of dec usd inr contract(29 dec) future settlement price is 66.37 so 66.50 is call option is ATM.As per theory closing day of expiry all OTM contract will worthless but here (29 dec) I check some strikes ATM,OTM,ITM all settled rs .0000 please find the screenshot and please explain why it happen
All Call option about 66.37 is considered OTM, including 66.5. Hence the 66.5 CE expiring worthless is justified. However the 66 and 65.5 option has an intrinsic value, not sure why NSE is is suggesting the settlement is ‘0’. Also, just for your information…. the options derives its value from the RBI reference rate (Spot price) and not futures price….but since its the expiry date both futures and underlying would be the same.
Need to dig up a bit further to figure out why the settlement is 0 for ITM options.
As mentioned in the CEAT eg u would have preferred to sell the call option and also not on single side..Is it selling slightly otm/Atm and buying the same month ext otm call(strike next to the shorted call) to take the advantage of consolidation or down trend movement? If so if the share moves continuously in the uptrend and it may end up in loss like ext otm becomes zero and slightly otm may end up as itm. Kindly clarify the thought behind your view..
Vasanth – I was referring to selling naked calls here, although it is not my first choice. I would be happy with spread positions as explained in module 6.
With the entire view of options theory can I use the ta in underlying chart and taking position in ATM/Itm options is the fair thought? Because in the comments you have mentioned that options is not direct instrument like futures to play the intraday trading..with the use of Greeks and mix of ta the trades can be executed?
Yes you can use TA to develop a sense on whats happening in the stock and initiate trades using options. Do not restrict yourself to ITM/ATM…rather select strikes based on the situation.
spot-1266 of acc now.
so 1280PE is ITM still all colums in nse site are empty. means no trading . just wondering why?
Hmm, looks like no liquidity.
hi karthik sir one small ques to you …suppose we sell Deep ITM call option which has no liquidity then what will happen at the time of expiry …..??? how such contract settle in NSE
If the contract remains deep ITM then you will have to bear the losses. Of course you will not be able to buy it, but exchange will intervene and cash settle it for you.
sir what will happen on expiry if i Sell Deep OTM call which has no liquidity….i will be in profit …???
No, the option will be exercised as per its intrinsic value, hence you would be under a loss.
Then this will be a very high loss? . For example if Nifty at 8000 and I wrote 10,000 call which has no liquidity, how much loss would be there?
one suggestion, pls forward everyone reply to their email id, I asked a question somewhere but not able to find it now.
Loss would be 2000 times lot size. Will check if that is possible. Thanks.
hi karthik , i notice that these todays usd inr option premium very cheap, same case in nifty option, please explain why>?
http://www.nseindia.com/marketinfo/fxTracker/optChainDataByExpDates.jsp
Over the last few days the volatility is on the lower end, and perhaps this is the reason for low premiums.
Hi Sir,
It would be very great if you could share more strategies executed by you or fellow traders. They will give practical insight and will be eye opener.
Also, can you please suggest some good books for reading on Options/ Strategies or related, which are more practical in sense.
Currently I am reading Traders, Guns and Money as found it mentioned. It’s a awesome book and has real life swap trade conundrums.
Yup, that book is very entertaining 🙂
Will try and add some more strategies, thanks!
Hi Karthik,
Thanks for all the information and knowledge sharing.
Can you please think of making a 10 mins videos on each topic ? Just a thought -:)
Making videos consume a lot of time, we consciously stayed away from it :)….but we will certainly give it another thought. Thanks for suggesting anyway.
Sir,
Which is the best indicater to work on Options (call option Buy & Put option Buy)
Thanks
Cant really point to one, you need a combination of everything!
sir, in margin calculator bank nifty option for sell , which is weekly expiry basis is not updated,provide this asap, contacting 080-40402020 they are telling that margin is same as monthly expiry, which is not true!!!
Margin is a function of risk therefore I’m assuming the margins are similar. Let me check anyway.
Can we get a list of liquid stock options in NSE?
As far as I know the top 5-7 names have the best liquidity – TCS, Infy, SBIN, Reliance, Tata Motors, Hindlaco, ICIC etc.
Okay. Thanks Karthik.
I was looking for a list of 20-30stocks which have best liquidity in Options Market. Can you provide with any such list? I tried searching at various sites, but was not able to find one comprehensive list.
Your best bet would be to stick to the top 20 in the Nifty 50 basket.
Sir in the example of Infosys q2 results , the person could have made 40 points if he shorted slightly OTM and infy is a liquid stock . What was his reason for going for ATM option ?
Perhaps he wanted to hedge the position and simultaneously take advantage of high volatility.
hi karthik,
can we depends on options fair value calucultor for taking a position,for eg-if today 8700 calls fair value was 124 in morning,it went up to 145 and once it was in 92 intraday and closed it at 114,if it trade below 20% than fair value can we take a 8700 call buy? or any other technical tools can we mix to arrive our trade for using fair value? or how logical can we put stop loss in fairvalue dependent trade? or its a wrong method?
There is absolutely nothing wrong with this strategy. The only issue is that most liquid options trade at fair value, hence it is really hard to find opportunities.
Hi Karthik. I have a doubt regarding the weekly bank nifty options. I understand that the monthly options follow the particular month’s futures, and not the spot. What do the weekly options follow? Today, when market ended at 18571 (spot), the value of the 18500CE (Aug04 expiry) was 70 and the value of the 18700PE was 105. It just doesn’t add up.
Another related doubt: the market actually ended at 18627; and then after close, it adjusted to 18571. This adjustment happens everyday. What is the rationale behind this adjustment?
Thank you for helping!
All derivative contracts follow the underlying in the spot market. The premiums look fine for me, what do you think it does not add up?
18627 is the last traded price, and 18571 is the closing price. The closing price is the last 30 minute weighted average price.
When the market ended between 18500 and and 18700, should the premiums for the 18500CE and the 18700PE add up to 200? It’s only adding up to 175 (70 + 105).
It will add upto 200, on expiry day. It can be otherwise when before expiry.
Yesterday was the expiry. This is about the weekly bank nifty options. The options I mentioned in my question are options that were slated to expire on August 4th. It didn’t add up to a premium of 200 yesterday. It only added up to 175.
Yes, they should add up at least on the day of expiry, else there could be an opportunity. But are you sure you checked the closing price (settlement price) and not just the last traded price?
Oh, I didn’t realize the settlement price could be different from the last traded price. I was doing paper trading on a strategy I’m working on, and the calculations based on the last traded price on the weekly expiry date left me confused. Thanks for clearing this up, Karthik!
Welcome!
Great effort put into making these resources. I thank both, the writer and Zerodha, for disseminating knowledge so clearly and efficiently. Looking forward to reading and understanding more in your other modules.
Thanks for the kind words Ankit! Hope you will continue to like the contents here 🙂
Hi Karthik
I have studied and tried to apply what I learnt from your module on options for the past two months. For the first month I hadn’t made any money (lost all what I made, though did secure my principal amount), but learnt a lot after ‘doing’ it practically on trading platform.
But then, I made around 20% profit in the 29SEPT2016 series, and I wouldn’t be able to do it without THIS module! Also learnt from the mistakes I did.
Thank you SO much for sharing such wonderful tool on Varsity – For all I have been successful in F&O the credit goes to YOU!
“Long live and prosper!”
I’m so happy to know this. I hope you get more successful and profitable. Good luck.
Hi I have a question regarding option trading.
Assume I have 2 lac of capital, which I have totally invested in equity stocks. I have no more capital now.
Can I simultaneously write nifty call or put options using my equity stocks as security? Can the margin for options be used across my equity stocks?
Assume I have invested my money in large cap stocks .
Yes, you can pledge your stocks for additional margin. More on this topic here – http://zerodha.com/z-connect/tradezerodha/margin-requirements/online-pledging-of-stocks-for-trading-fo
Hi karthik,
Please suggest what all check points we need to consider for nifty options intraday.
Its all detailed in the chapters 🙂
Hi Karthik,
In the second case-study ie Nifty- Delta neutral strategy, why it is square off the position just before the RBI announcement? What would have happened that person had opted to square-off just after the announcement?
Because what I’m thinking is that volatility would be lower after the announcement compared with before the announce.
RBI announcement is an event. The rational is that volatility runs up to the event and cools off post event. So it makes sense to close the trade before the volatility cools off.
Thanks for the reply.
Yeah, I have understood. In the example above, by observing the given graph after the announcement, what would have happened if that person had opted to square-off just after the announcement?
1) make a loss
2) make lesser profit than Rs 10/-
3) make more profit than Rs 10/-
4) not much difference
I’d guess he would make a lesser profit.
Hi Karthik,
Where can we see the implied volatility chart for stocks and bank nifty, to decide if the Volatility is high or low. For e.g. like we have India VIX to decide implied volatility levels for Nifty, where do we check the historical values for bank nifty and stocks ?
Check this – https://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
I am aware of this link. But it shows the value of IV in real time. What if I want to see historical values, to decide if the current value is high or low. Like to initiate a new trade on say Maruti, I need to look at historical values of IV to decide if the current value is high or low… where can I get the historical IV data….
IV of today becomes historical volatility tomorrow 🙂
Hi Karthik,
As you have mentioned several times that “IV of today is Historical volatility of tomorrow”. I have a query on checking whether volatility of today is high or low compared to historical data:
Today’s Implied Volatility of SunTV is 34.52 for 900 CE (Nov series, 2017).
I have calculated the daily volatility of SunTV for last 1 year, it is 2.73% and annualized volatility is 52.07%
Should I compare Annualized volatility of 52.07% with 34.52 (as of today, as per NSE). If yes, than can I presume IV is less than HV and one can look at buying option, keeping other factors in mind.
Thanks in advance. Rgds
Dipankar, although not a great way, serves as a good back of the envelope technique to compare today’s vol versus historical. I end up doing this myself.
Hi Karthik,
Thanks for your feedback.
In continuation, than what is your suggestion is the best way to estimate whether today’s IV is cheaper/costlier than Historical values?
I am not able to decide on taking trades because of this costly/ cheap/fair value query in my mind. Pls suggest.
Also is NSE IV numbers based on past 1 year data.
Rgds
Valid question Dipankar. The most accurate way is to compare today’s IV, when its let’s say 5 days to expiry versus the IV of past when the expiry is 5 days. However, doing this is not really easy…and comparing historical versus today’s IV gives roughly the same kind of results. Hence I go with it.
iBook link is corrupted ,it would great if you can kindly fix it .Thank you !
Thanks for pointing, I’ll check this right away.
Hi Karthik,
In the very last trade(Infosys directional trade), you have written that “the trader could have risked with slightly
more OTM options.” Can you elaborate on why would you go with more OTM. Change in premium would be more for slightly OTM option right? due to higher delta.(Assuming he is very confident of the directional trade).
You choose OTM trades when –
1) You have a lot of time on your side
2) You are confident about the direction
Both these conditions favored the case, hence I thought slightly OTM would be better.
Thank you Karthik
Welcome!
Thanks Karthik for the wonderful insights!! I have a few queries on the trades.
1. In CEAT example, what would be the ideal strike price to choose in case I decide to write a call option instead of longing a OTM put. I went through your earlier chapters and quite clear on buying logic wrt to time to expire. From logic, I believe it would be ideal to short an ITM call for its high delta changes. Please validate.
2. In 2nd example, I am not very much clear on the explanation for shorting ATM strikes. Please clarify.
Hope u cud lighten up a few things over here again.
Regards,
Mohit,
1) Never short a naked ITM option, can be very dangerous. The decision to write an option as opposed to buying its equivalent really depends upon how cheap or expensive the premium is with respect to the prevailing market conditions
2) Can you tell me which bit you are confused with?
“There is a high probability that I would place market orders at the time of exit, given this I want to ensure that the loss due to impact cost is minimized. ATM options have lesser impact cost, therefore it was a natural choice.” Not very much clear about impact cost.
When you place market orders, the order is triggered at the prevailing market rates. If the liquidity is low, chances are you will buy it at the worst possible bids. Hence you need to ensure you are transacting at high liquidity counters. I’d suggest you read this post on impact cost to know more (section 9.2) – http://zerodha.com/varsity/chapter/nifty-futures/
very great knowledge sir thanks a lot
Cheers!
Question
Consider
At day 1 I bought xyz CE1200 at 50 underlying value 1000
Day 2 underlying value is 1100 and premium of xyzCE1200 is 110
If I square off at day 2 then what will be my p&l?
You will make a profit of Rs.10 i,e 110-100.
Karthik,
This is excellent stuff. people usually charge to give this kind of information. great job.
I am newbie in FnO . I felt there could have been some more examples of trades for PUT option and CALL Option .
I have two trades and lot of confusion.
1 – I bought , Tatamotors 30 MAR 480CE @9Rs Premium on 27FEB, when spot price was 455.
I know I should have sold the CALL option. Instead I bought it.
Now spot price increased to 463 on 3 March but premium fell to 6RS
I have tons of time in OTM call, but I see the MTM is calculated for this option .
meaning everyday Price difference is added or taken as M2M.
– This way I am incurring tons of losses.
if I make profit after 15day or 20days … everyday , M2M in Options trading is killing me.
I tried to reach your support center with no luck.
Exiting the position will cause more losses .
– IS there an M2M for OPTIONS trading. if yes, could you write post with example explaining this one.
2 – Second one, I have tatasteel 30 MAR 480CE bought in OTM when spot price was 460, premium 19
and currently it is ITM spot price is 500+ premium is 26+ or something. as on march 3-2017
– I do not see MTM is calculated based on daily upmoves.
* This is very confusing to what I am reading and what I am seeing in practical.
Any thoughts what is happening here !!
No, there is no M2M as such. However, with declining premium, the value of your option also declines, which in a sense is a loss.
Remember, M2M is only for Futures and not options. With this information, I’d request you to review your current situation, I’m certain a lot of things will clear up.
Good luck.
Hey Karthik,
1. Can you explain in detail on what exactly Span, Exposure Margin, Premium Receivables and total margin mean? and how it is calculated. Is
2. Is there a formula that we can use to calculate the margin required say using previous closing prices (especially for writing options)
3. Say I am writing a CE and also I am buy a CE at a different strike. Assume the total margin required is 95k (post margin benefit of say 10k). I have 1 lakh in my account. How do I execute this trade?
Thanks.
1) Margins are explained in this and subsequent chapters – http://zerodha.com/varsity/chapter/margin-m2m/
2) Its called the SPAN margin, formula is proprietary to CME in US. However, you can always use this as a ready recokner – https://zerodha.com/margin-calculator/SPAN/
3) Execute as two separate trades, once the 2nd trade is complete, system will identify the spread benefit if any and give the benefits.
Sir,
I recently join zerodha . I went through this chapter , but have some confusion.
say, I bought INFRATEL company call 300 by paying premium 15 RS. after some days call 300 premium increased 20 RS .
At this stage can i book profit by earning 5 Rs./share before expiry date.
Yes Sir, you can. No need to wait till expiry.
sir , i have question regarding brokerage
say i buy nifty call 9000 at premium 100 rs of underlined value 8800 of 1 lot = 75
now question is that i have brokerage whether on 8800 * 75 = 660000 i.e. on underlined value or 100 * 75 = 7500 on premium value
i am excitingly waiting for this ansewer!
If you are trading with Zerodha, then it would be a flat fee of Rs.20/-.
thank you sir for answer
and what about other charges i.e service tax, stt, etc . It would be on underlined value or on premium value.
Service tax is applicable over the brokerage charge. STT is on the turnover.
sir,
i recently joined zerodha and buy option call 530 of gail on 7 march 2017 .Now on 9 march 2017 there is ex-bonus date and i think share prices will down because 3 share becomes 4 shares as bonus in ratio 1:3 . Now what will happen? can i have to face huge loss due to this?
No, you will not face any loss owing to any corporate action. The contracts will be adjusted accordingly.
Dear Karthik,
In the 2nd case study Nifty Long Stradle,
Why did you choose to short ATM option? There is a high probability that I would place market orders at the time of exit, given this I want to ensure that the loss due to impact cost is minimized. ATM options have lesser impact cost, therefore it was a natural choice. …….Here what does the impact cost mean?
Regards
Nifty as such has a very low impact cost, so you need not have to worry about losing money owing to impact cost.
Earlier, you said options in India are of European type and hence one cannot exit their positions until expiry. But at places you’ve said people profiting from the increase in premiums. I don’t understand. Can I exit options just like future, anytime I like/wish?
One can exit the option positions anytime he wants, but he can exercise the option only on the day of expiry. There is a difference between the exercising the option and squaring off the position.
Hi Karthik,
Just sharing my first Options trade.. Need your valuable guidance.
Well keeping the UP Elections in mind, I decide to trade a Short Strangle on Nifty.
But on the date of executing the trade I realized that the OTM premiums have already been depreciating a lot anticipating the Exit Polls. So I tweaked my strategy a little bit and went on to adopt Short Straddle as the Volatility has not depreciated that much( the effect of Volatility is greater for OTM options as per my knwledge). As per my understanding the Volatility will still drop in the course of time after results get decalred.
1 sell 8950 CE Nifty @ 119
1 sell 8950 PE Nifty @ 108
Now is the point where I messed up a little.
Nifty at the EOD was around 8934.
I know that as I have sold the 8950 CE I should retain the whole premium. But in the MTM p/L section for this option was showing some other value. And to square off the positon I had to buy it at some value. Same was with PE options..
I basically got very confused. Like my question is like if I am selling a Call option at 100 for rs.20. then only if i let the options expire under 100 then I will pocket the whole premium.. Otherwise if have to close my positon(square off ??) before expiry I have to buy it back..
Also we have to not let the Exchange square off our position as it leads to STT (taxes).
Well thanks to Zerodha things like Options, Call, Put , IV are not alien to me anymore.
Please let me know what I have wrote regardiing Squaring off and Expiry is correct or not.
Btw, after all this goof up I still managed to make a small profit :).
Promit Banerjee
Also in addition to the above question,
As Individual securities options are American options,
Suppose Short straddle on ABD stock
1 sell 500 ce at 66
1 sell 500 pe at 77
then if i want to close positions, I may “exercise” the options hence,
So now if ABD is trading at 480 and I exercise the options I will earn the whole 66 prmium from CE and 55 from the PE options.
Also, the same above position of ABD can also be squared off if I wish, like when ABD is trading at 480, note what premium 500 ce and pe are trading, square off and take p/l applicable..
Hope for your kind guidance.
Individual securities were American in nature previously. Now all options in India are European.
Well, I’m happy to know you garnered the courage to short a straddle (btw, its short straddle not short strangle). This is probably the right strategy for the given circumstance in the market.
When you short options and collect premiums, you are entitled for the whole premium only if you manage to hold till expiry. However, if you wish to close the trade before hand, then its not a problem. Assuming it has moved in the right direction, you will make a smaller portion of the premium and not the entire premium.
I have a feeling that the premium will drop by around 9:30 – 9:45 ish….(just after the event is over), I’m not tracking the options…but if you do, please do let us know how it went. Good luck.
This is really a great article, Karthik. I’m a newbie in stock trading (just got my account opened in zerodha) and I’m beginning to take interest in Optional trading, which most of the people advise to stay away from 🙂
I have some doubt about calculating P&L for Long option especially when your option is ITM and it’s underlying stock and the premium are both gaining traction. Let say I took Nifty CE for strick price 9100 at premium 90 on 9th Mar 17 and yesterday it’s spot price was 9153 and the premium was 107. I’m calculating my P&L as: (IntValue gain + Premium gain) * LotQty
IV gain => 9153-9100 =53
Premium gain =>107-90 =17
LotQty = 75
P&L = (53+17)*75 = 5250
Is it correct or I’m missing something and If possible could you please write the formula?
Ravinder, your P&L will be the difference in the premiums…i.e (premium at the time of sell – premium paid) * lot size. In your case 107-90 = 17. 17*75 = 1275.
So does it mean that spot price has no affect on the P&L in this case. It will always be premium gain/loss * lot size?
Based on the lessons, this is the formula to calculate CALL buyers P&L
P&L = Max [0, (Spot Price – Strike Price)] – Premium Paid
It seems that premium gain is not in the picture. Right? Could you please clarify the same?
This formula – P&L = Max [0, (Spot Price – Strike Price)] – Premium Paid , is applicable if you hold the position to expiry. However, if you decide to sell it before expiry, then P&L is just the difference between the premiums multiplied by lot size.
The premium is in turn dependent on spot price!
Karthik,
First things first. Thank you very much for the Lessons . I was trading in cash only for last 4-5 years and seen good and mostly bad days.
soon I shifted to zerodha, I started learning Futures and option since last one and half month. the kind of knowledge i gained clearly visible in my trading style when 80% profit calls and 20% mostly triggered by the stop losses. I wished I found your courses 4 yrs ago ,i would have been a HNI by now. Neverthless In recent rally your lessons bought me great fortunes and profound confidence .
Thanks you once again ,
Manju
Thanks for the kind words, Manju. Hope your trades get bigger and better. Good luck.
hi Karthik,
i love to read all the articles in varsity, this has changed my perspective about market and trading. thanks for giving knowledge.
as i am really inspired by you , i have some personal question if you wish to answer?
what is your educational back ground?, what inspire you to venture in to market ? how did you start?
Thanks for the kind words, Kaushik. You may not believe it, at Zerodha we genuinely love to share what we know and help others. Knowing other will benefit from without any cost associated to it keeps us motivated all the time. Its just that I’ve been lucky enough to deliver the content via this medium.
I’ve done my engineering from RVCE, Bangalore followed by a MSc in Risk and Asset Management from EDHEC, France.
Hi Kartik,
Could you elaborate on how to set the stop losses for options? You have explained in one of the modules to set the stop loss as a function of the volatility, same calculated on the basis of the days to expiry. But there you had indicated that this method can be done for futures and stocks.
I was wondering whether the stop loss for the option can be calculated like the way as mentioned below:
Say the SD is calculated at 3%. which would mean that the stoploss for the underlying would be at 3% lower than the Entry Price (for a Long call).
If the 3% translates to an absolute value of 50 points, then depending upon the moneyness of the strike , I calculate the probable loss in premium by multiplying 50 with the corresponding delta of the option.
The stop loss for the CE would then be set at the entry premium less the value calculated in the previous statement.
Is this conceptually correct?
Sure. You can explore this SL technique. Nothing wrong with it.
Hi Karthik,
Regarding a statement in Case 1 : “since there is ample time to expiry, a small dip in the stock price will lead to a good increase in option premium” – could not understand the essence of this statement.
The trader had bought a slight OTM PE option which would mean that the Delta would be within -0.3 and -0.5. A small dip in stock price would have an appreciable effect on premium because of the delta. But why is increase in premium being linked with the fact that it has ample time to expiry? At that point, theta decay rate is low, so the effect of delta on the premium would be more prominent than that by theta. Or am I missing something ?
It means the effect of time (theta) is not so much as that of Delta (price movement). In other words, delta has a higher effect on stock prices.
ok. I thought that the particular statement was attributing the “good increase in premium” to the effect of time rather than on delta
Sorry, if I confused you. Its the other way round.
sir,
i bought call of reliance industries of april expiry . Now there is news about banning f&o trading in reliance industries.
What will happen?
Reliance as an entity is banned from trading F&O. Check this – https://tradingqna.com/t/is-reliance-banned-from-f-o/11624
Hi Karthik
1.) I want to know if most of the FIIs buy
a). Calls or
b). Puts?
Or None of the Above
2.) And they are more interested in writing
a). calls or
b). puts?
Sorry, I dint get your question completely. Anyway, most of the FIIs do transact in options, perhaps to hedge their portfolio positions.
Hi karthik,
Greetings for the day.
I have a confusion regarding 3rd case.
1140 CE sold @ 48 ==》premium recvd – 48
1140 PE sold @ 47 ==》 premium recvd – 47
Total premium recvd — 95/-
1140 CE Squared off @ 55 ==》 premium recvd 55 – 47 = 7/-
1140 PE Squared off @ 20 ==》premium recvd 47 – 20 = 27/-
Total = 34/-
Am i missing something ?
Kindly clarify.
Thankyou.
Both the positions are short. So in the first leg you lose 7 and in the second let you make 27, net net you make a profit of 20.
Karthik,
I wanted to ask on block deals. As an individual I was part of block deal in recent times. executed by my broker.
meaning he took the money and executed the Block deal. ( legal and we have all transaction documents) .To get the money back from
broker individual has to pay service tax to govt. STT is already paid when block deal is closed .
I am wondering if you know any process around this or similar process . of paying Service tax .
once service tax is paid , I will end up paying capital gain . i am asking if this is normal process or am I in some money laundering scenario.
manju
I’m not sure, I’ll probably check with Nithin if is he aware of this.
Hello kartik thanks for VI short straddle strategy point no 23.4…yesterday I made 5 k in it …can you please suggest more stocks which showing such changes in VI …I had search with TCS etc but dont find such as Infy ..So please suggest stocks which VI is high before result ..thanks
The volatility will tend to shoot up before result announcement. So I’d suggest you look into this.
I have following 2qu.
1.can we buy before WK both PE and CE then sell on sell when IV shoots up and same time place short straddle so it’s more profit.
2. Can you please suggest some stock like infy coz I didn’t fount more stocks with such IV shoots up
1) Not sure if it will result in more profit, but the probability of making a certain profit is higher
2) No idea, you will have to scan the market for this.
Hello, Today I just checked with DCB abnk but its giving loss as price is 8..9 for CE and PE
Sorry, can you please explain in more detail? Thanks.
Pl refer trade of infosy Q2 result in options. The trade was executed on 8th Oct’15 and the result was on 12th Oct’15. The trade was taken 3 days in advance. On removing Saturday and Sunday, we can say trade was initiated 1 day in advance. My question is that Implied Volatality increases as coming near to event(result declaration). But in present scenerio it was taken one day in advance. So is it advisable to take trade on one day in advance or to take nearby even declaration day (when IV will still go higher) ?
Yes, in such situation, the impact of IV will last upto the time when the event;s outcome unfolds.
karthik sir
This is request to you pls…… provide a link for snapshot posting with question simultaneously
As before.Because sometimes we can not explains problems only in words.
I will be great step
Thanks sir
You can always upload this on Google drive and share the link, Ankit.
Sir please tell me about volatility indicator and how use them. And also 10day ema od put callratio and where we will find it.please
Please check through chapter 15 through 19 here – http://zerodha.com/varsity/module/option-theory/
sir , i want to know whether brokerage on option equity is 20 per order or 20 per lot ? if i order 5 lot in same order whether i have to pay 20 rs. or 100 rs.
Rs.20 per executed order.
Thank you very much sir… I learned lot of things regarding options trading. Now I want to learn options trading more deeply. Can you suggest me some books regarding options trading. Which is yours favourite or u readeed…
Thanks….
.
Check this – https://www.amazon.com/Option-Volatility-amp-Pricing-Strategies/dp/155738486X
Hi, Karthik! Thanks for everything.
My returns have significantly gone up only with 5 modules, one could only imagine what stuff is waiting with the rest of the modules.
Let me take this opportunity to ask a small query. As expected, in fact, better than expected, the TCS results were bad. So, I hedged TCS JUL 2450 CE with TCS JUL 2400 PE. The spot went from 2446 to 2396, but along with call, my put options decreased by 3 percent. As the underlying decreased, I was expecting for the premium of PE to increase (Also volatility increased, negligible change in Theta, Rho being constant). But my expectations were just expectations. I would like to know what went wrong with my analysis.
Happy to hear this Sudharshan. I hope your returns increases multifold.
I guess this was because of the super high volatility premium that went into TCS before the news. As volatility cooled off, so did the premiums.
Hi Team,
I am trying to do intraday trading in options but for some of the options chart are not showing.
is their way to find out which options for a stock we should trade ?
for example if stock price 500 , I can see 3 options 480 CE , 510 CE and 540 CE , so which one I should pick for intraday trading.
Old CE charts are not opening.
Thanks in advance.
Regards,
Vinay
Suggest you read this chapter – https://zerodha.com/varsity/chapter/re-introducing-call-put-options/
the LN function (to calculate returns) doesn’t work as shown. It cannot. I have tried manually……
It is a standard function excle, Piyush. It should work.
sir, i am confused in nifty example;
1) The INDIA VIX (volatility) was 64% up & as you said there will be increase in premium with increase in volatility,
so why there was decrease in premium of ITM, ATM, OTM options and it went down?
2) can we say that fall in spot is pushing premium down and increase in vega(volatility) is pushing premium prices up?
sir, please correct me if i am wrong
2) Possible, depends on the strike and spot rates as well.
sir can we manually exercise an option;i.e at 12:00 pm on the expiry day or the exchange will do it for us after 3:30.kindly clarify.also there seems to be a problem with the comments section.I am not able to post my doubts here.hoping for some luck this time round
Comments section seems to be working fine.
No, you cannot exercise the contract anytime you wish, you will have to wait for the expiry.
sir,in the first example when the base delta is 0.5 shouldn’t the gamma value be 0 instead of 0.005 because the delta has not changed and gamma is the rate of change in delta wrt to the change in spot.
0.0005 is close to 0 🙂
I tried to buy BANKNIFTY03AUG1725100CE 20000 at 0.05 around 3.05pm.
But the order was rejected with below status message:
“RMS:Rule: Check freeze quantity for FO including square off order,Current:20000, limit set:2501 for entity account-ZB9950 across exchange across segment across product ”
What does it mean ?
I even tried to buy only 40, again failed saying “RMS:Rule: Option Strike price based on Ltp percentage for entity account-ZB9950 across exchange across segment across product”
Please explain why I could not buy them. Thanks.
Subhash – we have limits on buying deep OTM options on bank nifty weekly expiry. By the way, why are you buying these options? I’d suggest you read this once – https://tradingqna.com/t/buying-deep-out-of-the-money-options-as-a-trading-strategy-what-is-your-opinion/17113
Hi sir,
Became an active trader, effective mar’17,
And learning everything about day trading. These modules are quite helpfule for a beginner like me. Thanks for bringing insights on option trading in layman’s language.
Just one queyry , since option call buying & put selling are one (being bullish) and option call selling and put buying(Bearish) are also same directionally, what happens to premium in case of put selling?
Say , I sold a put for a premium of Rs.50 and if spot increases , premium will go down or up? Similar if I sell a call, premium will go in which direction if spot price goes up?
If you sold a Put and the spot price increases, then the premium will go down and hence you tend to make money. In the case of calls, the premium will increase and you will lose money.
dea sir
in above module, there is daily average of 0.04% . how u calculate tthat . is it average of last one year daily return values ?
As we can see the daily returns are clearly distributed normally. I’ve calculated the average and standard deviation for this distribution (in case you are wondering how to calculate the same, please do refer to the previous chapter). Remember to calculate these values we need to calculate the log daily returns.
◦Daily Average / Mean = 0.04%
Have discussed the daily average calculation earlier in the module.
= 4.215%, to get the upper range number –
= 8462 * (1+4.215%)
= 8818
dear sir
Upper Range = 16 day Average + 16 day SD
= 0.65% + 3.567%
= 4.215%, to get the upper range number –
= 8462 * (1+4.215%)
= 8818
above stating that 8462*(1+4.215%)
i think this is not plus sign it should multiply sign 8462*(1*4.215%)
same for lower range instead of minus sign it should be corrected for multiply sign
please clerify
No, the idea is to find out the variation from the averages….for which you will have to add and subtract and not really multiply.
Hello sir,
Why there is so less liquidity in put options of stocks as compared to call options, barring few stocks.
1) Is put writing riskier than call writing due to panic selling.
OR
2) Many naive traders deal in options and they only understand call options.
OR there could be any any other reason???
It is because our markets are shallow. Participation is not much. Hopefully, it should improve over time.
Sir,
I am not able to download module 5.2 which is options theory for profesional trading in pdf. Plz help me.
This will be updated next week.
Hi Karthik,
First of all Hats off to Zerodha :). Doing fab work.
Just want to check is there any issue with Module 5 & 9 because Module 5 & 9 don’t have Download PDF link.
please check and update.
Regards
Piyas
Thanks for the kind words, Piyas.
Module 9 is work in progress. PDF will be up once it’s completed. Module 5 PDF will be up later this week.
Good luck and happy reading!
Have seen options with high IV as much as touching 40 just before the results day, however at the time the results are announced, the numbers change rapidly, why is the reason for that. Is it wise to always initiate a short strangle or like just before results day.
Yes, 40% IV is fairly common in options markets. IVs tend to shoot up whenever announcements are expected.
If i buy 290 CE
lot size= 100
spot price=285
strike price= 290
premium =5 RS
then if the spot price moves to 297. The difference is (297- 290) 7, after reducing the paid premium value, 2rs is profit.
Question 1: The intrensic value increase upto 7 difference if delta value is 1 only, am I right? or at the time of excersice this method will be considered.
2: As this is near ATM option, premium will increase 0.5 (delta approximately) per underlying value. Hence the premium will be (297-285=12) 12*0.5= 6, the total premium value is 5 + 6 = 11. will i get profit of 6rs if i square off?
I read complete option chapters (Chapter 4) but the confusion here is the premium will increase in the rate of delta (0 to 1) when underlying moving in the expected direction or as calculated in this method (long buy option: intrensic = spot- strike, profit/ loss= intrensic – premium). As per this method until the underlying move above to breakeven/ breakdown point, no profit. In CEAT India case, though the spot price was not even gone below Rs.1220/-, the premium increased (might be of delta, volatility), the client was able to make profit.
Is this a difference between excersice and square off or I misunderstood the concept.
1) The calculation works upon expiry, not during the series
2) The option is OTM at the time of buying (Spot @ 285, Strike @ 290) and transitions to ITM (Spot @ 297, Strike @ 290). The premium really depends on other factors, such as volatility and time to expiry
In Ceat case, the profits rolled due to Volatility. Remember, the premium is a function of multiple factors and not just Delta.
Thank you karthik.
I understand now. Thank you for varsity.
Cheers! Happy learning.
you have clarified the concept nicely. Thanks.
Cheers!
1. What should be the stop loss for nifty index option trading?
2. Should it be based on the index S&R or should it be a fixed % like say 30% based on the traders preference?
3. Are there any standard stop loss that needs to be followed for trading nifty 50 index?
1) It could be volatility based, check section 18.2 – https://zerodha.com/varsity/chapter/volatility-applications/
2) Yes, Index S&R matters
3) Nothing really.
Dear Sir,
Thanks for such wonderful and simple introduction to options.
I am bit confused with the Margins wrt to options. I felt margins in Futures are straight forward. I am little bit confused when it comes to options.
Assume I write NIFTY 10200 CE SEP 2017 option 4 days before expiry when Spot is trading at say 9960.
Margin requirement is 46000/- . Now by chance due to some very good news nifty moves drastically to 10150 there by increasing the premium sharply( this is an hypothetical situation). How will this effect my margin money which is locked in trading account.
Will the broker deduct amount during the trading session or only after closer of market.
My main doubt is how and when my margin vanishes assuming a black swan event. Will it happen when session is still live or after opening of next session.
If you have written options then margins gets blocked. Now if the position starts to move against you, the margin requirement also increases. This increased margin will take from you during market hours.
REALLY AWESOME MATERIAL
Happy learning, Alok!
wat r the cheaper and costlter values for volatility …………….
If you are talking about Nifty, then I’d consider anything more than 25 as high vol and anything below 12 as low vol.
Great material Karthik. Just finished reading all 23 chapters. Hope to apply the logic in my trading activities.
Happy learning, Akash! Good luck.
Hi,
Went through your content and wanted to ask few questions. Although option trading is a beast in itself
1. If i am good at identifying swing move and technical analysis can i just keep it simple by only Buying CE and PE in stocks (i.e. not at all selling or as we call it writing CE and PE ever)
2. I know time and volatility could be my enemies in above case, so can i trade like this in the beginning of the expiry(i.e. first 15days)
1) Yes, you can do that
2) Yup
Sometimes keeping it simple works the best 🙂
Good luck.
any other thing you want to tell me to be mind full. Everyone tries to keep it simple but i doesn’t happen always
and do have any links for similar study material for intraday trading? I need help wrt this area
I guess sticking to the general guidelines would help. You can always calibrate your trades once gain more confidence trading options.
Dear KR.
Why don’t you add 1 calendar on kite wall for consecutive 20 trading sessions?
It will help us lot.
Can you please elaborate? Thanks.
Hi Karthik,
How does the premium of a stock’s call option change when there is spin-off/demerger of that company. Suppose i buy a 1000 CE of XYZ (exp. 25 January18) when spot is currently trading at 980 for let’s say Rs. 15. Now, XYZ announces that it’s doing a spin-off of its ABC subsidiary and each shareholder of XYZ gets 0.2 shares of ABC upon demerger. The demerger happens on 15 December. Now, on the expiry date (25 jan18), XYZ is trading at 800 and ABC is trading at 300. Since, i bought the call option before the demerger, my option’s intrinsic value should be 100 [ spot(XYZ+ABC) – 1000 CE] and my premium should shoot up in value? Am i correct? Is this how it will pan out or am i missing something?
Ah, this is a little tricky Subir. In such cases, the exchange itself will provide a circular on how the contracts would change.
Thanks Karthik. Where can i find such information? Will the exchange provide information after the demerger? Do you know of any previous instances where this happened and what happened to the premiums?
The best thing about zerodha is that they have created their customers by spreading knowledge regarding stock market .
again a special thanks to karthik sir for providing such great module on options.
Thanks Samir! Happy learning 🙂
Sir,
Thank you so much for such an enlightening article. I am on the verge to getting started with trading.Do you think it is better to start off with spot stock trading instead of futures and options?
Thanks in advance.
Yes, always better that way. Good luck, Nidhi. Stay profitable.
Thanks for the Example trades…and explanations…
Is it possible to to add a trade with combination of LONG PUT / SHORT PUT (or) LONG CALL / SHORT CALL..
Really it will help to understand the practical problems of while we exit the trade before the EXPIRY
🙂
Long Call and short Call or Long Put or Short Put will nullify the trade if done on the same strike. If you do it across different strikes, then that would be a spread. Have explained spreads in the next module 🙂
excellent work sir . i don’t know how to express my joy after studying your module on options. great work. thank you once again for this highly educative work sir .
Happy to note that, Anil 🙂
Hope you continue to like the content. Happy learning!
Hey Karthik!
I enjoyed all your modules and I have been trading for the last 1 year. My question is about the “bids and offers in premiums”. Why is that I can’t sell at the price I want to. Why is the actual price I sell is different from the market price. My friends who trade through HDFC securities told me that they have never faced this issue. Please do enlighten me. Thank you.
Well, I suspect you are placing a market order while placing orders and your friend are probably placing a limit order. When you place a limit order, you will transact at the price you want. When you place a market order, you will get the price prevailing in the market. I’d suggest you always place a limit order.
Thanks for the reply. Well When I place a limit order and the premium price doesn’t touch that price. For example I have placed the trigger price at 38 and the CMP is around 36 and the price directly jumps to 40, the order doesn’t get placed at all.
Yes, this is quite possible. These are small intraday gaps, where trading does not happen at a particular price, rather jumps that price point to trade higher or lower. This happens especially when there is high volatility. So always track your order for execution, even though its a limit order.
Sir, example trade 3 how he made profit?, i think some thing missing in explanation. Because you stated the combined premium is 95 and while square off combined premium is 75.
It was a short straddle, hence he made money when the premium dropped.
Hi Karthik
Kindly solve my dilemma..
As on 25th Jan 2018 NIFTY Closed @11069 by losing 16 Points on day.When i noticed Option Chain on NIFTY For March 2018
For The 12100CE MARCH 2018 , Premium was Prev CLOSE=16.35 OPEN=19.20 HIGH=23.05 CLOSE=15
But for 12000CE MARCH 2018 ,The premium were Prev CLOSE=24.55 OPEN=25 HIGH=25.70 CLOSE=22. Could you pls clarify why 12100 Call jumped from 19.20 To 23.05 where as 12000 Call Jumped Only from 25 To 25.7 ?
Thank You Karthik
This is purely based on demand and supply dynamics (someone must have traded 12100 CE quite actively that day) – it would be very hard to justify this based on any other variable.
Hi,
If we buy a very Deep CE OTM of far Month NIFTY series(idea here is to minimise DELTA&THETA) , and on a day say VIX is 3% , So Change_In_Option_Premium= OPTION VEGA * VIX , So is it possible that we pocket the Higher Premiums than paid?
You cannot minimize Theta, especially when you buy a far month contract. In fact, the longer the time to expiry, the larger is the theta value.
I didn’t understand this bit in your question – So is it possible that we pocket the Higher Premiums than paid?
Hi, I have not read the whole module yet but i have some general doubts please reply.
Spot Nifty : 10700
1. If i sell Nifty CE of 10850 and premium is 26 rs. and on expiry spot nifty is 10855 then will i be making a profit or loss ? and how will it be calculated?
2. If i buy Nifty CE 10800 premium 42 rs. and on expiry Nifty spot is 10780 and premium is 50 rs. so can i square off my trade and take 50-42 8rs profit ?
3. If i buy Nifty CE 10800 premium 42 rs. and on expiry spot nifty is 10780. then i will have to take 42 loss ??
4. This might sound dumb but do you have to square off your options trades before/ on expiry ??
1) You will lose Rs.5 from the premium received, because 10850 is the strike and the spot expired at 10855, hence intrinsic value is Rs.5. So net profit of Rs.21 minus applicable charges
2) Yes, you can
3) Yes, you will lose the entire premium
4) I’d prefer to square of my trades, but technically you can leave it open and let it expire.
If i let me options expire it means that i am exercising my options correct ?
So In the first example where i sell Nifty CE 10850 what do I have to do on expiry to get the profit ? Let the trade expire without squaring off or square off by buying Nifty CE 10850 (at this point to square off i will have to buy it and the premium will be more then 26 because the option is at the money now, so by squaring off wont be be making a loss ? )
Also, in the third example i am losing 42 rs cuz Nifty is expiring below my strike price… so do i need to square off or no?
My broker told me that you will be charged a penalty if you dont square off all your trades on expiry?? I googled it and and there are some STT charges that are debited from the account, so the question is… which trades to sqaure off and which trades to not?
Yes, but the option will be exercised only if it has an intrinsic value. Else it will be considered worthless. I’d suggest you square off the position. I’m talking about squaring off the position just before the market close – like 3:20 PM.
It does not matter – the option is worthless and even if you square off, you will still make a loss of Rs.42.
Your broker needs to educate himself, maybe you should ask him to read up on Varsity 🙂
STT is high only for ITM options – read this first – https://zerodha.com/z-connect/queries/stock-and-fo-queries/stt-options-nse-bse-mcx-sx and then this – http://tradingqna.com/t/no-more-stt-trap-on-exercised-in-the-money-options/18977
Okay so, Nifty spot 10700
I Buy Nifty CE 10750 Premium 40 Rs
On expiry Spot is 10800 so do i still need to square off the trade at 3:20? cuz the premium will be less than 40 (cuz of time decay?) lets say 15 rs
so if i buy at 40rs and sell at 15 rs wont that mean that i am making a loss despite my option being in the money?
and if i exercise it then i will get 50-40 = 10 rs profit
This is ITM by 50, I’d suggest you square off before expiry.
Sorry, but i cant understand how it will be profitable to square off ?
If i am paying 40 rs premium to buy it then why would i sell it at 15 rs premium??
Mathematically, I will be making a loss
You bought a CE @ 40, strike is 10700. Spot on expiry is 10800. So the option is 100 in the money. But you paid 40 as premium, so net profit will be 100-40 = 60 minus applicable charges.
Yes, correct, 100-40 = 60. So even if i square off i will get 60 rs profit right ?
Yes, minus the applicable charges.
Hi Karthik,
I have a general query, I purchased Auropharma CE 460 feb expiry on 29th Jan. I’m a bit puzzled because I keep getting a statement for my trade every day since the purchase date. Is this how it generally works?
This is the margin statement, Emmanuel.
Hi Karthik,
Continuing my above query. I purchased Auro Pharma on 29th Jan at CE 30.25, lot 800 @ strike price 640. The premium was around 24200. On 2nd feb i received the margin statement where underlying price was 604 and the net option value is mentioned as -27640.
I’m not sure what to make of this. Will i be incurring an additional loss since the underlying is below the strike price? But i understand that the max loss in a call is the premium paid.
Pleas advise.
Hi Emmanuel,
A Margin statement essentially contains details of funds available in the various segments for your account. It doesn’t have details of your positions or trades undertaken. I’m not too sure which report you’re actually referring to. Suggest you send the report to [email protected] to seek clarification
Hey Karthik,
Can you help me about RMS rejection rule policy especially for Zerodha account holders and it’s circuit limit (already read nse RMS rule policy). I’m having this issue from last week to cont. current trade sessions.I’m not able to figure out because I got same rejection notification when I place order within the limits.
‘
Vashnavi, you’ll find almost all the rejection reasons here – https://tradingqna.com/c/zerodha/zerodha-order-rejection-reasons
RMS rule: Option strike price based on Ltp % for entity A/C-X across exchange across segment product. what is the mean of this in reference of nifty ?
for instance If the banknifty price is 26000 around then there is any boundations for which only I can place the orders ?
Can you please explain this like other term in varsity ?
Is volatility always usually high before results and important announcements?
Shoulnt it be the other way round??
after the news market tend to big a big move in one direction… so the movement in one direction in more, hence more deviation from mean, hence more volatility. So how is market volatile before and not after results and announcments
So general volatility based strategy is shorting both call and put ATM options and squaring off just before the announcement?
1.) Why volatality is high before any event ? even though price is not changing much, time is same, delta is same.
2.) Why just after announcement volatility decreases very fast, even sometimes price difference is not much ?
1) Becuase nobody knows the out of the event – this causes the volatility to increase.
2) This is becuase the event’s outcome is known, hence more certanity in the market.
Hello Sir,
I would like to know why premium of put option will lose value faster than increase in value of call option when we set up short strangle before an event and out come of that event is positive?
This is due to volatility or delta?
It’s not really specific to a put option. Can happen with either the put or call, and yes, its because of the drop in volatility.
Dear Sir,
This is by far the best content about options on internet as per me. Great explanation skills.
Thanks for sharing.
Thanks for the kind words, Jay 🙂
Happy learning!
Dear Sir,
I thoroughly enjoyed reading about options, your extra ordinary narrative skills engaged me throughout and the examples that you gave for every topic made it easier for me to understand!!
Thank you very much sir!!
Happy to note that, Shoaib and thanks for the kind words 🙂
Happy learning!
Supper explanation sir, I read all the chapter and now I am better confident to trade in options.
you did fantastic job.
Good luck and all the very best!
Dear sir,
1.How to calculate transaction charges (brokerage+STT+transaction charges +GST+SEBI charges) for the options (CALL/PUT) bought initially and expired in ITM? { I understand that STT is 0.125% of total contract value when we let it expire in ITM, what about the remaining charges?}
2.How to calculate transaction charges (brokerage+STT+transaction charges +GST+SEBI charges) for the options(CALL/PUT) sold initially and expired in OTM?
Kindly help.
For the 2nd case, you can use the brokerage calculator to calculate. (Normal STT 0.05% on the premium)
For the 1st case, brokerage and other charges will remain the same, however, STT will be different which you can calculate manually.
The formula would be = 0.125% * (Strike Price+ Intrinsic Value) *Lot Size
For the 1st case,
Remaining charges same means? brokerage 20rs + STT 0.125% on contract value+ transaction charges 0.052% on what intrinsic value? + SEBI charges on what?
Ex:- I bought nifty call options at strike 9800 (1 lot ) on 1 week before expiry date. I let it expire ITM and spot value of index at the end of the expiry date is 10000. Then charges = 20 (brokerage) + (STT) 0.125% of (9800+intrinsic value ~ 200)*75 + 0.052% of intrinsic value (transaction charges on NSE) + SEBI charges on intrinsic value
I guess intrinsic value is nearly equal to spot – strike for ITM = 10000-9800 =200
Is my calculation correct?
Yes, Mahesh. For STT calculation of an ITM option, you may want to check this – https://zerodha.com/z-connect/queries/stock-and-fo-queries/stt-options-nse-bse-mcx-sx
Thank you sir.
Delighted to see such a dedicated teacher helping us to learn.
Happy learning, Mahesh!
When the news hits the market, the market would certainly move. For example if the news is good, the Call options will definitely move. However more often than not the speed at which the Put option premium will lose value is faster than the speed at which the call option premium would gain value. Hence you will end up losing more money on the Put option and make less money on Call option. For this reasons I believe selling options before an event to be more meaningful.
Dont you mean “…I believe buying options would before an event….”.
No, I meant selling options. We are essentially talking about the rate of decline in premiums, which is beneficial for option sellers.
If I’ve bought 3 lots of Nifty and I want to close position of only 1 lot, then on Kite, I’ll press on the ‘Option -> Exit’ option and when the quantity option comes, change the 225 to 75, that’ll do it right? After that, only 2 lots of Nifty will be open?
Yes, that will work.
Sir what is the meaning of a naked trade ?
Any position which is unhedged and exposed to the directional risk of the market is referred to as a naked trade. For example, buying Nifty futures is a naked long position. If the market goes down (directional risk), then you lose money. However, buying nifty futures and also buying a Nifty Put option is hedged and therefore not considered naked.
Thank u sir ?
Welcome!
Hi Karthik,
I did some screw up 2 days back(lost ~5K) due a very bad, pure instinct driven foolish option trade due to euphoria from Thursday results and news on TCS. It was my first trade and personally consider it as my drishti(I hope you know what is drishti 🙂 it is a tamil word).
Tried my hands yesterday while I was close to mid-way through the varsity material with what I thought was logical :)) – It was a nice experience end to end – your chapters where the greeks that slowly and incrementally affected my decisions and turned it a good trade.
I thought TCS performance day over the day on 23rd April was not really warranted (the dip part) – so decided to enter into OTM call on 24th morning. TCSAPR3450CE, spot @ 3403 : close to deep OTM – the day went on to be quite bad – was -2500 at close of play, spot was @ 3385. I thought it was a flaggish formation – but not really strong since the previous rally was on for less than a week. I was still bullish (the put call ration at close of play yesterday was ~0.3) – I just hoped a morning rally to transition from OTM to ATM and exit at say 28 or so premium.
NOTE: I finished reading the whole material first by end of yesterday – revised it once today morning between 0900 and 1100 :).
The rally happened as I expected and I could see bulls were clearly keeping hold. As the option travered to ATM, I had finished the full material and I verified the new greeks you discussed. I saw 2SD levels for TCS at around 3475 range and considering spot was already at 3450 range, I revised target to 36 and as the rally kept going on, but I exitted at 37 since I felt ~2.7%(3475 levels of spot price) gain from previous close was dangerously close to 2SD (with 96% confidence I turned a little bearish :)) – I think it was lucky still.
The next trade was a good grab : Keeping volatility in perspective(spot close to 2SD range mid-day with strong rally from morning) and considering the expiry is tomorrow and time value running to zero, I went long on TCSAPR3450PE at 18.75 premium when spot was at 3475 again today. The rally happened just as expected and my idea was to make use of delta accelaration at around ATM levels and target placed was 30 initially and revised it and closed it at 36!!
Right now, I feel quite rewarding for all the time I spent reading the chapters one by one in my laptop, mobile, ipad (at different times of day doing different other things) 🙂 – thanks a lot. I planned the exit properly and make a good trade here in my view (spot is now again at 3470 at close of play!)
I just would request like you to analyse this trade and share your perspective on this. I’ll make notes and use them for future.
PS: Before you write it, I will avoid naked directional calls in future 🙂 I am in the process of building my overall strategy for trades, I actually dont know where to start and am writing down everything I am thinking (hoping to give a structure soon). Your inputs will be very helpful!
Regards,
Arun
Arun, congrats!
More than anything, I’m so happy to note that you are constructing trades based on logic/numbers/data-driven approach and not really based on random ideas. This is, in fact, is the true spirit of Varsity. Keep at it and keep learning 🙂
I’m assuming you are new to trading, if true, then I think this is a fantastic approach to the trade!
Yes Karthik, It was my second trade. Retrospectively going was the put call seems more risky, thought it went my way. I was still planning to hold it only till it touched 1sd level – is this right from your experience? Apparantly all would have been lost if i held the put right now plus i would have made 3x if i held the ce.. what do you think?
Correcting some typos and making the question clearer. Thanks in advance for sharing your PoV Karthik 🙂
Retrospectively thinking, going long on the 3450 put call seems more risky, thought it went my way. I was still planning to hold it only till it touched 1sd level which in my view was safe risk (the price dropped briefly but quite fast as you rightly discussed about fear factor & prices) – is this position right from your experience? Apparently all would have been lost if i held the put right now plus I would have made 3x if i held the CE option right now.
My question:
As the rally touched 3465, my point on time decay was wrong in the sense I actually went long. But the thought process was since time factor is very less and any additional increase in price is quite less likely(considering 2SD levels), I thought any further upmove will be tested and bears will try pulling down.
You had not discussed about demand and supply concept applying to the option premiums, but they will also impact premiums, right? They are in fact another greek, no? 🙂 When price drops, the natural demand for put options at close OTM strikes will improve faster than the decrease in premium for the same CE options (since overall outlook for TCS at the moment is bullish)
1. Was my call to buy PE option keeping volatility, potential price drop to atleast 1SD levels (or ~3445 where my OTM would become ATM) in mind correct? I expected that premium would in fact increase faster at any dip owning to fear of potential drop down close to expiry & fear of losing overall value of call options (with time closing in) : is it a right observation?
Regards,
Arun
Arun, like I mentioned in my previous comment, the only problem with SD-based targets and SL is that they react quite late to drastic price movements. However, in your case, I think the volatility has played a crucial role. The rate at which the CE dropped versus the rate at which the PE gained was quite expected. By the way, the effect of theta can realistically be experienced only where there two days to expiry.
Yes, demand supply plays a big role, unfortunately, there is metric to capture this. An indirect way to assess this would be only the spot vis S&R.
1) Generally speaking, you would not want to buy options when vol is high. But yes, major dips increases the volatility. So in a sense, your logic is bang on the buck.
Thats the hindsight bias kicking in, Arun 🙂
Ideally, you should hold until 1SD, but please do watch out for extreme price movements. This can skew the SD levels.
Thanks, from how I followed you, im making the best value for money from first profits: ordered “Fooled by Randomness” as first investment 🙂
Any other good reads from your view Karthik?
Learning compounds, Arun so keep learning 🙂
Do read “When the Genius failed’- https://www.amazon.in/When-Genius-Failed-Long-Term-Management/dp/0375758259 , its one of my favorite books 🙂
For volatility based option trades, one utilises the overall volatility (India VIX) at the moment, rt? So, where does one exactly use the Implied Volatility mentioned for each Nifty options contract on NSE site?
Thanks in advance.
It is available on NSE option chain. Hopefully, we will have a tool which gives you all the information soon 🙂
I think you mistook my question slightly or maybe I wasn’t clear enough. I wanted to know where does a trader use Implied Volatility for each options contract, the one which we get from here-
https://www.nseindia.com/live_market/dynaContent/live_watch/get_quote/GetQuoteFO.jsp?underlying=NIFTY&instrument=FUTIDX&type=-&strike=-&expiry=31MAY2018
because for volatility based trades, we use the general India VIX as mentioned here-
https://www.nseindia.com/live_market/dynaContent/live_watch/vix_home_page.htm
These IVs can be used to figure out which strikes are trading at higher vols. You can even compare this to historical volatility.
Dear Karthik
I am new to Options & just finished reading this chapter. Just few silly Questions one by one I may throw here for clarity.
1. As you mentioned, if a stock is at say Rs. 420 & I expect it to go up in next week, so I buy an nearest OTM CE say ~430 Rs. at some premium. Now there are few things I noticed – A Scenario just next day.
a. Spot Price may move to higher than 430,
b. Spot Price may be 430 Rs.
c. It may be Rs. 420 (As it is)
d. It may be Lesser than Rs. 420
So, what I observed about premium
1. Very high in case a.
2. Sightly higher
3. May be anything
4. Will drop
I am ignoring news (So Volatility is ignored), I am ignoring time value as it is just next day, I am ignoring sharp move in delta & gamma variations due to just next OTM strike.
Am I right or wrong?
Yes, your observations are more or less accurate. In fact, if you look at the strike selection graphs you will realize the same. Good luck and keep learning 🙂
Thanks Karthik
Now My next observation is that suppose if I buy 440 CE at Spot of Rs. 420 at some premium say Rs. x. This is for the current month expiry. So now if spot is in uptrend & I hold it & when price moves up beyond 440+, the premium goes very high, But demand may not be there beyond a limit.
Your comment please ?
Yes, this is a possibility. In fact, this happened to me last month 🙂
The liquidity maybe low, you need to place an offer and hope to get filled.
Now for the same example, if Spot moves beyond strike of Rs. 440 to say Rs. 460, which is beneficial
1. To exercise my option & get (460 – 440 – premium paid)
OR
2. To square off the position at higher premium.
I expect that due to delta being lesser than 1 always, premium can never move faster than underlying. So Change in premium can not increase by Rs. 20 ( 460 – 440 ). Hence, it will be better to go for option-1.
If So, how we do it in the system. I mean, as mentioned they are cash settled, I am not clear how to do it in the system. Can U refer any U-tube link or video / pic?
If you are happy with the gains, then you can certainly square off. If you think it is going much beyond 460, then stay on. Really depends on your risk appetite here. There is nothing special that you need to do for square off, you just need to keep the position open and let it expire and its deemed exercised. But please note, if you leave an ITM option to expire, you may end up paying a large STT on it.
Hi Karthik,
Your explanation in all module seems very well for us, Thank you very very much. Keep it up.
I have question:-
What will happen or what will be procedure if one wants to take delivery of the Infosys stock on expiry. In our current case study consider example of fundamental analysis of Infosys, here we don’t want to square off the premium we want the delivery of stocks.
Kunal, delivery of shares has nothing to do with F&O expiry.
Hello Sir, yesterday was my first options trade, asian paints did fundamental analysis, did a lot of ground work and bought slightly OTM, deep OTM options CE and hedged it with PE(added up delta) , yet I am not convinced about my desicion, since it was my first trade(couldn’t sleep actually).
Today closed the position with 20% profit sir, completely forgot about gamma, so sold minutes before it reached 85 – 100%, Lesson learnt. But very happy that my process was a success, I thank varsity for giving necessary tools.
Good luck, Mani. Hope more (and bigger) success comes your way!
Keep learning 🙂
thank you sir 🙂
Welcome!
How do you manage your trading time sir? I am very sure that you cannot sit in front of a monitor all day long since you are involved in many activities, so when you do your analysis, trading decisions etc for short term and long term strategies. How you keep yourself less cluttered? Because I find it quite challenging managing a traditional business, family time, trading aspirations and my hobbies. Is there any thumb rule or special recipe that you follow sir?
Mani, no thumb rule here, at least I’m not sure if there exists one 🙂
But here is the thing – everything I do is in one domain i.e markets. Markets are something that I really love so that kind of makes it easy for me to work around 🙂
Fine ?. I have a doubt in option selling sir. For example I sell TATASTEEL 800CE for 80, lot size 1000 thinking that spot prize won’t go beyond 800. So my brokerage for sell side will be calculated for 1000*800. If the trade goes against me and I decide to get out of the trade before expiry then what will be my loss? and how my buy side brokerage will be calculated sir?
The brokerage if you are trading with us is 20 for each site and nothing else. You can exit the option anytime you want, no need to wait till expiry.
thanks for replying sir, I think I was not clear with my question, anyway got my answer from a discussion in tradingqna forum.
Sir,
Request you to provide notes on price action / advance price action.
How does same work in live market.
Regards
Will do, Ajay.
Sir,
When we see news channel they show OI and predict what will happen in cash market means indirectly they are saying that spot price depends on option OI.
Which means don’t you think people having big positions can manipulate market at least on the day of expiry by doing short sell or buying intraday to get benefit from option.
These are just predictions, as good as your or my guess. Manipulating stocks/indices with high liquidity is not possible. But I do think stocks with low liquidity can be tampered with.
I want to buy an option say Bajaj Finance Strike price 100 Premium 10. I wanted to put a stop loss at 9.50 and book at 11.50. How should I put these figures on the trading terminal.
Like most important the stop loss and an advance book profit price at 11.50 in the terminal. Please advise
Once you buy the option, you can place a SL sell and buy orders simultaneously. Make sure you cancel one of the orders when one of the order gets executed.
Hi Karthik,
Thanks for your prompt reply.
What your are saying is that If I want to buy /sell an option. I have to place stop loss on both sides of trades simultaneously. As I have never traded options before so if you could send me a screen shot or something.
Here is what I’d suggest you do Ajay – buy 1 lot of Nifty Options and sell the same after few minutes. You may make a loss or a profit, but that is not the point, it will help you understand the process better.
Thank you . I did it today. I understood it.
Good luck and all the very best, Ajay!
Hi Karthik,
I am trying a delta neutral strategy by buying a Future and Selling 1 ITM CE and 1 OTM CE, my query if the nifty moves beyond the expected range (sweet spot) when and what adjustments are required to keep it profitable?
Anish, for delta-neutral you should be selling call and buying a put along with long futures. More on that here – https://zerodha.com/varsity/chapter/synthetic-long-arbitrage/
Hello karthik,
In the nifty option chain the change in OI varies aftet every few mins, so can we take this change as almost real time data ?
Thank you.
Hello karthik,
In the nifty option chain the change in OI varies aftet every few mins, so can we take this change as almost real time data ?
Thank you.
Mehul – check this https://tradingqna.com/t/is-the-live-open-interest-oi-data-being-provided-by-exchanges-correct/7208
Hi Karthik,
I am new to options but have grasped the concepts going through your lessons.
Please help me understand Nifty case study explained above
He buys 7800 CE at 203 and 7800 PE and 176 (Total is 379). Then Premium for CE reduces to 191 and for PE it increase to 178 (Total is 369). He has lost 10 points right ?
Thanks
Sudi
He loses 12 points on CE and gains 2 points on PE, so net 10 points loss.
But in the above example you have mentioned
“he did manage to make a quick 10 point profit per lot on this trade. Not too bad for an overnight trade I suppose”
If you add the P&L from the two options, you will note that its a 10 point profit. Add them up individually.
Cant thank enough Karthik, really brilliant explanation. I went through the entire module and could not miss a single word in it 😛
Thank you so much for the efforts you have put it, i believe it has changed my perception in understanding options.
Best Regards,
Murali
Happy to note that you liked the content here, Murali 🙂
Keep learning!
Hello,
Karthik ji,
pls go through once to the below link, i have tried a lot put a lot effort to bring alltogether.
just wanted you to review once.
https://docs.google.com/spreadsheets/d/1rdWAEpOFtT3OYgy8SGnBI1UGvB8c7NG_f7OYcBY9w24/edit?usp=sharing
thanks,
Mohit : 9913118189
This looks quite comprehensive, Mohit. Great job!
hello Kathik ji,
good morning
i wish if you could through the sheet once (shared below with link ).
would like you to review and comment for any of ur suggestions if m missing anything.
thanks,
Mohit: 9913118189
https://docs.google.com/spreadsheets/d/1rdWAEpOFtT3OYgy8SGnBI1UGvB8c7NG_f7OYcBY9w24/edit?usp=sharing
hello Kathik ji,
good morning
i wish if you could through the sheet once (shared below with link ).
would like you to review and comment for any of ur suggestions if m missing anything.
thanks,
Mohit: 9913118189
https://docs.google.com/spreadsheets/d/1rdWAEpOFtT3OYgy8SGnBI1UGvB8c7NG_f7OYcBY9w24/edit?usp=sharing
Like I mentioned Mohit, this is a very comprehensive sheet, gives you a first-hand info on most of the things related to options. Good luck!
Hi Karthik,
Very Good Article indeed
I have following doubts about earning day straddle trade
1) We are short straddle and What if earning is declared after market hours, next day stock opens with gap up?
2) From where to find earning declaration time ?(only date is given on bse website)
3) Who provides Implied volatility chart for stocks and index? is it available in Zerodha PI?
4) cant we go long straddle before 8-10 day of earning declaration and coming out just before declaration
Regards
Regards
1) Based on the earning results, one of the options will up and the other one down. However, the rate at which both these options move will vary, which is where the opportunities lie
2) The exact time may be difficult, but look for the stock widget in Kite Marketwatch, you can track the events associated with the stock. Check this – https://twitter.com/zerodhaonline/status/1003537789688819713
3) Neither
4) I’d prefer shorting one for reasons mentioned in this chapter.
Thank you so much for taking time and
giving valuable reply
Good luck!
Hi Kartik,
Just a small querry, I found out that Ashok Leyland stock has retraced back to 50% on Fibonacci levels at 127 and it is bouncing back. I know from sales data that company is performing well. How should one play in such scenario to make maximum? a) buy July futures b) back nacked 135 call c) buy naked 140 call
Nikunj – if you expect the bounce back to be sharp and immediate, then I’d think futures is a bet. Else, I’d be happy to buy ATM calls or maybe even a bullish spread.
I read through this recently (Aug 2018). I have read several other books including the one by Hull, viewed countless videos . I must sincerely record this intro was very effective . Perhaps my prior exposure helped but I found reading this far more interesting than many other tutorials . Great effort and thank you .
Thanks for the kind words, and very happy to note that 🙂
Happy learning!
Sir, I have purchased ITC CE options today at 5.14 premium with strike price at 310, since I am new to options I want to know when will be the best time to sell this.
You can sell it whenever the premium increases 🙂
how does nse measure implide voaltilty which it produces in option chain.
Check this – https://www.nseindia.com/content/indices/FAQs_on_India_VIX.pdf
Please tell me something about sgx nifty and how can i use it to my benefit.
Also whats its timing in Indian standard time.
SGX Nifty is Nifty listed in Singapore. The only way to take advantage is by tracking where Nifty is likely to open by looking at SGX Nifty.
okay thankyou. But whats the reason that nifty opens with conjuntion with sgx nifty.
i think that opening prices are determined by the bids and offers of traders which starts from 9 am so why does nifty matches its opening with sgx nifty.
The opening is never exact, but what matches is the direction of opening.
Is there any way in which we could manually calculate wheightage average of last hours of trading which would help us to determine the probable closing price for that day which is good to know when trading option in expiry day i think.
Yes, you can do this programmatically. You will need volume and trade information for this. Not an easy task 🙂
I am active trader in derivatives .Would you advice me to register an private company for trading. Will it be advantageous to me.Also will i be able to open two accounts in zerodh one personal and one in companies name
You certainly can do that, Ricky.
Hii.
I am new to options..
Am totally confused actually..
Hows the profit calculated is it he change in premium or the stock price…
Thanks for ur Help…?
Do we buy lots by the premium amount?
If premiim is 46 to buy 2000 lots it costs 2000×46??
Is it sooo
Yup, that’s how much you’d pay.
Derin, its based on the change in premium. I’d suggest you read through this module once (including comments) to get a grip on Options Trading.
Thank you…
I started trading…
Good luck, hope you stay profitable!
Hi,
Why put option premium losses value faster than the speed at which call option premium gain value?
Thanks for your great effort to educate people.
This is a specific example but in general, this is due to the decline in volatility.
Dear sir,
First of all, a sincere thank you. Varsity is a blessing in disguise for everyone out there who is curious about finance.
Really, god bless you for such work! The knowledge here is truly priceless because of it’s simplicity, and really, a big thank you to you and Zerodha team for this gift to us dummies.
I have a minor query regarding options, and it may sound completely stupid. Please bear with me since I’m from a non financial background.
It is understood why companies list themselves on the exchange. Because it helps raise money, because management itself is a shareholder, and it helps in mergers, etc, but what gain does a company as a business entity have by providing an arrangement for traders to trade options? Since it is a zero sum game, I guess company management or owners gain nothing through it, so what is the incentive for them to make provision for options trading under their banner?
Also, I have been through options strategies on varsity. Can you please suggest some good reading/video material for further study?
Thanks for the very kind words, Maaz 🙂
The company has no benefits when the share gets listed under F&O. NSE decides this based on the trading pattern. Check this for more details – https://www.nseindia.com/products/content/derivatives/equities/selection_criteria.htm
Hi Karthik,
Great explanation on all the topics with analogies. It makes me feel to read them all over again to appreciate the beauty of how options are explained.
Thank you very much!
Glad you liked the content, happy to note that, Vijaya! Happy learning 🙂
is it legal to trade in derivatives from loan money from bank or private moneylenders or friends etc.
As a broker, all one would check is if the money is coming in from a registered bank account. The broker would not be liable to check the sources of funds.
you got me wrong. I am not asking from brokers point of view. when i was studying the loan policy for personal loan in sbi it was mentioned could be used for any purpose other then speculative one therefore i am in doubt , Also i think trading in derivatives does not consider as speculation business.
Ah, is this a loan against share that you are talking about?
Hello Sir, first thank you, varsity helped me a lot to fall in love with options.
the strategies that you have mentioned are very good sir, I learnt a lot, also traded a lot with Zerodha, made some money, now I want to learn more about options strategies. How to construct an option strategy , very importantly how to adjust strategies according to market conditions. Can you suggest a book or two sir? I have already read Sheldon Nutenberg’s Option Pricing and Volatility but it does not take about adjusting positions in strategy
Let me review the book list again, Mani. I always find something new in Sheldon Natenberg’s book 🙂
Sir, is it possible for you to share those book list, books that helped you to become better trader
Mani, I’ve shared the list across a few chapters (as and when relevant).
ok sir
Welcome!
In the ceat case study how did he close his position? Does he has to “sell” that option or transfer it to someone for the difference in premium? I know it must be the latter but sorry if you can guide me as to how to close one’s position(as in did I miss anything on varsity)? And what are the possible ways in which one can close his long call/put and short call/put positions?
It is just a normal sell order, which will square off the position, Pranav.
since there is ample time to expiry, a small dip in the stock price will
lead to a good increase in option premium”.
Can you please explain me why this happen….i think i read this somewhere in this module but cant found it now….Plz sir explain this.
Hello…sir….I am still waiting for the reply….Thank you.
Don’t know how I missed this. I was trying to imply that when there is ample time to expiry, the Delta plays an important role.
can anyone tell me why ATM strike has less impact cost??
Yes, it does.
Hello Karthik,
Thank you for the amazing information, really appreciate it.
I have a question regarding an option that I bought (Buy to open ) a put trade ATM, I was betting that the price will go down.
After I did the transaction, they announced that the company will be purchased by another company.
The expiration date is not until November 19th.
My question is: is there any benefit to keep the transaction until they finalize the deal (As an option holder not a stock holder)? The price is not moving in any direction since everyone is waiting.
Hmm, the outcome really depends on how things pan out, and as you can imagine there are many possible outcomes based on the terms of the buyout. Speculating on it now can be futile.
Hello Sir, I am trading using kite python api, how to calculate margins for naked option writing and also for margin for overall position.
Mani, I’d suggest you post your queries here on the developer forum – https://kite.trade/forum/
I did sir, it was helpful thank you.
Good luck!
Infosys Q2 Results
Scenario
1140 CE was trading at 48/-, implied volatility was at 40.26%.
The 1140 PE was trading at 47/- and the implied volatility was at 48%.
According to volatility basis, it is logical to sell both call and put option when volatility is high especially when a major event is right around the corner.
Now volatility decreased for the above scenario. So now Premium has to decrease right for both call and put option. But it is not in this case. Why?
Could you please help me understand this.
The effect can be noticed right after the announcement, this is when the premium drops. Eventually, the direction will be set by the actual outcome and from then on Delta takes over and the premium starts to move in the direction of the stock.
Could you please suggest how is Margin and premium adjusted for a short position which is held for couple of days, since i believe Options does not have MTM settlement in cash like futures, but then how is the net profit and loss calculated? is it on daily basis deducted and added from margin?
regards
Once you initiate a short position, you receive the premium in your account as soon as you take the trade. So the maximum profit you make is already in your account.
There is no MTM settlement like futures, only the margin remains blocked for the trade as long as you hold the position. If the premium(or volatility) increases, the margins for the position is increased. Margins are updated by the exchange 4 times during market hours and once at the end of the day.
Your P&L will be based on the change in premium, however, your profit or loss is only realised when the position is squared-off or if it expires(at the intrinsic value)
i have bought options for IDBI bank (CMP 59) . IDBI is trading in the range of 58 to 60 for the last 10 days. So IV is decreased & IV was around 25-28 when i bought the option. I bought the options because as per volatality cone Mean IV was around 45% and SD -1 IV was 28% with 30days to expiry. I could not wait for options IV to reach SD-2 levels because it is rare oppurtunity to see IDBI options IV @10%. Hence I bought [email protected]/- and 57.5PE @ 0.8/- . My breakeven point is 2.4. With 30days to expiry is it a good bet to wait for the breakeven point? Please suggest if anything is wrong in it. Or else tell me when is the best time to buy options in the above mentioned strategy. Previously i tried this stratergy on HDFC,HDFCBANK, YESBANK and LUPIN ( at that time i did not know anything about options basics), i tried it just by fluke (without bothering about IV) and it clicked for all stocks. Also what shall be my stop loss for such trades. Because i failed in this strategy for IDBI ( OCT2018 series) ; bought 57.5PE and 60CE with 15days to expiry & unfortunately none of the options managed for ITM.
Buying the option when the volatility is low and when there is ample time to expiry is the right thing. The only thing that can mess up the trade is the delta.
Can we know exact timing when the quarterly result of stock will be out for example lets say yesbank result will come out 25 october which is declared but wheather it is possible to know the time or the result could be declared any time on that day.
Companies don’t follow a yearly calendar, Prakhar. So this may not be possible.
Hi Karthik,
Greetings,
I really appreciate the sincere efforts you put all along explaining these complex terms and concepts of market.
For me, after reading this only I came to know all about this. earlier my thinking about market is gambling only.
So I really understand the worth of it. I could have spend thousands of rupees to learn all these
Thanks a lot again for sharing.
Bharat Menaria
Bharat, I’m happy to note that. Hope you continue to find more value from Zerodha Varsity!
Before buying an option ( stock option particularly of top 10 largecaps), OI should be seen to identify its liquidity, but what does ” number of contracts traded mean? Just saw HUL 1680 CE (29/11/2018 expiry), it says OI of just 45000 and number of contracts traded 234. Is that liquid ?
OI represents the total number of outstanding contracts in the market, while 234 could be the volume (number of contracts). Btw, it is not really liquid enough, Varun.
What should be OI ideally for a stock to be called LIQUID? i mean should that be in lacs or how much ? …..Because i don’t see that much OI in stock options as in nifty and bank nifty options. Further, do these top blue chip companies show Liquidity near to their quarterly results ?
Varun, OI is not a great measure of liquidity. When you try to estimate liquidity, you essentially check how easy or difficult it is to buy/sell the stock. For this, you need to look at the volumes traded. Nifty has crazy volumes…for single stocks, it should be at least a 3rd of Nifty.
Sir,
Good Evening,
Myself Shiva a traditional Visual Basic 6.0 and SQL SERVER programmer just finished your tutorials and have automated exactly what your tutorials says. I tried my best. Reason behind the automation is the pain / grief experienced in the market and of course the curiosity behind your tutorials. Program will do all the things explained by you in tutorials with in a seconds. Thought of posting Screen shot but no where i can upload images.
Tons of thanks to ZERODHA team and recently have opened an account in ZERODHA 🙂
With Regards
KvsKumar
This is great news, Kumar! Very happy 🙂
You can upload the images on Google drive and share the link.
Sir,
Good Morning
Sir my pleasure you have responded, sir authenticity of the result shown in the images you only can validate nobody else can.
My workings on only Nifty options I have not considered BANK NIFTY, STOCKS in it.
NIFTY historic data was considered from Dec 2015 to Nov 2018.
Delta, Gamma, Theta, Vega and Rho calculation is not the part of the programme which I have written. I considered those things for just knowledge purpose.
If needed will incorporate that also, request you to recommend.
Sir I am not sure the result is 100% correct, just validate and guide me.
No intention to come up with any commercial software for sure, just I am trying to digging my grave myself 🙂
Send me your Google e-mail address will upload images.
With Regards
Kvskumar
That’s nice, Kumar. As long as it works and fits in within your risk appetite, it should be ok.
You can upload on your own Google drive and share the link here for everyone to see (hope you are ok with that).
Sir,
Good Afternoon,
Sir below is the link
https://drive.google.com/file/d/1lmbprqD7XF6XGvDC26EKLcq3HU6MSbex/view?usp=sharing
With Regards
KvsKumar
Looks like a lot is going on here 🙂
In essence, you are calculating the range and selecting the strikes, right?
Sir,
Good Evening,
Yes you are right i am just calculating the range and selecting strikes, i am just watching the data with the real market and doing corrections in the program may be after someday i will be able to trade with at least 60% confident.
With Regards
KvsKumar
Thats nice, Kumar. Good luck and I hope the model works well for you 🙂
Hi Kumar,
Good work sheet.would you mind such sheet for January?.please share how you are doing it step by step with excel sheets.Also share your strategy and trades if it is ok.
Thanks
Sir something wrong…I posted link 3 to 4 times but not posted.
With regards
Kvskumar
Links usually come in for moderation 🙂
I just approved and replied.
Sir,
Good Evening,
Sir could you please explain how ZERODHA is managing with almost no brokerage, because have seen so many brokerage firms has been winded up due to non-profit or other reasons.
Sir my queries will hurt ZERODHA but as a account holder its my right to ask and you as a ZERODHA its your responsibility to make all the account holder comfort;
1. If something happens to ZERODHA what will happen our scripts in demat.
2. What about the fund which is lying in the demat.
3. Is it safe if we transfer X amount for trading purpose.
4. What about the orders which was executed in between.
5. Is there any standard procedure to follow in such incident.
Sir there are many questions to ask…most probably for all the possible queries there will be an answer in your ZERODHA policies, if so please post it here.
No Regrets
With regards
kvskumar
I understand your concerns, Kumar. I’d encourage you to read this – https://tradingqna.com/t/how-safe-is-it-to-trade-with-zerodha/533/2 and this – https://tradingqna.com/t/are-my-holdings-safe-with-zerodha/11257
Thank you will go through
Cheers!
Sir,
Good Afternoon
Sir have created alert using SENTINEL but alert message is alerting me event after a hour or two, our alert purpose and SENTINEL purpose will be defeated if this continues. Request you to look into the same.
Below is the message:
Your alert KVYES was triggered at 10:50:38 – 28 NOV 2018. Visit Sentinel for more details.
LastTradedPrice(‘NSE:YESBANK’) <173.0000
Trigger time is 10:50:38 but alert time is 12:33PM
With Regards
KvsKumar
This was an error, should have been sorted by now!
Sir,
Thanks for posting the link which contains some appreciable points about ZERODHA as well as other legal points, you have mentioned IL&FS as your partner, recently there was a crisis with the same all knows. Anyway we will have our own strategy to secure our self, not a big fan of any service provider or company.
Hope and wish ZERODHA is immortal 🙂 and continue trade with ZERODHA.
With Regards
KvsKumar
Glad you appreciate the response, Kumar 🙂
Hope we can continue to improve ourselves and serve the community better!
Karthik,
If i have understood this correctly, because max delta is 1, option premium will always change by a smaller value than the change in the underlying, unless it is deep ITM option. So, if i have a strong directional view, why not directly trade the underlying and capture the complete breadth of change than the relatively smaller change in option premium.
I see a case for trading options only if i don’t have a strong directional view and the play is on volatility or theta decay.
Thanks,
Akshay
Its not just about having a directional view, Akshay. There is the angle of time as well. So the question is what is your directional view and by when do you foresee that panning out…this needs to be answered.
Say I expect NIFTY to move up by 50 points, I buy NIFTY futures as as well as 1 Lot of ATM CE at Rs 10 each with delta of 0.5
Case 1: Target is achieved in 1 day – Profit I make on Futures is Rs 50. Profit on CE is Rs 50 * 0.5 = Rs 25
Case 2: Target is achieved in 15 days – Profit on Futures is again Rs 50, Profit on CE will be less than Rs 25 considering 15 days Theta decay
I have not factored in impact of volatility in both the cases, but the point is, whatever the case is, profit from CE will always be less than Rs 50. So what is the point of buying options?
Thanks,
Akshay
I think I got the answer – CE won’t block any margins, so I can buy more options than I can buy futures, and hence can make more absolute profits. Am I correct?
Thanks,
Akshay
I just replied the same 🙂
Akshay, futures requires a much higher amount of money in terms of margin blocked. So in place of 1 Fut lot, you can probably buy 3-5 lots of Options. This impacts your ROI a great deal.
Karthik,
I analysed Futures vs Options Payoff and here is what I observed:
– Even with extra no of lots we can buy for options over the no of lots we can buy for futures from same amount, the net payoff from futures is better
E.g. Amt in account = 5 L, At max leverage, 700 Currency futures can be bought, 1400 ATM options can be bought. Delta for futures is 1, delta for options is 0.5. Net payoff is same for both. Infact payoff for options buying tends to be lower because of volatility impact, theta decay, impact costs due to higher spreads, and higher transaction charges than currency futures.
– The only time options buying can give better payoff is when we expect a real quick up move. But before major market events, Implied Volatility is high, making Options expensive. The only time it can work in our favor is when we expect the underlying to move quickly when the market is not ( Insider info 🙂 )
– So net-net only option writing makes sense – here too we should consider opportunity cost considering our margins will be blocked for the duration of the trade
Did I miss anything, or am I wrong anywhere. Please guide.
Thanks,
Akshay
I agree, Akshay. Another factor at play is the versatility of options, which I think you are not considering. You are comparing a naked future with naked options. Don’t forget you can set up strategies in options, know the expected P&L beforehand and sleep at peace in the night. Futures will never allow you to do this 🙂
Could you please provide us the step by step algorithm to follow while buying aan options…like which are the steps which needs to be followed nd in which order ?🙂🙂
I’ve kind of explained that in this and the previous chapter.
Hello Mr. Karthik,
Thanks for providing essential knowledge about option theories. Its very detailed and complete in itself. However I want to ask your opinion about intraday trading in Nifty only. What according to you is good, buying/selling Nifty options or buying/selling Nifty futures if you want small but consistent profit ..? I just want your opinion as you are well experienced in stock market.
Thanks,
Sooraj, if its intraday, I’d suggest Futures.
Thanks for sharing your opinion…!!
Pleasure, Sooraj. Good luck and all the very best.
Dear Karthik,
Thanks a lot for giving good perspective on options.If it is one weeks duration do you suggest going with options?Is it simpler to focus and sell options only and in Nifty and Bank nifty only.if I am looking for say 14k per week what is the capital required?Please suggest some strategy to achieve it.I want to only sell options.Can you add one chapter only on selling options and hedging risks.This would be very useful for retired people who can write against securities,FDs,Mutual funds etc.what are shares on which Zerodha provides margins and how much?
Thanks again.You are very good in explaining complicated subject like this.You add latest case studies.Also readers may be encouraged to share their experiences.
Regards
Channabasappa
Happy to note that, Sir.
Assuming the premium is about 12 and the margin is about 60K, you will need to write about 15 lots to make about 14K per week, this is roughly about 9-10L. I will add a chapter on Options selling sometime soon. At present we dont have a pledge against MF, hopefully, that should happen soon.
Good luck.
Hello Karthik,
I had a question.. Suppose if I short Titan 1000CE at 10.5 and wait for expiry date and if no buyer available what will happen to my trade.. assume Titan will end price of Rs 995/-..
The 1000CE will be worthless, hence you will get to retain the entire premium.
Hello. I’d been trading only on Nifty 50 till now and wanted to start with Bank Nifty.
a) I understand that there’s a restriction on buying OTM options on Zerodha. But we can still sell OTM/deep OTM calls/puts?
b) If I do sell OTM Bank Nifty puts (for e.g.), and they are giving me profit on expiry, then like Nifty 50, I can let it expire & not square off?
Milind, there is range restriction for selling OTM options. If its OTM, then you can just let it expiry without any worry.
Okay thanks!
Say, I’ve executed a short straddle for Bank Nifty. Now, if after some time, my position has gone against me & I want to close it, will I be able to do so if it’s now OTM and thus, outside the range which has been prescribed by Zerodha? E.g. Selling 27000 options when Nifty is also at 27000 but wanting to close position when Nifty reaches 27600.
Yes, you can close the positions, this is not an issue.
Hello Karthik,
Very nice chapter, and very well explained. Kudos to you and the Zerodha team.
One small doubt if you can please help to clarify.
I trade mainly intraday in Nifty options. For tracking the options movement, i used to see the underlying Nifty index chart. Is that a correct approach? Because some of my trader friends say, they see the futures chart to track the options movement more closely.
Which is more accurate?
Thanks much.
Thanks for the appreciation, Prince.
I’d suggest you continue looking at the Index chart, that makes more sense. I do the same. However, you can’t go too wrong looking at futures chart as well.
Hey Karthik,
First of all thanks for such a brilliant initiative. I had a question with regard to the last trade taken by your friend.
I completely get the logic behind the trade but what I have learnt from you is that, when trading options, there are two things that have to be on your side.
1. The underlying logic.
2. The time in which that logic has to work.
I understand that he could sense the overreaction to the bad news, but expecting the market to realise the positive side of the trade within that expiry or timeline and buying a naked option seems a tad too risky. It could have been possible that the positive realisation kicks in a bit later.
You summarized it well, Altamash. The realization part comes with experience I guess. Too hard to quantify or build a process around that 🙂
Hi karthik sir…im a novice in derivatives trading…got a few doubts.pls clear
I want to trade straddles options stratergy during earnings season..but want to trade long instead of shorting as the risk in shorting is more along with huge requirement of capital for shorting options…
Pls suggest me when should i take long straddle positions..??
My feel is i will take long straddle about 4/5 days prior to results day and want to close it on the results day before announcement…
Is it a gud stratergy or do u reommend any changes??
Plz reply…i found varsity to be something useful n simple …hence asking u..plz reply..
Thank u….
Nagaraj, I understand the temptation to go long straddles, but trust me, it is not really the best thing to do. You can go long when volatility is low and is expected to rise, but during results or any corporate events, it is usually the other way round i.e the volatility is high and expected to decline post-event.
Hello Karthik sir.
i am a zerodha member for a year now. I wamt to clear a query from you.
Good evening sir ji. I am following you and reading @ZerodhaVarsity for a very wrong time. I want to clear the only doubt I got for myself.
In OI if call OI Is increasing, then we look from the seller’s perspective that sellers are shorting calls and hence there is bearish outlook. But when PCR 0.7 or near 0.5 we predict that there are more calls in the market and therefore a bullish sentiment. I want to know that When both, OI and PCR results are from the same i.e. incresing call open interests, why the outlook on one is bearish(froms seller’s persepctive) and on the other its bullish(more calls in PCR~0.5)
PLEASE EXPLAIN THIS TO ME.
OI along cannot be used to arrive at a conclusion, Edward. You need to look at this with respect to the price movement, OI variation, and the volumes.
Then lets assume that change in OI is large positive and premiums also increases., Then we need to look from buyer’s side. I mean why sometimes we look from sellers perspective amd why sometimes from buyer. I mean one is buying and one is selling. Then whats the difference. I know I am wrong somewhere im grasping the concept. Please correct me where I am wrong.
Exactly, Edward. It is hard (and wrong) to attribute the OI as bullish or bearish OI. Therefore the need to look at it from the perspective of the price. Hence, the increase in OI plus the increase in price is bullish and vice versa.
Hello Karthik Sir,
I was trading so far with nifty futures on a intraday basis. I didnt care for nifty options becoz it was monthly and its complicated. but Now with the introduction of weekly option I am getting confused because i observed that they are moving fast as compared to monthly options. I feel they are good for intraday trading. I trade only till 12.00pm hence capture morning moves with nifty futures and never trade in afternoon volatilty. Now I am getting tempted to those weekly options.
Well I always want your opinion as you are experiened in this field and helped me a lot through varsity..!! plz clear my following doubt
should I trust weekly options for intraday in the morning or continue with nifty futures..?
I just want your point of view on this dilema..plz guide me. thanks..!!
I forgot to tell that I trade only reversals in nifty futures to capture quick gains…is it possible to apply same in case I buy options..??
Technically yes, but do check my opinion for your other query 😉
Sooraj, if you are profitable and happy with Nifty futures, then stick to it. Why do you want to change or disrupt that flow? End of the day, the color money is the same right? Whether you make money from futures or options, how does it matter?
thats what I am thinking..as I am comfortable with nifty futures…I should not look for anything else..but you know since heavy news, articles, videos are coming stating that nifty weekly options are much better even for option buyers…so I got tempted..but I always go for your guidance to clear my confusion..!!
as always thanks for your opinion..gotta stick to nifty futures only..!! hehe
Yes, stick to what works for Sooraj.
Hey Karthik, a while back on a post on TradingQna, you had recommended a book for fundamental analysis-
https://altaisadvisors.com/masterclass/book/
Can you recommend something similar for derivatives trading where people have discussed their trading strategies? Thanks!
(couldn’t find that post on tradingqna, so posting it here)
Unable to think of any, Sachin.
Sir you have stated that only trade you take on technical analysis is flag formation with low volume retracements.If there are any well developed price action patterns formation like bullish marubozu,harami,morning star should we not take a trade on this.And should we not take a naked trades for even 1 or 2lots also and what should be the lots size criteria to hedge the trades.What is IV Percentile and IV Rank so many have asked you about this and even I have heard these words in markets also.
Of course, you do take the trade if the trade is justified 🙂
Have briefly discussed about hedging (lot size) here – https://zerodha.com/varsity/chapter/hedging-futures/ . IV ranks etc is discussed in the volatility cone chapter.
Dear Sir,
I am a learner and want to start trading. Please guide me the steps of learning chapter wise for a beginner. Thanks.
Seema, I’d suggest you start from the very basics from here – https://zerodha.com/varsity/module/introduction-to-stock-markets/ . Go with the flow, most chapters are arranged in sequence.
hi sir,
1. “When the news hits the market, the market would certainly move. For example if the news is good, the Call options will definitely move. However more often than not the speed at which the Put option premium will lose value is faster than the speed at which the call option premium would gain value. Hence you will end up losing more money on the Put option and make less money on Call option. For this reasons I believe selling options before an event to be more meaningful. ”
a) Do this hold for the other way around?Means when the news is bad the speed a which Put option gain would be less than the speed a which call option losses?
b) when both option tend to moved based on same news, Why this difference happens in market? What is the logic behind it!
2. what is usually see is that after the news hits the market there use to be a huge movement in stock or Index . So doesn’t that mean that Volatility increases after news announcement? If So then why do you tell ” Before the event/announcement market’s volatility invariably shoots up and Because the volatility shoots up, the option premiums (for both CE and PE) also shoot up and I do subscribe to the theory of volatility movement and shorting options before major market events. “.
a) Kindly clarify me whether Volatility increase/decreases after news announcement ( as I usually see huge movement only after news announcement, I tend to believe volatility is increasing after news)
b) If Volatility is gonna increase after news announcement then why you have mentioned “Before the event/announcement market’s volatility invariably shoots up”
3. what about buying both far OTM call and put options diametrically opposite at equal distance from ATM strike before news announcement and wait for the market to move in once direction?Will this give profit as you have mentioned far OTM tends to give good profit % when speed is good and the other leg in we loss will also be less as it is far OTM ?
1a) Yes, this is true irrespective of the news (good or bad)
1b) The volatility differs plus the delta (based on the news) behaves differently, therefore the option premiums to behave differently
2a) On the contrary, the volatility decreases post announcement. This is logical because there is no more surprise left (the outcome of the event is already known)
2b) Refer to 2a
3) May work if there is ample time to expiry
Hi Sir,
I have seen many a times that on result day, once news/results are out the stock/index tend to move rapidly.
Which obviously means that the volatility will also increase because of that wild move. But then how to you tell the volatility will decrease after results/ dividend ?
I couldn’t understand this . Sir Kindly explain this in detail.
No, once the outcome is known, even though the stock moves (in whichever direction), the volatility reduces. Think of the movement and volatility as two different variables.
Hi Sir,
A small correction to my question in previous tread
I have seen many a times that on result day, once news/results are out the stock/index tend to move rapidly.
Which obviously means that the volatility will also increase because of that wild move. But then how to you tell the volatility will decrease after results/news ?
I couldn’t understand this . Sir Kindly explain this in detail.
Got it, have posted a reply to your previous query.
Hi sir,
A doubt on your answer to my previous comment.
My Comment : “I have seen many a times that on result day, once news/results are out the stock/index tend to move rapidly.
Which obviously means that the volatility will also increase because of that wild move. But then how do you tell the volatility will decrease after results/ news?”
Your Answer : “No, once the outcome is known, even though the stock moves (in whichever direction), the volatility reduces. Think of the movement and volatility as two different variables.”
My doubt : But as you have explained in this module that volaility is “A statistical measure of the dispersion of returns for a given security or market index” and when there is a huge movement in a market once the news/ results are announced ,which obvious increase the dispersion because of the price change and so the Volatility should increase.But still you tell that even though the stock moves (in whichever direction), the volatility reduces after news/ results !! How is it possible ? It is confusing for me 🙁 Kindly explain.
Think about this in a more logical way – what causes volatility to increase in a stock which has an event coming up (like corporate results). This would be the uncertainty surrounding the outcome of the event right? Now, once the event if out, that means the outcome is also known right? Hence the volatility would reduce.
Hi Sir,
1. I am unable to reply to any of the thread.Kindly look into it
2. Its been long time awaiting for your module on Mutual Funds. Kindly upload then ASAP.
3.Also do include and explain few more topics like Gan,Eliot,Wolf’s wave,Supply and demand in technical Analysis.
Working on a module on personal finance which will include MF. No, there is no plan to include topics on Gan, Wolf etc.
sir,
In chapter 13 you have mention that never short ATM and ITM options but in this last chaper you are proposing to sell ATM option Para 23.3 Nifty option example.
Why this so please clear.
Thanks
The sell is with respect to a spread, Maneesh. I’ve discouraged naked short trades, but not spreads.
Hi Karthik!
Where can I get Historical Option chains from?
PS: Thanks for the lovely elucidation and breakdown of this very complex topic!
Akul, I’m not sure if this is available anywhere. But maybe you should check here and keep track – https://github.com/shyams80/pluto
Alright! Thanks a ton, Karthik. Your modules are helping immensely.
Glad to note that, Akul. Happy reading 🙂
Will the new stt calculation only on the difference between spot price and strike price be applicable this thursday options expiry?
Its explained here towards the end of the thread – https://tradingqna.com/t/no-more-stt-trap-on-exercised-in-the-money-options/18977/71
Good morning Karthikji,
I’ve few questions regarding event based & normal day trades
1) where to find out announcement time at which companies will going to release quarterly results, although date is there in corporate BSE filings in website such as screener.in or investing.com etc ?? Suppose if Reliance quarterly results date are on July 19th but no mentions of time ?
2) Although I find comfortable selling options in Nifty, BankNifty till now. But now looking forward to sell top 5 stocks now like Reliance, TCS, or SBI but what I fear is that due to maximum number of shares per lot I can end up with big losses ? Is it ok to sell OTM options of such top stocks 10 days before expiry using 1 Std Dev ? B’coz in 2 Std Dev there’s no meaningful liquidity as well as OTM of stocks don’t hv any price too ?? For eg. If suppose SBI is trading at around 365, it’s strong resistance built up around its all time high price of 373 & some other studies, so can I sell 380CE or 382.5 CE with 10 days left to expiry (kindly don’t take this as I’m taking trading advice from u bt as per rational trading wisdom of options selling on near expiry 😊 )
3)Here in case studies u’d mentioned that one must short options couple of days before expiry & not one day before ?? Here I’m confused because volatility on premium will be max on last day before event & next day we can eat out premium on volatility collapse ?? I mean why it’s not one day before but couple of days before ??
Waiting for your wise advice!! 🙂 But veey sorry to say again & trouble u, 2nd questions read thoroughly & answer little bit in length pls 🙂
Have a fun Sunday & Thanking you 🙂
1) All events are highlighted on Kite, check this blogpost – https://zerodha.com/z-connect/tradezerodha/kite/open-interest-on-kite-charts-and-more
2) Of course, this would make sense. You need to be doubly sure of the standard deviation part. Also, remember, stocks, unlike the index, can move quite rapidly, 10-20% moves have become quite common. So do py attention to this.
3) Yes, you can, its just that the premium you collect would be very little if you write a day before. The time value would kick in and eat away all your premium.
Hi Karthik..
words are not enough to appreciate your efforts….the content you have put will by far be the best in indian context and will be appreciated by generations….
you are an excellent teacher…hope this selfless deed bring more success to you..
i have been investing via mutual fund SIPS for last 10 years and reading option trading for some time…..is it possible to make 3% to 4% kind of avg return per month on constant basis via option trading and what can be the strategy…
Indranil, thank you so much for the kind words, really appreciate it 🙂
The thing is, no one really can guarantee returns in the market. There are few conservative strategies such as covered call which help you generate a cashflow (although there are risks associated with it), but the returns are far lower on the investments.
Good morning Karthikji
Sry for trouble as I’d questioned above but unable to rply in reply sections as it’s temporarily not working from my end.
So I want to correct my own question no. 3 especially
1) As u’d mentioned in case studies that in your opinion one must sell options couple of days before events like earnings & not one day before event? ? Why so as volatility can reach higher effect on premium just one day before event & not few days before. Kindly correct me if I’m wrong & explain ur view on benefits of shorting couple of day before ?? Will respectfully do that what u’ll say finally 🙂
2)Regarding my second query that I’d found encouraging after your confident rply that “of course this would make sense…”. Only thing I want to make myself doubly sure again from your trading wisdom that is it OK na to sell stock options 10 days before expiry as per 1 Std Dev & other technical studies & oi analysis to take advantage of theta decay & volatility losing strength due to theta ??
I’ll be pleased to hear again from you.
Kindly very sorry for troubling u on me being getting doubly sure 🙂
1) True, but the closer we move to the event, the effect of delta would offset the volatility, hence the premium would stay at elevated levels and not move much. Given this, it is good to short a few days prior to the event. I’d suggest you observe this over a few events and see how it goes. Nothing like experiencing the trade yourself.
2) 1 SD may be risky, you may want to thnk 3SD. Please paper trade this for few expiries before you put in actual money 🙂
Good luck, Harsh!
Good morning Karthikji.
1)Yes I got u the reason behind it. But Kindly explain the technical words here u’d replied “effect of delta would offset volatility, hence premium would stat at elevated levels…” I can’t get this line.
2) Is it normal for premium to not move much few days prior to events in stocks? ?
Happy for your opinion
Thanking you a lot 🙂
1) It means that the directional move will (or the lack of it) will offset the gains/losses from volatility. Not sure if there is any technical word for it, but as long as you get the concept it is fine I guess 🙂
2) Depends on how the volatility is behaving, if it continues to increase, so would the premiums.
Thank you so much sir… I got it.
If I’ll hv worry then best is I’d hedged with far OTM 1-2 strikes buy after payoff calculations. Here profit & loss is pre-defined!!
Thats right!
Good morning Karthikji
I’m struggling to find out timing of results announcement. I mean the kite link you’d sent is only showing dates and months but no timing. For eg Reliance results will be on 19th July 2019 but at what time. Is it at market hours or after market hours?
Where to get this particular timing information ??
Ur courtesy 🙂
Unfortunately, the timings are decided by the company in the last minute.
Hello Karthik Sir,
I have one doubt, if you explain me ,I would be grateful.
Yesterday banknifty 28400 ce expiry on 8th aug was trading on 320 and today it fell 100 points as banknifty declined .57%. And yesterday banknifty 28400 ce expiry on 14th august was trading around 1800 and today at 460 and it dropped around 1300 points. But yesterday its market price was showing 0 due to no volume.
So if I want to grab this opportunity how can I place an order to sell bank nifty 28400 ce 14th aug expiry at 1800rs.
As one can conclude..that would have given a huge profit.
Please explain what points I am missing and how this could have been converted into reality.
Thanks in advance.
Amlan, yes, the drop would yield profit, but unfortunately, there is nothing much that can be done if there is no liquidity in the system. Also, if there was liquidity, you’d not see such high premiums. This is essentially the liquidity premium.
Thank you Karthik Sir for your response. But I was wondering someone will definitely the person to buy or sell this one..then how would the person execute this trade? I mean to say if market orders are not working for this trade then can one execute the trade using limit order or any other product type? Because I checked the option chain in nse website and the bid and ask price listed there are also similar.
You can place a market order, but the rates at which your order will execute will be very different from the LTP.
Hello sir,you referred impact cost above,can you explain it in detail wat it is?
Vidit, its explained here – https://zerodha.com/varsity/chapter/nifty-futures/
Hi,
Do you conduct classroom sessions?
Is there any recommended way to learn these lessons the best and use it right away?
Also, how do I start dummy trading to understand better?
Thanks in advance.
No classroom sessions, Satish. I’d suggest you read up the chapters and comments here, that will give you a good head start.
Hi Karthik,
Just wanted to know if I identify a stock to be bearish at around 3:15pm, is it better to buy a PE on same day or next day morning? I feel if we wait till next day, there may be too much movement by that time I execute, and oppurtunity would have been lost?
Thanks.
Satish, this depends on many things –
1) If you are heavily bearish – short futures
2) If you are bearish, but kind of sitting on the fence – buy PE
3) If you are bearish and the volatility is high – sell CE
4) If you are bearish and the expiry is around the corner – sell CE or short futures
So as you see, when you trade options, it is not just a function of the direction (bullish/bearish). You also need to evaluate other parameters. Good luck.
Hello sir,
I would like to discuss for the recent event on 20/09/2019 , lets say somebody comes to know of news events and is heavily bullish (or bearish) for the day. Everybody buys (or sells) in one direction during these days. What do you suggest one can possible do to earn maximum profit? Is it in the spot, futures or options market? Should one trade in the index or bank nifty or possibly unlimited returns in call (or put) options? Please discuss.
If you are very sure about the direction, then the best play is with the futures or ATM option.
Thanking you sir for replying.
What about slightly OTM options compared to ATM options (considering the acceleration phase) , is it going to be the same?
Yeah, ATM is kind of a soft hedge against your directional call going wrong. In case it does, the loss will be lesser compared to a slightly OTM option.
And all option writers (Call Option) are in panic as a big Black Swan in flying free from Soth Block, Delhi.
And all option writers (Call Option) are in panic mode as a big Black Swan in flying free from South Block, Delhi.
Hi Karthik,
Just wanted to know if option trading can be done only on sensibull, or zerodha has any other mode.
Thanks and Regards
Satish
You can do both of Kite and Sensibull, Satish.
Hello Sir,
There was a chapter in this module called Trading Strategies where you talked about Spread and other stuff. Why has it been removed? Any controversies arising out of them ☺️
Its all here, Rohit – https://zerodha.com/varsity/module/trading-systems/
Thank you for this link. Appreciate it.
You have an impressive way of breaking things down for mango people. The Terentino anology, cricketing anology makes it easier to corelate. Few people have this insight and gravitas. Have a good day sir.
Thanks for the kind words, Rohit. Happy reading 🙂
is there any good free platform where i can do virtual trade or paper trading live in futures and options with features of net P/L (LIVE MARKET ).intraday and delivery based trades
I think Moneycontrol has a platform called Moneybhai, I’ve not tried, but I’ve heard it is good.
Hi karthik,
I want to say thanks to you for zerodha varsity.
I have one question, on sensibull i placed one virtual trade on 3rd nov 11950PE @70 for exp 7 nov but today nifty is trading at 11872 and 11950PE premium increase now its trading @100.50, my profit will be 30rs. But my average price is showing 103rs and my loss 3rs , can you please tell me what is the avg price and why its increase from 70 to 103?
Thanks Ganesh. I’d suggest you reach out to Sensibull for this – https://sensibull.com/docs/index.html
Hi Kartik, I felt enlightened by your articles. It was so informative and so well written that I have read all of them in one go, though I need to revisit them to keep the learnings intact.
Thank you once again!
Keep Writing Keep Enlightening!
Rahul, I’m super happy to note that! Happy learning 🙂
This is by far the best option article i have read. It covers all the necessary topic and explained in such a spoon feeding way that i never came across any article in option. Never for a moment i found the article boring or loosing its grip it like watching GOT except for the fact that the conclusion and wrapping up of this article is not disappointing and up to expectation.
Thank you Karthik Sir, for such a informative article.
If you are planning to write next article in option can please write about various option technique like straddle , pair trading. If you already written something about them i would love to have a look at it.
Thank you and best of luck for future
Naveen, thanks for the kind words! Your comment made my day 🙂
Here is a module on option strategies, I think there are 14 different strategies explained here – https://zerodha.com/varsity/module/option-strategies/
Here is a module on Pair Trading, have discussed two different techniques – https://zerodha.com/varsity/module/trading-systems/
Happy reading 🙂
Hi,
I have given the certification exam on Zerodha Varsity App for this module. However, there were three questions where I feel the answers are incorrect. I maybe wrong but I need you to look into it. How should I send you the screenshots of those questions? Can you provide an email id for that?
Thanks,
Akshay
Can you tell me the level and question number, please? Thanks.
Certification exam for options trading. Question no 2, 7, 22.
Question 2 is about put option seller
Question 7 is about
Will check this, thanks.
Ignore the above reply comment..
Certification exam for options trading. Question no 2, 22.
Question 2 is about put option seller..and hence it should be spot greater than strike..
Question 22 does not mention the underlying change direction..then how come it changes to -0.46 it can even go -0.54.. hence it should come as inadequate data..Correct me if I’m wrong on this..
You are right on both counts, apologies for the confusion. Have made the changes.
Thanks for the changes. Also, will the changes reflect in my certification score as well?
Also, Thanks Karthik. The module was really amazing. Very easy to understand.
Glad to know that, Akshay. I’m not sure about the changes getting reflecting on your certificate, I need to check with the team.
Sir,
First of all i would like to thanks a lot for all the modules, which helped us lot to understand the basics of shares, Future, Options and how to get know the Technical, Fundamental analysis..
I have a question where or how to get the Nifty/Bank Nifty Options data for the past years , i want to study them. In NSE website its just for last 15 days. please help …
Glad to note that. Check this link – https://www.nseindia.com/products/content/equities/indices/indices.htm
Thanks Sir for reply…but couldn’t find the History of Option chain ( Call & Put ) on the given link , only Nifty future history found. Request, if you can provide with more detail.
Thanks
I’m afraid the historical option chain is not available, Mehandi.
Dear Karthik,
I intend to use MACD at 5 minute intervals with 9 day and 21 day EMA for selecting option trades.
Do you think it is a sound idea or not.
If not, can you suggest a alternate idea please.
Thanks/.
Satish, how do you intend to use this and how do you expect this to generate trade ideas for options?
Karthik,
The idea is wherever the 9 day EMA crosses 21 day EMA, will be an oppurtunity for call option and vice versa for Put option.
5 minute interval is because of the changes which occur in short period of time.
Regards,
Hmm, but this gives you just the directional view, right? As you may know, option premiums are not just influenced by the underlying directions but also by other factors such as the greeks.
Yes, right.
My biggest problem has been how to identify a trend. How to select a trade has been a problem.
So, I figured out this method.
I would further include Support / Resistance, and also based on time left to expiry, chose a correct strike.
Your views are badly needed please.
Fair enough, but I think this strategy is better off with Futures rather than options.
OK. What do you suggest for options. To identify a trend.
If you are doing directional bets only, then futures is a far better instrument to trade. Options are great when you deal with volatility and time.
Sir, as in equity whether the rule “buy low sell high and vice versa” apply to buying or writing an option, because the market depth shows a big difference between the bid and ask price of the premium. Your answer will be much appreciated.
Kumar, options is a completely different animal. There are many different forces that impact premiums. The one you are talking about is just the direction of the market, apart from that there is volatility and times as well.
For nifty options, I notice that the premium keeps dwindling over time
We make profits on increasing premium right?
Hameed, this depends on your position. For long options you want the premium to increase, for short options you need the premium to go down.
Hi Team,
I sold short bank nifty put option at strike price 32200 @ 850 rs expiry on 30 Jan 2020. today I buyback it at 1200 rs. I am new in market and sure how short put will get settled on expiry.
what will happen if I didn’t buy back my above short put option and let it expire on 30th Jan 2020. or do I have to pay any MTM to exchange, is there any penalty if I don’t buy back put option and let it be expire.
Please help me with this.
Thanks,
As the option goes against you, a higher margin will be blocked. If you dont bring the required margins, then the position will be squared off.
Hi Karthik
you are doing great job , your lessons are superb , i wish if i were you i would have applied all these knowledge and strategies to the market and became billionaire without being salaried ….. may be later after making enough money will share the knowledge to public.
If only life was that linear 🙂
Hello Karthik,
In the case study of ‘RBI news play’, the trader had predicted the volatility for the Nifty to be high because there was going to be some news/announcement in the market.
However in normal course of routine, how can one tell/predict if the volatility for a particular index/ stock is too high ?
Is the prediction based upon the topic of Volatility cone that you mentioned earlier?
Or is it based upon simply looking at the volatility index? If yes, then what range is considered too high, moderate, low for volatility index
To get a sense of how high or low the current volatility is, you simply estimate the historical vol and compare it to the current implied volatility of the ATM strike. This should help you get a sense.
You’re talking about estimating the ‘yearly’ historical volatility and comparing that with the current implied volatility, right?
Also I figure that implied volatility available on NSE is in annualized form, right ?
Yes, historical against current ATM’s IV. This is a quick and dirty method…a good approximation. Yes, NSE publishes annualised vol.
Dear Karthik
There’s an option trader Mitesh Patel, twitter handle @MiteshEngr, he made 87L PROFIT today. He trades F&O only. What strategy could he be using?
Thanks
I have no idea 🙂
Hello Karthik,
Today the market behaviour is highly unpredictable.
But for me and my friends there is a serious doubt rolling in my mind.
1.How come both call and put options are in green ?
2. 8100 PE is still 117600.00% up and green. But the market already gone 10000..
Similarly almost all CE and PE are in green and nothing lost any value. How this is happening and none of the LTP/ premium is reduced ?
3. How the 10% fall market suddenly went up ?
1) Increase in volatility increases the premium of both CE and PE. Hence both CE and PE gained value
2) Typical OTM option behaviour 🙂
3) These are unprecedented moves in the market, closely tracking global mkts.
Hi Karthik,
Like other chapters, this is also an excellent write-up and I liked it more because you have elaborated thought process behind a trade setup, that is great to know before entering into a trade. Thanks. Hardly anyone shares to these level of details.
AW, one question. For RBI/Nifty trade case, you mentioned that many traders opt for “Long Straddle”. Third case, Infy trade, is also on similar line as that of RBI/nifty trade. Here, in “My thoughts on the trade”, you shared that you would executed thread in more or less on the similar lines.
My question is – if a trader is not going to wait till expiry, then is long straddle is better than selling of call and put? Background for such trade, is a major event is on cards in next few days, volatility is expected to shoot up. So enter in buy call and put options and square off the wrong one immediately after event occurrence and hold on the other option for some more time.
Please share your thoughts.
Thanks and Regards,
-Sachin
Well, directional bets are always better, but its just that it comes with the burden of not having to get a good nights sleep 🙂
The thumb rule is that you if you are 100% sure about the direction – use a naked option, else use spreads 🙂
Karthik – thanks. Missed the psychological aspect altoghether.
Yup, everything matters 🙂
Hello sir.
I am very new to this trading concepts but I always wanted to learn about them, so my friend on from your zerodha family recommended me these articles.
I find them fascinating.
The thing is I am 20 yr old, and I feel it is important for me at this age to know about investment and market in general.
I want to enter this new domain and I have no idea how to.
I know the current conditions are not too favourable to enter the market at this point of time but I would love to when the dusts settles.
So I was hoping if you could help me with introducing what exactly is zerodha and how do things work here.
It would be great to hear back from you 🙂
Email Id – [email protected]
Sanchit, I’m glad you got started. Welcome!
Start from the very first chapter of the first module here https://zerodha.com/varsity/module/introduction-to-stock-markets/ and I’m sure you’ll find your way.
sir, can the volatility cone be downloaded on (numbers) in MacBook Air or it can be done only on Microsoft Excel
Guess on excel.
hi Karthik – Many thanks for the modules, really helped me understand the concepts.
Couple of questions
1. Do you have a module on how to sell/write and buy options in Zerodha? I am looking at steps to do in zerodha to write options and how we can buy it back? I am sure this is a silly question, pls point me to the right link 🙂
2. What is paper trading? I believe some kind of sandbox environment? Does zerodha allow it? Thanks.
Cheers,
Udhay.
1) Not specifically but have explained this across this and the next module
2) Yup, paper trading is like a sandbox thing 🙂 Don’t have this with us
hi Karthik – Again, two questions:
1. Do you see yourself as a conservative options trader? On a scale of 1-100, 1 being the least, how conservative are you? 🙂
2. Your friend who uses fundamental analysis for options – did it work consistently for him? Eager to know his journey !
1) Yes, slightly conservative in my approach to markets as such, not just options. I’d rate myself 75 🙂
2) Yes, it did for him 🙂
thanks Karthik!
Welcome, Udhay. Happy reading!
“However more often than not the speed at which the Put option premium will lose value is faster than the speed at which the call option premium would gain value.”
Hi Karthik, one thought on the above comment – isn’t it better to short Puts always to take advantage of volatility driving premium prices. But at the same time I recall earlier learning – that avoid shorting Put as ‘panic spreads faster than greed’ meaning possibility of market going up would be lesser than market going down. But the fact of the matter is we are taking advantage of moving price of premium and not the underlying. So in which scenarios shorting Puts will make more sense and when to completely avoid it. Thanks.
Nothing wrong with shorting Puts if you can manage the speed at which the markets can potentially fall 🙂
But from experience, I can tell, its best to avoid 🙂
thankyou so much for sharing your knowledge & definitely this is going to be beneficial for every trader. thankyou once again.
Happy learning and trading 🙂
Thank you Karthik. Beautiful way of presenting a hard topic.
Happy reading, Shilpa!
HI,
What is 2nd half of series means in below statement from ceat example.
I would have executed the trade (selling calls) in the 2nd half of the series to benefit from time decay
For the sake of this explanation, I have divided the series into two halves – 1st half is the first 15 days and the 2nd half is the last 15 days of the expiry.
Hi Kartik,
In section 23.3
Why did you choose to short ATM option?
“I want to ensure that the loss due to impact cost is minimized. ATM options have lesser impact cost,”.
Could you please help understand or point me in the direction where I can understand the logic behind this statement.
Thanks,
Pranay
Impact cost is the cost associated with the bid-ask spread. More on that here – https://zerodha.com/varsity/chapter/nifty-futures/
Great module!! There are still a few things which I haven’t understood completely, but this has changed my whole view of Options Trading. Just one request, please update the module where the example of Nifty is concerned(weekly expiry and 1 lot=75).
But the module is great. Thank you so much. Hope that I become profitable now. 😛
Thanks for the kind words, ROhit. No point updating, as it will keep changing 🙂
sir, it would be great if we can get more of case study or you can tell me the source from where I can read more case study.
Will try and add more case studies, Vaibhav.
Sir,
Pls check this snap shot and confirm I am moving in correct direction
Wipro Result Date :- 15 April 2020
Stike Price :- 180
Sell Put :- 12.65
Sell Call :- 13.6
Daily Volatility :- 4.24 %
Annual Volatility :- 81%
Squared off on 13th April (2 days earlier of result) :-
Put :- 7.5
Call :- 15.65
Profit :-(12.65+13.6)-(7.5+15.65) =3.1
Total Profit :- 3.1*500 =1550
Yes, but you could have held the position for a day more I think. Have you checked what would your P&L be if you had held for another day?
Sir,
Should I go for this selling CALL & PUT today as results on 14th May 2020 and will square off on 12may 2020
Biocon Result Date :- 15 April 2020
Underlying price :- 355
Stike Price :- 355
Sell Put :- 0
Sell Call :- 20
Daily Volatility :- 3.25 %
Annual Volatility :- 62.14%
Thanks in advance
If you’ve not done this before, then maybe you should paper trade it once to see how it goes.
Yes Sir,
As per your guidance, it is closed 2 days before of results.
Result on 15th April, 14th April Holiday, hence it is closed on 13th April.
On 15 April profit is :- 1.75 points
On 16 April profit is :- 5.1 points
On 17 April profit is : 9.25 points
On 20 April profit is :- 13.25
Sure, the idea is to close the position just before the event.
Dear Sir,
Please put more light on this case wrt paper trade.
I want to square off before 2 days of result.
Thanks in advance.
Vidyadhan
Yes, like I mentioned, the idea is to hold the position and close it just before the event.
Is it profitable for the option sellers when the premium decreases??
Yes, thats right.
Dear Sir,
Please put more case studies, considering live situations.
Event based Writing Put and Call is well understood in addition with avoiding naked long call.
Thanks a lot in advance.
Vidyadhan Gedam
Yes Sir, we will try and do that.
First of all thank u very much for putting up great efforts in sharing valueable knowledge. That being said, it would be nice if u could make a chapter on option chain analysis
Thanks, Chinmaya. The module on moneyness of option helps you understand option chain basics.
Dear Sir,
From NSE site we see daily buy/sell quantity of individual stocks. Is it includes all delivery/futures/options?
Thanks,
Vidyadhan Gedam
No, they are all separate.
Dear Sir,
Tomorrow :- 4th May 2020
I am considering Nifty Expiry 7th May 2020.
Today Nifty trading at 9860.
It will not go above 10500 till expiry, hence my strike price is 10500. My Assumption of spot price on expiry is 10000.
Premium :- 1.9
P&L = Premium – Max [0,(Intrinsic Value)]
= 1.9 – Max [0, (Spot Price – Strike Price)]
= 1.9 – Max [0, (10,000 – 10,500)]
= 1.9 – Max [0, (-500)]
= 1.9
Considering lot of 100, profit will be 1.9*75*100 = 14,250/- Rs. (Excluding Zerodha Brokerage)
Sir if above Analysis is correct, Please guide me in following
1. How much investment is required for this?
2. If i don’t want to loose more than 3000/- how to use stop loss.
3. Above analysis is as simple as it is or Option Greeks and Volatility comes into picture, if yes please explore more on this?
Thanks in advance,
Vidyadhan Gedam
1) Yes, for the margin requirements please check this – https://zerodha.com/margin-calculator/SPAN/
2) You need to keep a stop-loss accordingly 🙂
3) If volatility increases, then the option premium increases which means the option you’ve written will result in a loss.
Dear Sir,
Trying to do some paper trading.
Please revert me on ICICI, CE and PE value dated 9 April 2020 having strike value 340.
On NSE historical data it shows open/close/high/low/LTP all zero. Settle price 55 and 50 for CE and PE.
If i executed, writing both call and put , on that date, how much money would i receive.
Thanks in advance.
Vidyadhan Gedam
Since the price is 50+ for both CE and PE, you’ll lose money if you wrote these options.
Sir,
Which site is best for Option Virtual Paper Trading.
Thanks,
Vidyadhan Gedam
Try Sensibull – https://sensibull.com/
Hi Kartik- yet another enriching chapter, kudos:) My quick question
You have shared a graph that shows the Premium variation wrt volatility for different time to expiry of the series. It shows that the gradient of premium change isn’t much when the option is close to expiry. Hence, does it matter when the big announcements come in ( Monetary policy, Quarter Earnings etc). If the results come closer to series expiry , can we assume the delta expected in Premium wont be much even if the volality shoots up. And vice versa, if the announcements come in early in the series, the delta in premiums would be huge basis the volatility change?
Kind of true, close to expiry the greek that dominates is the theta.
hi kartik
i am a avid reader of your writings for 3 years
this is my initial trade, i have some questions in mind to clear thought process
i bought ITC may 150 PE yesterday at premium 2.85, after observing on 5 minute chart that ITC is starting to loose all its gain,spot at 160 that time,ITC closed at 158.45 and my premium was 3.8. i carried over the trade since ITC was in long term downtrend, however today morning stock was showing resistance to fall while sensex was falling. i closed at 3.45 with mild profit
my question are
1-what should be ideal time frame for intraday option trading, should i base my trade on 5 minute candle with volume & confirm it with 15 minute candle and 20 day dma ?
2-all ITC put option premium were decreased today, even some call option, then why deep OTM 170pe, 175 pe gained in premium or gain is very small due to volatility?
3- even when my trade was largely right why their was not much gain in premium , is it because ITC stock low volatility so should i select my stock on basis of volatility?
thanks
1) I would prefer 10 or 15mins candle
2) Yup, this could be due to the volatility
3) Premium is a function of Theta, Vega, and Delta, working all at the same time.
Dear Sir,
Pls guide me to come out of this trade.
Tata Power Expiry on 28 May, Result on 19 May.
Write PE (1.8) and CE (2.15) on 11may with strike price 27.
Now spot price 32. PE (0.45 ) and CE (5.5 ). As per theory i have to come out of this trade on 18/5/2020 as results on 19/5/2020. But now i am Sitting on loss of 18000/-
Thanks in advance,
Vidyadhan Gedam
Yes, this is a volatility strategy, you need to sure that the volatility is on the higher side before initiating the trade. The idea is to pocket from the decline in volatility leading to the event.
Dear Sir,
What is the approximate volatile value to initiate this trade i.e. to play with quarterly results.
Thanks in advance.
Vidyadhan Gedam
Check today’s implied volatility with respect to the historical volatility, this will give you a perspective.
Dear Sir,
I am following this trading idea with respect to Quarterly result.
Subscribed to SENSIBUL VIRTUAL TRADING and has given positive result except for Tata Power.
As per your guidance I have compared today’s IV with respect to historical value. I have find day wise IV data from below site. Yes you are correct IV is increased here and may be the failure for this trade.
https://www1.nseindia.com/products/content/derivatives/equities/archieve_fo.htm
Sir,
I have 2 questions:-
1. Is Virtual trading and actual trading gives same P/L?
2. Some where in your literature you said above trade can be saved using futures. Please use above data and guide.
Thanks in advance,
Vidyadhan Gedam
1) Results can be the same, but your experience will be different 🙂
2) Not sure about that, can u share more context please?
Dear Sir,
In chapter 16 (Calculation of Historical volatility), we have calculated daily volatility and annual volatility. Hope Annual volatility is historical volatility. What is meaning of implied volatility?
Thanks in advance,
Vidyadhan Gedam
Have explained the difference between all these types of volatility in the volatility chapter. Request you to please look at that.
Hi Karthik,
Another amazing module. Thanks for all of this. I have a question about the price in options. From my understanding, the premium of an option is completely driven by the option Greeks. At any point in time, an option will have a price which is only based on the Greeks, which themselves are based on the Underlying. But when I try to trade in options, there’s a bidding process associated with options just like stocks. How does this work?
1) Is it similar to stocks, as in the trade happens at a price agreed upon by both seller and the buyer?
2) If yes, how does the options Greeks come into the picture here? The options can theoretically trade in total contrast with the underlying.
3) Or, is the price completely determined by the Greeks and the trade happens at a point where both the seller and the buyer agree with the price determined by the Greeks?
4) If the previous point is true, is it possible to check the current price of an option as determined by the Greeks based on the Underlying’s value at that point in Kite or NSEIndia websites?? On both websites, I only see the LTP of an option listed and that could be very different from the current value for illiquid options.
Thanks,
Andrew
Andrew, any tradeable instrument, including the option premium will have a bid and ask. This is a key feature which makes the instrument tradable.
1) Yes
2) The greeks dictate what is the fair price for the options to trade. This sets the tone in the market
3) Mix of both
4) YOu can check the current market price and compare that with the fair price as derived by the B&S calculator
Thanks for the reply. That clears things up. Wish I had discovered Zerodha and Zerodha Varsity sooner :).
Thanks,
Andrew
Better late than never 🙂
Hello Karthik,
This has been the most complex module so far. I think I need to read it 1-2 more times to understand it correctly. I will probably completely stay away from Options trading until I become good in TA or FA first. 🙂
Just one question. Are M2M requirement applies when you are square off a long call option?
Suppose I took a long call position and later square it with a short call position. From my understanding, my P/L are fixed now irrespective of where the market goes. Do I still have to maintain the updated M2M balance every day?
Unlike futures, there is no M2M with options. If the short position goes against you, then the margins are increased.
I am not sure I understood you correctly. I took a long call position and later a short call position.
Now if margin increases in future and I don’t answer the margin call, what would happen?
Irrespective of the positions, if you have a margin situation, you need to bring in funds, else the position will be squared off.
But as you see in my example, it’s already squared off?
Like everyone here, I think I would need a couple more tries to fully absorb this module 🙂
Anyway, i read a few queries here on quarterly results and volatility. Is there a platform elsewhere or even in Sensibul perhaps, where I can check the historical volatilities on a day basis?
Thanks
I think it should be available on Sensibull, can u please check once?
Hi, Is the risk in buying a call or put option limited to the premium paid under all circumstances?
I bought Banknifty May 19300 CE @150, later it fell down to 100. I saw my P&L shows -21000.
But my realised profit does not show it. I thought may be my loss won’t be -21000 bcz it’s just limited to the premium I paid. Next morning I find on my console that it had been deducted (-21000). So I’m still confused why do they write everywhere that buying call option has limited risk but unlimited probability of profit.
Yes, when you buy an option, your risk is limited to the premium paid. If you paid 150 for bank nifty, the premium is 3K, considering the lot size is 20. So I have a feeling you’ve mixed some other trade here. Please check the contract note (available on console) for more clarity.
Hi Karthik,
I must admit, the entire module is wonderfully explained. brings out concepts very clearly.
I, however, initiated a trade sometime back.. shorted Nifty 9000 CE July 20 expiry for 480..two lots…has also put an order to sell put at a slightly higher price than the market price, that did not materialise. now it is at 700… So I am stuck with this trade with about 30000 loss..
planning to book my loss now.. what i should have done or can do now to minimise losses?
Thanks
Prashant, why did you write an ITM CE? You should not be writing these calls right unless you have a very compelling reason. We have discussed this in this module in several places 🙂
You can hedge your position to cut losses, but I’m afraid it may just end up complicating this further for you.
Hi Sir,
This is regarding index options.
I would like to know what happens to the sold options that go deep in the money. Is it true that we cant find sellers to square off the position and book the loss. And what if we let the sold deep in the money option expire? what are the charges?
If it goes deep ITM and you are unable to square off the position leading to expiry, then it will get settled by the exchange.
Dear Sir,
Quarterly results/Volatility based strategies are giving good results.
Now, I am studying the SGX Nifty from 6:30 am to 8:45 am. I have write the Nifty against the trend of SGX Nifty at 8:45 am. For example if SGX is 50 points up, i write put. And when Nifty starts trading on Zerodha at 9:00 am, i squared off the trade eating up the difference in premium.
This all I have done on Sensibul Virtual trade. My request to you sir, please tell us is it possible to execute the same trade in Zerodha. Means i write the trade before nifty trading on Zerodha (8:45 am). Trade will be executed once trading start (9:00 am) as per trend in SGX nifty. Square off will be done at 9:10 am.
Thanks in advance.
Vidyadhan Gedam
Yes, you can place an AMO order for this, check this – https://support.zerodha.com/category/trading-and-markets/kite-web-and-mobile/articles/what-is-amo-and-when-can-we-place-it
Market opens at 9:15 AM, not 9:00 AM.
Sir,
Any good book on hedging options?
Thanks in advance,
Vidyadhan Gedam
Cant think of one.
Hello sir
Your content in varsity is soooo good.
It will be useful for the new traders if you write an article on weekly option trading strategy, what type of strategy should be used on a particular day of the week. It will be more useful if your relate technical analysis with it…
Thank you
Thanks Kannan. This is a good suggestion, let me see what best I can do with this. Thanks.
hi karthik
in ceat example u will sell call but u said u wil not take naked postion
how will u hedge it .
These were case studies from real traders, so it was his decision for a naked trade 🙂
hi karthik.
naked trades are risky who bhi stock main .
how u manage this trade if same situation arises to u .
i want to know ur thought process 🙂
I agree, besides the margins are also higher for naked trades. I’d rather prefer a directional spread like a bull call spread or a bear put spread.
hi karthik
suppose i have sold 10000 nifty at 9.15am at 100 premium .theta is showing 20 rs in the morning (9.15 am).
when i will get this benefit of theta if i keep other greeks constant and spot value also.
1.till 3.30 (same day) or
2.i have to hold my position overnight till 9.15 am next day
theta work(decay) i want to know .when i will get 20 rs same day or next day morning
Ankit, although theta is a continuous variable just like delta and vega, the effect of theta is high when it gets closer to expiry. The theta effect is the best experienced when you hold the position overnight. But do remember, there are other factors acting on the premium, not just the theta.
hi karthik.
i know theta effect in overnight .ur right .
same day process i want to know .
if i want to take a position on wednesday or thursday .
plz clarify (theta work(decay) i want to know .when i will get 20 rs same day or next day morning)
hi karthik.
i know theta effect in overnight .ur right .
same day process i want to know .
if i want to take a position on wednesday or thursday .
plz clarify .
Dear Karthik,
While trading options, I generally follow the below given methodology:
1. MACD (12,26,9) is followed to identify direction.
2. If MACD crosses signal, consider as Buy. And Vice Versa.
3. At this point, check RSI. I have considered 35 and 65 as limits.
4. If within the limits, buy accordingly.
5. Select strike based on the number of days left to expiry.
6. Sell till the trend lasts or whenever there is a reversal observed.
It works around 40%. Please let me know if this is a correct method, and if any fine tuning / overhaul is required.
Satish, I’d be a bit hesitant to lead my analysis with indicators. I’d rather use candlesticks to trigger buy sell ideas, the indicator should be secondary. So I’d suggest you look at candlesticks as your primary driver.
hi karthik
can u please tell me what will happen if I short all weekly call nifty options and long monthly call nifty options.
Do check Sensibull, Nikhil. You can put these strikes and see how the payoff works – https://sensibull.com/index.html
Dear Sir,
Lots of learning from your reaching on Zerodha Varsity. On this auspicious day of Guru Purnima, I want to say, thank a lot, to you and your team for this wonderful teaching.
Vidyadhan Gedam
Thanks for the kind wishes, means a lot to us 🙂
Dear Sir,
Asking very basic question.
Span- 1,27,497
Exposure main -15,911
Premium receivable -25,241
Total margin -1,43,408
Which one is considered as amount to be transferred in my Zerodha account to write this naked trade.
Total margin is what you need to look at.
Dear Sir,
Based on SGX Nifty follow up and Nifty pre opening data, if both shows similar trend which trade should I take, write or buy.
this trade I will take in preopening session and exit at 9.15 am.
Humble request to explain what spot loss to be taken with example.
Thanx in advance,
Vidyadhan Gedam
Buy or sell depends on the trend itself right? Also, you cannot place an order in pre-open and close at the open. Basically your order will go through at market open.
There is a high probability that I would place market orders at the time of exit, given this I want to ensure that the loss due to impact cost is minimized. ATM options have lesser impact cost, therefore it was a natural choice.
Please elaborate Atm have less impact cost.
Near month ATMs have high liquidity, tight spread, hence lesser impact cost while placing market orders.
Hello Karthik sir. God bless you!!!.Finished reading Opions Theory module.Excellent material and your explanations are spot on.
I have few doubts , which I kindly request you to clarify.
As of Jul 03, Nifty is at 10607. Expiry Date: 16th July 2020
As per NSE website:
Im trading NIFTY.I have values from NSE website below:
Its Annual Volatility is mentioned as 36.32
Its Daily Volatility is mentioned as 1.90
For a 10650 call option, its implied volatlity is given as 16.84.The premium is 80.64.
I have calculated Hist . Volatility for next 10 days using SD* Sqrt(10), which comes to 11.02%(See calculation below)
Based on the Nifty calculation you have done , I calculated the Nifty values by taking data from Jan 1 2019 till July 3 , 2020 (1.5 year data)
I am publishing the values:
Average: -0.05%(Daily),-0.5%(10 Days)
SD(Volatility) :2.01%, 11.02%(10 Days)
Range of Nifty for 1 SD: 10004 to 11359 (Nifty Range for 10 Days)
Range of Nifty for 2 SD: 9389 to 12104 (Nifty Range for 10 Days)
1. Since the implied volatility of 16.84 of today(July 3rd) is high compared of to the Hist Volatility 11.02%(Based on 1.5 year data),what do we infer?. Should I buy the call option for 10650 strike price or not ?.Assume market is bullish.Also the difference between IV and Hist volatlity is narrow.
2.After 2 days , if the implied volatility of 10650 strike comes to say 40%, can I safely refrain from buying the call option as the Hist volatility is still at 11.02%(May be neglibigibe change as I include June 3 and June 4 values in Hist volatility calculation.
3.Assume I have bought the 10650 call option.Tell me how to calculate Stop loss.Entry value is 10607.Daily Volatility as per NSE is gven as 1.90%.Can I calculate stop loss using 10607-(19 % of 10607) for 10 days to expiry.?.
4.Can I come up with strike values ranging from 10004 to 11359, which is 1 SD or upto 2 SD(12104).Does this nifty ranges factor the volatility for 10 day period in approximation, since we are using Hist Volatility(SD) in our calculation.
5.Stop Loss Market Order – After calculating stop loss ,which comes to,say at less than 2% of the premium value,for SL-Market order to get executed, I should put a Trigger price say 10550 and sell.No matter what ,my order hits the stop loss ,as it reaches the Trigger price and order gets executed based on volatility, and at a worst case get closed to 10500.Tell me if my understanding of the concept is correct or not.
1) Yes, but 5 years data is quite a bit, maybe you should take the last 2 years instead. Anyway, since IV is high compared to HV, you should look at selling opportunities
2) No. You need to look at HV as a reference value. If IV is greater than HV, expect it to cool off and if HV is lower than the IV, then expect the IV to increase
3) The SL and target should be based on your analysis of the underlying
4) Yes, I’m assuming this is to sell options right?
5) As I mentioned, the SL and Tgt should be based on the underlying movement
Hi Karthik sir. My doubts are continued here…
1.How do I know if the premium for a call strike is cheap, nominal or costly, in general and also by knowing about volatlity.Is it just as plain as comparing with the Hist volatility to come to conclusions.
2.You have mentioned in your chapters that a call buyer should wait for the volatlity to increase.Leaving important announcements, Quarterly results, RBI Policy,What are all the parameters to be looked into for Volatility, so that I can safely say that the volatility is about to increase/Decrease or remain constant
3.Also tell me specific news to look out for.I saw you talked about Principal component analysis where you talked about bringing News, results into numerical value to factor the decision of Buying/Selling a call/Put option. How to determine the same and arrive at a safe decision.
4.Assume Nifty spot on July 5 is at 10600.Strike is at 10650.Time value is 50.If Theta is say 0.5 for a call option , does it mean that the call option will lose 0.5 points for this strike for July 5.Assume we have 5 days to expiry.Tell me how to put Theta into perspective.
1) Run the B&S calculator to estimate what is the likely fair value of the option. This will give you a perspective on how cheap or expensive the option is
2) Market events drive volatility up, otherwise, there are no key drivers to move the volatility. Use HV to compare with IV
3) I’m not sure, I’ve not really used PCA, so can’t comment 🙂
4) Yes, all else equal, the premium will lose to the extent of the theta.
Hi Karthik sir. Still My doubts are continued here…Kindly respond to all my doubts sir !!!
1.Assume Vega as 0.15.Can we say that a 1 percentage change in Implied Volatlity, the vega moves by 0.15 points.But again , if my strike price is OTM or ATM, does vega move faster, as I saw in one of the comments that Vega moves faster in OTM or ATM.Please explain.
2. How to put the Vega value into perspective for deciding strike prices.How can i compare Vega value with Implied volatility or Hist Volatility for my decsion making for buying or selling call strikes.
3.How to factor Open interest while buying /Selling options.If I see more numbers in call,does it mean the market is bearish or if I see more numbers in put, does it mean the market trend is bullish.How to decide srike prices based on the same.
4.In a weekly Nify contract,on Day 1, volatility will be higher and will eventually decrease as we near expiry Day 7.Im at the money (ATM) on Day 7 , The gamma value of ATM options shoot up drastically as we approach expiry.Vega for ATM is the highest in terms of value.But from Day 5, Theta will come into full effect and will reduce my premium. How do we balance out and take positions, as we witness opposing forces in full action.
5.If you want to know what is the expected monthly volatility of Nifty based on VIX of 16.8025, you should divide 16.8025 by square root of 12 (T = 12, 12 30 day terms in 1 year). So the expected volatility of Nifty using VIX for the next 1 month = 16.8025/3.464 = 4.85%. Is this correct.?If yes, can how does 12 comes as Time period , when we have 22 business days in a month.
6.How to bring India VIX value into perspective for choosing strike prices. Should it be compared with IV of ATM option or with Hist volatlity for any decision making.
7.Is STT or any other charges applicable except brokerage, if I dont wait for options to expiry and square off my positions before expiry.
1) Yes, vega moves to the extent of change in IV. IV has a different impact on the different strikes along with time to expiry. It is like a 3-dimensional thing 🙂
2) Not much of use for strike selection but you can use this to figure if you should be a buyer/seller of an option
3) You need to combine the price movement of the underlying + volume + OI to get a sense of the direction. OI on its own is not much of use (like the volume)
4) The same thing is true with monthly options, just that the timelines are different. You need to get to a position to figure which of these greeks have a dominant force
5) Yeah, divide with Sqrt of time will get you the answer. T can be any desired time frame
6) Use it as a proxy for market volatility
7) Yes, check the brokerage calculator for this.
Dear Sir,
How to put strategies,i.e 2 or 3 legs at the same time, just like Sensibul in AMO trade.
Thanks in advance.
Vidyadhan Gedam
You will have to place it one after another.
Hi Karthik sir. Thanks for your quick responses on my queries.
I have few queries based on your responses.
1.Assume I have bought the 10650 call option.Tell me how to calculate Stop loss.Entry value is 10607.Daily Volatility as per NSE is gven as 1.90%.
Can I calculate stop loss using 10607-(6 % of 10607) for 10 days to expiry.?.Here Im trying to buy the call option,as you were asking me about this in your response.
Im thinking that Nifty would go high.So for the downside can I keep 6%( 1.9% *Sqrt(10) – 10 days to expiry)
2.In my previous post, after calculating Nifty for 10 days using Hist volatility , Nifty comes to 10004 to 11359 for 1 SD and upto 12104 for 2 SD.
can I use 1 SD or 2 SD Nifty range for both call/Put option buying & Selling correct?.
3.Based on your response to “Run the B&S calculator to estimate what is the likely fair value of the option”
Which value should I look for (Like Delta, Theta , Vega) to get a perspective on how cheap or expensive the option is?.
Tell me a approximate benchmark values for greeks to look for, while buying call/put option.Also values for selling?.
4.If I know the Time value of premium is say 75, as there is 10 days for expiry and I know Theta value as 0.9.How can I
co-relate Time value and Theta value to decide if I should buy or sell a Call or put option.
Also ,Is it just something like the expected premium of 75 is to be reduced by 0.9, if all other greeks are equal.
5.How frequent should I check Options greeks , If I need to initiate a option trade to get perspectives.Is it something like I wait for a predefined time or should I check the greeks value twice in say 30 minute interval and start the trade.
6.Tell me if the STT calculation is correct.I buy 10500 Nifty call option at 60 on Day 1 with 75 lot size.
On Day 3, the premium is 100 and I choose to square off my position by selling the call option, which I bought earlier on Day 1.
My Net Profit -> 40*75 – 0.05%(60*75) – Brokerage.
7.For Technical analysis for both Nifty and stock options, can I use moving averages, Bollinger bands,
ATR., Candlestick- 10/15 min.Please suggest me a free website to look at these detals as many are charging
for “seconds” based charts on a live trade.
8.Is Hedging on Options, really nccessary to minimize my risk on options trade,as there are too many greeks on play.Can i not minimize my trade risk by just using a Stop loss market order.As by Hedging my cost of trade goes up.I need your take on this?.Do you use Hedging strategies to best possibltes in your trades sir?
I have no words to Thank you sir !!!. You are amazing.
Do you have any Youtube channel to subscribe.?
Kindly requesting to post some live trading options with sound reasoning covering all possible scenarios for better insights.Else post some recent trades you have done with reasoning.Thanks a ton !!!
1) Yes, that is perfectly valid wherein you take the Sqrt of time multiplied with volatility.
2) Yes, but 2SD is safer
3) You need to look at the option price itself. There is no benchmark for greeks. This is old post, but do check this – https://zerodha.com/z-connect/queries/stock-and-fo-queries/option-greeks/how-to-use-the-option-calculator
4) As a rule of thumb, shorter the time to expiry, higher is the effect of theta, hence avoid buying options. Longer the time to e expiry, lower the effect of theta, hence you can consider buying option
5) End of day is good enough, but I do know traders who track this live (with their own systems to track live greeks)
6) You can double the values here – https://zerodha.com/brokerage-calculator#tab-equities
7) Yes, but don’t do TA on option premium charts
8) Sometimes it helps, especially when the hedge is backed into the option strategy itself, like the iron condor
Here is Zerodha’s youtube channel – https://www.youtube.com/channel/UC59YUBhNLMkS2Q8NBWBGHAA
I’m not trading now as we are not permitted to trade (company policy).
Hi Karthik,
With compulsory physical settlement of Stocks upon expiration of Options, is it right to say that most of options trading has been practically reduced to trading changes in price of option premiums rather than aiming for returns on the day of expiry ?
Isn’t it true that the costs associated with physical delivery ( brokerage and taxes) and risks of short delivery are too high for retail traders ?
Regards.
That has always been the case, even before physical delivery kicked in 🙂
hi karthik .
according to you which is the most powerfull greek which can bully other greeks (jiska effect sabse zyada padega premium par if it changes ).with respective to
1.option buyer
2.option seller
plz provide a reason for ans .thanks
Each greek has its own unique power, cant really isolate these greeks.
hi karthik ,
as u are long term investor and ur experience is huge in markets.plz give an approx view where nifty will be in (index investing i want to do )
1.2030
2.2040
3.2050
No one ever can predict that 🙂
Hello Karthik,
I want to share my small success based on what I learned here.
So yesterday (Friday) was earning result day for Britannia. I was bullish for Britannia considering everyone was hoarding and eating a lot of snacks (esp biscuits) during the lockdown.
The share was pretty down for the week, so I bought 2 lots of CE options @43.50 during morning hours on Thursday. By 3’o clock on the same day, my options were worth around @120.
I was just dabbling with options so it was a very small trade but the results were fascinating.
Brilliant and thanks for letting me know 🙂
In fact, this is a better approach to trade where you add a fundamental logic and execute the trade using F&O. Good luck!
hi karthik.
i have taken a position on 17 july 2020
nifty 27 aug 2020 11700 = 65
nifty 27 aug 2020 11900 = 33.30
but on monday closing 20 july 2020 (nifty make a up move and vix also increased)
nifty 27 aug 2020 11700 = 65.05
nifty 27 aug 2020 11900 = 40.65
i want to know 11700 ce premium not moved but 11900 premium increased
wat is the reason behind it .as 10700 is near to atm and 11900 is far from atm compared to 10700
wat happen in this case .plz clarify
This can be attributed to change volatility -https://zerodha.com/varsity/chapter/vega/ , do read this chapter.
hi karthik .
11700 sold
11900 bought
but vega ka effect zyada hoga 11700 ce par in comparison to 11900
because 11700 is near to atm
That’s right Ankit. Besides, this is 3 dimensional when you look at it from the perspective of time to expiry.
Dear Sir,
Pls let us know, any mathematical calculation to find out, what is the value of limit order in AMO.
Suppose today NIFTY 11600 is trading at 6.65 with 23 July expiry. I want to put limit order to capture maximun primium I.e at what price it will open tomorrow. How to calculate LIMIT PRICE for this AMO order?
Thanx in advance
Vidyadhan Gedam
I dont think one can calculate this.
hi karthik
That’s right Ankit. Besides, this is 3 dimensional when you look at it from the perspective of time to expiry.
but both sold and bought calls are from same expiry (aug monthly )
tab bhi aisa kyu reflect hua .
Does not matter, time to expiry still has the same effect.
Dear Sir,
Now 11800 PE , 23 JULY EXPIRY available at around 600/- should I sell PE now. Definately it will not reach there. Ofcourse if required I will put stop loss.
Pls guide.
Also sir, any live discussion forum where you guide us.
Thanks in advance.
Vidyadhan Gedam
I’m really not sure, cant comment on individual positions 🙂
Sorry sir,
Above data is wrong. I was looking for 10800
Dear Sir,
Yesterday trade.
Sell NIFTY PE (23july) 11900 @ 12₹
Exit @7₹
Thanks
Vidyadhan Gedam
Good luck!
Dear Sir,
Wow what a day today.
SELL NIFTY 11200 PE at around 3:00 with premium ₹10….. Pocketing complete premium of 10 points in 15 minutes.
Thanks,
Vidyadhan Gedam
Happy trading!
Dear Sir,
Maruti results are on 29 July 2020.
I want to use theory of volatility and will write the call and put options on 26 July 2020 (premiums 143/149 and IV 46/48 with strike price 6000 and expiry on 30th July).
Sir I have 2 queries:-
1. Last time I failed in putting limit orders. i.e put order executed and call other not. Should I place both market orders? Reasoning will be helpful.
2. What happens if I choose next month expiry means 27 August 2020.
Premiums call/put :-235/382
IV call/put :-36/48 lower in call option than last month. Nearly same for put.
Thanks in advance,
Vidyadhan Gedam
1) Limit orders only, no market orders for stock options anyway.
2) The IVs behave differently for next month options and you may not achieve optimal results. If you agenda is to trade on volatility, then I’d suggest you stick to current month options.
Hi Karthik,
i have a doubt regarding the nature and utility of derivatives by a trader.
Both Futures and Options contract expire at a certain date. However futures can be used as a long term instrument by a trader if he sells his contract just before expiry and buys a new contract with next month’s expiry.
But what about options? By their very nature, they appear to be short term instruments with a maximum period of 1 month (equity options). Or is there any way that, like futures, the positions can be carry forwarded to next month ? (in a simple sell this month’s options contract and buy next month’s contract).
Please shed some light on this simple but fundamental question.
Thanks
It is not restricted to just futures. Both futures and options contract can be rolled over, Sharan.
Sir,
Both RBI Policy Announcement and Infosys Q2 result announcement examples were based on Volatility decrease due to result announcement. 3 Questions –
1. RBI example trade was closed before the Announcement – Shouldn’t the volatility still be high during that point as the announcement was yet to be made?
2. In Infosys example, the trade was closed just after the Announcement was made. So does that mean that volatility falls suddenly once the results are out or does it fall gradually?
3. Suppose I want to go long on Infosys after the positive announcement (I expect share price to go up in the upcoming days) but I also want to be shielded against decrease in premium value due to decrease in volatility after result. Should I go long – Immediately after result or after a few hours or the day after?
Regards
Hi Karthik,
I think my question got missed (Right Above this Comment).
Anyways, I’ll just quickly ask it here 🙂
How does the decrease in volatility due to news announcement work? Is the fall in volatility Sudden or Gradual? And when does it happen – Just before the news announcement (RBI example) or Just After the news announcement (Infosys Q2 result example) or gradually sometime after the announcement is made?
Regards
Think about the family of the lady who has gone into labour. Their hearts would be beating fast, eager to see the Doctor come out of the OT to say that all went well and the lady delivered a healthy baby right? On then their heartbeat would cool off. Likewise, in markets. Your heartbeats is like market volatility, its elevated right up to the event and cools off as soon as the outcome of the event hits the street (most of the cases). In case the outcome has a totally random outcome, the volatility shoots up again.
Dear Sir,
GM.
Would you please explain CASH SECURED PUT SELLING in detail please.
Thanx in advance,
Vidyadhan Gedam
These are the same as covered calls. Have discussed these in the comments. Request you to check through.
Hi Sir,
If i believe a stock to be rangebound for a month, and in order to minimise my risk, and also be hedged (plainly speaking) .. i decide to sell 1deep OTM call and 1 deep OTM put respectively.
So, i have actually gone ahead and done that this august expiry, and it’s my first time, just trying out things and trying to learn. The thing is i was wondering, given the scenario and my assumption of price staying in that particular range, is it better to sell the options in the beginning of the expiry or atleast mid way ? I don’t think margin money would differ that much, right?
A little practical insight please.
Aditya, if you expect the price to stay in a range, then its absolutely ok to sell CE and PE. I’d prefer to sell it halfway through than the start of the series, its just my comfort level. No difference in margin though.
Hi Kartik,
I clicked on reply button, but I don;t know if this is going to be a new comment or not.. Anyway, so, what exactly is the incentive of writing at the start of the expiry? the IV and Theta?
The only incentive to write at the start of the series = higher premium to pocket 🙂
Hi Karthik,
Thanks for the post.
In section 23.3 you gave the example of how volatility decreases as we approach the announcement time.
My doubt is why the volatility decreases?
Shouldn’t the volatility decrease only after the announcement when the result is known?
The element of surprise should be the same whether 5 min before the announcement or 1 day before.
Thanks
-Saood
That is true, the drop in vol is not significant, but just enough to give you a quick exit.
Sir while using black and scholes formula to calculate option greeks, which implies volatility I have to apply..either from nse option chain data or the india box data…
2.how to interpret volatility rise while trading intraday…I always prefer to buy call or put only at OTM OPTIONS… How to identify the volatility
value on the particular time in a day trading..
1) NSE’s is good enough
2) If volatility is expected to increase = good for long options, if volatility is expected to decreases, good for short option positions.
hi karthik
in covered call if our cash holding is not equal to lot size . how to trade it .
like if i trade sbi
i have 1500 shares of sbi in cash holding
but lot size is 3000 of sbi .
In that case, it won’t be a perfect covered call, the effect of the covered call would be just restricted to half.
Dear Sir,
I sell 10900 PE of 3rd September expiry.
Sell premium = 50 Rs
Current premium = 95 Rs
While executing the trade I saw the profit probability is around 77percent.. Humble request please tell me how to adjust it if Nifty may go beyond 10900 at the expiry of 3 September.
Even this topic is already discussed, request to put light once again
Thanks in advance,
Vidyadhan Gedam
YOu have two options –
1) Buy a deep OTM PE option say 10,500
2) Average down on price (Assuming you are super bullish and expect a bounce back)
2nd option is a generally a bad idea, but works well if you get the direction right.
hello sir,
i was writing OTM call option of reliance having premium of 3.25.
lot size 505
but for writing this call zerodha is asking for a margin of 29640 , shouldnt it be 505^3.25 =1641 ?
No, to write options you need higher margins. Just like trading futures.
To put thoughts into action, he bought the 1220 (OTM) Put options by paying a premium of “Rs.45.75/- per lot”.
Shouldn’t it be Rs.45.75/- per contract or 22875(45.75*500) per lot?
Yup, premium * lot size also gives you the contract value.
hello sir ,
sir we are expecting positive quaterly results , knowing that best time to exit call positions is 1 day prior to the announcements .
but what about the best time to enter options contract ( is it 8-10 days prior to results announcements )
Usually 4-5 days prior to the event.
hello sir ,
In RBI example we closed our option position before the announcement expecting volatility to go down after announcement but the announcement hold good news , so why dont we hold options even after announcements as good announcements will bring underlying price up so delta bring options price up tooo .
The idea is to just play on the volatility and not really on the news per-say.
hello sir
in call options , margin required = price of 1 option * no of share in 1 lot .
but in same options the margin requirment shows 5/6 times higher than actual required . why ?
like , indusind bank aug 530 CE.
The margin required for selling an option is different compared to when buying (wherein you pay just the premium). So are you referring to buying or selling of options?
about buying call options ( specially if they newly become OTM to ATM , 2-3 days before expiry ) their premium requirement are 5-6 times higher then calculated .
YEs, but once you’ve bought the option, you need not have to worry about increased premium right?
Dear Karthik,
As a checklist which you had given for trading in cash, can a checklist be given for option trading.
Thanks.
No, options work a little differently. So you cannot use the same.
How is it that with ample time to expiry OTM becomes riskier?
With ample time to expiry, its not. In fact, its advisable to buy the OTM only when there is ample time to expiry.
sir, It was a great module to earn once again. However I have a doubt
1) Can we hedge in Intraday using same order type i.e Both long position and short positions are Cover orders (CO). My concern is that when I do so it shouldn’t squareoff my existing position.
2) If above statement is not possible, then should one order be CO and other be Regular order
3) After hedging, It doesn’t mind where my stop loss is, Right ? because net effect is 0. So, I can have a liberty to move my SL to account for short term market volatility. And once market resumes to move in my favor, then I can remove my hedged quantity
1) Can you illustrate with an example please? I think this will offset the position, but do illustrate with an example please
2) This may work, example will help
3) Hmm, why do you need a SL if you are hedged?
suppose, there is a strong breakout possible at a support region and price is expected to fall further. And the market conditions are such that it is favoring Downtrend. So, I trade with more quantity. However,after initiating short position, price seems to rise for a while thus exposing myself to risk (especially during intraday trades)
I don’t mind taking SL if market goes 100% against me, but in this case I supose it’s volatility. So, I was thinking of hedging to avoid losing my opportunity as well as reducing the risk.
I haven’t tried it before, so thought discussing with you. 🙂
Fair enough, give this a try and see how it goes. Two things to note –
1) Ensure at support, when you buy, the stock forms a bearish pattern
2) Don’t forget to honour the SL if the stock goes against you.
One more doubt, If a option seller sells A Call option at a premium of Rs. 100 and buys it back at 80 Rs his gain is 20, assuming lot size as 100, here profit = 2000. But just while writing CE/PE option he would be entitled to receive full premium on that.
So, will his total profit be equal to Premium received + 2000(premium gain while trading) ??
Yes, he received the full premium, but when you close the trade i.e. buy it back, you have to pay the premium right? That leaves you with the difference between the buy and sell value of the premium as your P&L.
Good Evening Sir,
Please give your opinion on vertical spread to be used on expiry day. Strike selection to be done by keeping MAX PAIN in mind.
Thanks in advance,
Vidyadhan Gedam
Vertical spreads are good when you expect some momentum in the underlying.
Dear Sir,
Momentum must be there at after 2 pm on expiry day.
From last 3 months I am writing PE or CE based on trend and strike Max Pain +/- 150 points on expiry day. Premium is around 1 at 2.0 pm goes to 40+ at 3.15. is it best strategy to buy these 2-3 strikes at around 2 pm as one may to 40 plus.
Pls guide.
Thanx in advance,
Vidyadhan Gedam
As long as it works for you. Do keep an eye on the stoploss.
What is meant by naked trading or naked options?
If you buy or sell an option, its called a naked trade. If you have a 2 legged position wherein the risk of one leg is hedged by the other, like in the bull call spread, then its called a spread.
Like you made a checklist in technical analysis chapter, is it possible for you to make one for options trading too?
It is hard to build one for options, given the complexity of these instruments.
Sir after buying a call/put option under overnight (NRML) category in the morning, by the noon if I realise to go for intraday(due to unexpected profit)and square off my position then is that possible? Is a switch to MIS possible later on? Or once entered modifications with regard to overnight Vs. intraday can’t be made?
Thanks a lot!
Thats ok, Aarti. YOu can square off the position during the day itself. No need to switch to MIS etc.
Dear Sir,
Should we get the minute by minute option premium price from any where.
This requirement is in excel sheet not on chart.
Thanks in advance.
Vidyadhan Gedam
You can get this via the Kite connect API.
Sir,
Is it paid API?
how to use?
Yup, do check this – https://kite.trade/
Dear Sir,
Where to get stock traded in options which moved with high volume and price. I want to find it at 2:00 noon.
Thanx in advance,
Vidyadhan Gedam
You can set an alert on Sentinal, check this – https://support.zerodha.com/category/trading-and-markets/sentinel/articles/how-to-edit-an-alert
Dear Sir,
Good Evening.
Using covered calls as you guide sometimes back, giving consistently 2 percent weekly returns.
I m leaving both legs on Thursday morning taking profit. Not expected more than this.
But, when I take trade on Thursday failed miserably on weekly expiry after 2:30 as market moves awkward. After Humble request to tell me if I m right to use long straddle at 2:00 pm and close the trade at 3:00 pm on expiry day?
You can, its just that you may have OI restrictions if you are trading bank Nifty.
Dear Sir,
I have tried long straddle today at 2:30 on Nifty.
BUY 18350 CE at 6
BUY 18350 PE at 16
Result is positive but humble request pls revert with reasoning.
Thanks in advance.
Vidyadhan Gedam
Markets were weak, volatility has spiked, good for both long CE and PE, hence you are profitable.
Dear Sir,
Pls ignore earlier comment.
I have tried long straddle today at 2:30 on Nifty.
BUY 18850 CE at 6
BUY 18850 PE at 16
Result is positive but humble request pls revert with reasoning.
Thanks in advance.
Vidyadhan Gedam
Same reply 🙂
Good Morning Sir,
Weekly expiry trade work yesterday also.
As you asked to concentrate on OI.
At 2:30 range shows11650 and 11700. As soon as 11650CE comes below 5 I bought it. It goes upto 25+
Thanx
Vidyadhan Gedam
Good luck, stay profitable 🙂
Hi Karthik,
How do we interpret option chain. For example how can we know option writing happening at some strikes? how to identify option writing strike so that we can take opportunity to short that particular strike. Please help me to understand the option chain
We have discussed this at length in the moneyness of options chapter here – https://zerodha.com/varsity/chapter/moneyness-of-an-option-contract/
Good evening Sir,
Happy Christmas.
Based in sensibul suggestions, whenever I want to put covered call my order get rejected due to OI restrictions. Please guide how to solve this issue.
For example
Current nifty price 13700
Expiry 24 December 2029
I want to buy 13000 PE and sell 13300 CE.
Order is getting rejected.
Thanks in advance,
Vidyadhan Gedam
These are long-dated options, not much liquidity.
Good evening Sir,
Happy Christmas.
Based in sensibul suggestions, whenever I want to put covered call my order get rejected due to OI restrictions. Please guide how to solve this issue.
For example
Current nifty price 13700
Expiry 31December 2020
I want to buy 13000 PE and sell 13300 CE.
Order is getting rejected.
Thanks in advance,
Vidyadhan Gedam
I do have following understanding.
I purchased INDEX call options then on expiry date following holds true
(1) Spot price < Strike price < Breakeven point price
Then I will loose my premium (Complete loss of premium)
(2) Strike price < Spot price < Breakeven point price
Then I will get back my full premium ( No profit / No loss)
(3) Strike price < Breakeven point price < Spot price
Then I will get money = ( Spot prioce – Strike price) * No of option units
Please let me know if my above understanding is true
Thats right. As long as the spot is higher than you make money, every other situation you lose money.
I have doubt about my point 2 above.
(2) Strike price < Spot price < Breakeven point price
Then I will get back my full premium ( No profit / No loss)
If my understanding is correct ????
This depends on time to expiry, volatility, and the speed at which the market is moving.
First of all, thanks for this module.
Here’s a issue i have..
When i calculate premium using Zerodha’s B&S calculator. There’s like almost 100 points difference in calculated value and actual trading value.
and my 2nd question is,
Even though all these option greeks are acting on option premium’s price. Aren’t the traders who ultimately decide the premium’s price?
The difference exists due to the mismatch between fair price and market price. Yes, its the traders, but their decision is after considering the greeks 🙂
Thanks for the reply,
I mean like, not everyone keeps track of Option Greeks while trading right? Even if they did, like there’s no tools to accurately tell us at what premium this option should trade at. So, there’s a chance that the Time value of a premium is a rough guess that traders make?
Whats your thought on this?
Thanks 🙂
It depends on what kind of trade you want to be 🙂
I know for a fact that large institutional traders track the greeks closely and model their option book entirely based on greeks, and I also know traders who blindly follow their gut, both these are successful.
Either which way, there is no doubt that this involves years of practice and sharpening your trading instincts.
Thank you so much, i think now im getting a hang of it 🙂
Takes a while, but keep at it. Good luck!
Hi Karthik,
“However more often than not the speed at which the Put option premium will lose value is faster than the speed at which the call option premium would gain value”
In this statement, let’s say the market is moving upwards, then the delta of calls would transition from 0.5 (ATM) to 1 (ITM). However, the delta of the puts would transition from 0.5 (ATM) to 0 (OTM).
Considering this, shouldn’t the calls gain more value than puts because the delta increases in the case of calls?
That’s right, Raghav. With the increase in the spot price, the option would gain more in terms of intrinsic value and hence the call option gains more.
Dear Sir,
I hope you are doing well.
Do you suggest when buy/writing options we should prefer spreads or naked options?
Like If I am writing weekly expiry nifty/bank nifty should I just write them as a naked option or should I write them as a spread?
Example if I write a 4 strike price away OTM call( Rs. 10) is it generally better to write it as a spread or just naked?
If I write a spread the max gain reduces to maybe 2-3 rupees which is not worth making a position in.
Depends on your risk preference, its better to write spreads if you were to ask me 🙂
Dear Sir,
So If I were to write spreads what would be the general distance between each spread on nifty for example? like 100 points, 50 points?
As it is the premium of OTM contracts are very low during the week before expiry, making that into a spread would reduce the premium to virtually nothing considering 20/lot X2(buying/selling) plus other fees.
Try setting up the spread when they’re at least 15 days to expiry, in that way you get to collect a larger premium. The general distance depends on the strategy, for something like a standard bull call spread, 100 – 200 is a good enough.
Dear Sir,
You do not really talk about rho in this entire module? Is there a reason for this sir?
It’s really informative. Thanks for this Sir. I’m 19 years old,currently pursuing engineering in Computer Science . Found this very interesting. I’m really interested a lot in mathematics especially calculus. Is this a right time for me to trade in options? I do hold some delivery stocks tho… But i find that options trading requires a lot of practice.
Anyways thanks for this wonderful content…
Thats right, Tushar. Like anything else, Options require a lot of practice.
Hello sir
In the Infosys Q2 Results trade we were expecting the volatility to increase and hence the premiums would also increase so does it make sense to buy options beforehand and selling them when the volatility increases
If you expect the volatility to increase going forward then yes, makes sense to buy.
Dear Sir,
Do you recommend looking at liquid option charts?
Or not use liquid option charts?
Is there is a way for one to look at previous Future and Option charts as after expiry charts disappear?
You can look at the futures chart or the spot chart. I’m not a big fan of the option chart.
Hello Sir,
Hope all is good.
How exactly should one make entries in buying stock options? Most stock options are not liquid so it is very difficult to purchase them.
Using technical analysis and certain fundamental indicators?
Do we generally focus on nifty/bank nifty cause they are liquid?
Do you suggest holding options overnight as most are not liquid so very good chance you would not be able to square of close to expiry?
Himanshu, Index and top 10 stock options are fairly liquid, squaring off is not an issue even if you hold them overnight.
Dear Sir,
Using the 2 SD strategy I have decided to write 15400 CE and 14300 PE for March 25 respectively pocketing 11 and 9 premium. This is a short strangle strategy
What exactly is my stop loss?
Lets say I had written a naked call option at 15400. The nifty trading at 14600 rises to 15000. I had written it at 15400 for a premium is 11 now the premium is 22. What should I do?
Can you please advise me?
You can keep the SL based on 1SD reversion on the spot or just keep a Rupee value on the premium as your SL. For example, I’ve written at 11, I’ll get out at 5.
Dear Sir,
I’m not able to understand what you have written.
If you have sold an option at 11 and exit the position at 5 you make a profit of 6 points.
In the example I mentioned,
If I wrote the option at 15400 and nifty suddenly rises from 14600 to 15000. The 15400 option will substantially increase putting me at a loss.
When do I exit such a trade to quantify a risk vs reward?
If I have written 1 SD, do I keep a stop loss of 0.5 SD??
Please assist me in this matter if possible?
Yes, Jitendra. You can exit at 0.5SD or you can even keep a Rupee value as SL. For example, you wrote the option at say 11, then the maximum loss you are willing to take on this is 5. So your SL is 11-5 = 6. So when the premium drops to 6, you exit.
Of course, at 6, you need to estimate the risk and reward and see if the entire trade makes sense. For example, if your target is 20, then for 5 Rupee risk, you are expecting a return of 20, which is not bad.
Dear Sir,
If I have written an option at 11, I would like the option price to decrease right?
If the option decreases by 5 points then it is better for me.
Do you mean if the option increases by 5 points to 16 then I would book a stop loss?
I’m still confused about writing 1SD, 2 SD away. It seems good on paper, but not sure how to book a stop loss if the trade goes against me.
Sorry to harass you in this matter sir, if you could please explain if possible?
Oh yes, sorry about that. It has to go up for the SL to trigger 🙂
Hello Sir,
Lets say for example I think Nippon India will not go over 370 levels. I decide to write a call option for Rs.10.
Nippon drops to 320 ish while the call is worth Rs. 2-3.
There are now 2-3 days for expiry and the stock moves suddenly to 350-355 levels. Obviously, the premium rises to 5-6.
Do I close my position or do I ride this initial wave and hope that till expiry Nippon does not cross over 370.
This really depends on how strong the conviction is is 🙂 Btw this is quite common with option writing, one has to develop the gut to hold through the positions, but yes, the logic and conviction on your trade thesis should be strong.
Hi Sir,
Can you please explain how I should go about keeping stop losses for my option strategies?
If I write an option, how does one go about creating a stop loss.
Even I use a option strategy like the ones you have mentioned in the next module, what exactly needs to be done to keep a stop loss.
Using a fixed monetary stop loss does not really make sense as each case is different. So could you please explain how one would go about this?
Himesh, there are multiple ways –
1) Absolute decline in premium value i.e. you write an option at 10, wait for it to decline till 5
2) Fixed percentage SL i.e. your SL is fixed at 10% below the entry value
3) % volatility based – have explained this in one of the chapters using Bharthi Airtel as an example
4) Entry and exit strictly based on the underlying
Or you can use the methods described in the risk management modules as well.
Hello Sir,
Using an absolute decline or fixed SL does not make sense as it varies from stock to stock. This is an extremely rigid method.
Using volatility based makes sense, so should one use Bollinger bands or ATR or both?? I could write options further than 2 SD and use the ATR to roughly predict the daily movement?
How can you use the entry/exit based on the underlying?
Thank you for your prompt reply.
Yes,
8% profit. Something like that.
Sir; I have certain question, I need your help with .
1. Are GTT orders allowed for F&O in stocks or it is only available for index ?
2. And if my GTT order gets filled then it can be treated as a normal position, am i correct ? or whether it is neccesary to close my position by using GTT order only ?
3. Can i set the trigger price higher then the LTP for buying and option ? for example suppose HDFC is currently trading at 1580(CMP ); and call option for 1580 strike is trading at 90 ( LTP ); and id i want to buy this call option only if the trend continues in the upward direction from the current levels or else not ; then can i set my TRIGGER PRICE at 92 ( which is higher then the LTP ) and my LIMIT PRICE at 93 and place my GTT order?
4. And please clear me that if i set TRIGGER higher then the LTP; the order will not get executed unless the LTP breaches above the TRIGGER; it could happen that my order gets executed at current LTP as my TRIGGER is higher and I’am getting a better price for my order at current LTP ?
1) Available for both, please check this – https://zerodha.com/z-connect/tradezerodha/kite/introducing-gtt-good-till-triggered-orders
2) It hits the market as a limit order
3) Yes (but GTT does not check for trend etc)
Sir, If a place a GTT order for buying an option : my order will be initiated only and only after the LTP breaches the TRIGGER, in all cases whether the TRIGGER is higher or lower then the current LTP am i correct ?
I’am asking this because as per my strategy I want to set the TRIGGER higher then the current LTP for buying an option; and I have a doubt that this order could initiate directlly ( without breaching the trigger ) , as Iam getting better price at current LTP then my TRIGGER PRICE. it is not so correct; because the only purpose of TRIGGER is to initiate the order only after the TRIGGER IS breached right ?
Sir, please clear my doubts, because my doubts which you have solved for me in the past are already making money for me and this too will add to it .
This will go as a Limit anyway, right? So it will get executed at the price specified. Why don’t you place a GTT for 1 share of a stock which is trading sub 100 to experiment this?
THANK YOU SIR, I’ll try it out.
Good luck, Lionel.
When you say that, However more often than not the speed at which the Put option premium will lose value is faster than the speed at which the call option premium would gain value’.’
Request you to please elaborate the exact reason for the same.
Premium reacts faster to volatility, hence with volatility crashing, the put premium will erode faster and the gain in premium with increase in delta will be slower.
Karthik you explain everything amazingly,
just read the chapters and got the concepts very clear, but I have one confusion
in the 22nd ch you told that if there are about 15-25 days left for the expiry it is better to buy ITM option but in the 23rd ch in the Infosys trade based on fundamental analysis, you tell that since there is a more time(somewhere around 15-30 days) to expiry its better to take the OTM options.
Please help me with this
Can you please post an extract of the text from chapter 22?
Thank you very much Karthik for the clarification.
Good luck, Prathit.
Look at the 2nd chart (top right) – here the assumption is that the trade is executed in the 1st half the series, the stock is expected to move by 4%, but the target is expected to be achieved in 15 days. Except for the time frame (target to be achieved) everything else remains the same. Notice how the profitability changes, clearly buying far OTM option does not makes sense. In fact you may even lose money when you buy these OTM options (look at the profitability of 5500 strike).
Conclusion – When we in the 1st half of the expiry series, and you expect the target to be achieved over 15 days, it makes sense to buy ATM or slightly OTM options. I would not recommend buying options that are more than 1 strike away from ATM. One should certainly avoid buying far OTM options.
In the 3rd chart (bottom left) the trade is executed in the 1st half the series and target expectation (4% move) remains the same but the target time frame is different. Here the target is expected to be achieved 25 days from the time of trade execution. Clearly as we can see OTM options are not worth buying. In most of the cases one ends up losing money with OTM options. Instead what makes sense is buying ITM options.
Thats right, when you expect the target him over 15 days, then sticking to ATM or just outside ATM helps.
ive made my calculations based on what you’ve taught in the module. I just want you to go through and please tell whether my calculations are correct or not so that Im able to start my option writing.
will be thankful to you. 21 years old trying to learn new things to gain experience.
Can you outline the procedure used, Abhishek?
23.3 ( RBI news play )
Q1) Though VIX was in an uptrend, the IV of 7800 was low (20-22).
But trader wrote the option.
So far we know that go long on option when IV is low and write option when IV is high (more than 40).
Q2) We have learned that Nifty and Banknifty have high volumes, so less slippage less impact cost.
What’s ur take on these points sir?
Plz guide
Thank u
Thats right (both Q1 and Q2).
But the trader did the opposite Sir.
Thank u
bro where to find the option greeks
Hello Sir,
1) Lets say I have initiated a bear call spread for June 24 with a margin of 35K and pocketing premium of 6710.
Now during the last week my margin will increase but how did I know how much required. Does Zerodha ask me for more money on the Monday of the last week or do they do it automatically?
2) Assume I have just bought a naked otm call option which requires no margin while initiating while position, how much margin does zerodha ask me for?
You can know the margins required in the order form itself, Partha. Plus the system will notify you as well.
2) Assume I have just bought a naked otm call option which requires no margin while initiating while position, how much margin does zerodha ask me for?
YOu can check the margins here – https://zerodha.com/margin-calculator/SPAN/
Its also available on the order form in Kite.
Hello sir,
When exactly does one really need to look at Gamma? Obviously do not short naked atm options as they have the highest gamma, but otherwise when exactly do we need to worry about gamma.
Secondly, in Sensibull it says one should only worry about Gamma if you have 10+ lots. What do they mean by this?
You wont need to look beyond delta, vega, and theta. Gamma changes are very minimal, so if you have 1 or 2 lots, gamma change does not matter much. But if you have super large positions, then even a small change in gamma may have an impact on your profitability.
Hi Sir,
Thank you for your response.
Can you give an example of how gamma change affects large positions?
I guess I’ve explained this with an example in the Gamma chapter. Can you please take a look at that? Thanks.
Hi Sir,
Thank you for your response.
Can you give an example of how gamma change affects large positions?
By large positions would that be more than 10 lots?
Hello Sir,
I think you may have missed out my question.
Can you give an example of how gamma change affects large positions?
By large positions would that be more than 10 lots?
Partha, check section 13.2 – https://zerodha.com/varsity/chapter/gamma-part-2/
Hi Mr. Karthik,
Thanks very much for all the Zerodha varsity chapters. Accidentally I came across zerodha varsity & started reading. After reading all this, I reinvented my thought process to look at the market statistics, options trading & opportunities. This really gave me a new direction to my thoughts, trading & investing plans.
Earlier I used to trade like retailer, now I found the new way to put logic behind every trade I am doing & I am doing better & better now. Now I have purchased Taleb’s “Fooled by Randomness” as per your recommendation & I am very excited to read it. Will share the feedback soon.
You are the best teacher, explained everything with proper logic & explanation hence everyone can understand seamlessly with having some experience in trading.
Regards,
MD
Thanks for the kind words Mahadev. Yes, Tabeb’s books are amazing and puts things in a different perspective altogether 🙂
dear sir, I am confused after seeing few case studies of live trading in options in YouTube. From varsity knowledge base, I understand that any options buyer will not receive total premium back in any case. I see some live trading sessions, where the people are showing a demo on how to trade in options are squaring off their positions by taking an example of OTM option strike which shows a very minimal profit. How are they losing premium money even it shows a profit before reaching break even point. Even if it reaches break even point also, first we need to get our premium back then only if we are receiving more than the premium will be the profit. Is it not a funny to show a profit of 2k by spending a 5K premium? Could you clarify on this please?
Durga, it will be tough for me to comment without knowing the exact context of what these guys are doing. But you can trade options just like that, without really having to wait till expiry.
in cash market, we buy a share and if we made profit on selling, we get receive share bought amount and profit amount. where as in options market, the premium is non returned to the buyer, only the profit made will be credited right? If we purchase OTM strike and if the price goes in favorable direction of the buyer, even without reaching the breakeven point also it will show a profit amount. If we exit at that time, do we receive premium back and profit? or only profit will be received?
Its just like buying a stock. You buy an option by paying a certain premium and sell it a certain premium the difference between what you pay and receive is your profit or loss.
Hello dear karthik.
I am sharing here my own experince in OPTIONS BUYING, C.E only.
Hope it will help others also.
I started with banknifty C.E buying just 1 lot and booked 40% Profit And came out of the market.
Next day proceeded with same strategy and booked frofit. But went on for another trade. Ended up booking NET LOSS of the day. With a one day break
I again bought bank nifty C.E option, This time 4 lots. Booked frofit FOLLOWING SAME STRATEGY, But again tempted to take another trade, Booked loss.!! To compensate that loss i took another trade. I mean 3rd trade of the day, Booked more losses !!!
I stoped for one week.
I focued on increasing my knowledge in options trading.
After 1 week I again started with options buying . But this time With STOCKS. Not with banknifty.
I took a very good share which was bullish at that time. I chose C.E.Buying option in the start of the month, with MONTHLY EXPIRY, 1 lot of 2850. I booked handsome profit. Took another trade, Booked profit. And RUN AWAY FROM THE MARKET THIS TIME😬.
Then next day repeated the same thing, with same stock, Booked profit Twice. Ran away.
3rd day I increased the frequency of the trades even after booking profits, Resulted in huge losses.
So In my 20 days/12 Sessions, and 16 trades, I booked NET LOSSES of about 5% (abt 5700 rs Which i dnt think is much as compared to the learning i went through)
I am a begginer.
My experience is options trading in easy (Not easier) in Equity than in Banknifty ATLEAST for beginners when it comes to volatility related risk factors.
Its not the BUYING OPTION that make losses (As it is commonly quoted that option buyers book more losses) Its our greed that more often becomes the chief cause of our losses.
If you are deciplined and have all the fundamental knowledge of options trading, You CAN MAKE MONEY with options buying also. Of course you will make losses in the journey But with NET P/L in GREEN.
Patience is very much required. I have seen during trading session my P/L in -16000 RED and again after 1 hour in +13000 GREEN.
Hedging require you to Sell options in most of the strategies Which require more Funds in your account and not everyone can afford that. So people go for option buying despite knowing risks, Me too.
I took Naked call options in all my trades.(Perhaps we call it uncovered call).
Yes. You are right when you say we should go on to device our owbn strategies as there is no limit.
I look Mainly for Volume, O.I, Spread in premium, 20th depth, bullishness of the stock. For technical, I only use Candlesticks, Macd, Rsi and BB. to identify Range bond of spot price is of equal importance.
Yes, Not anything is more helpfull than 20th depth (And of course Smart Money concept you told) When make Entry in the trade (Atleast for)
Emotions play crucial role. If you cant bear to see -50000/Day in RED, You dnt deserve to have +100000/Day in GREEN 😎
Before i ask you new quiry, I just want to say👇 these are not my recomendations please.
You can make money in options buying even without hedging. You do it with scalping or sometime with holding/As situation demands (My individual experience, I managed to do).
But you must have basic knowledge about option trading and some technicals.
BE NOT GREEDY. This was the only factor that ruined money in my case (Atleast In 90% Cases).
Because i am a beginner and a learner. I posted what i personally experienced. I never recommend anything to anyone.
Karthik, Please comment on my strategy on the basis of your experience. Whether the tools or indicators are sufficient for a begginer to enter into a trade ? Maybe i come up with another ones on the basis of my new experiences.
And
If we enter into a trade of monthly expiry in the start of the month, OTM CALL and difference b/w the spot price and strike price is about 15 pounts. How many days should we wait if it goes againts us ? Provided there are still 19 days/14 trading sessions left ? And we are bullish about the stock.
Thank😊
Thanks so much for sharing your options experience so patiently. This will help a lot more traders to reflect back on their own journey.
Options is best understood by learning and experimenting, which is exactly what you are doing. Not all experiments will be successful, but that ok as long as you take back some lessons from it.
As far as the wait time is concerned, it really depends on a ton of other market conditions.
Good luck and happy learning 🙂
*The tools and indicators that i use are sufficients ??
Yes, but keep exploring 🙂
Sir i have a question though it was nicely explained by you but still i have a doubt on rbi policy example as i am not able to understand why it is not that much meaningful to go toward long straddle ? And why would the premium of puts will decline faster than the increment of calls premium
Its just that during events, volatility is high and expected to cool off post the event. Hence traders prefer to sell options.
Hello sir, I am a 15-year-old who has been studying finance on my own for the past year, and I have never enjoyed it so much. Thank you so much for all these amazing lessons.
Manav, happy to note that. I hope you enjoy reading the content here on Varsity 🙂
Hello dear karthik.
I hope you are doing well.
Yesterday i made 50000 rs in options buying in BANK NIFTY With only 70000 capital. Earlier 31000 and 18000 with same strategy in last week.
I took 50 trades (Buy and sell). OTM. Quantity 400. No stop loss. No hedging.I focused on 5 to 10 points. Every time i saw a profit above 1000-1500, I would exit. Of course i made some losses also but till 3 p.m, There were +56000 green in my portfolio.
Next day about 51000 plus got credited to my funds account after deduction of various charges.
What i know is there is about 123 rs total charges per trade (Buy and sell) in options trading. Are there any hidden /Toll if we take multiple trades in options ?
I mainly focused on price action using 20th depth and candle pattern. I did it when prices were moving up and down in a range bound.
Kindly comment on pros and cons of my strategy. Especially taking multiple trades.
With love.
Kaushal😇
Good to hear, and I hope your profits roll.
1) No hidden charges. You can cross-check the contract note to confirm this.
2) Pros – No overnight risk, so that a good thing
3) Cons – You may end up overtrading, especially on days when you hit 2-3 loss-making trades in a row. This may have a -ve impact on your capital.
I am bit confused regarding the last example..how his money get double
Check the price difference between the buy and sell price of the premium.
Hello sir,
These chapters are amazing, thank you for this valuable content.
I have doubt that
1)You told that you would like to short before a couple of days instead before one day when event is there, this one I did not understand because Actually volatility increases when we close to an event, so I am thinking like that if we short before 1 day of event, we can earn more premium. Can u please clarify my doubt.
2) if we keep options till expiry what will happen like are they cash settled or settlement by physical deliver?
Yes Pavan, you can keep shorting upto the event day. As and when the short positions move in your favour, you can add to your position if you’d like.
Index options are cash-settled, stock options are physically settled.
Can you please suggest some books on Options trading for beginners(books covering the topic in advanced level as well)?
Have you completed the Varsity notes on options? Including the strategies bit? If yes, I’d suggest you move ahead to read Shelden Natenberg’s book on Option pricing.
Hello Sir,
Can you explain the CTM concept??
Hello Sir,
Can you explain the CTM concept??
Can we choose if we want to exercise the ITM option or not?
I will try and put up a note on CTM.
Dear Sir,
Mind tree results on 13 October.
Strike price –4300
IV of PE = 61.34
IV of CE = 58.0
Is it best to sort now or should I wait.
Depends on what you think about the volatility 🙂
It will drop
Sir,
You have not replied. HISTORICAL VOLATILITY is 41 percentile of Mindtree. Now it is in the range of 60. Must be a good time to use straddle.
Request to revert.
Yes, provided you think 60 is high enough. That opinion, you need to develop, don’t think I can help you with that 🙂
Dear Sir,
I have taken trades on Infosys as per this article.
Results on 13th October 2021, 6pm.
1. First trade on 4 days prior to result. short ATM PE (IV =41 ) and (CE=32). Both IV shoot up. Taken loss
2. Second trade on 2 days before.. IV shoot up and loss.
Today I will see after market opening what will happen to option prices.
Now my question is, if there is big variation in IV should we buy lower IV option and sell higher IV. Both should be at ATM.
THANKS
Ah, thats unfortunate. Its best when you initiate the position just before the event i.e. in this case may be on 12th before market close. IV is expected to cool down, so buying options may not help much I guess.
Does zerodha report if any client is earning 1 lakh per day to CBI, ED, income tax?
No, we don’t, unless department official requests us for reports for a specific purpose.
Hi
If other brokerages are offering 10RS/15RS per trade…Why clients should use Zerodha….Please list few reasons
Any plans for reducing brokerage??
Thanks
You can check this – https://zerodha.com/videos/274880/why-zerodha
No plan to reduce brokerage for now.
HI
When Banks FDs deposits are giving a 4% return & VPF, PPF 6 to 7% return….why we should invest in stocks/mutual funds/ SIP’s which don’t have any guarantee return or capital may become zero
Isn’t this a starting point for greed…expecting high returns?
4 or 6% is fine in the total absence of inflation. But unfortunately, inflation is real, so you need to find avenues to grow your money. Else over time, the purchasing power of money will be lower.
in the last trade, you mentioned that the stop loss was not based on logic.
what would have been a logical approach to a stop loss here?
Something like a volatility based stoploss or a stop loss based on Support and Resistance would probably make more sense.
Hi Karthik Sir,
I Have one Question regarding Today Market Movement , As we see Today Nifty 50 has rose tó 320 points in the Morning after the Positive expectation of GDP. Now , I Want to know Why Market Fell after One Hour from its High . Sentiments of traders were Positive for Market and There was no Negative News beside . So What reasons Make tó nifty Fall all Sudden. Now , Nifty Again Positive tó 80 Points . I Was searching Reason for all Sudden Fall in Nifty , didn’t Get any Clue . I Got Reason for Rise That is GDP News but no Reason for Drop.
I wish I had an answer to that 🙂
It’s really hard to make these micro predictions in the market, Shubhika.
Hi Karthik,
Huge fan of your knowledge and thank you for providing such a great content to us.
Can you help me with option strategy where if i am already holding any stocks in my portfolio then how can we earn more income by selling options against holding.
One way is to short OTM CE option and enjoy time decay but if stock moves upwards my profit will be maximum to strike price of call option that i sold.
Any other idea you can suggest?
Thanks for the kind words, Tejas.
Covered calls is certainly one option where you sell OTM CEs and pocket the premium. Another is SLB – https://www.nseindia.com/market-data/securities-lending-and-borrowing , although not related to options.
Where do I get 5 min charts of Nifty call/put options of expiry days of last 1 year ?
I have to backtest my strategy based on intraday trading on expiry days.
I’m not sure these historical charts are available. I’d suggest you check with Sensibull once.
“Since there is ample time to expiry, a small dip in the stock price will lead to a good increase in option premium” – How is this happening? What is the logic behind the same?
It’s a combination of both time to expiry and the movement, Sivanthu.
since there is ample time to expiry, a small dip in the stock price will lead to a good increase in option premium… What is the logic behind this? Can you please explain
sir, in the example of bangalorean you concluded to buy strike that is more OTM(he bought at slightly OTM) but owing to the mindset of the trader he expected the strike to be ITM and exit the trade where it will take ample of time(say 10-20days) in that case a trader should but ITM but not OTM or ITM(you taught in previous module). how here buying OTM makes sense?
Harish, when there is more time to expiry, and you are convinced about the directional movement, then you are better off taking a slightly OTM bet.
Sir correct if i am wrong,
on 21/03/2022
nifty spot = 17300
nifty 18000 mar CE = Rs. 45
on 31/03/2022
nifty spot = 17900
nifty 18000 mar CE = rs. 150
sir if i am an option seller the premium received on the expiry date is 45*50=Rs. 2250
so sir when the premium have shoot up from 45 to 150, my loss (150-45)*50=Rs.5250
but if i keep the contract open till expiry my PROFIT would be Rs.2250 (since underlying is below 18000)
am i right sir,
thanks in advance sir 🙂
That’s right, Muthu. As an CE option seller, you get to retain the premium if the market expires at or below the strike price.
Sir and how to give government securities as collateral to option selling?
Muthu, you can give GSec and SGB as collateral for option selling.
Hello Karthik,
Excellent explanation of every concept. Could learn a lot about options.
As per my understanding we will analyse underlying stock/index, finalise the strike price based when we are trading/how far is expiry etc.
However my basic question is, should we be analysing underlying asset movement or premium movement to decide stop loss/profit booking?
Apologies if it is very basic question.
I’d suggest you look at the asset movement since premium movement is a function of the asset movement.
As explained in the two trades based on volatility without any directional view the trade was executed and was successful.However,for it to be successful the traders had to write/sell both call and put keeping in mind the risk of directional view.Does this mean that while setting up a trade with volatility we have to do the same as by doing this we are neutralizing the risk ,however if the trader had only sold a particular call or put option and market would have not favoured the respective view then losses would exist.
Guide for the same!
Thanks in advance
It all depends on how the volatility moves. When you sell options, a drop in volatility will ensure your odds of position moving to profit is higher.
Sir just wanted to thank you for these modules. They have added a new skillset for me, made me much more confident during conversations and thought process, and also has made me some good money while markets are falling. I owe it all to you, thank you so much.
Thanks for the kind words, Prabhat. Hope you continue to learn and like Varsity:)
Hi Karthik, one question – your statement – “However more often than not the speed at which the Put option premium will lose value is faster than the speed at which the call option premium would gain value”
Why does this happen? Which greek plays a role in this phenomenon, or is this something you just gave for example sake?
Fear spreads faster than greed in market, Pradeep 🙂
Could you please explain what is the meaning of slashing revenue guidance?
It means the company expects lower revenue over the next few quarters or maybe for the year.
Can you please explain me the statement in the first case study on CEAT tyres based on options theory
“since there is ample time to expiry, a small dip in the stock price will lead to a good increase in option premium”.
Spot was 1260 and strike price was 1220 – OTM option
OTM options have delta less than 0.5. Since there is ample time to expiry theta does not have its effect. If we ignore impact of volatility, the premium increase due to underlying stock price dip should be small due to low delta of OTM options.
In this case Change in stock price is Rs 16 and change in premium is 6.25 (52-45.75). So delta is 0.39 only, which is expected for OTM options
Is the statement , small dip in stock price will lead to good increase in premium correct as per theory? Am I missing something?
Thats right, Kalyan. This is true when there is ample time to expiry.
Thanks a lot
I must say this course material is one of the best and most well organized training material I cam across. Truly marvelous . Thanks for your efforts
Happy learning 🙂
I went through the option theory tutorial once and will do it again several times to get the grasp of the concepts. Before reading the tutorial, I always wondered how much profit will trader make by ‘always selling deep OTM options’. After reading this tutorial, strategy of such trader looks very naive/emotion-driven. But I am trying to find out which option greeks might go against such trader, assuming that no ‘black swan’ occurs?
All greeks have a role to play, Hardik. You cant really isolate a certain greek 🙂
Hi karthik,
I have a query please help.
1. I have seen that there is a difference in the values of greeks with differenr brokers. Why so?
2. The BMC formula is there for option pricing, so do brokers have any freedom to change any variable in the formula?
3. Who exactly calculates the values of call and put options, brokers or NSE itself?
3. In the calculation of option price, do they use futures price instead of spot price? Like do they put the interest rate = 0 and simple use the future pirce or they have to stick to the formula which asks to consider spot price only along with interest rate which is usually on the basis of RBI’s 91 days T-bill.
1) It should not be, as everything is based on the same data
2) Not really given that the B&S formula is price based
3) Market collectively decides a fair price for a given strike
Yes, you can use the futures price instead of the sport price. Thats how it works in commodities.
Hello Mr. Karthik,
Please correct me If am wrong :
i) Theta reduces the premium on a daily basis. Hence after opening premiums will get reduced once and then theta will not impact the premium.
ii) For intraday and scalping traders, the significance of theta will be low and delta and vega will be high. Gamma I am still confused, please clarify.
iii) For intraday and scalping, trading with ITMs will be more meaningful and more impactful.
1) Theta changes continuously, not on an increment basis.
2) Thats right, unless you are trading close to the expiry day. You can ignore gamma
3) I’d suggest ATMs
What are more ways to Identify the direction of the market?
Sagar, you can use either a quantitative approach, fundamentals, or technical approach.
Sir, the Infosys Pre Result case study ..of shorting call and put options of 1140 on 8th Oct 2008 for the result on 12th October 2008 are contrary to the table given in previous chapter..i am confused please enlighten me.
the table which says what strike to buy..like in 1st series of the month and second series of the month..here it is said if target is to be achieved in 5 days than buy call 2 strikes away from ATM.. contrary to this Infosys case study say sell ATM put and call 4-5 days before result to take advantage of volatility.
The volatility strategy is specific to an event, Deepak. You don’t deploy that otherwise.
Sir, is live IV chart and historical IV for all stocks and indices available anywhere for free?
Not sure, but do check with Sensibull once.
Hi sir,
In the above examples ATM options have been shorted. But based on the previous modules you had advised not to short ATM options due to very high Gama and especially close to expiry. I just wanted to know if we are making a trade based on volatility given enough time to expiry is it okay to short ATM options.
The logic was lower impact cost, especially since this is a short-term trade. Shorting ATM is generally risky unless you very clearly know what you are doing, as in this case.
Dear Karthik,
I have been learning from Varsity a lot. I have been practically analyzing the old data and have been re-inventing what you have been teaching.
Halfway through this module, I decided to enter my first trade right now as I write this on 4th May 2023 at 13:45. Nifty is at 18185. Following are my observations :
1. The VIX is at around 11.9 which also turns out to be a support level for VIX. This is somewhat the lowest value for VIX if I analyze the chart from 2019 – till date. So volatility is bound to go up a bit from here in the next 2 – 3 days.
2. Nifty is at a level where there had been a price action at this very particular level in the past.
3. The recent results of the Nifty companies were in favour of the perception that the Nifty will break this level.
4. I expect Nifty to grow by 1.2% in next 3 – 4 trading session as I believe that will be the next level where there had been a price action in the past.
5. I am in the first phase if I take May Expiry into consideration.
Based on the above points, I tried buying 18500 CE but I was prompted that it was a bit illiquid and that SEBI had some guidelines. So I bought 18400 CE now with a premium of 101. I am continuously observing 5 minute candles right now. They have been making Higher Highs and Higher Lows. But as I am about to finish writing this answer, the resistance in the 5 minute candle Nifty chart has been broken (at around 14:30).
I was sure when I would exit the position if things would have gone southward but I am still not clear of what should be my target.
1) Look at the data again, maybe ViX can continue to stay in the region for a much longer period? If that happens what happens to your trade?
2) Ok
3) Sure, but like I mentioned earlier, what if that does not happen? What happens to your trade?
4) Ok
5) Ok
SEBI has no restriction, Amit. It is a restriction/limitation at the broker level. Anyway, for the target you can keep a few % or points above your entry as a target, especially since this is your first trade.
Good luck and I hope you have a long and successful trading career 🙂
1. I thought a breakout would have caused an increase in the VIX. Though it could have varied from a small increase to a large increase depending on how strong the breakout would have been.
2. 🙂
3. I would be more cautious about this thing in the future.
4. 🙂
5. 🙂
I actually don’t know what went wrong there. I went for buying 18500 CE in the first place but my order got rejected. So I ended up buying 18400 CE.
I exited that trade with a 22% return. I exited that trade based on technical analysis on a 5 minute candle. It seemed like the market was starting to lose its short term bull momentum.
Thank you Karthik. This course really helped me a lot. 🙂
Amit, to figure why your 18500CE order was rejected, check this – https://support.zerodha.com/category/trading-and-markets/trading-faqs/f-otrading/articles/what-are-open-interest-limits
Good luck and I hope your profits continue to roll!
Dear Karthik,
I had one more query. Is there any Options Backtesting tool available that provides us with all the Options Greek Data?
I want to Backtest some strategies that include the usage of Options Greeks.
I have tried to search the web but I could only come across Backtesting tools that have only technical indicators as filters. I want to devise strategies based on Greeks, VIX and all other things that you have taught us here. Is there any tool out there that suits my requirement?
Amit, not sure, but please do check with Sensibull for this. Else you can also speak to streak.tech for this.
Thank You Karthik.
I checked Sensibull and Streak. They do not provide Greeks Data. I will try and figure out some other way.
Sure Amit, do drop a message if you find something useful so that others can benefit as well 🙂
Dear Karthik,
I have come across Opstra. It has got Greeks Data. But it does not auto – backtest strategies. We have to manually do it.
Ah ok. I’ve never used that product, so would not know.
Hi Karthik.
Could you recommend any good source where traders share their strategies?
I this module you have recommended one book “Fooled by randomness”, please give some more book recommendations. like your top 5 book recommendations
Baburao, do check the module on trading strategies. About books, I’ve been sharing the list of relevant books at the end of every module; request you to check that.
Sir,
A. We learnt volatility based future price prediction range is selected based on below few formulas:
1. Current price +/- Current price*sd
2. Current price*exp(mean*t+sd*sqrt (t))
3. Current price*(1+mean*t+sd*sqrt (t))
4. Current price*(1+sd*sqrt (t))
Could you kindly let know when we should be using which formulae?
B. I haven’t yet started trading options/ futures yet. We know that the stoploss given in simple swing trade is with market price of the stock. Similarly, could you kindly let know the parameter to which SL is given for options? Is it with the market price of the underlying value/ premium value or something else? Please help.
1) You can use the first one
2) One way is to keep a % SL on the premium itself, Anirban.
Sir,
Whereas all have already been mentioned in your notes itself, I am still trying to align my thoughts if I am rightly moving. I would request if you may please comment on below:
We know For Call option:
Buyer: Take delivery at strike price at expiry
Seller: Give delivery at strike price at expiry
We know For Put option:
Buyer: Give delivery at strike price at expiry
Seller: Take delivery at strike price at expiry
Please correct me on below,if I am going wong somewhere:
For CE:
1. For a buyer to take delivery, he has to keep money in the fund. The fund amount is lot size* strike price*no of lots
2. For a seller to give delivery, the system will debit only the difference amount (spot price minus strike price)*lot size*no of lots from the margin blocked of the seller
For PE:
1. For a buyer to give delivery, he has to keep money in the fund. The fund amount is lot size* spot price price*no of lots
2. For a seller to take delivery, the system will debit only the difference amount (strike price minus spot price)*lot size*no of lots from the margin blocked of the seller
For option sellers – In case of stock options, the system will debit securities, not funds. Index options are cash settled.
Hi
I have seen nifty option chain today in which i saw people are sellling and buying nifty put option at 19000 level eventhough it is clearly visible that it cant even go down below 19500 level considering 28th sep as expiry…Whats the point of buying such far away options??? why people are stalking around there much??? Please explain sir
When people buy OTM options on expiry day, its like buying a lottery ticket, they are hoping a big move would happen and their option turns ITM 🙂
Most importantly new contracts are being created today too such that option price change turned green today…
Hii Kartik
So far I am understanding the module.. thanks to your easy assimilation and way of putting it
I have a doubt regarding Liquidity
As you said in first case( CEAT) where trader did not chose two to three away OTM because stock is not having much liquidity. How do we know that stock is more liquid or less and what is relation between Liquidity and choosing strike?
A highly liquid stock means its easier to place your orders, and hence easy to transact and lower slippages.
One more suggestion
The comment are sorted in ascending order that means comments which were posted earlier are shown at top and newest comments are shown at bottom, can it be changed from Descending order so that newer comments will be shown first
Like to search my comment I had to scroll all the way down comments 2015
Thanks Komal, its a valid suggestion. Let me check.
Sir,
If we pledge our investments (stocks and g secs), the margin can be used for selling options and intraday trading. I feel it’s a good idea, and are there any disadvantages? And If we combine both investment and trading together, the returns can be very high in a year.
I also have a small question, in Broking industry there is an entry of (Zero commission brokers) , mirae asset launched it’s plan for 2399 rs(one time payment ) which offers lifetime free brokerage and finvasia by shoonya whose cost is 0 for lifetime and they are registered under SEBI. Are there any risks associated there? 🙂
About pledging – yeah, seems good. But the only problem is that you will lose money and stocks if the option goes against you.
About brokers – Yes, all brokers are regulated by SEBI. Please consider a broker from all aspects and not just brokerage charges.
Hi Karthik,
Thanks for this chapter. I have a few questions on these trades.
1) In the first trade (CEAT India), the stock overnight declined ~1.5% (from 1260 to 1244). Would this price change increase volatility and, in turn, increase the premium? If yes, in this case, is the effect of change in the delta on premium more than the increase in volatility? Further, in your approach, would you sell OTM Call option?
2) In the second trade (Nifty – Delta neutral), why did the decrease in volatility not decrease the PUT option premium? In fact, most of the PUT option premiums increased (even minutes before the RBI announcement). Why so?
3) In the third trade (Infosys – Delta neutral), would it be a good strategy to close the position right after the market opens i.e. ~9:16 AM? It will reduce the impact of INFY quarterly results on the position, and the trader will benefit due to decreased volatility. What do you think?
4) In the fourth trade (Infosys – Directional trade), since the target hit in 25 days, wouldn’t it be a good strategy to buy an ATM or slightly ITM call option here? I was referring to graphs in the previous chapter.
Please let me know your thoughts.
Thank you,
Yogesh
1) Yes, any rapid price change induces volatility. But then there are multiple factors that impact the option price, in this case it could be delta more than Vega.
2) Perhaps for the same reason as i quoted above. You also need to consider time to expiry.
3) Either before or just after the announcement. Both are ok. End of the day, it all boils down to how much risk you are willing to take.
4) Since there is more time to expiry, slight OTM is fine.
Dear Karthik,
In the last case study about the fundamental call on Infosys, would you recommend taking a short position on Nifty too? This would protect against losses due to market-wide price movement. If yes, then would you have any input on the selection of option and strike for such pair strategies?
You can, but then it also depends on your risk appetite and capital.
Namaste sir.
Now weekly expiry is ending then it is good or bad for option trading?
I think its good for traders in the long run.
Hi karthik Sir,
On what basis you are saying the infosys fundamental was a naked trade? Is this because the trader is just predicting without the exact numbers or just guessing the direction of the market?
If a trade is unhedged, then it is called a naked trade. Example –
1) Buy Infosys Spot = Naked trade
2) Buy Infosys Spot + Short futures = Hedged position.
Just found this amazing site…very educational and amazing!
Questions on your case studies…
case #2 – usually IV doesn’t drop until after the event itself. Is it realistic this trader shorted and IV would drop prior? Instead wouldn’t a calendar have worked a few days before, and selling right before the event?
case #3 – shorting before earnings and waiting for IV drop only works if the range works. I dont know what the expected move was but did this trader get lucky that the move stayed within the range? usually shorting 4 days before the pricing is pretty high, but if it blew past the expected range he’d be in huge trouble with little wiggle room since IV is sucked out of the options.
Case #2) That is the general expectation i.e. the IV to drop right after the event. But one more thing – IV kind of peaks leading to the event. So you may want to figure when to short.
Case #3) Of course, in case of a surprise, the range itself breaks. That is an assessemnt for any trader to make i.e to figure what are the odds of the market to spin out a surprise. So maybe it is luck plus skill 🙂