11.1 – Add up the Deltas
Here is an interesting characteristic of the Delta – The Deltas can be added up!
Let me explain – we will go back to the Futures contract for a moment. We know for every point change in the underlying’s spot value the futures also changes by 1 point. For example if Nifty Spot moves from 8340 to 8350 then the Nifty Futures will also move from 8347 to 8357 (i.e. assuming Nifty Futures is trading at 8347 when the spot is at 8340). If we were to assign a delta value to Futures, clearly the future’s delta would be 1 as we know for every 1 point change in the underlying the futures also changes by 1 point.
Now, assume I buy 1 ATM option which has a delta of 0.5, then we know that for every 1 point move in the underlying the option moves by 0.5 points. In other words owning 1 ATM option is as good as holding half futures contract. Given this, if I hold 2 such ATM contracts, then it as good as holding 1 futures contract because the delta of the 2 ATM options i.e. 0.5 and 0.5, which adds up to total delta of 1! In other words the deltas of two or more option contracts can be added to evaluate the total delta of the position.
Let us take up a few case studies to understand this better –
Case 1 – Nifty spot at 8125, trader has 3 different Call option.
| Sl No | Contract | Classification | Lots | Delta | Position Delta |
|---|---|---|---|---|---|
| 1 | 8000 CE | ITM | 1 -Buy | 0.7 | + 1 * 0.7 = + 0.7 |
| 2 | 8120 CE | ATM | 1 -Buy | 0.5 | + 1 * 0.5 = + 0.5 |
| 3 | 8300 CE | Deep OTM | 1- Buy | 0.05 | + 1 * 0.05 = + 0.05 |
| Total Delta of positions | = 0.7 + 0.5 + 0.05 = + 1.25 | ||||
Observations –
- The positive sign next to 1 (in the Position Delta column) indicates ‘Long’ position
- The combined positions have a positive delta i.e. +1.25. This means both the underlying and the combined position moves in the same direction
- For every 1 point change in Nifty, the combined position changes by 1.25 points
- If Nifty moves by 50 points, the combined position is expected to move by 50 * 1.25 = 62.5 points
Case 2 – Nifty spot at 8125, trader has a combination of both Call and Put options.
| Sl No | Contract | Classification | Lots | Delta | Position Delta |
|---|---|---|---|---|---|
| 1 | 8000 CE | ITM | 1- Buy | 0.7 | + 1*0.7 =0.7 |
| 2 | 8300 PE | Deep ITM | 1- Buy | – 1.0 | + 1*-1.0 = -1.0 |
| 3 | 8120 CE | ATM | 1- Buy | 0.5 | + 1*0.5 = 0.5 |
| 4 | 8300 CE | Deep OTM | 1- Buy | 0.05 | + 1*0.05 = 0.05 |
| Total Delta of positions | 0.7 – 1.0 + 0.5 + 0.05 = + 0.25 | ||||
Observations –
- The combined positions have a positive delta i.e. +0.25. This means both the underlying and the combined position move in the same direction
- With the addition of Deep ITM PE, the overall position delta has reduced, this means the combined position is less sensitive to the directional movement of the market
- For every 1 point change in Nifty, the combined position changes by 0.25 points
- If Nifty moves by 50 points, the combined position is expected to move by 50 * 0.25 = 12.5 points
- Important point to note here – Deltas of the call and puts can be added as long as it belongs to the same underlying.
Case 3 – Nifty spot at 8125, trader has a combination of both Call and Put options. He has 2 lots Put option here.
| Sl No | Contract | Classification | Lots | Delta | Position Delta |
|---|---|---|---|---|---|
| 1 | 8000 CE | ITM | 1- Buy | 0.7 | + 1 * 0.7 = + 0.7 |
| 2 | 8300 PE | Deep ITM | 2- Buy | -1 | + 2 * (-1.0) = -2.0 |
| 3 | 8120 CE | ATM | 1- Buy | 0.5 | + 1 * 0.5 = + 0.5 |
| 4 | 8300 CE | Deep OTM | 1- Buy | 0.05 | + 1 * 0.05 = + 0.05 |
| Total Delta of positions | 0.7 – 2 + 0.5 + 0.05 = – 0.75 | ||||
Observations –
- The combined positions have a negative delta. This means the underlying and the combined option position move in the opposite direction
- With an addition of 2 Deep ITM PE, the overall position has turned delta negative, this means the combined position is sensitive to the directional movement of the market
- For every 1 point change in Nifty, the combined position changes by – 0.75 points
- If Nifty moves by 50 points, the position is expected to move by 50 * (- 0.75) = -37.5 points
Case 4 – Nifty spot at 8125, the trader has Calls and Puts of the same strike, same underlying.
| Sl No | Contract | Classification | Lots | Delta | Position Delta |
|---|---|---|---|---|---|
| 1 | 8100 CE | ATM | 1- Buy | 0.5 | + 1 * 0.5 = + 0.5 |
| 2 | 8100 PE | ATM | 1- Buy | -0.5 | + 1 * (-0.5) = -0.5 |
| Total Delta of positions | + 0.5 – 0.5 = 0 | ||||
Observations –
- The 8100 CE (ATM) has a positive delta of + 0.5
- The 8100 PE (ATM) has a negative delta of – 0.5
- The combined position has a delta of 0, which implies that the combined position does not get impacted by any change in the underlying
- For example – If Nifty moves by 100 points, the change in the options positions will be 100 * 0 = 0
- Positions such as this – which have a combined delta of 0 are also called ‘Delta Neutral’ positions
- Delta Neutral positions do not get impacted by any directional change. They behave as if they are insulated to the market movements
- However Delta neutral positions react to other variables like Volatility and Time. We will discuss this at a later stage.
Case 5 – Nifty spot at 8125, trader has sold a Call Option
| Sl No | Contract | Classification | Lots | Delta | Position Delta |
|---|---|---|---|---|---|
| 1 | 8100 CE | ATM | 1- Sell | 0.5 | – 1 * 0.5 = – 0.5 |
| 2 | 8100 PE | ATM | 1- Buy | -0.5 | + 1 * (-0.5) = – 0.5 |
| Total Delta of positions | – 0.5 – 0.5 = – 1.0 | ||||
Observations –
- The negative sign next to 1 (in the Position Delta column) indicates ‘short’ position
- As we can see a short call option gives rise to a negative delta – this means the option position and the underlying move in the opposite direction. This is quite intuitive considering the fact that the increase in spot value results in a loss to the call option seller
- Likewise if you short a PUT option the delta turns positive
- -1 * (-0.5) = +0.5
Lastly just consider a case wherein the trader has 5 lots long deep ITM option. We know the total delta of such position would + 5 * + 1 = + 5. This means for every 1 point change in the underlying the combined position would change by 5 points in the same direction.
Do note the same can be achieved by shorting 5 deep ITM PUT options –
– 5 * – 1 = + 5
-5 indicate 5 short positions and -1 is the delta of deep ITM Put options.
The above case study discussions should give you a perspective on how to add up the deltas of the individual positions and figure out the overall delta of the positions. This technique of adding up the deltas is very helpful when you have multiple option positions running simultaneously and you want to identify the overall directional impact on the positions.
In fact I would strongly recommend you always add the deltas of individual position to get a perspective – this helps you understand the sensitivity and leverage of your overall position.
Also, here is another important point you need to remember –
Delta of ATM option = 0.5
If you have 2 ATM options = delta of the position is 1
So, for every point change in the underlying the overall position also changes by 1 point (as the delta is 1). This means the option mimics the movement of a Futures contract. However, do remember these two options should not be considered as a surrogate for a futures contract. Remember the Futures contract is only affected by the direction of the market, however the options contracts are affected by many other variables besides the direction of the markets.
There could be times when you would want to substitute the options contract instead of futures (mainly from the margins perspective) – but whenever you do so be completely aware of its implications, more on this topic as we proceed.
11.2 – Delta as a probability
Before we wrap up our discussion on Delta, here is another interesting application of Delta. You can use the Delta to gauge the probability of the option contract to expire in the money.
Let me explain – when a trader buys an option (irrespective of Calls or Puts), what is that he aspires? For example what do you expect when you buy Nifty 8000 PE when the spot is trading at 8100? (Note 8000 PE is an OTM option here). Clearly we expect the market to fall so that the Put option starts to make money for us.
In fact the trader hopes the spot price falls below the strike price so that the option transitions from an OTM option to ITM option – and in the process the premium goes higher and the trader makes money.
The trader can use the delta of an option to figure out the probability of the option to transition from OTM to ITM.
In the example 8000 PE is slightly OTM option; hence its delta must be below 0.5, let us fix it to 0.3 for the sake of this discussion.
Now to figure out the probability of the option to transition from OTM to ITM, simply convert the delta to a percentage number.
When converted to percentage terms, delta of 0.3 is 30%. Hence there is only 30% chance for the 8000 PE to transition into an ITM option.
Interesting right? Now think about this situation – although an arbitrary situation, this in fact is a very real life market situation –
- 8400 CE is trading at Rs.4/-
- Spot is trading at 8275
- There are two day left for expiry – would you buy this option?
Well, a typical trader would think that this is a low cost trade, after all the premium is just Rs.4/- hence there is nothing much to lose. In fact the trader could even convince himself thinking that if the trade works in his favor, he stands a chance to make a huge profit.
Fair enough, in fact this is how options work. But let’s put on our ‘Model Thinking’ hat and figure out if this makes sense –
- 8400 CE is deep OTM call option considering spot is at 8275
- The delta of this option could be around 0.1
- Delta suggests that there is only 10% chance for the option to expire ITM
- Add to this the fact that there are only 2 more days to expiry – the case against buying this option becomes stronger!
A prudent trader would never buy this option. However don’t you think it makes perfect sense to sell this option and pocket the premium? Think about it – there is just 10% chance for the option to expire ITM or in other words there is 90% chance for the option to expire as an OTM option. With such a huge probability favoring the seller, one should go ahead and take the trade with conviction!
In the same line – what would be the delta of an ITM option? Close to 1 right? So this means there is a very high probability for an already ITM option to expire as ITM. In other words the probability of an ITM option expiring OTM is very low, so beware while shorting/writing ITM options as the odds are already against you!
Remember smart trading is all about taking trades wherein the odds favor you, and to know if the odds favor you, you certainly need to know your numbers and don your ‘Model Thinking’ hat.
And with this I hope you have developed a fair understanding on the very first Option Greek – The delta.
The Gamma beckons us now.
Key takeaways from this chapter
- The delta is additive in nature
- The delta of a futures contract is always 1
- Two ATM option is equivalent to owning 1 futures contract
- The options contract is not really a surrogate for the futures contract
- The delta of an option is also the probability for the option to expire ITM
Hi kartik
Very very thanks for this chapter.This is very intresting chapter, but after reading this a no. of things running in my mind. Please check this and correct me where I am wrong.
If delta (sum of all delta’s) is
1. +1.75
Profit- when market goes up
Loss – when market goes down
2. +.025
Profit- when market goes up
Loss – when market goes down
3. 0
No profit , No loss at any market movement
4. -.075
Profit- when market goes down
Loss – when market goes up
I also think to calculate net p&l , I can do it mathematically-
Net P&L= total no. of shares of same underlying * change in underlying *total delta(sum of all delta’s)
• Profit- when market goes up and delta is +ve
Or
When market goes down and delta is –ve
• LOSS- when market goes up and delta is -ve
Or
When market goes down and delta is +ve
Is this formula correct??? Since delta is also variable , I am confused. Please clarify
You are absolutely right here –
1) If the deltas add up to a +ve number, this means you make money when the markets goes up
2) If the deltas add up to a -ve number, this means you make money when the markets goes down
3) Net P&L = Change in underlying * Total Delta * Lot size —-> how ever please do bear in mind this is only an expected P&L and not really the actual P&L. Remember an options contract is subjected to other variables…we will understand this point in detail over the subsequent chapters.
sir,in tradinr intraday or swing what is definition of down &uptrenr i mean how many candeles down,up
Check for at least 6 to 8 prior candles.
Yet another great article.. Thanks for this.. 🙂
I must thank you for patiently reading all the articles on Varsity and constantly encouraging us 🙂
Thank you sir salute you for an great article
Most welcome and I really hope you found the chapter useful and easy to understand.
sir i have doubt regarding stoploss of option order,if i want to place stop loss for option with repect to it’s underlying how can i calculate it? also if option expiring as otm but if my premium is changed by 4-5 what should i consider it means profit or I had paid premium after profit?
This is a very valid question – in fact I would explain this in detail when we take up the 3rd option Greek – Vega. So request you to please stay tuned till then. Thanks.
Hi kartik,
Thanks for clearing my confusions.I have read the chapter many times and develops a clear concept. Clearly, options are superior than futures. But, thinks problems me is- if ‘X’ persons trade nifty futures, he has to trade at nifty future prices but if ‘Y’ persons trade nifty options and there are 10 strike prices available , then each strike price has only Y/10 volume. However, ATM options are somehow more volume. Then is there any volume issue with options. Please clarify.
I get your point here, in fact for this reason along with many others ATM options are always a good option to trade. You will understand more on this as we progress.
hi sir thanks for such a simplified version of greeks.
when we can expect article on option strategy?
Aditya, all I can say at this point is soon 🙂
I am eagerly waiting for option strategies.. When will u complete this module..?
When will u upload next chapter..?
Chapter 12 about Gamma (Part 1) should be up by t’row – it is a very different chapter and hopefully you will enjoy reading it 🙂
Worth it…Nice job i appreciate your efforts.
Thanks Alok 🙂
I have spent lots of money for getting training about but all are worthless as compare to Varsity….u all did a great job..thanks..
Thanks Arshad.
There are many so called ‘market educators’ who in the pretext on teaching market finance fleece your hard earned money. Keeping this in perspective we started Varsity with an objective of creating an online platform where we put up meaningful content and make it available for everyone, for free.
Hello.
I recently read about the Adani enterprise demerger and the controversy surrounding it s the stock plunged 80% intraday. How does it impact the a) market lot b) futures price c) premium?
Adani was a mess – mostly attributable to people not reading the circular issued by NSE. The lot size/Future Price/Premium all depends on the corporate action in perspective. However they all reduce or increase in proportion to the spot value.
Hi Team,
Great articles/modules. I’ve learn’t a lot here than reading/attending classes. Very well writen with lots of examples. Thank you very much.
A lay man question: In delta lesson modul, you’d mentioned that +5 delta moves by 5 points the underling movement of 1 point. Are you refering to points as in ‘premium change’? Pleae kindly clarify.
Thanks Ramesh, very happy to know that you appreciate the efforts. Please do stay tuned for more.
Yes, if an option has a Delta of 0.5, then for every 1 point change in the underlying then the premium changes by 0.5 points.
Thank You Karthik.
So if 5 contracts of 0.5 Delta then, the Delta adds up to 2.5. Then every 1 point move in underlying the position will now move 2.5 times (premium points) – either side up or down.
Yes sir. Thats correct.
Can I use option strategies for intraday trading depending upon the situation? In intraday for example if am using bull spread, the shorted OTM Option won’t have much impact due to non deterioration of theta.. Even the Usage of neutral strategy, shorting 2ATM, Buying 1ITM & 1OTM won’t have much impact if my position is wrong.. Suggest the usage of options strategy for intraday trading…
Sanatharam…I will be discussing options strategies in detail in the next module. Request you to kindly stay tuned.
Hi, thanks for the all teaching modules.. I understand that Delta for call option is +ve, and delta for Put option is -ve. I have a question.. Can delta be a negative value for a only call option ? I assume not.. But still have a confusion.
Call Delta per say is a +ve number, but when you short a call option the Delta is considered -ve. Similarly when you short a put option the delta is considered +ve.
Hi Karthik, I didn’t understand the case no #5 in this chapter. Can you please elaborate this with premium, delta values for better understanding. Thanks in advance
Anand – Case 5 talks about a situation wherein you have a short ITM Call option. ITM options have a delta of 0.5, since you are short call option the position delta would be 1 * (-0.5) = -0.5. The other position is a long ITM Put option. Put option has a negative delta…but do remember when you short a put option, the delta is +ve.
So the overall delta of this position becomes -0.5 (from short ITM call) plus -0.5 (from long ITM Put), hence an over all delta of -1.0.
Sir, It is ATM position as delta is 0.5. Correct Sir.
Yup….in and around 0.5.
Thanks Karthik. I owe you a lot. Your gyan on technical analysis enriched my knowledge and ignited passion for trading. Thanks a ton. After saying goodbye to long career in banking and insurance I decided to become full time trader and was looking for authentic material on TA and FA. Believe me your content is far more better than any book on share market in circulation. Karthik tell me is it true that 95% people loose money in the market. If it is true then who are the rest 5%. And how to increase the success rate in trading. Plz share your thoughts.
Thanks for the kind words Anand. Yes, it is true that most of the people lose money ‘attempting’ to trade. Think is mainly because the vast majority trade based on gut feel, and random theories. Besides somewhere their egos take over their brains and they fail to evolve themselves as traders. Most of them dont even bother to educate themselves.
My suggestion – Stay humble and constantly educate yourself. This alone will enhance your odds of being successful in the markets.
Dear Mr. Karthick,
Greetings the day.
I have just joined Zerodha in Nov’15 and was going through varsity modules. Actually, I was shocked to note that there is someone who has such a practical and simple way of teaching. Definitely, this is only experience and involvement which speaks. I have gone upto Thetha chapter only, which has been the simplest chapter for me.
I just had a query and no one else can be better than you to address it. I am extremely sorry for disturbing you.
Suppose nifty is trading at 8000
I buy one Call @8000. Second @7900 and third @ 7800 so these call will be ATM, ITM and DITM.
Suppose their Premium is 60, 80 and 100 respectively (average premium 80 ) and Delta is 0.5, 0.6 and 0.8
As per your module, Delta of same underlying can be added hence total Delta will be 1.90
Suppose nifty moves from 8000 to 8100 so change in underlying 8100-8000 = 100
Change in Premium = change in underlying * Delta + old premium
Hence 100 * 1.90 + 80
= 190 + 80
= 270
Net profit = 270 – 80 ( premium paid ) * 3 ( different calls bought) * 75
= 190 * 3 * 75
= Rs 42750
Or 190 * 75 = Rs 14250
Kindly correct me. I may be wrong in adding delta or calculating new premium.
Lalit – glad to know you like Zerodha Varsity 🙂
1) Yes you can add up the deltas – this gives the overall delta of the position
2) It would be 190 * 3 * 75 = 42750/-
Although this seems fine to me, something tells me that we are missing something here….not able to point a finger at this moment. Will get back if it strike me 🙂
sir here i have one doubt…what is 75? where it has come from ….?
hi sir sry for mis understanding……now i got the point…….75 is lot size..m i ri8? and his profit 14k not 42k…m i ri8?still little confusion pls clarify sir?i think lalith question has a big subject…
Yup.
Profit will be 190 * 3 * 75 = 42,750 if squared off before expiry (3 strikes, each strike needs minimum 1 lot for trade, 3 strikes means 3 lots minimum)
Profit would be
190 * 75 = 14250
as 190 is total change in premiums of all 3 contracts combined
Dear Karthik Sir , when is the Module on Trading Strategies (Other than Option Startegies) coming?
Anup, the module is already live, check this – https://zerodha.com/varsity/module/trading-systems/
The calculation is wrong because
Change in uderlying 100
Total delta 1.9
Total premium 240
So new premiumv = 100 x 1.9 + 240
= 430
Hence profit = 430 – 240 = 290
Delta varies between 0 & 1 and cannot exceed beyond 1.
Thanks a lot Mr. Karthik.
Welcome!
Lalit Dimple case….The combined premium and combined delta are 240 and 1.90 resp.So 100 points moevment in nifty willlead to 190 points move in total premium..Hence the profit will be 190*75=14250 only
sir,
I have a doubt usd inr spot is 66.83 and 66.75 (itm)call option premium is .5075 and delta is .5 after some time spot change to 66.88 then what will be the premium and after what about spot down 66.70 please help , I am totally confused in option Greek in usd inr
Delta of 0.5075 suggests that for every 1 point change in the underlying, premium will change by 0.5075. In this case the change in premium is 0.05…so the delta will change accordingly.
Hats off to You for the DELTA chapter split in to 3 parts. Every subsequent part was studied with greater enthusiam. It was a dlight.
Glad to know that 🙂
Loved the part on DELTA as a probability of expiring ITM. Now consider the case of JAN 2016 . on 4-1-2016 the DLTA of 7500PE was .05 I assume considering the underlying price on that day, but today it’s DELTA is 0.5.
What I wanted to know is wether we should consider the DELTA value as a probability only near expiry or mid month also as is the case today. If today closing we consider 7500PE whose DELTA is .4 ie 40%, in the next few days of fall it will become almost 0.9 and we can go wrong by writing it now. So I wanted to know how many days prior to expiry we should start considering this probability. TYour answer will be highly appreciated.
Well the delta of the option indicates the probability at ‘that’ very moment. The delta helps us make a quick back of the envelop calculation on the possibility of option expiring ITM. However there is some comfort looking at this when there is very less time to expiry.
Agreed that option calculator gives us only theoretical values. but what is the meaning of current option price below the theoretical value or above the theoretical value.
i have attached a screenshot here of today’s marketwatch of Nifty PE 7400 & CE 7400 along with its theoretical values in the right side. 7400PE current price is 126 which is matching with it theoretical but 7400CE cureent price is trading around 38 while it theoretical values showing it around 56. what is the meaning of this?
If the current price is above or below the theoretical value, then it simply means that the option is trading higher/lower than its true worth. 7400 CE trading @ 38 while its true worth is 56 conveys the same – i.e the option is trading cheaper than its true worth. Please note, just because the option is trading cheaper you should not go ahead and buy it, be aware that it can get more cheaper after you buy.
Yes, it is got cheaper by 4 more rupees. But is that bcoz; market is in bearish mood and the said contract is Call option? what if, the market gets reversed from this current point, will it go up to the extent and match its theoretical value?
Under normal circumstances the spread between theoretical option price and market price converge. In fact it would be hard to find this spread under normal circumstance.
What is the theoretical value?
Value arrived by doing mathematical computation is theoretical value. The value traded in the market is called ‘market value’.
Karthik, million times thanks for the hard work which you are doing for us.
God bless you
I have a question, regarding premium
If you see stock of AMARAJABAT on 5 Feb, stock moved by almost 3.2% (854 on 4 Feb to 881 on 5 feb) moved by 27.5 points but premium for 850 CE (ATM on 4 Feb)did not move
Why this happened? Sir please guide me
Thanks
Hey there, thanks for the article. I am a cfa level 2 candidate and studying option greeks from the curriculum was somewhat boresome. You have explained it all well in an easy to understand way and now I feel option greeks to be an interesting part of the curriculum and add value to my knowledge database as an option trader (though occasional) . You deserve a big thank from my side. I will recommend my pals to go through these articles.
Regards,
Dhiraj.
Thanks Dhiraj and good luck for you CFA exams!
How can i get the delta in Kite? or any other tools? i dont want to install any software. need it online
As of now its not available, but we are working towards making an options suite for Kite. Hopefully this should happen soon.
awesome karthik..I could not understand greeks from one of the best books on option trading by Mark D Wolfinger, but u have explained it beautifully. keep up the good work.
🙂
where I can get delta
thank you very for your sincere efforts.. it is very simple to understand.
Thanks!
Thnaks Karthik for the fast response. Your every response opens many close doors.
Cheers!
When you say buying two ATM is same as buying 1 futures contract. However ATM would definitely become ITM or OTM depending on the movement and would start giving skewed returns?
Yup, therefore this equation holds true only at ATM. Remember, always add up the deltas of the overall position…as long as it adds to +1 then it would equal a futures position, and there are ways to make this happen.
How delta adding up can help, as they change with underlying.volatility also matters,right.
Hmmm, you got to read the entire chapter for this 🙂
Hi Karthik sir,
small doubt; can we add up the deltas of puts/calls for DIFFERENT UNDERLYINGS to know the overall position OR this procedure of adding up deltas is for only one underlying.
Thanks®ards
No you cannot add up the deltas of two different underlyings.
If the delta of a deep OTM option is 0.071, and I buy 10 Contracts of the same strike price, which makes the added up delta 0.71, does that mean I am buying an ATM/ITM option or is it still deep OTM option, just more reactive to change in underlying?
Yes, you can always add up the deltas to identify the moneyness of the overall position.
To be more specific can we say the options are still deep OTM. It has to go through slight OTM, ATM or ITM to be profitable.
When the options move to ATM then the moneyness at that time becomes 5 (10 * 0.5).
Yes, ATM options have a delta of 0.5. The options will turn profitable once it moves from deep OTM to just OTM to ATM etc.
Read 3 chapters on Delta, but not sure whether understood it properly. its a high funda thing, will it b possible to grasp and use it.. only time will tell.
I know not whether I fully understand it. but yet I will complete d module and then take a call whether i will be capable to trade OPTIONS.
Great writing and explaining.
Yes, please do read it. I agree it gets a bit challenging, but its worth the effort. Good luck and stay profitable.
Hello sir I am a python and java coder(CSE student) and have been trading in Options for past 4 months with Zerodha, Is it possible for me to write a piece of code which can always generate Profit by making use of all the Greeks.
Like I can programme taking into consideration Delta, just for intraday, because I assume the time frame can be excluded for intraday, Is it possible in reality.
Hate to break you heart, but there is no code that exists that can generate profits all the time 🙂
Codes and programming enables you and gives you better insights, but better insights does not always translates to profits.
Even I m a software engineer but I do prefer doing things manually wheather it is reading charts or initiating trades.Sir then don’t you do algo trades because people say it results with higher probability of winning and zerodha has streak for algo trading and don’t you use it and wats your opinion on algo trading.
I’ve stopped actively trading, Srinath because I can’t devote enough time to it. However, I do invest very actively in the market. End of the day, an algo is good as the instructions you give it.
Hi,
Really appreciate the way you have prepared the modules. Thank you.
One question, At the time of buying CALL option, if we chose the strike price to be less than the underlying price then is this not equivalent to PUT option ? Why do we have so many ways to get the same thing ?
No, if you buy a call option strike which is lesser than spot, then essentially you are buying an In the money call option.
Dear Karthik,
Your articles are really very useful to us, thank you for your efforts you are putting in for us.
I have following 2 scenarios which are I think anyone may face while trading stock options.
1) suppose bajaj-auto spot is 2200 & I wanted to buy 2400 call option, but there are no sellers for the same. How can I buy that CE?
2)i bought an option, On expiry my position is ITM & now i want to square off my position but no buyers are available for the same contract. What will happen to my profit in this case?
Please clarify my doubts.
Thank you.
Well, if there are no sellers, then obviously cannot buy the shares. Hence it is important to buy/sell liquid contracts.
Remember, if you own an option then there will certainly be a seller….so exchange will make sure that the seller will honor his obligation so that you are settled well. This is in fact one of the key roles of the exchange. Also, you maybe interested to know that our exchange systems are so robust that till date, no one has defaulted on their obligations….or rather there is no scope for one to default.
Thank you Karthik,
It was really very helpful.
Glad to know that, good luck!
Kathik, can u pls elaborate why the delta of the next month is higher than the delta of the near month for the same strike price?
Eventually it all boils down to time. Since next month contract have lot more time to expiry, the delta is also on the higher side.
It makes sense to sell the deep otm options near expiry date as their price will definitely go down. So is it some kind very safe play? Do many people do these trades? If not, then why? Does volatility come into play?
Sorry for so many questions but your content is really engaging. ☺
It does make sense to sell deep OTM options before expiry. However, not many choose to do this because of the risk-reward ratio such strategies offer.
sir,
Call option has positive delta and put option has negative delta, then how short call get negative delta…please help..
Long call and Short Put have +ve deltas.
Short Call and Long Put have -ve deltas.
good morning karthik sir, first of all thanks a lot for such a useful modules…im just testing these strategies on NSE Paathshala…i was confused with OTM options…as tomorrow is the expiry for 29th dec CE…i took short position for 1 lot of at 8300CE at 0.65 premium…what is the profit that i receive ..assuming delta is -0.3 for short position..is my thinking right?…if nifty goes down..then i make profit…my profit will be 75* premium at the end of the day…does people trade for such a small profits of 50-80 for a margin around 40000..
Since you are short a call option, your profit is restricted to the premium you receive. In this case 0.65.
okay sir…i got it.. i was going through theta.. i got the logic…here’s one more…..to select an option whether call or put we should check with technical analysis of underlying…to select strike price for the option we should check moneyness and delta…am i right??
True, thats the right way to go about.
sir from where I can find the value of delta
You can use Pi to get these values. Or you can calculate yourself using this calculator – https://zerodha.com/tools/black-scholes/
Nice explanation & coverage!!!!!
Thanks!
Happy reading 🙂
In the last topic i.e. Delta as a probability, you mentioned that it is favorable to sell the CE option since there is 90% probability of the option to expire OTM or worthless. the logic was the nearness of expiry date and requirement of huge movement in 2 days. My query is if the expiry date is far away, is it still recommended to sell that OTM option premium, provided the delta is currently showing value of 0.3 (arbitrary value just for understanding)?
Yes, you can sell them much earlier to expiry. You can even get to keep a larger premium (provided the option expires OTM). The idea of selling near to expiry is to use time to your advantage. When you sell them before, there is a lot of time to expiry, therefore the probability of the option transitioning from OTM to ITM is higher.
Thanks for the answer. Maybe we can use volatility calculations to figure out the best strike price having probability of expiring OTM or worthless? and one last query is which option premium is better to write, CE or PE?
I have a preference for writing only call options. I’m a little hesitant to write Puts.
Yes, you can (or rather should) use volatility to estimate the best strikes to write.
Sir is there any relationship between delta and intrinsic value, please explain.
No direct relation ship as such. However, options with non zero intrinsic value will have a high delta.
Vry nice sir
Thanks.
Dear Karthika..
If OTM options only have Extrinsic Value, and Delta only affect the Intrinsic Value, then how is Delta affect the OTM options price?
There is nothing like an extrinsic value of an option, or at least, I’ve not heard of it yet.
Hi sir, first of all thanking you for such a wonderfull work.
i want to ask you, like if the spot price moves up by 100 points of ABC stock and if i have an ATM call option its premium would increase by 50 points, lets say theoretically as other greeks too affect the premium pricing. But what if no any traders willing to trade when the option premium went up by 20 points, still does the option premium goes up for the next 30 points. what i exactly asking is regardless of the buying or selling pressure from the traders does the premium of the option contract goes up those 50 points?
No, the premium goes up when someone trades the option. However, while trading, the smart trader would be aware of this, hence he will bid or ask at the right price point.
Dear Karthika..
What will be the consequence, if I does not square off the position with in the market time on expiry date for the following….
(1) Suppose I brought 9550CE at Rs.10/- and Nifty expired at 9504
(2) Suppose I Sold 9550CE at Rs.10/- and Nifty expired at 9504
What is my tax liability(STT) for both the case?
1) You will lose the premium paid as the option expires worthless
2) You will retain the premium received.
No STT in both cases. However, if you have an option which has expired ITM, the consequences of STT is significant. Check this – https://zerodha.com/z-connect/queries/stock-and-fo-queries/stt-options-nse-bse-mcx-sx
What is the consequences of tax if I sell and buy the future?
GST of 18% is applicable along with STT.
Hey!! The articles are very nicely written. I have little doubt though, what if the combined delta is +2 for all CEs and the underlying is bearish let’s say move -200 would the option move -400?
Thanks!!
Yes, thats what it means – a 200 point fall leads to a decline of 400 points on options.
Hello Karthik,
I have few queries regarding options plz clarify.
Call Option(Lot-100, Expiry-30th Nov)
—–>buysell<—–
@10————————————————————-@10
premium paid=1000 —————————– premium received=1000
Now————————————————————Now
square off(sell) @15——————————- square off(buy) @5
receive premium=1500—————————–he pay premium=500
profit=500(1500-1000)——————————— his profit=500
(1).is it right or wrong?
(2).His(1st buyer) involvement closed here itself or he
need to do anything as seller(buyer who squared off his postion)
to buyer(2nd buyer) if the buyer hold his position until expiry?
(3).if the buyer(who paid premium as 1000) wait until expiry if he made a profit from whom he get the money?(the seller who sold option to him already exit his position)
Let
TCS 2500 CE
Spot price-2700
If buyer wait unti expiry(until auto square off on 30th).
On 30th few minutes before market close LTP@25.
(4).he will get 100*25=Rs2500 or something else(other payment calculation)?
(5).In options, at any point of time the no.of Buyers= no.of Sellers or not?
(6).How settlement is done between buyers and sellers, if at the time of expiry only 2 buyers and 2 sellers available ?
Let
TCS 2500 CE
Spot price=2489
(7).On expiry day at around 9:30am what would be the possible premium?(0.3 or 0.1 or may be greater than these values or something else).
Plz give answers as per question numbers as i mentioned.
Thank U.
1) Yes, that right
2) Once you square off, you are out of the market and your obligation is closed.
3) Your profits will come from one of the sellers who made a loss. Not necessary it has to come from the same seller
4) Upon expiry, he will get lot size * intrinsic value. The intrinsic value of a call option is either 0 or the positive difference between the strike and spot and then the put option the intrinsic value is either 0 or the positive difference between the spot and strike
5) Not necessary. One buyer can 100 lots from 10 sellers selling 10 lots each
6) Its cash settled by exchanges
7) Yes, it will be quite negligible on the expiry day – I’d suspect around 1/-
Good luck.
Thank U karthik
Cheers!
Hi Sir,
After reading varsity I m getting confidence to trade logically.
Please clear my silly doubt here.
Most of the time during expiry, premium starts erasing. If we assume that in coming last two trading days market will open flat then can we sell the call option & earn profit?
For example – just like in Nov when nifty was at 10385ce it’s premium traded around 60-70 now the nifty at 10500ce but premium is trading at 45.) If I sell 10500ce at 45 & before expiry the premium fell to 1 0/- . So would I make 44/- pr0fit?
Yes, if you think the markets are likely to stay flat, you can write the options and collect the premium. Yes, you will make 44 in profit.
& merry Christmas to you.
To you as well, Vikas. Hope you have a great year ahead. Cheers!
thanks!
First of all thanks for such a wonderfull article/chapter. One question banknifty weekly option is expiring today and its trading @ 20 so could i sell the call option cause at the end the value would be. 05. So i would make 20 * 40/lot = 800 profit can i do this.
Technically yes, but do make sure the strike is tradable. Check for the range here – https://zerodha.com/margin-calculator/Futures/
I’ve noticed that sometimes premium of Deep ITM or ITM option also changes in -ve. I mean if its a ITM or DITM then as per the rules the premium price should go high with respect to underlying. Right now on this date 15-06-18 if you look at HINDUNILVR option chain then you will notice that 1540 & 1580 Strike of CALL both are showing NET CHANGE -4.00 & -0.10 respectively. at the same time underlying is 1625 which is around +0.8% for the day.
Yes, this is quite common and you will understand why when you read through the chapters on Volatility 🙂
Sir/Madam,
i want to represent the data of delta, gamma, theta in graphical form. Please help me where in this site i will get by inputting greeks data.
Your best bet is to check this on https://sensibull.com/.
Dear sir, I have a doubt. When you say that call options have positive & puts have negative delta, isn’t this only for long calls & long puts ? Because as per what all i have understood in the previous chapter, short call should have negative delta & short put should have positive delta.
You can look at it this way – the call options gain delta with an increase in price (therefore lose delta if price decreases). The put option loses delta with the increase in price (therefore increase in the delta with a decrease in price). If you have shorted a call, then you want the delta to decrease, which happens when the price drops. Likewise, if you have shorted a put, then you want the delta to decrease, which happens with the increase in price.
Thank you sir ?
Hi,
I learned about option greek and according I took a position in Yes Bank at Spot Price:- 360 on 30Aug2018 for september expiry. I bought one Deep OTM CALL option of strike 380 @ 13.85, and also bought one Deep OTM PUT option of strike 340 @ 11.45. On 31Aug2018 Yes Bank fell 15Rs and spot price came to 345, but premium of CALL decreased by 8Rs, whereas PUT premium increased by just 1Rs. Why SO???
As my both options were OTM and PUT option came from Deep OTM to OTM but its premium increased by just 1Rs, whereas CALL Deep OTM is still deep OTM but its premium decreased more. Please explain me?
Shrey, this is a classic case of volatility driving the option premiums up. The decline in calls shows that the premiums are eroding with the drop in volatility. The put premium too on the other had and losing value, but its been offset by the drop in the spot price. Hence the calls are falling faster than that gain in puts.
Can someone honestly make consecutive profit (year on year – not necessarily weekly or even monthly) if they are disciplined and with proper money management / risk management?
Ive noticed that most teachers don’t necessarily trade their own money, but actually make money through teaching, tips, access to traders circle/group.
With all the knowledge that one has, can you honestly say that you can make consistent profits. (40% – 60% on your capital)?
Capital can be 1L, 10L, 1Cr or 10Cr, irrespective.
That is difficult, Ameet. I’ve not been able to do that with trading. But I do know traders who have/continue to do that. I’ve had a fair bit of success with investing.
sir m stuck …I mean how to get delta value of any script by which formula I can get the delta value..
Delta is applicable only for options, Priyank. I’d suggest you check https://sensibull.com/ for this.
Hi Karthik, Thanks a lot for another insightful article. It really helps a lot.
Quick question- I bought a Nifty Put option at Rs. 9 today; Delta 0.14. Nifty gained 60 points from there. Going by the standard Delta calculation, the premium should have dropped to Rs. 4.5 approx. While in reality, it came down to Rs. 7 only.
What do think I am missing here?
Thanks, Laksh
Maybe volatility also increased supporting the premiums?
Hello Karthik,
I have few queries in regards to Bank Nifty for the week 15th Nov 2018. Please find the link below.
https://drive.google.com/drive/folders/1dTMMrwuHc5mErHS_Q5STQCGx8C5cyek1
The strike prices that I am talking about are
1. Bank Nifty15th Nov 26100 PE
2. Bank Nifty 15th Nov 26100 CE
3. Bank Nifty 15th Nov 26000 CE
On 15th Nov, Bank nifty closed at 26154.75. Considering 15th Nov as the expiry day of that week, the value of the PUT option strike has come down to 0.05, however the value of the Call option both 26100 and 26000 hasn’t come down and also at the end of closing hours of trading I could see traders buying and selling the Call option strikes. I would like to know as to why the value of Call option did not reduce and why the traders were trading the strike price even at the close hours and what would have happened after closing hours of market to these Call options and how would it have affected the traders who bought or sold at the last minute.
Ananth, both 26000 and 26100 CE has intrinsic values of 154.75 and 54.75, so it cannot come down to 0. The reason why traders were transaction was to probably close the postions.
Hello Karthik,
I am trying to post a link from google drive and queries in regards to the same, however it is not getting posted. I am not sure what I am missing. Please help.
Thanks in advance.
Its working now, Ananth.
Hello Karthik,
I have few queries in regards to Bank Nifty for the week 15th Nov 2018. Please find the link below.
https://drive.google.com/drive/folders/1dTMMrwuHc5mErHS_Q5STQCGx8C5cyek1
The strike prices that I am talking about are
1. Bank Nifty15th Nov 26100 PE
2. Bank Nifty 15th Nov 26100 CE
3. Bank Nifty 15th Nov 26000 CE
On 15th Nov, Bank nifty closed at 26154.75. The value of the PUT option strike has come down to 0.05, however the value of the Call option both 26100 and 26000 hasn’t come down and also at the end of closing hours of trading I could see traders buying and selling the Call option strikes. I would like to know as to why the value of Call option did not reduce and why the traders were trading the strike price even at the close hours and what would have happened after closing hours of market to these Call options and how would it have affected the traders who bought or sold at the last minute.
Hello Karthik,
I have few queries in regards to Bank Nifty for the week 15th Nov 2018.
The strike prices that I am talking about are
1. Bank Nifty15th Nov 26100 PE
2. Bank Nifty 15th Nov 26100 CE
3. Bank Nifty 15th Nov 26000 CE
On 15th Nov, Bank nifty closed at 26154.75. On the expiry day the value of the PUT option strike (ATM) came down to 0.05, however the value of the Call option (ATM) 26100 closed at 43.20 and call option 26000 (Slightly ITM) closed at 133.30. I could see traders buying and selling the Call option strikes at the last minute of trading hours. I would like to know as to why the value of Call option did not reduce and why the traders were trading the strike price even at the close hours and what would have happened after closing hours of market to these Call options and how would it have affected the traders who bought or sold at the last minute.
I wanted to show you the image that I captured for the same, however I am not able add the link in here.
Replied to this query earlier.
Hi Zerodha,
Firstly, I feel a sense of confidence over my fundamental knowledge while I go through varsity. It’s really easy to understand. For that I wanna appreciate you and your team efforts personally. Grateful to your efforts.
Coming to the topic. I have a doubt in this module.
Look at the below line in double quotes.
“Likewise if you short a PUT option the delta turns positive. -1 * (-0.5) = +0.5”
Generally if we short a PUT option, we collect the premium instantly and any increase in the premium won’t add more money to the position. If my understanding is right, why are we even calculating delta in that case?
Can you please elaborate here. Thanks in advance:)
Thanks
Srikrishna
Thanks for the kind words, Srikrishna.
Delta, like other option greeks is a sensitivity of the option premium, which need to understand when assuming any position in the option market. Yes, increase in premium does not add more money, but it does have an impact on your P&L, right? This is a risk and should be measured by its sensitivity.
This is my understanding after reading your comments.
If I am in loss while selling put option at a particular point of time. And later, there is an increase of 1 point in the underlying. Now, accordingly we have an increase of (-1 * (-0.5) = +0.5) 0.5 for the option. So, there is an effect on P&L here.
But, if I am in profit while selling put option again at a particular instant of time and later there is an increase of 1 point in the underlying. Now, the above calculation of 0.5 is not valid in this case. Since, we have already collected the premium and more increase from here won’t be adding to our position(P&L).
Is my understanding correct? Please let me know.
An increase in the underlying actually works in favor of the put option seller.
Hi Karthik,
Can you please explain me how the probability of the option expiring in ITM is determined?
Thanks
Srikrishna
The delta of the option kind of conveys the probability of the option expiring ITM. For example, if the delta is 0.2, then there is a 20% for this option to transition from OTM to ITM. So on and so forth.
Karthik,
I actually wanna know the calculation behind this –
“If the delta is 0.2, then there is a 20% probability for the option to transition from OTM to ITM”.
I want to know how the relationship between the delta and the above probability is determined?
And also I have asked one more doubt just above this question. Can you please answer that as well? Thanks in advance.
Thanks
Srikrishna
This is just a proxy (a very good one though), Srikrishna. I dint get the other question, can you please ask that again? Thanks.
sir, i am completing MBA in FINANCE , I want to ask about NISM-MOODY CDMS cource it is good 4 me to do.because i am searching job in derivative section.please help me out.
Ujwal, I’m not sure about that. However, if you are a student (or even otherwise actually), then any learning is good learning. Go ahead and do it!
thank you sir for boosting me.
Good luck and happy learning!
A Terminal which show all Greek like
gama delta theta Vega rho value at time
also provide good candle chart
PPlease tell me the name of such Terminal How can I purchase them
Can zerodha provide such terminal which enriches in all fundamentals Technical value chart and cover also Greek value in one singht
You can use Kite and Sensibull for this, Pankaj. Both the platforms are integrated and you get everything that you need to trade options.
Kite – https://kite.zerodha.com/
Sensibull – https://sensibull.com/
in kite .zerodha. com
exactly where Greek delta theta Vega
value can see
means which heading is locate
Please guide
These are not available on Kite, its available on https://sensibull.com/
Is there any penalty imposed by exchange after shorting call or put options if i don’t buy it back before expiry?
suppose 24 july, 2019 i take a short position in Infosys for call option and expiry date is 26 july, 2019. If i don’t buy it back before 26 july then what are it’s implications ?
Nope, no penalty as such.
Dear Karthik,
I have recently started studying the greeks and request you to please clear a doubt. In case 2, where the trader has both call and put options and the total delta is coming to 0.25, im just wondering what is his thought process behind buying various call options? i was wondering if he wanted a delta of 0.25, he could have as well bought 5 ATM call options.
thanks in advance 🙂
Kunal, 5 ATM will make it 2.5 delta, which is very different from 0.25 Delta. At 0.25 delta, you are neutral about the markets, but at 2.5 delta, you are bullish.
Dear karthik,
suppose spot is 11000(Nifty), if i sell call(ATM) & put(ATM) at 11000 strike, overall delta will be neutral? but how overall delta will behave if spot moves up & down? let us take consider stock will move up +400 points & then it will go down by -400.
would u please explain how delta changes when we short the options ? i am asking question because in Delta part 3 chapter, less examples are given as to how delta changes for sell options.
You are right, the delta changes with the spot and this change the delta position. For you to maintain a delta neutral position, you will have to ensure you rebalance and add more legs to your position. This can be an expensive affair.
Hello karthik,
thanks for ur reply. Right now banknifty is hovering around 27860, if i sell call at 358 & sell put at 282 with 27800 strike, would u plz tell me after which point on either side( up & down) i will start to loose money. Expiry of these option is 29 aug 19. but i do not want P&L on expiry day as i know that. i want to know P&L before expiry.
The sum of premiums is 358+282 = 648.
You’ll lose money if Banknifty moves above (strike + sum of premiums) 28448 or below (strike – the sum of premiums) 27152.
Hi karthik, where can i get current volatility of bank nifty ?
You can use the B&S calculator to extract this. Check this – https://zerodha.com/z-connect/queries/stock-and-fo-queries/option-greeks/how-to-use-the-option-calculator
Sir
If call option is bought Deep OTM and market goes up and delta reaches to OTM or ATM and premium increased as well then :
1) can we book profit by selling at ATM or OTM ?. ( as we are selling at high premium and buying at low premium although the IV is 0 or spot price does not cross strike price).
Yes, Vikas you can sell the option at any point you think is good enough to pocket the premium.
Hi Karthick,
Great article I have been going through your lessons and they are the most easy to understand for a layman like me who doesnt have any prior knowledge about markets.
By the way I didn’t understand the last point in the lecture about probability of the option expiring in ITM and writing the option can you please elaborate it.
Thanks, Prasanna. The delta can also be looked up as a probabilistic indicator, which tells you the probability of the option closing ITM. For example, an option with delta of 0.4 indicates that the option has only 40% chance of expiring ITM. An option with 0.8 delta indicates that it has 80% chance of expiring ITM.
When I can get profit in option
Eg.i buy 240 CE and spot price is 238 premium is suppose Rs.6/-and lot of 300 shares
Now spot price increase by Rs.1 so spot price is now 239 ,premium also increase by suppose Rs.0.40. now premium is Rs 6.40.
Contact expiry date is so far yet
In this situation can I exit from contract and take profit of Rs.300*.40=Rs.120/-
Yes, you can. No need to wait till expiry.
Hey Karthik,
Great content, man!. So deep knowledge and clarity of thoughts. Hope to meet you someday and you’ll get to meet the best one the city has ever seen.
Glad you liked it, Ayush! Happy reading 🙂
Hi,
The statement from the above article “In the example 8000 PE is slightly OTM option; hence its delta must be below 0.5, let us fix it to 0.3 for the sake of this discussion.” The delta of PE is negative but you have said the delta of PE as positive in the mentioned statement. I am confused. Please clear my doubt.
Hmmm, if this is a short delta position, then Delta is positive.
i have 4 lots of britannia ce now i am in loss with 2 days of expiry ; can i roll over the position or wait till expiry ?
Depends on your view. If you think the stock needs time to recover, then roll over. If you think the exected move will happen over the next couple of days, then you can continue to hold the position.
[…] 11. Delta (Part 3) […]
Hi Kartik,
Can you please elaborate on this? (mentioned below taken from your article)
how odds are already against us if it would be delta of an ITM option close to 1?
Shall we not short ITM option ever?
In the same line – what would be the delta of an ITM option? Close to 1 right? So this means there is a very high probability for an already ITM option to expire as ITM. In other words the probability of an ITM option expiring OTM is very low, so beware while shorting/writing ITM options as the odds are already against you!
When you short an option, you want it to expire worthless, which means its delta has to be close to 0. The closer the option is ITM, the higher is the delta. Hence you want to move away from it so that the odds favour you as a seller.
Hi…in the quiz in varsity app, referring to the following question, “A trader is short on TATA steel ATM put option, he is essentially”-Correct answer is given as Delta negative. But it has to be Delta positive according to the observation no.3 under case.5 in this chapter. Please clarify.
Hmm, need to check this again. But yeah, its Delta positive.
Hi Karthik,
Thanks for the excellent material on delta. I just had a question on calculating the probability of profit of a strategy. I know over all delta of the position is a good estimate. But Can you tell me how to calculate it ? Does BS model throw POP as well ? or we may derive it from the normal distribution of break even prices ?
Many thanks in advance
Delta is derived out of the B&S model. The calculation technique is quite complex and quant heavy, I’d suggest you look for it online, there.
sir , plz tell that why change in spot and change in future is same
Because the futures mimics the spot price.
I have a doubt regarding delta!
How can we add up deltas?? Shouldn’t it be average of deltas instead of adding up because afterall, we will gain according to the individual strike prices and deltas
Hmm, the delta is additive, one of the inherent properties of the greeks. Unfortunately, I don’t have a mathematic explanation for this just yet, something that I’m curious to figure myself 🙂
hii sir,
I have multiple doubts please clear them
strike price is something where we are expecting stock price to reach. like if stock is trading @100rs and we expect it will go @120rs, so 120 is a strike price. when stock is trading @100 and I buy @90CE which is ITM and premium paid is 6rs, delta is 0.7. At what point I will make a loss? and what is the reason behind making a loss?
If stock price goes up from 100 to 105, it went up 5 points. so 5*0.7= 3.5 , I will make profit of 3.5rs?
Another question is will I make profit if market goes up irrespective of what is my strike price. like if I bought @110CE instead of @90CE when will I make profit?
@110CE and @90CE what would be my profit if market goes up from 100 to 105?
please clear my doubt !!! correct me sir!
Think of it as buying a stock, the stock price here is the premium. Your P&L depends on the difference between the buy and sell price of the premium. However, the twist is that the premium need not go up just because the price went up, because the premium is a function of price, volatility, time, and the speed at which the market moves.
Great Read,
what is the meaning of Varsity ?
Varsity is like a University 🙂
Sir,
Although futures mimic the spot price and move in the same direction, but don’t they change by different absolute numbers ?
Therefore, shouldn’t the delta of a futures contract be close to 1 and not exactly 1 ?
Thank you
Hmm, I cannot deny this. However, I also know the absolute change is a function of demand and supply. Need to think through this and find a rational explanation 🙂
Sir,
What happens if I short a Deep OTM option 2 days before expiry and I want to short-cover it, but there is no seller for that OTM price?
Will I still have the premium received while I made a short position if it expires unsettled at OTM price?
In case you dont cover, then your position will go for expiry and will get settled. Yes, the premium will be credited to your account.
yes you will receive net credit as long your short stay OTM on expiry
If I don’t Square-off my Short position before expiry, is there any chance that it will lead to Physical Settlement of Share?
It depends on the moneyness of your contract. Physical delivery will be applicable if the option you’ve sold is in the money (ITM).
really great insight to option trading !. I surely understand now, what mistakes I was doing earlier thanks, sir. keep writing these amazing articles they are really very helpful
Happy trading, Abhishek 🙂
hi karthik .
i have oberserved the delta is decreasing in a particular strike price when market stays still nearing to expiry .why this happens .
example nifty strike 9000 pe delta .20 5 days to expiry .market stays still same strike price delta will be .10 2days to expiry .
theta vega i understand .but why delta is changing if market does not move that much but delta is shrinking as it is nearing to expiry
As we approach closer to expiry, the delta gets more sensitive. For a small change in underlying, delta moves are larger.
hi karthik.
when premium are less sensitive and more sensitive .
1.current month
2.next month
3. far month
Sorry Ankit, I don’t seem to understand your query. Can you kindly give more context to this? Thanks.
hi karthik.
when premium are less sensitive and more sensitive .
1.current month
2.next month
3. far month
i mean to say if nifty spot price changes premium change sensitivity kaha zyada hogi according to expiry of different month .
plz provide the reason behind it
Yes, the current month is the most sensitive, Ankit.
hi karthik .
wat is the logic behind it that current month premiums will be more sensitive .
because spot price is same for all the 3 expiries
That’s because of the time factor. The current month is the closest to the first expiry.
Hello karthik,
thanks for ur reply. Right now banknifty is hovering around 27860, if i sell call at 358 & sell put at 282 with 27800 strike, would u plz tell me after which point on either side( up & down) i will start to loose money. Expiry of these option is 29 aug 19. but i do not want P&L on expiry day as i know that. i want to know P&L before expiry.
PLEASE ELABORATE THE ANSWER TO THIS QUESTION AS IT WAS IN COMMENT SECTION.
Thanks
Your range will be 27860+640 and 27860-640. The P&L before expiry depends on what price you square off right?
Sir,
You have mentioned “You’ll lose money if Banknifty moves above (strike + sum of premiums) 28448 or below (strike – the sum of premiums) 27152.” It will be strike or spot +- Premium?
Could you please help with this more as let say if premium is 500 (squaring off price).
The sell call would be in loss of 500-358 as It should be less than the earlier sold premium of 358 to be in profit. RIGHT?
The sell put would also be in loss of 500-282 as it should also be less than earlier sold premium of 282 to be in profit. RIGHT?
BOTH ARE IN LOSS THAN HOWCOME THE UNDER 640 THEY LL BE IN PROFIT?
Please help with the same. I am not clickin it.
I’d suggest you check chapter 11, 12, and 13 – https://zerodha.com/varsity/module/option-strategies/ it has all the details regarding these strategies.
Hello! To your statement – “We know for every point change in the underlying’s spot value the futures also changes by 1 point. For example if Nifty Spot moves from 8340 to 8350 then the Nifty Futures will also move from 8347 to 8357 (i.e. assuming Nifty Futures is trading at 8347 when the spot is at 8340). If we were to assign a delta value to Futures, clearly the future’s delta would be 1 as we know for every 1 point change in the underlying the futures also changes by 1 point.”
Is this correct? In your previous posts regarding Future’s Pricing, you have used Futures pricing formula = Spot*(1+r-d)
So if Spot price increases by 1 point, then the future price should rise by 1* (1+r-d) right? Not exactly 1 point?
True, unlike most option futures (barring ITM) has a 1 to 1 movement wrt spot price.
Thank you Kartik for your response. But I think you understood my question. To the statement -> “We know for every point change in the underlying’s spot value the futures also changes by 1 point”, is this true? Since we know future’s price = Spot*(1+r-d). By this formula, 1 point change in underlying would actually lead to 1*(1+r-d) change in the future’s price. So this does not lead to 1 to 1 movement wrt spot price, right?
Like if d = 0, r lets say 4%, then 1 point change in underlying would change future’s price by 1.04 right?
I get your point. Let’s say the math works out to 1.04, then it means for every point change it futures changes by 1.25 points. The constant proportion is still maintained, right?
Hello.
As per the above chapter, if 2 or 3 days before expiry a trader sells a Deep OTM option, it is high probability that the Deep OTM doesn’t convert into ITM and expires as OTM only, on the day of expiry.
Now, about trading on the day of expiry itself? Can a trader enter into any kind of trade, selling or buying, on the day of expiry itself which has a high probability of getting profits? or it is not a good idea to trade on expiry?
what are the different cases and scenarios for this ?
Thankyou 🙂
Yes, but the premium you realise for this will be very little.
Nice topic .can you pleae let me know in nse where I can find delta for the stock at various strike price.
I’m not sure if NSE provides this data. Please do check sensibull.com for this.
What is dynamic delta hedging and how is it different from delta hedging?
DDH involves continuous adjustment of the position to ensure you are always delta neutral. Quite an expensive affair if you as me.
Hi Kartik,
Hope you are doing good.
You are a excellent mentor. Your knowledge and thoughts on subject are sound and clear. The way you present a topic makes it easy to understand. Are you planing to write a book on option. If not you should.
As I observed the best thing is that you are replying to every comment.
Thanks for sharing knowledge.. stay blessed…
Also
Thanks Deepak. Everything I know about options is mentioned here, dont think I can write a book 🙂
sir,
1. When we initiate a hedged position( eg .bull call spread ) to get a delta value do we need to sum up both ?
eg. licjsgfin spot = 277
lichsgfin sep 270ce buy , pre =18.50 ,delta = 0.62
lichsgfin sep 280ce sell , pre =13.75 ,delta = -0.51 . so if we add both the delta we get 0.11 delta , do that mean if underlying move up by 10 points ( 10*0.11=1.10) we make a profit of 1.1 per share .correct me if im wrong .
2.Is this same with the theta .
1) Yes, that’s the theoretical idea. But in reality, there are other forces acting on the options premium, hence you need to consider that as well
2) No, you cannot add up the theta.
Sir, let’s say I found a promising pattern which also provides me the Stoploss price.
In case of equity I can easily place correct Stoploss and in futures I can kind of guess the value.
But I have no Idea how to choose correct premium value for particular Stoploss in the underlying.
Kindly explain, Thanks 🙏
Mano, usually traders ignore the premium, analyse the trade based on the underlying. For example, a stock is trading at 525, 530 CE is at x. I can initiate a long CE at 525, keep a SL at 520, and a target at 530, irrespective of where the premium is.
(continued from previous)
Sir, let’s say the underlying spot @ 525 and I choose target @ 530 with Stoploss @ 520,
And I choose 530CE for which at premium say 5 and the delta value is 0.3
for target (5 point move in the underlying) => (5*0.3)+5 = 6.5 as the target of 530CE
for Stoploss (5 point move in the underlying) => (-5*0.3)+5 = 4.5 as the Stoploss for 530CE
Is it okay to choose target and SL by this method sir, Am I missing anything sir?
Thanks 🙏
Yes, this is also fine, in fact this is a more calibrated approach and helps in getting a perspective of the likely premium value at which you need to exit.
Chapter 11.2 – In the example of a put option the delta should be negative, not positive. Please change it!
Checking on this.
Thank you very much for your great content.
really impressed and it is very useful for beginners like us. 🙂
Happy reading, Roy!
Hi sir , thank you for the great article.
Can you please tell me , where can i find delta values for strikes during live market?.
You can check Sensibull for this.
Since you mentioned that delta can also be an indicative probability. Would this be considered only for individual options?
Like if there is an option strategy which has many legs and have some combined delta “x”. Would this still be a probability? OR we can only assume this for individual legs ?
It is best when looked at individual options and not as a combined leg.
Hi Sir thanks for the article, I’am understanding the option trading here better than the youtube videos.
Please clarify me if my understanding is correct
+ve total delta indicates I am in Call option and -ve total delta indicates I am in put option.
+Ve also means you are short Put and -ve delta also means you are long Put.
Thanks Karthik.
Can you please brief about – * Option Contracts “Turnover” represents “Notional Turnover”. , these turnover represent in NSE Option chain.
Sagar, Strike * premium * lot is considered as the notional turnover for options.
Thanks
it appears cut and paste issue.. please check page 109 of 239 in pdf.
“With an addition of 2 Deep ITM PE, the overall position has turned delta negative, this means the combined position is less sensitive…”
in the calculation -0.75 is the delta and it moves almost like a nifty but in the opposite direction. So, how can it be less sensitive ?
it appears like cut and paste issue.
Ah yes, it is not less sensitive. Thanks for pointing 🙂
Hey Karthick!
Assume we have more than 25 to 30 days to expiry while deciding. If your conviction is bullish, would you prefer going long in futures 1 lot (Delta=1) or writing 2 lots ATM puts (Delta = 0.5 *2=1) or going long 1 lot Deep ITM put (Delta = 1). And vice versa for bearish stance. How do you take a decision in this situation?
Thanks!
Just finished reading the chapter on Gamma. Based on my understanding of Gamma, I would avoid shorting 2 lots ATM puts (Delta = 0.5 *2=1) as Gamma value for ATM is large and could increase my risk exposure. So it boils down to whether going long in futures 1 lot (Delta=1) or going long 1 lot Deep ITM put (Delta = 1) for a bullish stance? Vice versa for a bearish stance.
Does that mean in short straddle, ATM short gamma is not a problem as it is balanced either way?
Thanks for patiently answering all questions. Appreciate it!
Its balanced at the time of initiation, but as the market moves in a direction, the balance changes and you will have to adjust the position again.
well…astonishingly went through the points..how simple you managed to convey this toughest topic. very glad to read and understand. conngrts..sr
Happy reading, Abdul. Glad you liked the content.
Woaaaaaahhhh!
The probability of itm going to otm is less,so if we want to do a directional trade by writing options should we select otm options for writing. And for day trading form your experience which is better buying or writing.
Hi Karthik,
Thank you for the article.
As i have been writing to you all the time however Looking forward for your respose.
I have a query kindly assist.
as you stated earlier-
) If the deltas add up to a +ve number, this means you make money when the markets goes up
2) If the deltas add up to a -ve number, this means you make money when the markets goes down
3) Net P&L = Change in underlying * Total Delta * Lot size —-> how ever please do bear in mind this is only an expected P&L and not really the actual P&L. Remember an options contract is subjected to other variables…we will understand this point in detail over the subsequent chapters.
My question is :- U make money when u have negative delta and market goes down which clearly states for the Put option ryt???
we get negative for put only but now i am confused we make profits when market goes down in 2 cases:- buy put and sold call.. (how do we differentiate then in the chart you made above)
1) Yes
2) Yes
3) The decision to either buy a put or sell call depends on the premium of the options.
@The probability of itm going to otm is less,so if we want to do a directional trade by writing options should we select otm options for writing. And for day trading form your experience which is better buying or writing.
Yes, OTM would be a better bet 🙂
The decision to buy or sell depends on multiple factors and there is no single rule for it.
Case 5 – Nifty spot at 8125, a trader has sold a Call Option
Sl No Contract Classification Lots Delta Position Delta
1 8100 CE ATM 1- Sell 0.5 – 1 * 0.5 = – 0.5
2 8100 PE ATM 1- Buy -0.5 + 1 * (-0.5) = – 0.5
Total Delta of positions – 0.5 – 0.5 = – 1.0
You calculated based on delta but in reality, trading is done based on the premium change
Suppose premium for 8100 CE is 330 and 8100 PE is 280
if nifty moves up by 100 points now new spot will be 8225
change in premiums for call 100*0.5 = 50 new premium will be 330+50 = 380
Change in premium for put 100*-0.5 = -50 new premium will be 280-50 230
The total change in premiums will be 380 -230 =150 (profit)
Am I correct?
My doubt is even though deltas can be added up but premiums will be different for the same strike for a call and put …
it will affect P/L also? Am I right??
Since its 2 PUT buy, the delta is -1. Yes, the delta changes and change in delta also influenced by the market’s demand and supply situation and not just the way delta calculation.
Sorry, I calculated for buy here.
kindly read it, sir..
I figured actually. Please check my reply 🙂
Hi,
Really knowledge sharing articles. One doubt, if deep itm Delta is 1, does that mean probability is 100%
Yeah, in a sense delta is a proxy for the probability of the option expiring ITM.
What a clear teaching !! Thanks for being with us
Happy learning, Taran 🙂
Hello sir,
First of all, hats off to your brilliant efforts of educating the masses about such complex terms and raising the integrity of the stock markets and the investment profession.
Now regarding my query, I have a peculiar doubt about the probability part of this reading about Delta.
Please help me understand the following :
1) What is the quantitative logic behind measuring the delta values in % terms as the probability of the option to go ITM?
2) Is the probability a conditional one or an unconditional one? [e.g P(ITM|an event occurs) or just P(ITM)]
3) To understand this concept clearly, can you provide me with the formula for Delta so as to compare the same with Covariance and Correlation formulas?
I hope I’m not complicating the topic for myself but, the questions just came out of curiosity.
Thank you.
Thanks for the kind words, Soham.
Delta as a probability is a proxy used by traders, with no quantitative logic as such (or at least I’m not aware). Delta is derived from the B&S formula, in fact, all Greeks are.
Thank you for the prompt reply.
And do take care in these difficult times. Health is the greater wealth ;P
Totally agree 🙂
Hello Karthik,
I am usually more interested in the percent change in option than the points change, so instead of the delta, I calculate how many percent option will increase, if underlying increases by 1%, and I use that along with volatility and theta to choose an option strike in general.
I want to ask is there a name for this greek? (percent change in option on 1% change in underlying)?
Not sure, but this sounds like Delta 🙂
Great haha. I already call it delta.
Whatever works 🙂
Hello Sir
Does the value of Delta changes with the no. of days left to expiry?
1 minute or 5 minute candle
Taking readings on a Daily close basis
7th May
BN @ 32904
30500 PE (sell) (27th May expiry)
premium price 232.8
Delta : 0.18
10th May
BN @ 33142
30500 PE (sell)
premium price 119.95
So,
spot moved (33142-32904) =238
change in premium 238 * 0.18 = 42.84
therefore premium on 10th should be 232.8-42.84 =189.96
But it closed at 119.95.
Q1) Are my calculations correct sir?
Q2) Do the premium was less than calculated bcoz of time value decaying?
Q3) Formula of Delta (change in premium/change in spot) calculation works when all else equal?
Thank u sir
1) Seems correct
2) Yes, do remember there are multiple factors that influence the premium. Theta decay, decrease in volatility also leads to lower premium
3) Yup, that’s right.
Hi, sir,
Yesterday i was created Bank nifty straddle and as we know today it moved 3.82% and also break the Upper break even point.
Adjusting trading Delta is -80, how much it will impact the over all P & L, Explain -ve delta result and + ve delta result
-80 indicates that you are more short than long, hence to make it market neutral, you should perhaps buy an ATM call or futures.
In Varsity app, Module 4 Options Trading, Intermediate level quiz, Q10, Short ATM PE is marked as Delta Negative.
Should it not be Delta positive? Put options have negative delta and the trader is short PE. He will benefit with the rise in underlying. His delta should be around +0.5. But the correct answer for the question is set as delta negative.
Please fix the question setting in the app
Checking on this, thanks for pointing.
hai sir
Again thank you for this module, as a beginner Varsity helps me a lot. I completed all option strategy modules and then I revisited this module i got some doubts after reading “The combined position has a delta of 0, which implies that the combined position does not get impacted by any change in the underlying&However Delta neutral positions react to other variables like Volatility and Time”
i have some thought about this because of delta is changes with respect to direction.
If nifty is trading @ 15000
ATM CE have a delta of 0.5 & ATM PE have a delta of -0.5
if we bought both CE&PE in ATM, then net delta is 0.
1) if the nifty move up (for eg. about 300 pts)
then ATM CE become ITM CE and delta also shifts to 0.7 (roughly for simple calculation)
and ATM PE bcome OTM PE and delta also shifts to -0.3
then the net dela become 0.4, that is net delta is moving 0 to +ve when maket goinig upside
If the deltas add up to a +ve number, this means you make money when the markets goes up
2 like above
if the nifty move down (for eg. about 300 pts)
then ATM CE become OTM CE and delta also shifts to 0.3
and ATM PE bcome ITM PE and delta also shifts to -0.7
then the net dela become -0.4, that is net delta is moving 0 to -ve when maket going down side
If the deltas add up to a -ve number, this means you make money when the markets goes down
? so if we execute this trade in intraday (time decay not affected because of intraday , but vega may be) , can we make profit irrespective of the directional movement?
? if it is true how can be say, Delta Neutral positions do not get impacted by any directional change? (in above case)
Yes, this is applicable to intraday as well and you may profit in case there is a strong directional move. As long as the position remains delta neutral, it won’t. But the fact is that with changing mkt direction, there will be an impact on the delta of the position, hence the overall profitability.
But ur comparing option with futures as same by variation of points is same, but the variation in the percentage is not same
That would always be the case, right?
No i am asking, why do u equating the futures and options when the variations in points are same but percentage change matters right ? To equate them. But in this case its %change is not same. so why do you equating them ?
Variation in points is not the same, Sourav. Futures is liner, the option is non-linear. Factors that influence these instruments are very different.
Hello Sir,
First of all I would like to thank for all the explanation being done free of cost. Great work Sir.
I have a small doubt, say for suppose Nifty is currently at 15697(spot), I am thinking that market rallied too much(assumption for sake of example) in past few days so I expect it to stabilize for next few days. With this assumption I sold 15900(strike price) call option at certain 200(say) premium. Now if nifty rally continues till expiry and the spot is present at 15800 on the date of expiry, with the delta calculation it should be evident that premium increases to 250(say).
Now with this clearly since premium increased I should be at loss to exit my position, however I was right in my prediction that nifty doesn’t cross 15900 till expiry. In this case what will be the scenario, will I book profits by exercising the contract?
Also please correct me sir, If any of the underlying assumptions are wrong.
Shranith, if your conviction is strong that Nifty won’t cross 15900, you should hold. In fact, you should sell options only when you have strong views.
Super content on options. Your explanation and writing style make things very easy to understand.
You gave the example of 8400CE which has only 10% chances to become ITM. This means near expiry day or on expiry day, we should sell OTM or deep OTM call options to earn profit. Am I correct or I missed something?
Yes, it also means 90% chance of the option of staying OTM. Not a guarantee, but serves as a reference point.
Hello Sir ,
Does the delta decrease or increase w.r.t. expiry ?
( BN fell today around 50 points and my 32500 PE delta instead of increasing , got decreased from 0.06 to 0.02 )
Thank u
No, delta does not have a direct impact wrt to expiry.
18th June BN closed @34558
BN 36500 CE ( sell ) delta = -0.04
22nd June BN closed 34745
BN 36500 CE ( sell ) delta = -0.025
Even if the spot moved towards 36500 to become ATM , delta decreased instead of increasing.
This is confusing me.
Plz guide sir.
Thank u
Abdul, this is because we are also closer to expiry. Delta also has an impact with time remaining to expiry.
Sir,
As in case 4(Delta Neutral position) buying one CE and one PE, you’ve said its delta would be zero. But when the spot rises, If CE moves from ATM to ITM, its delta would move from 0.5 to 0.75 and in case of PE, delta moves from -0.5 to -0.25. So, overall its moving from 0 to 0.5 which is no more Delta Neutral position.
Its 0 at the time of initiating the position, Ravi. But it changes as the spot market moves.
Hi,
If Nifty moves by 50 points, the position is expected to move by 50 * (- 0.75) = -37.5 points.
What Will be the Adjustments in premium.
As we know – ve number means opposite direction movement.
1. if we are long Call, add the delta tó the Premium
2. if We are long Put, deduct the delta from Premium .
But in case 3 , we took both call and put ( Long positions )
So, What Will be the Adjustment in Premium ..
Delta gets added and deducted, hence it’s delta neutral. But if the spot moves higher %, then the position will be skewed towards +ve or -ve delta. So you will have to add more CE or PE to offset that.
Very nice explanation
Hi,
Do note the same can be achieved by shorting 5 deep ITM PUT options –
– 5 * – 1 = + 5
-5 indicate 5 short positions and -1 is the delta of deep ITM Put options.
I Have a Question regarding Above , PUT Option always have – ve delta , and inverse relationship with Premium.
As Above example short PUT have Positive delta , it Means it has Positive Relation to the underlying , as Market Move Up so Does Premium Move Up.
Yes, thats right.
Hi,
Do note the same can be achieved by shorting 5 deep ITM PUT options –
– 5 * – 1 = + 5
-5 indicate 5 short positions and -1 is the delta of deep ITM Put options.
Put Have always – ve delta , irrespective of Long or short but in Above example short Put Have Positive delta and show Positive Relation with Premium .
how is it possible ?
Suppose , NiFTY spot – 8284, Strike – 8500 PE ( short PUT ) , Delta value = -0.8 , Premium – 120 , What will be the New Premium
Nifty goes Down 20 Points
expected Change in underlying = -0.8*20 = 16
New Premium = 120+16 = 136
As I show a inverse relationship with Premium .
But shorting 5 Deep ITM PUT show Positive Relation
how is it possible ?
I dont know if I got your query right, but do note this –
The algebraic sign of the direction = +ve for long and -ve for short.
Delta of a PUT = -ve
So long put = +ve for being long * -ve since put, therefore -ve
Short put = -ve for being short * -ve for put, therefore +ve
So if the market goes up, put loses premium value (consider the change in spot price as +ve or -ve). And if the market goes down, the put gains.
there is just 10% chance for the option to expire ITM or in other words there is 90% chance for the option to expire as an OTM option.
MY QUESTION IS IF YOU BUY 10 LOTS OF 0.1 DELTA AND THE TOTAL DELTA IS 1 . DOES PROBABILITY CHANGES FROM 10 TO 100
No, the probability still remains the same.
These tutorials suggest that the delta for ATM options is eith 0.5 or -0.5, whereas right now on sensibull (accessed from kite) the options chain shows ATM delta as 25 or -25 (can be interpreted as 0.25 or -0.25).
Please clarify.
Hi Karthik,
Cant thank you enough for making such a difficult topic into such a simple layman language. It feels, as though, you are teaching in a physical class and patiently explaining all the complicated option jargons !
Thanks.
Happy learning, Snehal 🙂
Hi Karthik,
Good Day!
Can delta alone can make changes to option price without supply-demand (i.e. the strike is illiquid and is having delta of 0.1) for a particular strike ?
Similar way can other options Greek too make changes to options price without supply and demand?
Thanks,
Lingam.
If you think about it, the delta captures the directional impact of the underlying. So yes, that alone can have an impact on the premium.
Very informative article. Thank you
Happy learning!
sir the profit of delta combined will be calculated on single lot or total lot??
On your overall positions.
sexy chpater boss
loving it
Impeccable article
Thank you ☺️
Happy learning 🙂
What is the Formula to calculate the Delta, anyway to see the Delta value of a option in Zerodha Kite?
Delta is an output of the Black & Scholes options pricing model.
How can we know what is the delta of any call or put option? Is there any site to know delta after end of the day
Kedar, you can use Sensibull website for this. Or use any basic options calculator for this.
I heard some comments regarding buying or selling options. They said option buyers can’t make money when compared to option sellers. Yes odds of winning for seller are higher than buyer but does that mean option buyer can’t make money?
To some extent its true Dhananjay, but having said that it all depends on the trader and the traders’ strategy.
In 11.1 Adding up the Deltas, the concept is very well explained, though i feel there is something which needs to be mentioned to the reader that not only the Premiumness of the Option depends on other greeks, but also depends on the movement of the underlying as well.
Suppose for Eg: if we have both Puts and Calls having different Moneyness , the summation of the deltas will always change as the moneyness also changes wrt to the change in the underlying.
Nifty spot at 8125
1 8000 CE ITM 1- Buy. 0.7 + 1*0.7 =0.7
2 8300 PE Deep ITM 1- Buy – 1.0 + 1*-1.0 = -1.0
3 8120 PE ATM 1- Buy -0.5 – 1*0.5 =-0.5
4 8300 CE Deep OTM 1- Buy 0.05 + 1*0.05 = 0.05
Total Delta of positions 0.7 – 1.0 + 0.5 + 0.05 = – 0.25
In this if the Movement of Underlying goes up, then deltas of CE will change and Total will be in positive.
Kindly correct me if I am wrong but to just add them up at first would not really give us the exact direction of impact on positions.
That’s absolutely correct. We have discussed these points as well right? Check the ‘adding up of deltas’, section.
whats the combined position here
Dear Karthik sir,
I need to clarify my understanding about deltas addition :
I buy 1 lot of Nifty which has 50 shares. All of them are ATM call options.
Now since ATM has delta 0.5, if Nifty moves by 1 point, the entire position will move by 50 x 0.5 =25 points.
Is that correct?
No, delta is for the strike. So ATM has 0.5 and the lot size does not really matter. What matters is if you add another strike, say an OTM with 0.35 Delta, then the overall delta is 0.5+0.35=0.85. The number of stocks making up to the lot size does not matter.
Thanks Karthik sir for your clarification.
Sure, good luck.
Dear Karthik sir,
Can 2 different strikes belonging to same underlying but different expiries be added?
No Sandeep, you cant really do that.
Dear Karthik Sir, not understand one point as u say delta of an option is also the probability for the option. Suppose Nifty spot trading at 10,000. Strike:- 9900 CE and their delta is 1 for weekly expiry so it means there is 100% probability that Expiry should be above 10,000 level.
It is also possible that Expiry should be below 9900. Pls correct If I am wrong.
Its in the money option, so delta will be very high and hence the probability. It wont be 100% 🙂
If my option strategy delta goes below .5 or -.5, I can bring it high by adding more strikes of same underlying asset to get the benefit later considering time gap in expiry.
Yes, you can add or subtract more deltas as long as its the same expiry and same underlying.
Sir,one question
“the probability of an ITM option expiring OTM is very low, so beware while shorting/writing ITM options as the odds are already against you!”
what kind of odds lie there?
The odds of strike expiring ITM 🙂
Where can we find/calculate the delta of an option?
YOu can check Sensibull for this.
Dear Karthik,
thank you and these details will help us to become independent retail trader .
really l liked the approach of explaining with real time examples and with simple English words.
just i needed answer for one query , which time frame we need to refer in Day trading.
i am planning to refer Heikein Ashi candles for analysis.
Thanks,
Manjunath
Thanks, Manjunath. I’d suggest you look at either a 15 or even 30-minute chart for day trading.
Thank you Karthik.
Welcome!
How good are these articles Karthik. you are a fantastic story teller
Glad you liked it, Vishal. Happy learning 🙂
Hi Kartik,
Thanks for providing this great article , I had one question what if instead of buying or selling multiple options to stabilize the delta we just buy or sell one option with the same delta , is there advantages for the first case over the second?
Sorry, I dint get that. Can you quote this with an example?
Hi Kartik!
I had one doubt. You wrote that Delta can also be used as percentage and as we go close to expiry, deep OTMs tend to have lower delta. Does this mean that shorting deep OTMs with delta approx 0.1 will give profits most of the time? Since they have just 10% chance to get converted into and ATM, does this mean that shorting such OTMs give us 90% chance of making profits?
Thanks
In a way yes, these have higher odds of expiring OTM and hence you get to retain the premiums. But be aware, markets can be extremely volatile around expiry and your OTM option can become ITM quickly 🙂
Sir on 12/9/22 at high of 9:30(15 min) candle the price of Bank Nifty was 40549.95 and at the close of 10:00 candle the price was 40641.40.
Total movement = 91.45
Delta of 40500 CE at high of 9:30 was 0.52
Premium at high of 9:30 was 409.60
As per calculation, at the close of 10:00 the premium should have been-
409.60+(91.45*0.52)= 457
But on actual basis it was 442.85
Why there is so much difference.?
On the other hand when the same option decreases it decreased by 11 points in comparison to a decrease of 12 points in the underlying I e, with a rate of approx 90%
Pls clear my doubt as this is very confusing.
AShish, you are looking at option premium only as a function of the delta. The option premium is a function of many other variables like gamma, vega, and theta. They all act on the premium at the same time. Hence to get the exact premium value, you will have to incorporate these changes.
Thanks for the reply sir but still I have doubt-
– Can theta affect the market in intraday
– Can IV decrease when the market is rising
Pls elaborate
Dear sir, In my previous question also pls explain why did the market fell at the rate of 90%
90%? Not sure Ashish, can you set the context?
Wow ! This is the best explanation on internet for Option Greeks. Huge kudos to karthik sir and entire team .
Happy learning 🙂
Hi Sir,
I needed a clarity on the concept of adding up the deltas. Please correct me if my understanding in the following example is wrong. If I hold 3 options of an underlying with lot size of 100. Each with deltas of 0.5, 0.7, 0.8.
So when the underlying moves by 1 point change in the value of the position should be
For Option 1 – 100*0.5 = 50
For. Option 2 – 100*0.7 = 70
For Option 3 – 100*0.8 = 80
So the total change in the value of the position is by 50+70+80 = 200 points.
But on adding up the deltas 0.5+0.7+0.8 = 2, and since the lot size of my position is 300, a 1 point change in the underlying will cause a change in value of 300*2 = 600 points in my position!!. Is this how we understand adding up the deltas and ascertain the value of our position.
Yes, thats right. You need to add up the overall deltas. So in this case, the overall delta is 2. Which means to say for every 1 point change in the underlying, you position will by 2 points. So if the underlying moves by 300 points, your combined option position will move by 600 points.
Zerodha and Karthik thanks a ton this is fabulous way of teaching options which I never got it only now I understand pretty well thank you.
Glad you liked it, happy learning 🙂
Small confusion back in my mind,
Call buyer & call seller (writer) will have contract
Put buyer & put seller (writer) will have contract
If right
CE buyer make money when premium will increase
CE seller make money when premium will decrease
PE buyer make money when premium will increase
PE seller make money when premium will decrease
Thanku Karthik Anna for this easy and valuable learning…💚
This is correct, Faiz. Happy learning 🙂
Suppose Nifty 8000 CE is trading at 8000 at 10: 15 a.m. and the premium is 80.so option is in ATM & the option delta equals to 0.5.
Let say at 12 o’clock Nifty spot price is 8200 . New premium will be 80+200*0.5=180. the option is in ITM now and the option delta value let’s say is 0.6 . Suppose at 2 p.m. Nifty spot price becomes 8000 .so the point falls from 8200 to 8000. For this 200 point downfall the premium will fall by 200 * 0.6 =120 and new premium at 2 pm becomes 180-120= 60. Nifty 80 000 CE premium at 10:00 a.m. is 80 and at 2:00 p.m. is 60 even though Nifty spot price at 10:00 a.m. and at 2:00 p.m. is same. I am confused .sir, please clarify if this is even possible.
Bipra, this is the rough structure of premium movement if you look at premium purely based on the delta. But in reality, the premium is a function of multiple option greeks, not just the delta.
Also, in your example, you cant look at the points move, in the first case, delta was 0.5 and in the 2nd its at 0.6 or probably more, so the impact will be higher.
As you say the delta of a future contract is always 1.
Then how does the futures move from premium to discount or other way around and what does that mean.
Thank you.
The premium and discount are based on the spot price, right? Has nothing to do with delta.
I didn’t understand this example. should I buy this or not????
8400 CE is trading at Rs.4/- delta is around (0.1).
Spot is trading at 8275
There are two day left for expiry – would you buy this option?
please answer this Sir…
I’d not. Theta acceleration would be the highest, and the premium would erode quickly.
Hey Kartik
I have a question suppose in case of addition of delta’s value of my current delta is 1.5 .
1. Is it possible that value of my delta is 1.5?
2. If yes then change in my premium would be more the change in the underlying correct?(call / put) doesn’t matter .
Am I correct?
1 more thing I need to clarify, suppose value of delta is .2 and I take 4 lots of a strike price lets say 18000ce then the addition would be .8 and with this rate the change in the underlying occur right?
1) Yes
2) Yes. A delta of more than 1 indicates that your position is more sensitive to an increase in prices
3) At 0.8, your options gains 8 points for every 10-point movement in the underlying.
Sir , I am sorry I am late to ask this question, But sir I have 2 questions as follows :
1) Today I am seeing many youtubers(and really experienced traders) are putting up there pre market analysis as in like today we will find a buying side trade or today we will find a selling side trade by seeing the underlying chart . Sir how can people like us having small capital and beginners can do that .
2)Also sir please tell us how to track global markets and news for intraday trading in options(buying only) .
1) It is articulating your thoughts, Vishwas. You will get it with market experience.
2) YOu can check FT or Bloomberg. Marketwize is also a good app.
Thanks a lot Karthik Sir
Happy learning, Vishwas!
Hi Karthik Sir,
Firstly, I am extremely thankful to you for presenting such a simplistic explanation of a complicated topic (Options), as it helps newbie traders like me to learn this topic quite easily.
I have a 2 part question:
1. Why I need to buy 1 lots of ITM, ATM, & OTM instead of buying 3 lots of ITM (example)?
2. Why Delta gets added up ? (In this chapter, you have mentioned how, I want to know why)
Glad you liked the content, Subroto.
1) I’m missing the context here. Can you share the context pls?
2) For this, you will have to dig deeper into option maths. I’d suggest you look up for Black & Scholes formula and the maths involved.
Hi Sir,
Thank you for this article. Had one query in section 11.2. where you have mentioned
“In fact the trader hopes the spot price falls below the strike price so that the option transitions from an OTM option to ITM option – and in the process the premium goes higher and the trader makes money.”
Can you pls help me understand this. To me this looks contradictory to the PE example mentioned above this phrase.
So when you buy an option (regardless of CE or PE), you expect the price of the premium to go up right? When you buy a PE, you expect the price to increase as well. The price increase happens when the underlying falls. So in this case, Nifty falling from 8100 to 8000 translates to price of the option to increase and in the process the option also changes the monyness status – from OTM to ITM.
Thank you for the explanation
Happy learning, Raj!
Very nice article, it pulls me to read the entire article at one shot. Thank you karthik and zerodha
Happy learning!
hiii sir , am haveing some doubts
while calculateing net p&l = change in underlaying *total delta*lot size, isnt it .
am expecting nifty to move 17000 to 17200
so buyed itm option haveing delta of 0.7 of 2 lots
=200*1.4*2=560
is it right sir ?
what value is 560 is it premium change or total profit after 200 points change in the underlaying
Its the total premium, Abhishek. Btw, the premium is not just affected by the change in delta, but also change in Theta, gamma, and vega.
Hello Sir,
In the previous chapter you mentioned that
Premium change = Change in underlying * Delta (lets say Equation 1)
In this chapter you mentioned that deltas can be added.
So my question to you is, can the added delta be used in the Equation 1 to calculate the premium change or is it only to realize the overall direction and sensitivity of our overall position?
I am asking this because adding the delta is causing some irregularities in theory.
Example:
BN ATM Strike price = 40000
ATM CE premium = 150 (lets say)
Delta = 0.5
Lots bought = 5
Change in underlying = 100
Case 1:
So premium change = 100 * (0.5*5) = 250
Profit = 5*250*25 (lots * premium change * lot size) = Rs31,250
Case 2:
But if we calculate for each Lot separately,
premium change = 100*0.5 =50
Profit = 1*50*25 (lots * premium change * lot size) = Rs1250
So finally, Profit for 5 lots = 1250*5 = Rs6250
Which on is correct?
I got a bit confused because on separate comments you have mentioned that Delta can not be bigger than 1 (your comment on August 13, 2017 at 8:21 am)and that it can be bigger than 1(your comment on December 31, 2022 at 11:34 am).
You mentioned that buying 2 ATM will give a Delta of 1 but what does it really mean?
Do I have 2 lots whose premium will increase in ratio 1:1 with the change in underlying? If not, what does Delta 1 signifies?
Please help, I feel like I am missing something big in this chapter.
Vishwajeet, when I say deltas can be added, I mean the delta’s of different strikes with each other or maybe the delta of a future + the delta of an option. The deltas can also offset each other; for instance, +1 delta of future against two lots of short ATM Call deltas results in an overall delta of 0, rendering the position as a directional neutral position. Dont add the delta of the same strike (multiple lots); that will give irregularities, as you mentioned.
Sir,
In the example you just gave, you did add delta of the same strike (2 lots of short ATM call deltas) .
I know I am missing something and for that
Please give answer of the below questions by question no.
1) Can the added delta be used in below equations? (Yes/No)
Eq1: Premium change = Change in underlying * Delta
Eq2: Profit/Loss = Premium change * Lots * Lot size
2) Can you please give a complete example where delta adds up to more than 1 (Lets say, 0.4+0.5+0.6 = 1.5 for OTM, ATM and ITM long call)
and based on that Delta, you calculate final position of Profit/Loss in numbers.
I believe your example will finally clear all my doubts .
Thanks a lot sir for this great series and for making time for my queries.
1) Yes and Yes
2) Assume you have long futures and a long ATM CE. Long Fut = Delta of 1. Long ATM Call = 0.5 Delta. So total delta = 1.5. My advice is to not calculate P&L basis delta. Use only the change in premium for P&L.
Hope this helps.
MINUS sign and DASH (HYPHEN) sign are both often used of same size, which seems confusing to me.
An ARROW sign or EQUAL sign would have created less illusion i think, instead of an Hyphen.
Although in my various learning experience of OPTIONS this study material is so lucid that even a Grand Maa can grasp the subject.
Really Grateful.
Heartfelt Regards
Sagormoy Banerjee
Sagormoy, thanks so much for the kind words. Your feedback is noted 🙂
What is the delta of a future stock?
Sir,
Could you kindly correct if I am somewhere wrong with the below concept?
Suppose an underlying is trading at 10. A 10 CE option (ATM) has premium val. of 2. with delta say 0.5. Now, the underlying shoot upto 15 and the same 10 CE option has now turned ITM and say the delta is now 0.8.
From a buyer perspective:
An option buyer bought 1 lot of 10 CE ATM at 2. Position delta for him is +1*(0.5)=+0.5. Change of premium for (15-10)=5 point rise in underlying will be 0.5*5=2.5. Thus new premium will be 2+2.5=4.5. P&L=+2.5 for the buyer.
From a seller perspective:
An option seller writes 1 lot of 10 CE ATM at 2. Position delta for him is -1*(0.5)=-0.5. Change of premium for (15-10)=5 point rise in underlying will be -0.5*5=-2.5. Thus new premium will be 2-2.5=-0.5. P&L=-0.5 for the seller.
you should not look at just Delta to see the P&L of option positions because there are other variables which will impact the premium. The easier way is to look at just the difference in the premium while buying and selling. Check this – https://zerodha.com/varsity/chapter/options-m2m-and-pl/
Sir,
I would request you to please neglect the above previous query and rather correct the below please:
Suppose an underlying is trading at 10.
A 10 CE option (ATM) has premium val. of 2.
Delta say 0.5.
Now, the underlying shoot upto 15 and the same 10 CE option has now turned ITM and say the delta is now 0.8.
Change of premium value of the same 10 CE option will now be delta*change in price= 0.5*5=2.5
New premium value of the same 10 CE previous ATM option (now ITM) will be 2+2.5-4.5
From a buyer perspective:
An option buyer bought 1 lot of 10 CE ATM at 2. Position delta for him is +1*(0.5)=+0.5. Change of premium for (15-10)=5 point rise in underlying will be +0.5*5=+2.5. P&L=+2.5 for the buyer.
From a seller perspective:
An option seller writes 1 lot of 10 CE ATM at 2. Position delta for him is -1*(0.5)=-0.5. Change of premium for (15-10)=5 point rise in underlying will be -0.5*5=-2.5. P&L=-2.5 for the seller.
Thats ok. But please do see my previous response, it still holds true 🙂
Hi, how can we use Greeks and iv together, to find Demand and Supply on Premium of an option.
I know few peope who does that, just look at options chsin and strike and tells where and option can be bought and were an option can be sold.
All based on Greeks and IV.
I have read your Greeks chapter.. and Iv. But not able to find the answer to my question. If u can please help.
Hi,
First of all thank you for explaining delta in such a simple way. But by the end i have a small doubt. Considering delta calculation, do we consider delta change as per number of lots or number of total shares.
Eg : 5 lots of nifty = 250 shares
So considering delta at 0.5 and movement of nifty by 50 points.
Formula : 50*0.5*5 or 50*0.5*250 for an expected P&L
Yes, delta is as per lot. You multiply the delta by the number of lots; you get the total delta of your position.
Hi,
I was taking the quiz on the varsity app. There was a question that if a trader is short ATM put option, the trade is essentially delta neutral, delta positive, delta negative or the position has no delta. I chose delta negative as for put options the delta is a negative value. But the correct answer shown on the app is delta positive. How is this correct?
For PUTs, its -ve delta. So short of -ve delta makes it +ve 🙂
Hi karthik sir,
I have a doubt here while reading this,
“8400 CE is trading at Rs.4/-
Spot is trading at 8275
There are two day left for expiry – would you buy this option?
Well, a typical trader would think that this is a low cost trade, after all the premium is just Rs.4/- hence there is nothing much to lose. In fact the trader could even convince himself thinking that if the trade works in his favor, he stands a chance to make a huge profit.
Fair enough, in fact this is how options work. But let’s put on our ‘Model Thinking’ hat and figure out if this makes sense –
“8400 CE is deep OTM call option considering spot is at 8275
The delta of this option could be around 0.1
Delta suggests that there is only 10% chance for the option to expire ITM
Add to this the fact that there are only 2 more days to expiry – the case against buying this option becomes stronger!
A prudent trader would never buy this option. However don’t you think it makes perfect sense to sell this option and pocket the premium? Think about it – there is just 10% chance for the option to expire ITM or in other words there is 90% chance for the option to expire as an OTM option. With such a huge probability favoring the seller, one should go ahead and take the trade with conviction!”
My question is if I buy a deep otm option for intraday, and nifty spot moves up by 50 points , that means my premium will become (4*0.1) = 0.4 rs returns on premium that is 10%.the trading amount is less let’s say I bought 10 lots (500qty) (200*10) = (2000 rs). what are the risks associated with this kind of trades as I seen Zerodha Does not allow traders to carry forward overnight deep otm buy positions. This question might be silly, out of curiosity-I am asking and also learning options for the first time. 🙂
The only risk is the risk of you losing your entire capital as the probability of such moves are very low 🙂
Made a mistake here, the premium will be ({delta} 0.1*50 {expected price change) = 5rs, that means the premium will get 225% on this value.🙂
Thats ok, but pls check the previous reply. The philosophy remains the same 🙂
“Remember smart trading is all about taking trades wherein the odds favor you, and to know if the odds favor you, you certainly need to know your numbers and don your ‘Model Thinking’ hat.” Are you signalling black swan events? 🙂 and to protect against the odds we need to hedge our positions and not buy naked options. Because if we are wrong in our directions , then there is a chance of losing the entire premium amount.
No, I’m only suggesting on taking a structured approach to trading and avoiding all random decisions 🙂
Hi, how can we use Greeks and iv together, to find Demand and Supply on Premium of an option.
I know few people who does that, just look at options chain and strike and tells where and option can be bought and were an option can be sold.
All based on Greeks and IV.
I have read your Greeks chapter.. and Iv. But not able to find the answer to my question. If u can please help
You need to tie it all together. We have discussed a few cases studies towards the end of this module, I’d suggest you read that to get a perspective.
Sir, you explained a vast and complicated subject in a simple manner. thanks a lot.
Happy learning, Joseph 🙂
Hindi mai hota to Jayda samaj mai aata kartik bhai
Sirji, please check this – https://zerodha.com/varsity/module/%e0%a4%9f%e0%a5%8d%e0%a4%b0%e0%a5%87%e0%a4%a1%e0%a4%bf%e0%a4%82%e0%a4%97-%e0%a4%95%e0%a5%87-%e0%a4%b2%e0%a4%bf%e0%a4%8f-%e0%a4%91%e0%a4%aa%e0%a5%8d%e0%a4%b6%e0%a4%a8-%e0%a4%a5%e0%a5%8d%e0%a4%af/
Where is evidence about conversation of Delta into pesentage will give u probability? How did u derived this equation ?
As I’ve mentioned, its a quick and dirty method to figure the probabilities and a general market practice. Not sure about the derivation, I’ve not looked into it as well.
This is not about any query but just to express my feeling while reading through each chapter specifically the “Model Thinking” portions.
I feel like as if I’m reading a thriller story. In each chapter, diverse viewpoints are unfolded which is similar to detectives like Poirot or Holmes used to analyze suspects before reaching the final conclusion. I can’t resist reading till I complete all of them.
Thank you.
Thanks Manas, and I’m really glad you liked the content here 🙂
Happy learning!
Sir,
Could you please confirm if I have rightly understood the below?
(i) If I buy a lot of future contract, then the positional delta would be +1. This positional delta value will not change with respect to change in underlying as delta will be always 1.
(ii) If I buy a lot of Deep ITM CE option, then positional delta would be +1 initially. However, as the spot changes, the positional delta would change if the transition changes away from Deep ITM as delta value itself will also change with respect to change in underlying. Thus, positional delta is not insulated here with respect to changes in underlying.
(iii) If I buy/ sell several CE & PE options and say the total positional delta value is ‘x’, then this total positional delta value will remain insulated and will not change ever irrespective of change in underlying,
1) Delta changes to the extent of 1.
2) Yes, your delta is 1 at the time of taking the position, it will change as the market changes.
3) No it does. Each position value changes and therefore deltas.
Sir,
If I buy/ sell several CE & PE options in such a way that the total initial positional delta value is ‘0’, then this total positional delta value will remain ‘0’ irrespective of change in underlying.
No, it changes as the underlying market changes. Hence the need to adjust delta, and thats called Delta hedging.
Hello,
Could you please explain how did we arrive at this logic:
“Now to figure out the probability of the option to transition from OTM to ITM, simply convert the delta to a percentage number.”
Its a rough rule of thumb, Kenneth. I’m not sure about the math. More like a quick and dirty method to figure the probability.