8.1 – Intrinsic Value
The moneyness of an option contract is a classification method wherein each option (strike) gets classified as either – In the money (ITM), At the money (ATM), or Out of the money (OTM) option. This classification helps the trader to decide which strike to trade, given a particular circumstance in the market. However, before we get into the details, I guess it makes sense to look through the concept of intrinsic value again.
The intrinsic value of an option is the money the option buyer makes from an options contract provided he has the right to exercise that option on the given day. Intrinsic Value is always a positive value and can never go below 0. Consider this example –
| Underlying | CNX Nifty |
|---|---|
| Spot Value | 8070 |
| Option strike | 8050 |
| Option Type | Call Option (CE) |
| Days to expiry | 15 |
| Position | Long |
Given this, assume you bought the 8050CE and instead of waiting for 15 days to expiry you had the right to exercise the option today. Now my question to you is – How much money would you stand to make provided you exercised the contract today?
Do you remember when you exercise a long option, the money you make is equivalent to the intrinsic value of an option minus the premium paid. Hence to answer the above question, we need to calculate the intrinsic value of an option, for which we need to pull up the call option intrinsic value formula from Chapter 3.
Here is the formula –
Intrinsic Value of a Call option = Spot Price – Strike Price
Let us plug in the values
= 8070 – 8050
= 20
So, if you were to exercise this option today, you are entitled to make 20 points (ignoring the premium paid).
Here is a table which calculates the intrinsic value for various options strike (these are just random values that I have used to drive across the concept) –
| Option Type | Strike | Spot | Formula | Intrinsic Value | Remarks |
|---|---|---|---|---|---|
| Long Call | 280 | 310 | Spot Price – Strike Price | 310 – 280 = 30 | |
| Long Put | 1040 | 980 | Strike Price – Spot Price | 1040 -980 = 60 | |
| Long Call | 920 | 918 | Spot Price – Strike Price | 918 – 920 = 0 | Since IV cannot be -ve |
| Long Put | 80 | 88 | Strike Price – Spot Price | 80 – 88 = 0 | Since IV cannot be -ve |
With this, I hope you are clear about the intrinsic value calculation for a given option strike. Let me summarize a few important points –
- The intrinsic value of an option is the amount of money you would make if you were to exercise the option contract
- The intrinsic value of an options contract can never be negative. It can be either zero or a positive number
- Call option Intrinsic value = Spot Price – Strike Price
- Put option Intrinsic value = Strike Price – Spot price
Before we wrap up this discussion, here is a question for you – Why do you think the intrinsic value cannot be negative?
To answer this, let us pick an example from the above table – Strike is 920, the spot is 918, and option type is a long call. Let us assume the premium for the 920 Call option is Rs.15.
Now,
- If you were to exercise this option, what do you get?
- Clearly, we get the intrinsic value.
- How much is the intrinsic value?
- Intrinsic Value = 918 – 920 = -2
- The formula suggests we get ‘– Rs.2’. What does this mean?
- This means Rs.2 is going from our pocket.
- Let us believe this is true for a moment; what will be the total loss?
- 15 + 2 = Rs.17/-
- But we know the maximum loss for a call option buyer is limited to the extent of the premium one pays; in this case, it will be Rs.15/-
- However, if we include a negative intrinsic value, this property of option payoff is not obeyed (Rs.17/- loss as opposed to Rs.15/-). However, to maintain the non-linear property of option payoff, the Intrinsic value can never be negative
- You can apply the same logic to the put option intrinsic value calculation
Hopefully, this should give you some insights into why the intrinsic value of an option can never go negative.
8.2 – Moneyness of a Call option
With our discussions on the intrinsic value of an option, the concept of moneyness should be quite easy to comprehend. Moneyness of an option is a classification method that classifies each option strike based on how much money a trader will make if he were to exercise his option contract today. There are three broad classifications –
- In the Money (ITM)
- At the Money (ATM)
- Out of the Money (OTM)
And for all practical purposes, I guess it is best to further classify these as –
- Deep In the money
- In the Money (ITM)
- At the Money (ATM)
- Out of the Money (OTM)
- Deep Out of the Money
Understanding these options, strike classification is very easy. All you need to do is figure out the intrinsic value. If the intrinsic value is a non zero number, then the option strike is considered ‘In the money’. If the intrinsic value is a zero the option strike is called ‘Out of the money’. The strike, which is closest to the Spot price, is called ‘At the money’.
Let us take up an example to understand this well. As of today (7th May 2015) the value of Nifty is at 8060, keeping this in perspective I’ve taken the snapshot of all the available strike prices (the same is highlighted within a blue box). The objective is to classify each of these strikes as ITM, ATM, or OTM. We will discuss the ‘Deep ITM’ and ‘Deep OTM’ later.
As you can notice from the image above, the available strike prices trade starts from 7100 all the way upto 8700.
We will first identify ‘At the Money Option (ATM)’ as this is the easiest to deal with.
From the definition of ATM option that we posted earlier, we know, ATM option is that option strike which is closest to the spot price. Considering the spot is at 8060, the closest strike is probably 8050. If there were an 8060 strike, then clearly 8060 would be the ATM option. But in the absence of 8060 strikes, the next closest strike becomes ATM. Hence we classify 8050 as, the ATM option.
Having established the ATM option (8050), we will proceed to identify ITM and OTM options. To do this, we will pick a few strikes and calculate the intrinsic value.
- 7100
- 7500
- 8050
- 8100
- 8300
Do remember the spot price is 8060, keeping this in perspective the intrinsic value for the strikes above would be –
@ 7100
Intrinsic Value = 8060 – 7100
= 960
Non zero value, hence the strike should be In the Money (ITM) option
@7500
Intrinsic Value = 8060 – 7500
= 560
Non zero value, hence the strike should be In the Money (ITM) option
@8050
We know this is the ATM option as 8050 strike is closest to the spot price of 8060. So we will not bother to calculate its intrinsic value.
@ 8100
Intrinsic Value = 8060 – 8100
= – 40
Negative intrinsic value, therefore the intrinsic value is 0. Since the intrinsic value is 0, the strike is Out of the Money (OTM).
@ 8300
Intrinsic Value = 8060 – 8300
= – 240
Negative intrinsic value, therefore the intrinsic value is 0. Since the intrinsic value is 0, the strike is Out of the Money (OTM).
You may have already sensed the generalizations (for call options) that exists here, however, allow me to restate the same again
- All option strikes that are higher than the ATM strike are considered OTM
- All option strikes that are below the ATM strike are considered ITM
In fact, I would suggest you relook at the snapshot we just posted –
NSE presents ITM options with a pale yellow background, and all OTM options have a regular white background. Now let us look at 2 ITM options – 7500 and 8000. The intrinsic value works out to be 560 and 60, respectively (considering the spot is at 8060). Higher the intrinsic value, deeper the moneyness of the option. Therefore 7500 strikes are considered as ‘Deep In the Money’ option and 8000 as just ‘In the money’ option.
I would encourage you to observe the premiums for all these strike prices (highlighted in the green box). Do you sense a pattern here? The premium decreases as you traverse from ‘Deep ITM’ option to ‘Deep OTM option’. In other words, ITM options are always more expensive compared to OTM options.
8.3 – Moneyness of a Put option
Let us run through the same exercise to find out how strikes are classified as ITM and OTM for Put options. Here is the snapshot of various strikes available for a Put option. The strike prices on the left are highlighted in a blue box. Do note at the time of taking the snapshot (8th May 2015) Nifty’s spot value is 8202.
As you can see, there are many strike prices available right from 7100 to 8700. We will first classify the ATM option and then proceed to identify the ITM and OTM option. Since the spot is at 8202, the nearest strike to spot should be the ATM option. As we can see from the snapshot above, there is a strike at 8200 which is trading at Rs.131.35/-. This obviously becomes the ATM option.
We will now pick a few strikes above and below the ATM and figure out ITM and OTM options. Let us go with the following strikes and evaluate their respective intrinsic value (also called the moneyness) –
- 7500
- 8000
- 8200
- 8300
- 8500
@ 7500
We know the intrinsic value of the put option can be calculated as = Strike – Spot.
Intrinsic Value = 7500 – 8200
= – 700
Negative intrinsic value, therefore the option is OTM
@ 8000
Intrinsic Value = 8000 – 8200
= – 200
Negative intrinsic value, therefore the option is OTM
@8200
8200 is already classified as an ATM option. Hence we will skip this and move ahead.
@ 8300
Intrinsic Value = 8300 – 8200
= +100
Positive intrinsic value, therefore the option is ITM
@ 8500
Intrinsic Value = 8500 – 8200
= +300
Positive intrinsic value, therefore the option is ITM
Hence, an easy generalization for Put options are –
- All strikes higher than ATM options are considered ITM
- All strikes lower than ATM options are considered OTM
And as you can see from the snapshot, the premiums for ITM options are much higher than the premiums for the OTM options.
I hope you have got a clear understanding of how option strikes are classified based on their moneyness. However, you may still be wondering about the need to classify options based on their moneyness. Well, the answer to this lies in ‘Option Greeks’ again. As you briefly know by now, Option Greeks are the market forces which act upon options strikes and therefore affect the premium associated with these strikes. So a certain market force will have a certain effect on ITM option while at the same time, it will have a different effect on an OTM option. Hence classifying the option strikes will help us in understanding the Option Greeks and their impact on the premiums better.
8.4 – The Option Chain
The Option chain is a common feature on most of the exchanges and trading platforms. The option chain is a ready reckoner of sorts that helps you identify all the strikes that are available for a particular underlying and also classifies the strikes based on their moneyness. Besides, the option chain also provides information such as the premium price (LTP), bid-ask price, volumes, open interest etc. for each of the option strikes.
Have a look at the option chain of Ashoka Leyland Limited as published on NSE –
Few observations to help you understand the option chain better –
- The underlying spot value is at Rs.68.7/- (highlighted in blue)
- The Call options are on to the left side of the option chain
- The Put options are on to the right side of the option chain
- The strikes are stacked on an increasing order in the centre of the option chain
- Considering the spot at Rs.68.7, the closest strike is 67.5. Hence that would be an ATM option (highlighted in yellow)
- For Call options – all option strikes lower than ATM options are ITM option. Hence they have a pale yellow background
- For Call options – all option strikes higher than ATM options are OTM options. Hence they have a white background
- For Put Options – all option strikes higher than ATM are ITM options. Hence they have a pale yellow background
- For Put Options – all option strikes lower than ATM are OTM options. Hence they have a white background
- The pale yellow and white background from NSE is just a segregation method to bifurcate the ITM and OTM options. The colour scheme is not a standard convention.
Here is the link to check the option chain for Nifty Options.
8.4 – The way forward
Having understood the basics of the call and put options both from the buyers and sellers perspective and also having understood the concept of ITM, OTM, and ATM I suppose we are all set to dwell deeper into options.
The next couple of chapters will be dedicated to understanding Option Greeks and the kind of impact they have on option premiums. Based on the Option Greeks impact on the premiums, we will figure out a way to select the best possible strike to trade for a given circumstance in the market. Further, we will also understand how options are priced by briefly running through the ‘Black & Scholes Option Pricing Formula’. The ‘Black & Scholes Option Pricing Formula’ will help us understand things like – Why Nifty 8200 PE is trading at 131 and not 152 or 102!
I hope you are as excited to learn about all these topics as we are to write about the same. So please stay tuned.
Onwards to Option Greeks now!
Key takeaways from this chapter
- The intrinsic value of an option is equivalent to the value of money the option buyer makes provided if he were to exercise the contract.
- Intrinsic Value of an option cannot be negative; it is a non zero positive value.
- The intrinsic value of call option = Spot Price – Strike Price
- The intrinsic value of put option = Strike Price – Spot Price.
- Any option that has an intrinsic value is classified as ‘In the Money’ (ITM) option.
- Any option that does not have an intrinsic value is classified as ‘Out of the Money’ (OTM) option.
- If the strike price is almost equal to spot price, then the option is considered as ‘At the money’ (ATM) option.
- All strikes lower than ATM are ITM options (for call options)
- All strikes higher than ATM are OTM options (for call options)
- All strikes higher than ATM are ITM options (for Put options)
- All strikes lower than ATM are OTM options (for Put options)
- When the intrinsic value is very high, it is called ‘Deep ITM’ option.
- Likewise, when the intrinsic value is the least, it is called ‘Deep OTM’ option.
- The premiums for ITM options are always higher than the premiums for OTM option.
- The Option chain is a quick visualization to understand which option strike is ITM, OTM, ATM (for both calls and puts) along with other information relevant to options.
Hi kartik,
Thanks for new chapter. You have magical writing power which makes the learning so interesting and easy. I completely understood the concept of this chapter and very excited for next chapter.
Thanks for the kind words and we are really glad you were able to understand the chapter :). Will put up the next chapter as soon as we can.
Hi
what happens when the sold OTM option becomes ITM option? I am referring to Bank Nifty options and moreover why cann’t we sell ITM options for bank nifty?
When OTM becomes ITM and you are short on OTM, then you will lose money. I guess you can sell ITM options for Bank Nifty, although not a great idea to do so. Are you facing any problems with this?
can i learn ( option premium decay ) analysis?
Yes, the same is explained here – https://zerodha.com/varsity/chapter/theta/
Very excited for next chapter please update it as soon as possible
Thanks. We will update it sometime soon next week.
Hi kartik
If I place an order to buy nifty8050CE at premium of 100 with a trailing stop loss of 100 points. After sometime premium is 120, can I modify my trailing stop loss to 80 points or 60 points or can I square off my position at current price
You can do anyone of them – either trail it or book profits!
Hi Karthik,
Varsity is the great effort of you and Zerodha. I do not have words to appreciate, thanks a lot….
Thanks for the kind words Manoj! Really glad you are liking Varsity.
VERY GOOD. oF YOU TO USE THE OPTION CHAIN VISUAL.,KARTHIK R, I CAN SEE YOU HAVE TAKEN PAINS TO EDUCATE. US TRADERS.THANK YOU
Welcome! Happy trading 🙂
Sir, please try to upload atleast one chapter per week.
We will try our best Keshav. In fact that is our aim as well..but sometime things get hectic and its not possible to upload. But nevertheless we will do our best. Thanks.
@ 8300
Intrinsic Value = 8060 – 8300
= – 260 (It should be -240)
Thanks for pointing this, will make the changes.
Hi kartik,
I have 50000 rs in my trading account. How many shares of nifty CE with strike price of 8200 and premium of 100 under bo & co order can I buy???
Are you looking at intraday trade – BO & CO is for intraday day only.
i kartik,
I have 50000 rs in my trading account. How many shares of nifty CE with strike price of 8200 and premium of 100 under bo & co() order can I buy??intradat trade
Roughly 28 lots.
One lot of nifty = 100 shares
28 lot of nifty= 2800 shares
This means 2800 shares I can buy in one trade. Am I right???
One Nifty Lot = 25 Nifty Units
28 Lots = 28*25 = 700 Nifty Units.
So for every 1 point up or down move you can make or lose Rs.700 respectively.
What is BO and CO?
BO = Bracket Orders CO = Cover Orders
More on it here – https://tradingqna.com/t/what-is-differrence-between-bracket-orders-and-cover-orders/352
sir.when trading options which graph should we look into,is it nifty ce,pe we r in or spot.bcoz as chart trader iam confused which chart to follow, as and every strikewill hav diff setup,trading cycolegy greeks lot more,got it
For trading options please look into the charts of the spot market and not really the chart of the Options.
sir,ok should we look spot r fut nifty &when looking nifty charts how can we rely as it consists of 50 stocks&each chart will tell differently how can we attribute to spot nifty,ce,pe clarify detailly
You should look at the spot charts. The index is made up of these 50 stocks, check this http://zerodha.com/varsity/chapter/the-stock-markets-index/
sir,ok today i was observing spot nifty chart how can we calculate t analysis as it doesnt have volume,why cant nifty fut
You do get the volume information on Nifty charts. Request you to please double check.
cannot agree. it is important to keep an eye on spot while watching the option chart in 3minute frame and also watch the support and resistances in 3mntf. during. opening moves. option chart will respond. immediately to changes in underlying. after 10:15a.m. sluggish response, until lunch time or two thirty when actual operational intension of the day is displayed. then. another bout of responsivenes near close at 3:10. or. thereabout. by the way elliott waves can be seen in option charts
.
Sir,I don’t think nifty spot will be traded so how can we get the volume correct me if I’m wrong
The volume of Nifty spot is cumulative volumes of all the 50 stocks. Check this – http://chartink.com/stocks/nifty.html.
sir,ok but what about in pi i hav double clicked but couldnt help,and what about theoratical option price like in nest plus u said its comming soon in pi,when can we expect,it will be game changer
Sometime soon Narsimha, I’m not in any position to specify a timeline on this matter.
sir,i asked about volume of nifty spot which iam not getting even after double clicking&the link u provided is for eod what for iday&tick/tick
For intraday it may not be possible Narsimha. I will get back to you on this soon, meanwhile you can certainly use the Nifty futures chart.
Hi Karthik, the bid-ask spread for the Nifty is quite close; and when I square off an order at market price, there are no major surprises. But with the Bank Nifty, there is a huge difference between the LTP and the market price. So while trading larger volumes, is it safer to trade Nifty?
Well the bid – ask spread for both Nifty and BankNifty are quite the same 🙂
Do this –
1) Take the difference between the bid and ask (this is called the spread)
2) Divide the spread by the average of Bid and Ask
3) Express this as a %
If you do this you will realize the % is almost the same (ard 0.015%).
The spread is tight when liquidity is abundant. In simpler words – when there are more people trading a particular contract liquidity improves and therefore the spreads get better (it gets tighter). Tighter spreads imply lesser damage when you place market orders (lesser surprise). You may also want to read about ‘Impact Cost’ here – http://zerodha.com/varsity/chapter/nifty-futures/ section 9.2
Karthik, I was asking about the spread in absolute terms (not percentage). With Bank Nifty options, I see a difference of over 10 rupees between the bid price and the ask price onscreen. A few days ago, before I squared off my (Bank Nifty options) positions, the screen showed a decent profit (which was calculated on the LTP I suppose); but when I hit the button to square off, I ended up with a loss 🙁 This hasn’t happened when I’ve traded Nifty options.
Got it. Yes in absolute terms the difference is kind of bigger on Bank Nifty. It makes sense to trade Nifty especially when you know that you will use market orders.
MADAM, TRY PLACING A LIMIT ORDER TO BOOK YOUR PROFITS
Hi Karthik, Hats off buddy… Amazingly good chapters… Work highly appreciated Sir 🙂 Cheers
Thanks for the kind words Chetan, very encouraging for all of us at Zerodha 🙂
Thanks a lot for this information.
Even 700 shares of nifty CE/PE option per trade is quite more than future market.
Also one thing that I want to ask is – approximately nifty daily change is of 100 points (day’s high- day’s low) ,is the same change is observed in the premium’s of ATM strike price of nifty options or other stock options like idea cellular????
The lot of 25 is fixed for both futures and options. I think 700 came about because one of the comments posted earlier. Also, it may not be safe to assume 100 point daily moment in Nifty. The change in premium based on the change is underlying is captured by delta…which is the focus in chapter 9.
PLEASE USE A SPREAD SHEET, DOWN LOAD NIFTY OHLC DATA.NEXT, CALCULATE HIGH – CLOSE AND OPEN-CLOSE.
TAKE THE AVERAGE FOR THESE TWO COLUMNS FOR AT LEAST 100 DAYS. WILL GIVE YOU AN IDEA ABOUT THE
DAILY RANGE.
Hi Jose, request you not to use caps lock. It strains the reader’s eye. Please use small case letters. Thanks.
When will u upload next chapter?
Sorry for the delay, but we should have it up over the next 2 days max. Thanks for your patience.
Hi Karthik, as always an excellent job in explaining concepts of options and futures. I have a question which is probably related to next chapter but it would be great if you could answer them. When calculating the delta for any option, what values of historical volatility do we take? Where can I get this data from?
The other question is a few days ago put option volatility(around 24%) was higher than average volatilty (18.23% ,this data I got from one of the option tools I use) and the premium of put options eroded quickly, and since yesterday the put option volatility has come down near the average range but the call option volatility has dropped to around 13% while average and put volatilities are around 18%. Call option premiums decayed quickly. So can we generalise this into saying when Average volatility>Call volatility ,calls are being written and it may be the right time for me to write calls whereas when Put volatility is greater than average volatility put options are being written and perhaps we can write some too? I hope you understand my question. Again the details of the volatility I got from the option tool I use.
Which options tool do you use Keerthan?
Delta can be calculated using a simple Black & Scholes option calculator. You don’t really need historical volatility for this. Also, historical volatility can be calculated very easily – I will explain the same in chapter 11 or 12 of this module.
With volatility % like 18% and 24% you must be referring to bank Nifty (or some other Index) if I’m not wrong. Anyway, whenever current volatility > Average volatility …and you expect the volatility to drop ..you should look at option writing opportunities and thereby collecting the premiums. Likewise whenever current volatility < Average volatility ...and you expect the volatility to increase..you should look at option buying opportunities. This is because the option premium increases/decreases with increase/decrease in volatility. Also, dont mix up call and put volatility. Treat them separate and clutter free for a clear understanding. Of course more on this topic in the subsequent chapters.
Karthik, I use an excel sheet which was given to me by a friend(custom made) where it asks for Historical Volatility to calculate the Greeks and Theoretical option prices( I guess it is Black Scholes Model).
For average volatility I use data from FOVOLT.csv files from NSE. When I meant “PE Volatility” and “CE Volatility” it is the average values of the top 5- 6 PE.CE strikes .
Anyway in your explanation what do you mean by “current volatility” and “Average volatility”? I mean, what values are we using here? Also can you let me know where does India VIX fit in all these?
Thanks for your help!! You are doing a wonderful job!!
Current Volatility is the volatility in the market as of now while the average volatility is historical average volatility. This can be a bit confusing now, but we will discuss these in detail over the next few chapters…so you should have greater clarity then.
Hi,
As we know from previous chapter that an option can’t be exercised before expery date. Why do you mention to exercise it before expery date in this chapter.
If one can exercise before expery then
What will happen if I write an option which is in the money and someone exercised it? Profit or loss
It was a deliberate statement, an assumption to drive the point across – here is what I’ve mentioned
“Given this, assume you bought the 8050CE and instead of waiting for 15 days to expiry you had the right to exercise the option today. Now my question to you is – How much money would you stand to make provided you exercised the contract today? ”
So in reality this does not happen in Indian markets as all options are European in nature.
Hi Karthik, what is the difference between settle price and closing price?? e.g. on 15 July BHel 180CE has a closing price of 2.90 and settle price of 11.40. (Expiry 27 august). Also, what CE an CA in call options??
CA is call option American and CE is call option European. Check section 4.6 here for more details – http://zerodha.com/varsity/chapter/sellingwriting-a-call-option/
BHEL does not seem to have 180 strike price at all – http://www.nseindia.com/live_market/dynaContent/live_watch/option_chain/optionKeys.jsp?segmentLink=17&instrument=OPTSTK&symbol=BHEL&date=27AUG2015
Am’I missing something?
My apologies…that is 280* not 180…that was a typing error…
Guessed as much. Anyway settlement price reflects the last closing price…if the contract has not traded today (due to liquidity concerns) then the settlement price reflects the previous the most recent closing price and that could be 2 days before. Hence the difference.
Hi Karthik,
a small and a silly doubt.
for trading equity, we see spot price charts, for futures we have particular futures chart. On these two we apply TA and predict a direction for the market movement. For options, I read in few places, we should not apply TA, then are we deciding the direction by observing the primary or intermediate markets or news is it based or just the instincts? To trade options, I understand from your writings, options greeks will help us select a proper strike rate after which we’l be benefitted. But how to select bullish or bearish firmly???
thanks in advance.
LADY, TAKE A LOOK AT INTRA-DAY OPTIONS IN 3MNT FRAME . LOCATE SUPPORT AND RESISTANCE LOCATIONS.
USE OPTION CHARTS. TRY 8PERIOD STOCHASTICS IN 3MNTFS. LOOK FOR A ELLIOTT WAVE STRUCTURES INTRA-DAY.
FREQUENTLY ELLIOTT WAVE STRUCTURES TURN UP EVEN IN INTRA-DAY. ABOVE ALL USE STOP LOSS COMPULSARILY.
JUST AS MEDICINE IS MULTIDISCIPLINARY (PHYSIOLOGY,ANATOMY, PHARMACOLOGY,ORGANIC PATHWAYS AND WHAT NOT) SO IS TRADING. REMEBER, A CHART CANNOT PREDICT A NORTH KOREAN MISSILE LAUNCH. HENCE THE
STOPLOSS ORDER FOR EVERY TRADE.
Hi Karthik,
one silly doubt, for spot and futures trading, seeing the respective charts we apply TA to find some candle stick pattern and predict market direction. I have read in few places, for options we should not apply TA. From your writings I understand options greeks will help us select the strike rate properly, hence we can be profited. but my doubt is, how will we select call or put, bullish or bearsish? by observing primary or intermediate market direction? news or instincts? very basic, after too much of reading I am confused. thanks
Priya to get a directional sense you can depend on TA or FA, once you develop a direction sense you can either use Futures or Options to leverage your directional view. Also to get I would suggest you read this chapter – http://zerodha.com/varsity/chapter/getting-started/ I guess this will give you an orientation
thanks Karthik,
just for reconfirmation, I can use the checklist which you gave in TA module(mainly a candliestick pattern) and go long or short in options market??
Hello Karthik,
Your efforts in explaining the nitty gritty of each and every concept is highly appreciated that to with example. For instance till today I was only knowing that Intrinsic value of options cannot be -ve.. But why it can’t be -ve is what I came to know from this chapter. You and your team are doing awesome job with VARSITY knowledge sharing. Thanks
Please continue with the good work.
Darshan, thank you so much for the kind words and encouragement. Please do stay tuned for more quality content on Zerodha Varsity.
what role intrinsic value plays in deciding premium price of an option? why above ashok leyland example show IV 45.72 for the strike price 67.50 for the spot price 68.70. it should be 68.70-67.50=1.20. am i correct?
Shreya – Option Premium can be split as Time value + Intrinsic value….so clearly intrinsic value plays an important role. The IV you are referring to in the option chain stands for implied volatility and not intrinsic value 🙂
Ops! What does it mean by implied volatility? how it behaves in context with premium? and why( we could make out higher the IV, lower was the premium and vice versa)?
You will know all about Implied Volatility very soon 🙂 Will be talking about in chapter 19 I guess.
Hi Karthik, based on the result expectations of HPCL i had gone long by buying a far OTM CE 1100 option.the stock then was at 950. now, the results were fantastic but, the stock corrected as if there is no tomorrow. the delta of the option was 0.09 and i was expecting the stock to move by 50 points . this would give me a leg up of 4.5 points as far as the premium was concerned( 0.09 * 50). i brought the call at 4 and now its less than 1. my question is with almost all stocks the price does go up after a favorable result. here though it was a good result the stock fell. i have attached the chart for you, can you point out what could the reasons be for such a fall? thanks.
Madhu – This is a very typical reaction. If the results are generally anticipated to be good, then the stock runs up before the result announcement in the backdrop of the announcement. Once the announcement is made people book profits and liquidate their positions. However if the results are expected to be bad or avergae but the company surprises with good set of numbers…then the stock usually tends to rally.
HI Karthik,
Firstly Thanks to Zerodha in general and a big thanks to you in specific for making things as simple as possible.
I am still learning dynamics of options trading. Can you please take look at my below trade which went very bad. I also know many would have come across such situation.
1. I had bought PUT(15 Rs) and CALL(19Rs) both options as a hedge and I knew there would be one side move on 18th Sep post fed outcome.
Then opening was as expected on 18th Sep Nifty was at 120+, then I see both put and call prices nose diving(PUT fell by 82% and CALL fell by 42%). What happened here?
2. I know it’s out of the money options and close to expiry. I have noticed in similar situations when Nifty opens 120+ even out of the money CALL option would jump by 200%. correct? what happens here?
3. It was so pathetic, So how do we have some idea of such situations a day prior so we could exit at least. What metrics would help – volumes, open interest, etc? looking forward to your reply. Thanks.
This is quite common Suraj. Whenever an even is lined up, the volatility shoots up, therby driving the option premiums (for both calls and puts) very high. As soon as event is over the premiums drop since the volatility drops. Add to this the fact that expiry is close…the OTM options tend to fall even more. I would suggest you read up the chapter on vega to appreciate this better.
QUESTION :- BEARISH / BULLISH CHARACTER OF AN OPTION WITH RESPECT TO ITS UNDERLYING ?
1) TODAY NIFTY NOV FUT WAS BULLISH . ALL IN THE MONEY CE SHOWED SAME BULLISH MOVEMENT . WHEREAS ALL OUT OF THE MONEY CE SHOWED OPPOSITE BEARISH MOVEMENT ….. WHY SO ? KINDLY EXPLAIN
2) question regarding standard tick-size of an option ? the buy-sell difference between certain CE are too high like at the time of closing of 8450 CE ( market sell = 3.35 & market buy = 4.25 ) …. kindly explain this .
thank you
1) Can you share the data, will be much easier for me to go through the details.
2) This is because of liquidity. OTM options are less liquid hence the bid ask spread is wider. Higher the liquidity in the contract, lower is the bid ask spread.
1) sir , i did not take the screen shot but i shall try to make same study today as well . but did u get my point ? surprisingly such was not the case with nifty JAN16 options ….. in here all out of the money , in the money options stayed bullish same as the underlying .
2) in case of OTM options how to benefit from (HIGH BID-ASK SPREAD) when buying & how to benefit / safeguard / get a fair selling value when we decide to sell ?
Got it, suggest you look at this chapter, section 19.4 – http://zerodha.com/varsity/chapter/vega/
sir attached example of NIFTY NOV15 CE prices today .
NIFTY NOV 15 was bearish today 10-nov-15 till 2:15 pm …… prices till that shows certain CE are bearish in line with underlying …… while certain are bullish ….. kindly guide us in detail
You can attribute this to Vega, please do refer to this – http://zerodha.com/varsity/chapter/vega/
Hi ,
I have been going through the Varsity modules and would like to appreciate the kind of efforts must have put for its creation and the way it has been presented. People who have no exposure or knowledge of Derivatives would surely benefit from it and would go a long way towards making them good traders.
Hats off Zerodha team. God bless you all.
Thanks Manoj. Please stay tuned we have a lots more content coming up!
Hi Karthik bro,
One question – How can I get Nifty 28Jan2016 chart in kite(i.e. with premium in Y-axis and date/time in x-axis). I mean what do I search in the search box to get it in the “market watch”.
Thank You for this wonderful content and helping us out 🙂
got it 😛
still thank you for your wonderful effort 🙂
Welcome 🙂
Good luck!
Hari – just search for “Nifty 28 Jan” and the contract should show up…once this is loaded, just click on the chart icon by hovering over the contract in your market watch.
Yup got it Thanks.
Hope this helps someone.
The format is “derivative name” + expiry day + expiry month for example “NIFTY 28 JAN”.
Cheers!
Hi Karthik Sir,
small doubt (if) i bought NIFTY16FEB7500CE @79, 2 lots (lot size 75) on 9:30am and sell it on 2:00pm
need cash – 79*150 = 11850
if yes than profit is 125*150=18750-11850=6900 ??
am i correct or not waiting for reply Thanks in advance
Absolutely, you profit will be the difference in premiums multiples by the number of lots.
and sell it on 2:00pm @125 ******(text missed)
I’d kind of sensed, the answer still remains the same 🙂
Hello Karthik,
First of all let me thank you for this enlightenment, you know how to write stuff. Putting Bollywood analogy with simplified version of stock market makes these articles great. The more I read the more curious I become.
I have loads of question I’ll try to sum up my understanding my making up story below. Please correct me if I understood incorrectly.
So basically there are 4 types of trades in options.
Call, Put, Short Call, Short Put.
Let’s take example of Ashok Leyland. Currently Ashok Leyland is trading at 90 in call option with premium of 2 INR. So if I buy Call current month option the break even would be 92? We expecting market is bullish here
But as I trader I want to earn back my premium so I will short the same Call 90 option of current month. So I will get my premium back. i.e. 2 INR. I will immediately close this short call option trade or I will wait till or below before touching to 92.
So once I closed short call option now I have only call 90 option of Ashok Leyland. If the prize goes above 92 I will be in profit, if below 90 I will be in loss if it stays in between 90 to 92 I will be in break even.
This should be my strategy in the bullish market. Same goes for Call with Call short if market is bearish.
Please let me know if I am right? Please add up if it is possible to short call option immediately? I haven’t done real time option trading this is just reading about options & coming up with strategy to earn some profit. I want your insights as option trader for this strategy. Give me pros n cons if possible 🙂
Another question I see no one asking is we have 3 expiry dates in the every option i.e. Current month, next month, & Far month. For this time we have 25th Feb 2016, 31st March 2016, & 28th April expiry.
If I buy 31st march expiry same option in feb & if I get profit in same month i.e. feb, can I close this position in feb instead of waiting till march? Actually I didn’t get next month expiry logic.
& the last one basically Options are zero sum game, so if I wanted to buy call option there has to be put option buyer, right? So what does it mean open interest? I can see in every option tradable stock.
my implied understanding from options is that if there more people buying Call options then it means market expecting to go up & it should eventually goes up ( not necessarily) but I can say like this?
I’m really sorry for bombarding with loads of questions but I will be very grateful if you able to answer those.
Thanks in Advance.
First of all, thanks for going through the content here and I’m glad you really liked it 🙂
Now with your queries –
1) Yes, if you pay Rs.2 as premium on 90 strike, then breakeven will be 92, and the outlook is bullish
2)If you short the same call option, then your expectation is ‘flat to bearish’and your breakeven will be 88 (90-2)
3) You can short a call option and close the position anytime you wish
4) You cannot buy call and sell call of the same strike simultaneously as it would nullify your position
5) You can buy March series option in Feb and close the same in Feb, there is no problem with the same.
6) Suggest you read this to understand open interest – http://zerodha.com/varsity/chapter/open-interest/
hello karthik,
Thanks for the apt reply. i will be going through open interest content. 🙂
Good luck Sushil!
Sir,
I read somewhere that selling options requires a margin amount but do they require margin in hedged positions ( I think , they are probably called covered positions) ?
i.e In a contract like “Buying an At the Money Option and Selling Out of Money Option”
Answered the same earlier.
Sir,
First of all thank you for such a beautiful real life explanation. It helped a lot in understanding the concept in real life. I have a question: Say, for a stock having same stock and strike price, a call option is priced higher than a put option having the same underlying. Why is the call option priced higher than the put? Thanks in advance
Its hard to explain this in a comment, but please be aware this is because of ‘Put Call parity’, an equation which relates the prices of calls and puts.
sir
If I bought nifty call option eg Nifty30June8400CE @ 100 rs one lot (25) . If I hold till expiry. At the expiry nifty at 8700 then can I exercise the option at the expiry.? is there any switch for exercise like square off..? how it works?
And from above example how much profit I made..?
You can let the option expire ITM, the exchange will automatically settle this for you. However, letting letting the option expire ITM would attract huge STT charges, check this – http://zerodha.com/z-connect/queries/stock-and-fo-queries/stt-options-nse-bse-mcx-sx
I have read 8 chapters of Options, and I can only say WOW, again understood the whole thing till now theorically. I had seen as many videos and gone thru so many you tube videos on OPTIONS.. so I knew something but it never gave me a full understaning of IV/moneyness , prem for call and put and why is its need, spot prices vs strike prices. All these were greeks to me.
But hats off to you, you have been teaching us the ABCD of the OPTIONS which is priceless. I was contemplating for going to the classes many a times, wh wud have cost me a great deal, but what cud I have learnt in 2/3 days with more than 20/30 students in a batch.
Here I will read and re-read again and again if I have not understood some jargons of the trading.
Thanks once again. I have no questions since I have NEVER traded options on my own. I hope I will b able to comprehend the rest of the chapters too. TOO GOOD.
Thank you so much for the kind words! Good luck and stay profitable 🙂
What is expiry time on expiry day ? is the value of option based on index/stock at 3 PM on expiry day ??
3:30 PM. The value is based on the closing price, which get updated at around 3:40 PM.
Hi KARTHIK
i have a small doubt in (8.1) IV
if i remember correctly, from previous chapters, one should buy a call option when he is bullish about the underlying.
But in the very first table of Underlying & CNX Nifty, where the spot price = 8070.
Why one would buy 8050CE, if he is bullish about the underlying,
i know i must have gone horribly wrong somewhere because no one else asked this question and i couldn’t figure it out myself, so just asking to correct me.
I think i got it, please correct me if i am wrong,
The person would have bought the call option when spot price was below the strike price of 8050,
his prediction was correct and now the spot price is moved to 8070, which is Rs.20 above the strike price and hence he will make Rs.20 out of it,(ignoring the premium paid) if he has to execute the contract.
So this was the 2nd half of the story 🙂
Right 🙂
Well, you are still buying a call option. Its just that the moneyness of the option is different.
Hi, as I have already admitted about the impressive nature of your wisdom, it can be more beneficial if you can make audio-visual (videos) series, as I am sure that the depth of “communication” would certainly surpass than just reading and more importantly a lot of mileage for varsity public!.., right? Kindly, do the needful… Best Regards!!!
Thanks for you kind words. We are looking at this option, and hopefully something should follow through very soon.
Hi I’m sandip yadav , i recently open my acct with zerodha its vry good 4 Trader where re getting study material with support. My question is here if i bought bank nifty bought ce bought at 20500ce@50 so how much premium i ve to pay here.
Premium is Rs.50 in this case.
Hi
I am new to NFO. Suppose I buy Nifty CE 9050 Strike Price. (Exp March), today morning @ 130. When I open the chart of the same, premium rose to 145 +. Then I square off the same contract @ 145. (Which means intraday) What is the effect on my capital. Thanks in advance.
Regards
You make a profit of Rs.15 (i.e your sell price 145 – your buy price 130) times the lot size i.e 75
=15*75
=1125/-
This page is very resourceful for someone like me who is a beginner. Every thing here is explained in a very subtle way. Kudos.
Just noticed something improper on the content of this page.
In the first section you were explaining why the intrinsic value cannot be negative. You took the example of 920 Call option and Spot price 918. Here’s my understanding, since you cannot exercise the option until the strike price is reached by the underlying and intrinsic value is the money that you will make if you were to exercise your right to buy today. In this case since the spot is below strike so you may never exercise your right to buy the underlying which mean you make zero money, therefore intrinsic is zero.
Hi Pranay..thanks for the kind words.
Your understanding is right. I read through the chapter again, I’m unable to find the inconsistency.
Hello Karthik,
You are super. Like many even i have gone through multiple videos, pdf files trying to understand options, but that was of very little help. Please clarify few questions. I hope these questions doesn’t sound silly.
1. It has been said through the chapters about the Intrinsic value that it is “NON-NEGATIVE NUMBER”, like say as buyer i am exercising an option on the expire day irrespective of call or put on the last day of the expiry and if the odds are against my strike price then yes i would be losing my premium and then the statement “NON-NEGATIVE NUMBER”, holds good. However when i am Seller/writer of a call or put option, then on the expiry date if the odds are against my strike price then my Intrinsic value will be negative because i will be under huge loss, wouldn’t the statement “NON-NEGATIVE NUMBER” doesn’t hold good in this scenario.
2. How should be the difference in the point from ATM for it to be called “Deep in the money” or “Deep out of the money”.
3. I also see that there is a chapter in regards to Option strategies where there are 12 strategies have been explained which i will go through, however out of curiosity i would like to know if you could suggest few books on option strategies with more strategies. Hope i am not asking for more?
Please Clarify. Thank you in advance.
1) You can think about it this way – intrinsic value is a non negative number. If it a non zero number then the buyer makes money and if it is 0, then seller makes money. By the way, if you are a buyer of an option and it turns out to be ITM, then it makes sense to square off the position rather than letting it expire for reasons stated here – http://zerodha.com/z-connect/queries/stock-and-fo-queries/stt-options-nse-bse-mcx-sx
2) There is no formal definition for this. I generally consider a 10-15% away from strike (on either direction) as deep strikes.
3) You could refer to Sheldon Natenberg;s book on options.
Good luck.
Thank You
Welcome!
Hi karthik,
I am new to trading few days back i have opened AC and i was going through chapter 8
Today my Fri was doing intraday in that he bought axis Apr 450pe at call 0.90 and sold at 1.80
But today axis spot price 487.5 if my question is that if strike price is higher than the spot price it is on
Otm right and he should be in loss but how come he gained profit i am getting confused
Pls clarify me
Firstly, welcome to Zerodha family 🙂
Well, looks like he did an intra day trade and the price was favorable for him. Anyway, please do read this chapter, it will give you clarity on the ITM, OTM, and ATM options.
Hi karthik,
What is the difference between intraday and other trading and how does it works : for example if iam trading in intraday suppose if bhel spot price 170.06 and my closest strike price is 160 or 180 ryt
But my guy bought bhel at Apr CE 190 as a strike price and spot price was 170.06 how?
My question is that we can choose any strike price in intraday pls clear my doubt
I’d suggest you read this whole module to get a grip on strike selection. Selecting the right strike is a function of many different things 🙂
In OTM calls, if the underlying stock price increases but still below the strike price, then still premium is increasing. Why is it so? I think it should be purely because of IV.
Eg.Federalbk CE May 115. In this case, the price is 111.85 but whenever the price rises to say 112.10, the premium also increases. Since even at 112.10, there is no intrinsic value, volatility should be the only factor affecting premium.Am I right?
Volatility can increase irrespective of whether underlying stock price increases or decreases.Then why the premium goes down when underlying stock price goes down?
Not necessary – Vol has the same effect on premiums irrespective of the stock going up or down.
I think the premium goes down as spot goes down because of Delta effect. So delta only affects the time value of the premium in all types (OTM, ATM and ITM). In the case of ITMs, does delta affect the intrinsic value or the time value?
Delta measures the impact of direction on the premiums, does not impact time value.
As ITM options’ intrinsic value is 0, change in spot price has no effect in premium value? That cannot be true, assuming volatility and time to expiry is constant for the given day. Pls explain.
It has, ITM options behave just like a futures contract. For every 1 point change in the spot, premium too changes by 1.
Sorry typo It should be OTM instead of ITM.
Due to delta effect, change in spot price will result in very small change in premium value in OTMs. Does that mean this change will add to time value? This I am asking because intrinsic value is zero for OTMs and change in premium will only have to get added to the time value.
Yes, thats because the OTM option has very low gamma 🙂
Delta is dependent on gamma which is dependent on the spot.
sir i have a doubt as follow as I am new in options trading:
suppose I buy a call option of SAIL of strike price 70 ,lot qty is 12000 at 1rs premium and spot price at this time is 65rs
after some days the spot price reaches 72rs and suppose premium also increases to 2rs.and now I exercise my right to sell this call option at this 72rs.
so will my profit be 3rs*12000=36000(i.e. 1rs profit from premium and 2rs profit from difference of current spot price and strike price)
plz correct me if I am wrong.
To exercise, you need to hold the position to expiry. Yes, your profit would be Rs.2 minus the premium you have paid.
ok sir thanx ,so on expiry day do I need to square off my position for exercising the options ?? or should I do something else plzz clear my this doubt.
Its best if you square off the positions yourself and not let your options run into expiry.
Hi,
I want to know how many index have weekly expiry contract?
Just Bank Nifty for now.
Sir, do u also provides nifty option tips to your customers. . .
No.
Hi
The banknifty is currently trading at Bank nifty Jun 23300 CE (june 1, 2017)
I wanted to buy otm calls of Banknifty Aug 25000CE, but I am not able to buy the same on zerodha, can you please assist
I’d suggest you type Banknifty Aug 25000 on the universal search area…you should be able to get the contract.
Hello sir, I have 3 questions:-
1) Recently I saw jul Nifty spot trading at 9530 & jul future at 9535 , while 9000 jul PE @ 15 & 10000 JUL CE @ 5. WHY 9000 JUL PUT PREMIUM IS HIGHER THAN 10000 JUL CALL ?
2)WHY NIFTY FUTURE TRADING BELOW THE SPOT PRICE(LIKE NIFTY JUL FUT TRADED IN 30jun2017) ALMOST 10 PONTS DOWN THE PRICE OF SPOT PRICE ?
3)WHAT CAN WE DO? IF THIS CAN HAPPEN :-
SUPPOSE- BANKNIFTY CURRENT MONTH 22500 CE @550
WHILE BANKNIFTY NEXT MONTH 22500 CE @ 550 (BOTH TRADING AT SAME PRICE)
1) Maybe market considers 9000 as a more likely event than 10000, hence PE is valued higher
2) Supply demand
3) Not sure if this is a common occurrence, anyway, if you spot – you can buy the next month and sell this month I guess 🙂
Hi. karthik.
I have a query.
What are the pros & cons of Selling (writing) Deep In The Money (ITM) Call and Put Bank Nifty weekly expiry options.? The premium received is more in ITM compared to OTM. Can I exercise / square off ITM options before expiry such as after 3, 4 days after selling if in profit.
Thanks in advance.
Selling deep ITM options is quite dangerous, I’d not suggest you venture into this, unless you know what you are dealing with.
Hi Karthik,
Thank you for creating these modules.They are extremely simple and comprehensive to learn the basics.
While going through the chapter on moneyness of an option where you have dealt with moneyness of a call and put , the Intrinsic Value formula provided for call options is Spot price – Strike price while for Put options is Strike price – Spot price.
However in the examples you have given in the moneyness of call and put the values of Intrinsic value are not reflecting that.
Example in the moneyness of put option , the strike is 8200 and the spot price provided is 7500.The IV should be = Strike – Spot which is 8200-7500 = 700 while what has been calculated in the module is 7500 – 8200 = -700 (which is 0)
Could you let me know if i am going in the wrong direction or is there an error from your end.
Once again thanks for the modules.I look forward to reading all of them.
Regards
Pls ignore the above. I realized my mistake.
Regards
Cheers!
Sam, the IV of a CE is Max[spot-price, 0] and for PE its Max[strike-spot, 0].
banknifty spot@ 23888 inthe money option expire@ 2.35 how much stt will have to paid by me strike price was 23900
Were you long or short on this?
sir can we manually exercise an option anytime on the last day of expiry;say at 12:00 pm or we have to wait for the exchange to do it for us?
No, you will have to wait for the contract to expire.
i have bought a bank nifty 25100 call on 1 aug at a premium of 180 and spot bank nifty is 25122, expiry is 3 aug. let us have a scenario where the spot bank nifty comes to 25150 on expiry. please give me what would happen to the call option on expiry
The option will expire ITM with an intrinsic value of Rs.50. As a trader, if you are holding an option and its turning out to be ITM before expiry, then you are better off squaring this position for reasons stated here – https://zerodha.com/z-connect/queries/stock-and-fo-queries/stt-options-nse-bse-mcx-sx
Sir I am only 10th pass can I learn call and put options please motivate me to gain knowledge and I am still struggling , and I left my study
I’d suggest you pursue your basic education first. It is really important you do that. You can always learn options, it is never too late. Check this interview – https://zerodha.com/z-connect/zerodha-60-day-challenge/winners/10th-std-pass-market-wizard-from-thrissur
You are a excellent teacher for new comers like me. I have read only upto this module and will read the other modules soon, I am confused and have few doubts
I buy a call option for a premium of Rs.5 on nth day, the contract expires on (n+10)th day. On (n+3)rd day i decide to square off because the premium is Rs.7. Is margin required to sell the call option i bought on nth day and willing to sell on (n+3)rd day?. When i square off do i become the call option seller and another person becomes the buyer or is it nullified? because the contract expiry day is only on (n+10)th day. If i square off on (n+3)rd day for a premium of Rs.7 and on (n+10)th day the premium rises even more lets say to Rs.10, What happens to the premium of Rs.5 i paid on nth day to the seller?
Good to know you liked the content here, Bharath.
1) No margin required.
2) You are just squaring off an existing position, so no new position is created
3) Since you are out of the market, this will not have a P&L impact for you.
Thank you Karthik,
One more doubt. If the call option buyer squares off before contract expiry time, what happens to the contract and how the change in premium at expiry time affects the call option seller?
The contract will continue to exist. It will cease to expire on the expiry day. If the option has an intrinsic value upon expiry, then both the seller and buyer will be settled based on the value of this option.
if i buy a option for next month .
Let’s take example .suppose, in aug month , i bought a option Cipla 600sepCE @ 20 rs ;cipla stock value is 574.
and i take position for one moth . now if option value of Cipla 600sepCE @ ZERO on next day opening . so can i still hold that position ? or it will squareoff automatically ?
or if once value got zero and again 10th of Sep value would be 30 , so can i sell that option @ 30 ? which bought on Aug.
You can continue to hold it till expiry.
txs alot Karthik
Cheers.
Hi Karthik,
I am new to options trading and have recently got an acct opened with Zerodha and happy with that.
In last one month I have burnt my hands losing about 30k in Fut. And have now come to options to burn it even more I think… ha ha. I am learning options now and your study mtrls, articles and the Q&A are really very helpful in understanding the concept really well and I really appreciate that. You guys are doing a fabulous job. Further, at present I want to do intraday trades in options as I am left very less cash in hand to waste or try my luck. I am confused by the statement that you need to hold the contract till expiry in order to exercise your right but at the same time you say that you can square off your position anytime if you are running in profit. Can you pl elaborate on this a little more plz. Can I buy or sell on the same day. And if I do so, am I trading the stock option or the premium? I know it might sound very stupid but then my understanding is this much only. Thanks for your help.
Sohan, I’m sorry to hear about the losses incurred. Consider this as a fee paid to markets to learn valuable lessons 🙂
There are two things that you can do when you buy options – either hold till expiry or square it off anytime you wish. If you choose to hold till expiry then you will get the intrinsic value of the option as your profit or loss. Intrinsic value is the difference between the spot and strike. However, if you choose to sell the option at any time before expiry, then your P&L will be the difference between the premium paid and received.
I have noticed on expiry of bank nifty many times that the itm option is not traded on its intrinsic value.
eg, 25022= spot
25000ce LTP @₹7 only but it has to be 22 isn’t it, after expiry
the question is what would a buyer get ₹7 or 22 after the expiry.
Agreed, this is because of the STT implication. Out of the 22 odd points, at least 15 would go away as STT, hence the options kind of discounts this.
Hey Karthikbhai
I want to know
1) In Banknifty option – CE For intraday can we use Bracket Order(BO) ?
2) If yes, what is margin I get ?
3) BO is use consider premium amount
( Ex. If Premium is Rs. 5 and I have Rs. 1000 in demat and suppose margin I get for option – call is *20 then I can invest 20,000/- in option ? )
4) Brokerage +STT + Stamp duty = in total trade value ( in % )
( Ex. Trade value 1000 then total expense rs 20 (I,e – 2.0% of trade value)
Thanks in advance
I am waiting for your guidance
1. For Option Buying, Bracket Order is allowed only for Nifty
2. No leverage is given for Banknifty option Buy orders.
4. Brokerage for all Option orders is a flat Rs 20 regardless of the lot size (Option Premium value might be Rs 1000 but the Contract Value is Strike Price* Lot Size+ Premium* Lot Size)
1. For Option Buying, Bracket Order is allowed only for Nifty -> Ok .. but margin given !!!!
2. No leverage is given for Banknifty option Buy orders. – > Ok
4. Brokerage for all Option orders is a flat Rs 20 regardless of the lot size (Option Premium value might be Rs 1000 but the Contract Value is Strike Price* Lot Size+ Premium* Lot Size) -> Is Rs. 20 all cost to trader or 20+STT+SD+etc ??
1. For Nifty Options buying, leverage given is 1.4 times
4. Brokerage is Rs 20, STT will be 0.05% on premium(charged while selling only) and Stamp Duty differs as per your state.
You can calculate the charges in the Brokerage Calculator here
Hi
Thanks a lot for the knowledge but I still have some doubt. Would like to know if I’ll be in profit or not by buying Bnaknifty Dec CE 27000 for which the premium right now is 0.05. Suppose I buy this today and the premium goes up to 5 rupees by 15th Dec. But the bank nifty spot price could not Cross 27000 by 15th of Dec. In that case how will the profit calculation takes place?
You will make a profit if the option hits any value higher than your purchase value. In this example, you will make 14.5 as profits.
Thanks a lot Karthik for the response. But still not clear with profit of rupees 14.50. Should not it be 4.95 rupees profit on each unit of bank nifty?
Moreover, want to confirm one more doubt. I need not wait till expiry of Dec. I can indeed exit the position when ever I want before Dec if option premium goes up, right?
Hey sorry, it is 4.95 not 14.5 🙂
You can exit the position anytime you want.
I have been trying to study options for the past 4 years.Trust me …this is best thing i am reading about options…..this is just Woow…
Thanks for the kind words, Sahil! Happy learning 🙂
Hi Karthik,
First of all I can’t thank you and your team enough for creating this amazing resource and keeping it free to access. I have opened an account with Zerodha in May and soon after found this treasure trove of knowledge. I have gone through the modules on TA and FA at least twice, I think. Few days back I started with the modules on F&O. Thanks to these well explained articles with appropriate examples, I’m now able to comprehend Options as a precise and methodical calculated risk-reward instrument instead of a vague gamble. (PS: I’m a big fan of the caricatures that accompanies these articles. I remember you had mentioned the name of the person behind these drawings in one of the comments, forgot the name though)
Moving on to the question I had regarding moneyness of options, this is more for my understanding than a question. Can we interpret the strike options that would result in profit if it was to expire right now (making current spot price = expiry price) as ITM options? Similarly result in loss as OTM?
Nachiketa, I’m so happy to learn that you found the content useful. I’ll pass on the feedback to our illustrator, he will be equally thrilled 🙂
Yes, if you were to exercise your Call option right now, you will get the intrinsic value measured as Current Spot Price – Strike. This would be an ITM option. Likewise, for a Put option, the intrinsic value would be Strike – Current Spot price.
Karthik,
Pls let me know what is IV column in option chain sheet?
IV in the option chain stands for implied volatility.
Thank you.
Welcome!
Sir, I chanced upon these modules while browsing on internet. First I will like to thank you for you fabulous work in bringing the varisty and knowledge to the reach of common person.
Sir, my question is intrinsic value of call is spot price -strike price. The ITM call prices should be around this as explained in your aforesaid chapter. But on going through the option sheet of nifty of date 29.12.2017 I calculated the same for strike ITM 10350 it should nifty spot 10530-10350=180. But it is priced at 262.30. Similarly for other ITM strike rates they are higher priced.
Sir, I should take it as overpriced and can be sold or their is time value added in the pricing.
Sir please clarify my doubt. Regards.
The option price of an ITM will be ‘at least’ equal to the intrinsic value of the option. Over and above this, everything else is attributable to the time value of money.
Intrinsic value of call option = Spot Price – Strike Price
Intrinsic value of put option = Strike Price – Spot Price
But you took values in reverse order for calculation
@ 7100
Intrinsic Value = 8060 – 7100 (call option ) 8060 is Strike price
= 960
Intrinsic Value = 7500 – 8200 ( put option) 8200 is Strike price
= – 700
Kindly check .if I am wrong kindly reply
The calculations are correct and as explained. Not sure if I’m missing something.
When new option strikes will be opened for trading? For example – Today RNAVAL options are available only till 77.5 and its opened today only. When 80 strike option will opened?
As and when the price increases, new strikes open up.
Hello sir,
kartik sir i posted a problem here few days back about JP associates option chain. Now i am unable to find that here on this forum. i dont know what happend
Where did you post it? As in, under which chapter?
sorry sir,
Now its saying (your comment is awaiting moderation) what is mean by this????
You must have posted some link, hence it requires moderation.
In the image of Option Chain of ASHOKLEY, Intrinsic Value for few of the Strike Price is empty. (for eg. For the strike price of 40, 42.5, 45 in CALLS section.) What does it mean and signify?
Sorry, I mistook Implied Volatility as Intrinsic Value as it abbreviated as IV in the sheet.
Thanks for the great article
Ok 🙂
Am I right in assuming that the Intrinsic Value is applicable only for Longs and not for Shorts? As a result, what we term ‘ITM’ for Long Call is actually ‘OTM’ for Short Call and what we term ‘OTM’ for Long Call is actually ‘ITM’ for Short Call, right?
I ask this because if a seller chooses a Short Call strike of 8700 which is Deep OTM as per Section 8.2 above, there is high likelihood that he gets to keep the premium received – and hence he is essentially ‘In The Money’ contrary to what NSE displays the strike as OTM.
The intrinsic value calculation remains the same irrespective of long or short position. So if an option is ITM, it will remain ITM irrespective of the long or short position.
Hi karthik,
Is there direct option to trade ITM, ATM & ITM on zerodha? Or we have to trade like call 2 lot buy & put 1 lot buy in different strike rate ?
Thanks in advance..
Madana, I’m not sure if I fully understand your question. However, you can select any strike or any option type and transact in it. No restriction as such.
Madana Gopal Based on intrinsic value strike prices are segregated in to ITM ATM and OTM options looks like you didn’t understand clearly go through tutorials again…..
Karthik you did awesome job.. I have 5 years of experience Never saw this kind of amazing super easy tutorials earlier…
you are the besttttttttttttttttttttttttttttttttttttttttttttttttttttttttttt
Happy learning, Anil 🙂
Hello sir
Sir I am watching CD option chain
RBI reference rate is 63.4983
So 63.50 strike is ATM but look at their premiums:-
63.50 Call is @ 0.4925/- & IV = 4.47%
63.50 Put is @ 0.2475/- & IV = 4.97%
Call is almost double than Put.
I think there is no intrinsic value in both side both are almost totally time values & I don’t think volatility playing any major role behind the scene.
Then why there is HUGE difference in their value. Could you pls… Explain this ..
Thank you so much sir….
If the premium cannot be attributed to intrinsic value, then it has to be time value 🙂
Yeah that’s ok sir, but I didn’t get why there is HUGE difference in their price above. I guess both are ATM option
So their values should close to each other but they are not. In fact CALL option is double than PUT option in price in this case.
Assume:- At ATM STRIKE
Put is at 100/- than CALL at 70 to 140 is digestible but if call is 200/- it’s too much
That is what I want to know about …in my previous query…
Why there is HUGE difference In CALL AND PUT OPTION value at ATM strike
I hope you got my question……
Thank you sir..??
Ah, yes got your question. Clearly, the volatility is not playing a role here as the IVs is similar to both the options. The only explanation is that since the calls are at almost twice the price – the market is perhaps expecting the USD INR to increase (as in the Rupee to weaken against the $). Hence owing to aggressive buying the call option has increased. Now if this explanation is true, the volumes of calls should be much higher compared to Puts. Can you validate that?
VERY GOOD OBSERVATION! YOUR REPLY IS GIVEN BELOW AND THE CUSTOMER VALIDATED IT
Ah, yes got your question. Clearly, the volatility is not playing a role here as the IVs is similar to both the options. The only explanation is that since the calls are at almost twice the price – the market is perhaps expecting the USD INR to increase (as in the Rupee to weaken against the $). Hence owing to aggressive buying the call option has increased. Now if this explanation is true, the volumes of calls should be much higher compared to Puts. Can you validate that?
ONE DOES NOT EXPECT BLACK SCHOLES TO CAPTURE DEMAND & SUPPLY, BUT YOU HAVE PREDICTED THE SITUATION CORRECTLY! QUITE AN ACHIEVEMENT CONGRATS !
Please consider small Suggestion : For particular topic, you can also mention books ( recommended ) related to that topic, as in many comments it is asked ? + link to some videos also can be added.
sure, Santosh. Will try and do that going forward. Thanks.
Yes sir you are volumes are increasing at call side at steady pace
Thanks for replying sir…?
Good luck!
Hey,
so at the day of expiry all OTM contracts become worthless but are we suppose to square off the positions (NRML & MIS both) before expiry to avoid excess STT or we can just let it decay?
If the option is worthless, then maybe you can let it expire. But do make sure you sq off the ITM options before expiry.
Hello sir,
You have mentioned “Before we wrap up this discussion, here is a question for you – Why do you think the intrinsic value cannot be a negative value?
To answer this, let us pick an example from the above table – Strike is 920, spot is 918, and option type is long call. Let us assume the premium for the 920 Call option is Rs.15.”
If the buyer can buy the stock at 918 in the open market, why would he exercise his right to buy the stock at 920. Hence the option became worthless. So for this reason an intrinsic value can never become negative. Is my understanding correct sir??
Thank you so much for all your efforts of responding queries.
Aishwarya
Hmm, I think you need to spend a little more time on understanding options, Aishwarya.
I’d buy a 920CE when the spot is at 918, by paying a premium of 15, only if I expect the market to go much higher than 918+15.
Hello Sir,
Thank you for your reply. But the above scenario is on day of expiry. Its for the reason why the intrinsic value can never become negative. (in referene to the above chapter). Pls correct me if Im wrong.
Thank you so much sir
Aishwarya
Have explained why the IV cant be negative. Yes, I understand your concern about expiry, but then before the expiry, there is always time value.
Hi Karthik,
I just wanted to say that this is awesome work. I have just started taking options trading seriously, but I wanted to know more before I could jump in. I accidentally happened come across your awesome work. I have gone through the 11 chapters in just a matter of 2 hours, I couldn’t stop myself from praising the one who framed this. The examples were kept simple, language was kept basic, making sure that even a novel reading kind of approach would register all the stuff into the brain. Thanks a lot once again. I would go through all the modules and write to you if I have any queries.
Kiran, thanks so much for the kind words 🙂
I hope you continue to find the contents on Varsity useful, please feel free to ask your queries.
I’m sorry if I’ve understood it wrong, but I thought IV for call options is Max[Spot Price – Strike Price] and vice versa for put options. In that case, any value below the current level 8060 will have a -ve value and hence 0 IV. In the example above for Moneyness of Call option, it’s mentioned the other way round. Let me know. Thanks!
The intrinsic value of Call option is Max[Spot-strike, 0], so if the value is -ve, we consider it as 0.
Dear Sir
As a lot of persons has earlier said that they come to this great work only by chance; it is true in my case ALSO.
The material has been put in a quite simple manner so that it can be easily understood by anyone. I find it so interesting. I am reading it 3rd time. Each time I get more and more knowledge. Thanks to the author for presenting the material in a simple manner. I am finding the stock options as a treasure as I have been and investor in cash market. Though i am using it as a hedging. Earlier in cash market i could not have decided my exit.
Sir I bought 305 shares of Indus Ind bank @ 1700. At the rate of 1800, I came to know about options. As I was in a profit so I decided to sell a call of 1920 @ 9 keeping in mind that i will sell my stock at the strike price.
Pls guide me about the consequenses and what would be my profit or loss if the spot price goes above 1920. and what should be my strategy.
Thanks & regards,
Thanks for the kind words, Achal. Happy to note that you are liking the content here.
YOu will retain the entire profit of Rs.9, as long as Indus Ind Bank is below 1920. For every Rupee increase in the scrip (beyond 1920), is a Rupee loss for you.
Thanks sir
Truely, I was not expecting a reply.
Of course, I’d reply. Why would want to give an opportunity to help 🙂
I am not sure what type of teaching power you possessed. Amazed by the simplicity of this article explaining a complex topic.
Hahaha, thanks Arjun for the kind words. I guess you do things with a lot of love, the outcome will be sweet 🙂
Sir while scanning the increase in OI for the expiry 31.05.2018, it is observed that there is huge increase in OI for call options strike 8600 and 9000. Both these strikes are deep ITM having no time value premium. Sir can you explain the reason for the increase in OI for these strikes. Regards
Rakesh, it is really hard to figure out a reason. Perhaps, there are a bunch of people who believe these trades are worth taking on 🙂
It is also possible that prevoiusly they had opened positions now it became deep ITM and they wanted to close their position so you are seeing a huge OI in deep ITM.
Just a random guess…
As long as the position stays open, it will reflect in the OI.
Hello Kartik,
Thanks for the details.
I have one doubt which no one in my circle answered it to my conclusion.
On 17th May 2018 BankNifty was @26200-26300 range it was bearish.
I was tracking BANKNIFTY 17th May PE of Strike price 27000 and premium was 700+(ITM)
My Question was if I sell/Write this 27000PE contract I was in a gain of premium and it was expiry day for that contact. But the end of the day I saw an increase in premium price as Banknify went down by 200 points but as it was expiry I was expecting the price to reduce to zero and seller of PE would gain profit. End of market price was 900+. I am missing something here. 🙂 Please help.
Regards,
Vivek
Vivek, the put option gains moneyness (or gains in premium) when the stock price drops. So with the drop in Bank Nifty, the premium also increased.
Thanks, Kartik for the reply.
Increase in premium is clear but on expiry as I know price crease to zero.
Suppose someone sells Put of that strike price will be entitled to gain all the premium.
But as I said EOD price was not zero but 900+ and that was an expiry day for that option.
What will happen in this situation?
900 is the last traded price which will be different from the settlement price. The settlement will happen at the settlement price.
What would be the settlement price in this case sir ? Will it come down to 0 since it’s the expiry ?
There is a lot of time to expiry, Daniel. Anyway, the settlement is always at the intrinsic value.
The strike you chosen was ITM(if it expired as ITM) …I think ITM options are immune to time decay and most OTM options are more likely to expire worthless and ITMs expire with some worth. plz correct me if i am wrong
I’d put this in a slightly different way – the rate at which an ITM option loses value owing to time is slower compared to an OTM option.
Dear sir, today is the start of a new contract. I visited NSE website to have a look at the option chain for ‘FEDERAL BANK’ and to my surprise not all strike prices mentioned in the chart had a Premium value, some of them were represented by a ‘-‘ .
Could you please tell me why this happens?
That means there are no trades in the contract, Daniel. Check towards the 2nd half of the day.
Now evrything on the list has a premium value. Thank you sir 🙂
Good luck, Daniel!
Hi Karthik,
Just a basic query. I didn’t find anyone asked that earlier. Will appreciate your clarification please.
Hypothetical situation :
Stock XYZ spot price = 100
Theta per lot 200
Day1: Bought 1lot(1000) 100CE @10
Day2: no trade. Spot price= 90
Day3: spot price = 105
So zerodha shows me profit of (105-100)*1000 =5000.
Is it the true profit. If yes then where is the calculation of theta?
Yes, that is how your P&L is calculated. Theta is an options Greek, ts calculation is based on the B&S options calculator.
Hi…
If my sell position expires ATM then I’ll get full premium/partial premium or I’ve to pay more money than the premium to close my position?
If you sell and the option is ATM or OTM, then you will retain the entire premium. If the option is ITM, then you will lose money.
Hi Sir
As you mentioned , Call option Intrinsic value = Spot Price – Strike Price.
When I am checking at today’s scenario Axis Bank June 18 530 CE , where spot price is 519.10.
so IV = 519 -530 = -11 which is not realistic as you said.
But when I am checking it at Nifty Website in option chain , its showing IV 30.71.
How is it? Can you please clear?
The call option intrinsic value upon expiry is = Max[Strike – spot, 0].
The IV on NSE website refers to “Implied Volatility” and not intrinsic value 🙂
Thanks for clarify…
Welcome, Ashish.
Kindly reply me, sir
ATM can be negative or positive, but it should be very close to the spot price… Is it correct?
ATM is the strike closest to spot. There is no +ve or -ve side to it, Rajesh.
Hi Karthik, as I post this BNF is at 27146 and the 27000CE is at 158 which is almost the intrinsic value of the call. But, the 27100 CE is at 93, which is 2X of its intrinsic value, i.e. there’s time value involved.
Why such a difference in the ATM call? Both should be at almost intrinsic or nearby, right?
Now at 10:37 even 27100 has come to near its intrinsic value. Do help me understand what happened here in the morning.
Like I mentioned, these options are factoring in STT.
This is ITM option. The difference you see is factoring in the STT. Check this to figure out how STT is applicable on ITM options – https://tradingqna.com/t/no-more-stt-trap-on-exercised-in-the-money-options/18977
so we have the border for otm and itm which is atm, similarly can we generalise a percentage for a border between deep otm and otm for any stock?
Border meaning?
Yesterday i buyed a call with 3.3 premium & it closed at 3.4 Today 3.4 is being shown as my buy price & not 3.3 Why so sir ?
Please help…
Yes sir, same thing i also noticed. Why is it so ?
Can you contact our Support team? This shouldn’t have happened.
Dear sir,
Firstly sorry to go a bit off topic but only an expert like you can answer such a thing.
I came to know about a gambler called Bill Benter who is said to be world’s richest gambler & have amassed 1billion $ just by betting on horse races. But the strange fact is that he didn’t just randomly bets on any horse, instead he has developed a statistical model which could very accurately predict the winner of the race. But sir, how in the world is this possible ? A horse race would be won by the most fastest horse, how come is it related to mathematical formulas anyway. Is mathematics really so powerful ??
Manas, I don’t know about Bill Benter, but this sure sounds possible and it does not surprise me. Have you watched the money, Moneyball? If not, I’d suggest you do to understand the role of stats in game theory 🙂
Sir, i tried to open an account with zerodha so i clicked on “open an account” in the website, entered my details & clicked “continue to sign up” but nothing is happening. I tried multiple times but nothing happened. Then i downloaded kite, tried signing up through there but it says “duplicate entry lead”. What to do…
Manas, can you try this link – https://zerodha.com/?ref=varsity
The link is working perfectly fine, don’t see any issues from our end.
Still nothing happening sir ☹️☹️ will try the offline method & go to nearby branch
Manas, online signup is working fine. Is there a problem with your broadband? Can you double check please?
Finally after a long wait, got started with zerodha ??
Welcome to the Zerodha family, Manas!
Sir, I want clarity on this. We know that if in the money option is not squared off in expiry, STT is charged on full settlement. I had a bank nifty 27500 PUT which ended up in the money. It closed at 27478 last week expiry. Now SEBI gives option of “DO NOT EXERCISE” these days. I did not get that from zerodh side. Hence I contacted support. They said it’s automatic if profit is less than STT than option won’t be exercised. I understand that STT would have been higher, so it’s a loss saver for me. But suppose in some stocks we don’t find a buyer on expiry, or bids aren’t what in the money option deserves, and we are forced to keep the option. In that case what to do then? We will never credited our profits? I can’t even see your shadow in back. It’s someone else.Dont you think “Do not exercise” option must be provided like other brokers?
In above case I had 25 lots of bank nifty . So, 22 points (2700-2478) will make it 22000 Rs profit on 25 lots. Had I squared off my purchase premium was around 2 and it ended at 15, so 13 points would be 13000 profit in that case (if I squared off before 3:30). Shouldn’t I get 13000 credited because my option is considered “not exercised” by your system automatically?
The credit would have been given, in case you had sold the option. Not if you held it to expiry where STT would kick in.
Gaurav, your comment has this line – ” I can’t even see your shadow in back. It’s someone else”, I’m curious to know what this means 🙂
Yes, in case of low liquidity, you’d be stuck with a position, although exchange would ensure its settled for you. The Do not exercise option would be applicable in this situation as well.
Dear sir,
This question may sound stupid but sir i am really intrigued to know is it really possible ?.
Sir, suppose i have 1 crore rupees to trade. Now if buy call option of premium 30 by using whole 1 crore then i would be able to buy 4444 lots. & if it moves just 1 point above, that is 31, it is showing a whopping profit of 315,174 rupees.
That means if someone do this only 4 times in a day properly he crosses 10 lakhs per day in earnings.
So is it really possible to earn such crazy money if we have a large capital ??
Yup, its possible 🙂
But you need to ensure there is ample liquidity like the Nifty contracts.
Thank you very much for replying Sir.
& yes i was actually talking about Nifty index only, i have never even searched for stock options.
Sure, Manas.
Dear sir,
I recently read somewhere about what people were saying as exchange lot restriction is 100 lots per order. But i am not able to get any info. on it. I have heard people trading many many lots intraday but never heard about this 100 lots per order restriction. Is this true ?
No official communication on this Manas, so this is just a rumor.
Thank you for the confirmation sir.
& i finally found out the link where i saw people saying this
https://tradingqna.com/t/will-the-liquidity-in-nifty-and-bank-nifty-allow-me-to-sell-options-worth-rs-30-crores-on-a-normal-trading-day/7068
Yes, liquidity is a real issue with options.
Sir, can u please tell about open interest in terms of lots ?? Like suppose lot size is 75 & open interest for a particular strike is 4 million. So does that mean that 4 million lots have been traded today ?
Divide 4Mil by 75, you will get it in terms of lots.
Thank you very much sir ??
Welcome!
Hi..
if we sell a call option .. at the end of expiry do we need to buy compulsorily if the premium heading to zero
Not required, you can square off the position any time you wish.
Hello Karthik,
Understanding that we don’t have to wait till the expiry of the option, however what if the exchange happens to square off the trade on the expiry day, then what is the penalty for the buyer of an option and what is the penalty for the seller of an option, irrespective of the underlying and strike price.
The exchange will be considered is settled and do the needful only if you have an open position by expiry. There are no penalties as such.
Hello Karthik,
Please let me know how can send you a screen shot for which I have a query. Thanks in advance.
You can always upload this on Google drive and share, Ananth.
Hello Karthik,
Please find the image with this link – https://drive.google.com/file/d/1NSDyyP2mQe2FzH925YVvgDvdQ1WCqp-5/view
This is the image taken after the closing hours of market on 15th Nov 2018.
My queries related to the Image that I have shared.
1. Banknifty 15th Nov 26100 PE – Since it is the expiry day of the week the price of the option contract has come down to Rs.0.05/-. which is understandable.
2. Banknifty 15th Nov 26100 CE and Banknifty 15th Nov 26000 CE – Even though it is the expiry day the prices have not come down and even at the last minute we can see the prices were increasing which shows that people were buying and selling the option contract at the last minute. Please clarify:
A) Is it not necessary to have the prices of the option contract coming down to zero on the expiry day?
B) What will happen to the option Contract from the buyers point of view and from the sellers point of View?
C) How does P&L will look like from buyers perspective and from seller perspective?
A) I’m guessing this was close to the spot price, hence the premiums would also factoring in the STT rate
B) Option buyers will have to pay a heafty STT if the option expires ITM. Do check this – https://tradingqna.com/t/no-more-stt-trap-on-exercised-in-the-money-options/18977
C) The Buyers gains will be the sellers loss and vice versa
Hello karthik sir, i have no words for the entire zerodha team… Great great job… My question is that why we see small lot size on some Strike Prices whereas minimum lot size is already pre determined and kindly let us also known that on which types of strike prices may be option buyers don’t get out when they feel profitable or something like that they feel that they are blocked because of suddenly nobody wants to buy the contract (cause buyers now want to square off their opened position).. Thanks a lot again you guys did a brilliant and highly appreciable work for all types of investors and traders…
Thanks for the kind words, Jain.
Which lot size are your referring to? They are predetermined as you said and does not vary based on strikes.
What is
nifty8050PE
Or what what PE stands for is it PUT option in European
Thats right, PE for put option, CE for call options, both being European in nature.
Why Zerodha don’t allow to buy deep out of money or in the money options?
Which contract are you talking about, Vishal?
Nifty, Bank Nifty………..Is there any rule?
Sir, today when bank nifty spot was at 26940 ,the 26700CE was trading at 205, which should atleast be ideally 27940-26700=240 and plus suitable time value? can u explain why so?today is expiry day..JAN 31 Expiry
Y’day was weekly expiry Karthik. So the ITM option would adjust for the STT applicable, hence it tends to trade at a slight discount.
sir, then how do we calculate the precise intrinsic value (also accounting the STT)? Can you give the formula or method?
Interesting, I’ll get back on this.
Ok sir.
As per this module depends on whether we’re in the first half or second half of expiry AND when can the target hit.
My question is- How would someone know when it’s target would hit. You had taken an example of 4% target hit in 2-3 days, but how’d I figure that out?
We are working with an assumption here, this depends on your point of view.
Hi
There is a mistake in @ 8.3 Chapter, calculating put options intrinsic values.
its spot price is 8202
in the calculation, you used atm 8200 as the spot price
Ah, let me look upon this, Sushma. Thanks for pointing though.
Hey Karthik,
W.r.to perspective of viewing stock, I have following query/conflict to me to understand..
#1) When the spot price is below the strike price, say spot price is Deep ITM then stock price increase to reach strike to become ATM, then premium will decrease, isn’t it..?? and over the period spot becomes OTM, then if I sell my stock, only premium will be calculated, right. But when stock is at OTM then premium is lesser value than D ITM..??
#2) When does strike price gets change.? My actual query is, if everything (spot, strike, premium) is getting changed over time, which value I have to consider as constant and start using the formula’s explained here.?
1) If you are talking about a PE option, then yes.
2) Strike’s dont change. It remains constant throughout the life of the contract.
Hi Kartik..
I have initiated a bear put spread in Ashok leyland..
What will happen if I don’t square of my position before expiry?
Its best if you Sq off the position before expiry to ensure STT and physical delivery complications. Read this – https://tradingqna.com/t/no-more-stt-trap-on-exercised-in-the-money-options/18977 and this – https://zerodha.com/z-connect/tradezerodha/policy-on-settlement-of-compulsory-delivery-derivative-contracts
Hi Sir,
1.”@8050
We know this is the ATM option as 8050 strike is closest to the spot price of 8060. So we will not bother to calculate its intrinsic value.”
since 8050 is ATM, during the expiry will this option strike also be worthless or or since there is a intrinsic value of 10 (8060-8050) the amount equal to 10*lot size would be our Profit?
2.I have also heard that the first strike in OTM is the ATM ( rather than the closest to spot price). In the example mentioned in this chapter it should be 8100 as the spot has crossed 8050 and CMP is at 8060.Is this true?
3.What is the use of ATM strike identification?
1) If the market expires at 8060, then you’d get 10*lot size, provided its a CE
2) It is always ‘in and around’ the current market price, so look for those strikes
3) It is the central strike, which coincides with the current stop price. It has the closest chance of transitioning into an ITM option. Holds good for both CE and PE.
Hi Sir,
I traded BankNifty 29900 CE on the expiry date of 04Apr2019. The BankNifty closed at 29904. I had purchased for 0.50 INR and two lots (20*2=40). So ideally as per the information available on the page, something like this should have reflected on my transaction statement of 04Apr2019:
(29904-29900) = 4
(4 – 0.50) * 40 = 140 INR
But nothing like this showed up. What am I missing here? Please share your thoughts.
Thanks & Regards,
Monika, you’d expect to be profitable by 3.5 i.e 4 minus premium paid i.e 0.5. Although this is an ITM option, STT eats into the profitability…plus a little more actually. Hence it does not make sense to exercise these options. Better to let go of 4 than pay 6 more as taxes. Check this – https://tradingqna.com/t/no-more-stt-trap-on-exercised-in-the-money-options/18977
Hello Karthik sir,
I am a great fan of yours sir your teachings really helped me a lot,just wanted to ask that where can i learn in depth about how to analyse option chain.
Happy to note that, Varun. Is there anything particular you are looking for in an Option Chain? Maybe I can help you with it.
Hi Karthik,
Can you also please refer or explain the remaining columns in option chain.? viz., Volume, IV, Ask price, Bid Price, Net Change, OI, Change in OI.??
Volume = total buy + sell
IV = Intrinsic value
Ask Price = The latest price at which one can buy
Bid price = The latest price at which one can sell
Net change = change from previous day’s close
OI = Current Open interest
Change in OI = Change in OI wrt to the previous day’s OI
Karthik Sirrrrrrrrr…… Need info like, how each individual will impact / not on the price of share.? For example, Why OI and Change in OI is required, will it add any significant info which we can use it for trading.? similarly IV.? etc., elaboration or explanation in your terms.?
You need to understand what each variable is (which is explained in the chapter), and once you do that you will automatically understand the impact 🙂
Okay sure thala, will thorough with topics then and try to figure it out. And still if I won’t get you are here for us anyway :D.
Of course, I’m 🙂
Today nifty closed 11944
But why 11900 ce was closed at 37 not 44
It breaks intrinsic value rule . Why did it happen
It just accounted for the STT payable, Gautam.
Coundnt get it
Because there we have to pay stt so they reduced premium??
Traders know the impact of STT, hence the premium reflects this change.
Hello, I want to know that what happens if I don’t sell my in the Money call option. Example: Bank nifty 31300CE which trades at 100 rs. At 15:30 on the expiry day,and the spot is around 31450. I have 10 Lots.
What happens if the option expires at the same rate without selling it. How much will be my P/L?
In this case, your option in the money. The securities transaction charge on in the money options is quite high and you’ll end up paying for it from your profits. Check this – https://zerodha.com/z-connect/queries/stock-and-fo-queries/stt-options-nse-bse-mcx-sx
For this reason, it is better to square off the position just before the expiry.
Hi Karthik,
Some people refer to the Futures price to mark the ATM strike and sometimes Futures price and Spot price indicate towards 2 diff ATM strikes. So, I’ve a couple of question here-
1) Which is the right standard for ATM strike – Future or Spot?
2) In case of a confusion, is there any other way to confirm ATM strike, like lowest IV or highest straddle price at that level etc?
1) Spot for Equities. Futures for Commodities and currencies
2) The strike nearest to spot is the ATM.
http://zerodha.com/varsity/wp-content/uploads/2015/05/Image-4_Option-Chain.png
in above pic
IV = SPOT PRICE – STIKE PRICE [ In yellow box ]
= 68.70 – 67.50
= 1.2
But above snapshot IV = 45.72 How ?
Sorry for the confusion, in the equation – IV = SPOT PRICE – STRIKE PRICE, IV refers to the intresic value. But the IV you are talking about is implied volatility, which is 45.72%.
Thank you so much sir ! For everything is well explained.
1 what is logic behind ITM optioms are always expensive compare to OTM options.
2. One thing is clear here whatever concept of call option, put option is exact opposite to call options, My question is this does it not make any confusion while trading because during market time every second or minutes can change premium and profit/loss as well.
Once again thank you sir for all your team for such a great effort.
1) This is because the ITM options have intrinsic value compared to ATM or OTM
2) This is exactly the reason you need to familirize yourself with the working of Call and Put options, both from the buyer and seller’s perspective.
Dear Sir,
Thanks for all the efforts that you have put in this module. I will be starting trading in options soon. However, certain things like STT trap, tells me that there is always scope of learning.
Sir, my question might sound foolish but I just want to make sure I am not missing anything. Sir, if someone has enough capital to trade in current month NIFTY call options, then won’t it make sense to only buy deep ITM options. If I draw a bell curve taking all the possibilities till which Nifty can fall with 99.7 probability, and buy an option accordingly outside this range and there is no black swan event, then in any case, I WILL make profit. So, it makes sense just to trade in deep ITM options and make profits.
Also, Sir, one is supposed to square off a long call before expiry to avoid excess STT, but is there any chance when there arw no buyers and one can’t square off?
Sidhant, there are no guaranteed profits in the markets, even if you buy a deep ITM option 🙂
The assumption is that you’ll have an infineite amount of money to keep doing this every expiry, which I’m not sure is a possibility. By the way, you will have to backtest your theory across multiple expiries to see how the P&L has behaved before taking this live.
Hi Karthik,
BankNifty on 29th Aug 2019 closed at 27305. but 27500 PE is at 161.60 for August Expiry.
Though it is 195 points in the money, the premium is 161.60.
Could you please explain why the premium is not equal to intrinsic value. even though STT is applicable for ITM contracts, but this much huge difference on closing day?
Thanks & Regards
Satya.
That is partly because of STT and also you could be looking at the LTP, please do check the settlement price.
Halo karthik sir,after the change in STT calculation rule,now on expiry day if i hold a option which is expiring now IN THE MONEY,for eg. M holding icici bank 380 CE and the cmp is 391 on expiry day and i want to exercise the right,so what is the procedure for that in zerodha,and how much money should i have in my trading acnt for that,and how much profit will i get finally after exercising the right??
Sumeet, if you are holding an ITM call option, then you need to have enough margins to buy the stocks (physical delivery). More on that here – https://zerodha.com/z-connect/tradezerodha/policy-on-settlement-of-compulsory-delivery-derivative-contracts
Hi Sir,
Very thoroughly explained with NSE example chart and I understood very well and thank you for that.
Glad to note that, Shashee. Happy learning 😉
From Sept. 2019 How will be STT calculation for option buyer on expiry?
It will be charged on the intrinsic value and not on the turnover. Check this – https://zerodha.com/marketintel/bulletin/230019/no-more-stt-trap-on-exercised-options-from-today
Hi Sir,
Just got to know about this, so have following doubts:
1) If we are long stock options so to avoid margin requirements we’ll have to exit the option by expiry week Tuesday EOD, Right?. Are there any exceptions to this (where we need to exit even before Tuesday).
2) In case of long stock options – Can we have an option in Zerodha while initiating a transaction (option like “would you exercise the option – Yes, No”). If No, then there’d be no margin requirements from Wed and option would get squared off automatically 5 mins before expiry time on last Thursday and if Yes, then that margin thing applies starting from Wed.
This is because we’ve seen big moves on the expiry day and margin is hard to afford especially if we have more than even 1 lot.
1) There is no margin required for long options, you only have to pay the premium amount. Also, the expiry for monthly options is the last Thursday of the month
2) Unfortunately, this is not possible. You will have t manually execute the trade
but as per mandatory physical delivery requirements do we not require margin for long stock options if option carried till expiry day, i’m not sure if i got this is right.
https://zerodha.com/z-connect/queries/policy-on-settlement-of-compulsory-delivery-derivative-contracts-update-oct-2019
Ah, yes, Abhishek. Sorry, I missed this. You need to have the necessary funds before expiry.
Dear Sir,
I have a doubt.
In this module, till now, you have stated that if we have a bullish view, then we must buy a call option or sell a put option depending on the premiums. Likewise, if we have a bearish view, then we must buy a put option or sell a call option depending on the premiums.
Then, why do ITM strike exists ? ITM strike is contrary to the above concept. If we buy a call option with ITM strike, then we are bearish and if we buy a put option with ITM strike, then we are bullish.
Kindly explain.
Regards,
Rahul Mishra
Rahul, I’m not sure if I get your point. How can ITM call be bearish? In fact, it is more bullish compared to ATM or OTM CE.
Sir,
For ITM Call, the strike price is less than spot price, this means that we are expecting the spot price to decrease till strike price. Thus, we are bearish on the stock. (I thought it in this manner, may be I am completely wrong.)
Kindly clarify my doubt.
Regards,
Rahul Mishra
Hmm, no Rahul..this does not work that way. The strike is fixed, what moves is the option premium in accordance with the spot price. I’d suggest you start reading this module again starting from chapter 1.
If there are two strikes 8050 and 8100, spot price is 8075 then both these strikes are referred as ATM right? So there can be two ATM at some point?
No, officially there can be only one ATM for CE and one for PE, but practically, both the strikes here are ATMs since they are so close to the spot.
In the option chain snapshot shared, why do the top strike prices of 40,42.5 not have any bid or ask price?
There was no one interested to trade these I guess.
Hello Karthik,
two questions-
1. Can you suggest some good books on options ? to increase our knowledge further..
2. I think it will be very helpful if in each module of Zerodha varsity if you can add a reference section and mention further readings like books, blogs articles etc.
Thanks,
Arqum
1) What other additional knowledge are you looking for?
2) Have done that in many chapters, wherever it is relevant.
Respected Sir,
I understood ITM, ATM, OTM.
I went through the nifty options link u gave .
Just 1 question ,
Why are some rows empty
( OI , change in OI , volume , IV , LTP , net chng )
Thank You.
That’s because of the absence of liquidity in these contracts.
Sir
In the above snapshot of Nifty options chain, you said ITM options are shown in pale yellow colour and OTM options in white colour background. As you can observe, the various strike prices of Nifty options chain differ by 50. So if the underlying (Nifty here) moves by more than 50 (above or below) then this pale yellow and white background will change. If the market is too volatile then it means this colour pattern should change dynamically. Is it so sir? Does the background colour of ITM and OTM option chain gets changed so dynamically ?
Thanks
Its not on a live basis happens on an end of day basis.
Sir
A small correction is required in “8.3 Moneyness of PUT Option”. In the example, you said Nifty spot is at 8202 but in calculations, spot is taken as 8200 (not 8202 although difference is quite low). It creates confusion as IV = Strike – ATM Strike (8200) but actually it should be IV = Strike – Spot = Strike – 8202.
Thanks
Ah, thanks. Let me check this. Btw, what all are you reading on Varsity? I see your queries everywhere 🙂
Sir
Suppose the spot price of a scrip is Rs. 85 and the available options strike are . . . . 70. 80, 90, 100 . . . ..
In this case, both 80 and 90 are equidistant from spot (85), then which strike will be ITM and which will be OTM ?
Thanks
The strikes are developed based on the Rupee value of the underlying. If its 80, then I think strikes will be available at every 2.5 or 5 Rupees.
Sir
I have read all the modules of Varsity once. This is the second time I am going through all these modules, trying to make best possible use of this lockdown time. I have never seen such a great material like Varsity.
Sir my query is:
Suppose I place an order of Nifty 8400 PE SHORT (Sell). As soon as I place this order, my margin gets blocked. Now I place another order of Nifty 8600 PE LONG (Buy). As soon as I place this second order, my margin gets released and overall margin due to these two combined orders gets reduces. But what if I change the sequence of placing these orders i.e. first I place an order of Nifty 8600 PE LONG (Buy) and then Nifty 8400 PE SHORT (Sell) ? In that case, while shorting the Nifty 8400 PE, will I be required the original whole margin or the margin gets reduces due to the combined orders ?
And lots of thanks for developing such a great material and that too free of cost. Before coming to Zerodha, I infact paid huge sums of money for the study / learning packages offered by many other brokerages.
Thanks and regards
The margin is reduced based on the overall risk of the positions. Which means to say that you have to place the order with full margin, after you take the position, the risk is assessed by the system and margins are released.
Good luck and happy reading 🙂
With regards to option chain Do Difference between LTP and current market price predicts anything?
Both are the same (LTP and CMP). It may not mean much, it is just a price indication.
what will happen if i purchase a CE at OTM ? The price changes daily, so maybe it can later on become ITM also .
Yes, that is certainly a possibility.
Thank you so much sir. But I sometimes observed difference in my kite platform and nse chain
Such as?
Hi Karthik,
I have a question with respect to LTP. Is LTP decided by demand and supply or by the Option Pricing Model followed by the exchange.?
Also, in case there is a huge demand for say particular strike price, even then will the LTP not change as per the law of demand supply?? Based on order matching, will only the OI change?
Thank,
Alok
LTP is a function of demand and supply but is also dictated by its fair value derived from B&S model. Multiple forces act simultaneously on option, Alok. You need to be aware of this while trading option.
Thanks Karthik.
So u mean to say that i can outbid the highest bid of a strike in case I absolutely want to trade no matter what. But it will be somewhat near the BS theoretical price?
Also, is there a specific range or a parameter that measures this effect of demand supply?
Thanks,
Alok.
Yeah. No measure as such for this, Alok.
Dear Karthik,
Kindly accept my sincere gratitude for writing such an informative and easy to understand material. I was looking for many resources but you have magic in your writing which keeps me glued with these chapters. Thank you once again.
Lots of Love,
Nirav
Thanks for the kind words, Nirav!
Karthik please Correct me if i am wrong-
if i buy/sell option today and i want to exit the position before expiry then Profit or Loss will be calculated based on premium difference.
if i buy/sell option today and i didn’t square off the position on expiry also then P&L will be calculated based on Strike price and Spot price , here premium won’t play any role.
Yes, that’s right. At expiry, the premium will be a play on the intrinsic value, which is based on the difference between spot and strike.
Thanks
hi sir if i option sell , and after two day buy……. i can do it or no ,??
Yes, you can.
Hi Karthik,
please help me with following doubts ,
1) As you said in one of your module that Premium = time value + Intrinsic value, Today @ around 15:25 Nifty was trading below 9100 (somewhere around 9097,9098), so that made the 9100 PE option ITM . But to my surprise even though the time value was almost zero( because only 5 mins left for expiry ), and since it was ITM ,it should have been trading at premium of 2 , 3 rupees only because premium = time value (0)+ IV (2,3 rs).But it was trading at the premium of 6 Rs. Why was this so?
2)When nifty closed the price was 9102 but after some time it was 9106 , why so?
3) How nifty arrives at the settlement price ? what formula they use ? Can you pls explain this in detail?
4) Is it possible that even though the premium is almost zero (0.05 or 0.10 Rs), Nifty to have Large Intrinsic value like 10 Or 12? For example , Nifty 9100 PE , premium 0.10 , spot 9110 Or 9112 . Is this scenario possible?
5)How do people trade just few minutes before expiry and double their money ? since premium is almost zero at these times , can zero time value and large Intrinsic value exist simultaneously? If yes how?
6) How can we buy at low premium and let the option expire and then cash in the intrinsic value? is this possible?
1) Weekly options isit? Firstly they are not very liquid, secondly, you need to take the settlement price. You are looking at the LTP
2) LTP vs settlement price
3) It is the weighted average of the last 30 mins
4) No, that is an unlikely situation
5) I’m not sure either, a bit of luck and bit of skill I guess
6) Depends on the market, right?
Hai Karthik,
I am new to options. varsity helps me to understand. Your way of explanation is simple and easy to understand for new comers also. I have a doubt in Call option buying. If I have taken a long position in call option at a strike of 360 with premium of 10 rupees. During expiry day if spot price is 363 and premium price reduced to 7 rupees. Will it be profit or loss on the expiry day? Can you please explain?
On expiry, if the spot is 363, then the value of the option is 3, hence the premium will be around 3. Excess time value will decay due to lapse in time.
Hi Karthik,
Kudos on helping all of us. Really appreciate you taking time to answer our queries.
I have a doubt on Options. Assuming I have taken delivery of 1 Lot of INFY trading at Rs 685 and I sell a Put Option at Rs 800 strike price with Rs 125 premium for 25-June-2020 expiry. What would be my P&L if INFY trades below Rs 800 (i.e. Put Strike price) on expiry day?
Thanks much
Vinay
Vinay, the overall P&L is a sum of the P&l from individual positions. So on the delivery trade, you made 800-685 = 115 and on PUT you will lose to the extent of the intrinsic value of the option. YOur net P&L is the sum of these two trade.
Hi Karthik,
It is really nice to go through these simple, yet wonderful knowledge base for option trading
i have few questions to be asked.
what happens when we sell In the money option contract on the day of the expiry
lets take an example of nifty currently trading at 9314 (At the time of writing this question) , if somebody sells an option contract of 8500 value or even lesser on the monthly expiry date, what is the profit potential for such trade execution?
zerodha margin calculator shows margin of 142000 approximate is required for selling option (at the time of writing this question) with premium recieved around 46000 rupees.
how the calculations (Profit and loss) are performed while we sell call option “In the Money or Deep in the Money” contracts?
please provide your valuable guidance.
If the option expires ITM, then the difference between the positive difference between the strike and spot multiplied by lot will be your P&L. The option will be exercised. But knowingly well that the option is ITM, why do you want to write this option?
Hi Karthik,
Kindly confirm the understanding that I have developed uptill now or correct me if I am wrong.
Whenever there is an indication by a candlestick pattern (and other technical indicators) in NIFTY in spot market (say bearish,
say 10070). From this data, I ll be selecting the Strike price in options and taking decision (whether to sell a call or buy a put) deciding on the amount of premium that I need to pay.
(NOW MY STRIKE PRICE HAS BEEN FIXED LETS SAY 10050)
Since I have bearish view on the market and my strike price is now 10050 and I am not keeping it till expiry (ie: benefitting from premium), whenever the price of premium will go down I ll be benefitting from the trade. Q1 RIGHT?
Q2 Let say I sell a call @10050 premium 100, now when the price is in OTM I ll be benefitting from the trade as premium is lower and if the premium reaches in ITM range will be lossing money in that case. RIGHT?
Q3 Let say I buy a Put @10050 premium 150, now when the price is in OTM again I ll be beneftting from that trade as premium is lower and if the premium reaches in ITM range will be loosing money in that case. RIGHT?
I got actually confused by reading many comments but Please elaborate the role of ITM, ATM and OTM options with premium.
i)
1) Yes, once you sell/write, the value of the premium will have to reduce from the point you’ve sold. Else, you will lose money.
2) Yes, best is to evaluate the premium – what price you wrote and what price it is now
3) The premium has to increase after you buy the option. This is just the opposite of selling the option.
Yes,
Got that.
Thank you
BTW Its fantastic material that you and your team has prepared. Good luck.
Happy to note that, Udbhav. Happy reading 🙂
why deep ITM’s have high premium and it goes decreasing as we reach deep OTM’s
ITM options have a higher probability of expiring ITM, OTMs have a low probability, hence.
i think because they have high iv, correct me if i am wrong
Hmm, not really, Aniket. Suggest you continue reading this module, the answer will reveal itself 🙂
Karthik,
Plz.clarify : 1) to make profit Premium needs to be higher than the Premium paid for irrespective of the fact your a Put or Call Option buyer 2) you make money if you Spot Price is higher thn the Strike Price in case of Call Option buyer (opposite for writer) and if Strike Price is higher than the Spot Price for Put Option Buyer (opposite for writer). 3) one can set-off positions anytime if getting the desired premium. There is no need to wait till expiry.
1) Yes, thats right
2) Yes, thats right
3) Absolutely
Good day Karthik,
Intrinsic value calculation (spot – strike) for call options is applicable only if we exercise the option on the day of expiry.
On the day of expiry, for strike 8400 CE if the spot expires at 8600 (in the money) –
1. What is the return to the trader? Is it (spot – strike) and same is remitted to his account?
2. Is there any additional charges for not squaring of the position and letting the option expire?
Thanks a lot.
Shashanka
1) Yes, but you will have to keep physical delivery in perspective now. More on that here – https://zerodha.com/varsity/chapter/quick-note-on-physical-settlement-2/
2) Nope
Why should options always trade in lots? Why isn’t it offered as single quantities too?
Derivatives are delt in pre-specified lots, remember contract standardization is a virtue of derivatives.
Hii kartik
can option seller square off position before expiry date?
in this context , how will be profit and loss.
Yes, he can. P&L will depend on the prices at which you exit the position.
Sir if if we buy otm call CE on monday and we make loss and expired on friday.
My question is we need to sell and close that call or it will automatically closes becos call expired that day.
If to be sold by us to close, what happens when we didnot closed on expiry day and sold next day,
Since it is a worthless option, you can just let it be. No need to close it.
Could we generalise and say the following:
The intrinsic value (IV) of an option is the amount of money the option buyer could make (or the option writer could lose) when the option contract is exercised, allowing for the premium.
Yes, that makes sense.
Sir one query. Suppose Tata Motors is trading at 110. I buy an ITM or Deep ITM Option 4 days before expiry say 90 CE. Now, suppose i don’t square off my position till expiry and wait till expiry and after 4 days on the day of expiry the ITM option expires ITM only say 112 rupees.
Now, on the day of expiry what will I earn in the settlement? Will I earn an amount which is equal to difference in premium X 5700
( one lot of Tata) or will I earn an amount which is equal to INSTINCT VALUE 22 X 5700?
IN a nutshell what we will earn in settlement on the day of expiry if we don’t square off till expiry , Instrinct Value or Premium ?
In this case, you earn a right to buy Tata Motors at a price equal to 90+premium that you’ve paid while in the open market the same stock is selling at 112. You can take delivery and sell the same at 112 and make the difference.
Ok Thankyou sir. So how will i actually exrcise my right? Do i have to take delivery of stock first after 2 days of expiry (T+2) and then sell the same on my own ? Or all this happen automatically and the stock automatically gets sold and i get profit credited in my account ??
You will have to take delivery and sell it separately.
A logical query on moneyness of option.
Say
Strike is 1000 CE
Spot is 900
Premium is 5
I sold this call and got premium of 5
Now on expiry day 3pm spot is 1001.
Trying to understand what would be the premium since IV is -1 hence zero.
If i want to square off the call what would be the indicative price of this call premium as theta would be virtually 0.
The premium will be 1 or slightly above.
Good day Karthik,
In the last chapter (chapter 7), you wrote that Intrinsic value formula (spot – strike) for P/L calculation in case of call option is applicable for only ON the day of expiry. But here in this chapter you have calculated the P/L using the same formulae in the middle of the series? Also you said in the earlier chapter that we have to use a separate formulae for P/L calculation for all days except expiry day?
There is a contradiction here or am I missing something? Also you have not mentioned the separate formulae anywhere.
Thanks,
Shashanka
It is not a contradiction Shashank. The concepts criss-cross a bit, let me put this pointwise for you –
1) Before expiry, the P&L depends on the difference between the buy and sell price of the premium. For example, you buy an option by paying a premium of 10 and sell the same after 2hrs ar 12, then you make 2 as profit.
2) At expiry, the P&L depends on the intrinsic value of the option. For example, you hold 11,000 Nitfy CE, Nifty expires at 11,120. Then your P&L is 120.
3) During the expiry, the premium of the option itself is dependent on the intrinsic value of the option. This is what I have written in the chapter. For example, if an option is trading at 10, then the price itself depends on the intrinsic value.
Thanks Karthik…this makes it crystal now.
Good luck!
Hello karthik,
In the new NSE website’s option chain, the traded volume is more when compared to OI. Even if the volume increases or decreases it has to reflect in OI and Change in OI. I’m very much confused in reading the option chain now.
Could you please help me out? Thanks!
Vinay, OI is on a cumulative basis i.e. it gets carried over on a day to day basis. However, Volume is for that specific day. So there will be differences.
Ok! I got your point. But, there is a difference between old option chain and new option chain. For example, see today’s option chain, 11600 CE; OI is 44,543; Volume is 8,02,496. If there is a drastical shift in volume then it must reflect in Change in OI atleast. But, the change in OI is just 934 contracts. In old website it was very clear, whereas here it’s confusing me.
Does it not match on an EOD basis?
No!!! That’s what I’m saying!!
A trade results in creating volume, but it need not necessarily impact the OI. OI changes when new positions are created. For example, I buy 1 contract, you sell 1 contract. OI is 1, volume is 2. Now, another guy buys from me and I sell, OI is still 1, but volume is 4.
Hi Karthik, What exactly is moneyness means ?Can we define moneyness as profitability of the given option at the given spot price?
Moneyness is basically how much money you are entitled to receive today, assuming today is the expiry of the option.
Thank you Karthik.
Cheers!
Dear Sir, well explained about Options; But i wish to point one as follows:
Under 8.3. Moneyness Of a Put Option, 4 th line, Nifty’s spot value 8202.00
I think, it is 8200.00 only ; For Calculations of moneyness for various strikes-7500,8000,8200,8300,8500 Spot is taken as 8200 only.
Ah, let me check this again.
could you please explain. why premium is low in OTM compared to ITM .?
logically, for CE, OTM is yet to be reached so, premium should be high right compared to ITM
Sorry for my ignorance .
Vijay, the premium is a function of how valuable the option is right now as opposed to how valuable it maybe in the near future.
Hey Kartik, Thanks for providing such amazing educational content for free. I just wanted to ask that in future if you can launch a module on Algo Trading as I can’t find much information on the internet. And I want to learn more about it!
I dont know programming, else probably we would have discussed it here already 🙂
Thanks for lightening fast reply
Good luck, Vijay!
Hi Karthik, I recently opened an account in Zerodha and prefer to sell options (with hedging). Though I practiced paper trading, l wanted to do real time trading with only one lot, ie selling 1 lot of any indices. I wanted to continue this way for a few more months until I am confident in my strategy.
1) Now please let me know if the brokerage is high for trading 1 lot in Zerodha.
2) Also please let me know if it is safe to SELL very deep OTM options. (I ONLY prefer to use daily or weekly chart for finding a strike price and that always falls in the very deep OTM options).
Thanks a million for all amazing chapters in Zerodha Varsity!
1) 20 for buy and 20 for sell – 40/- in all
2) Yup, as long as you know what you are doing.
@karthik
Firstly, I would like to congratulate you on the wonderful initiative taken in terms of educating newbies.
—
Couple of questionnaire related to F&O at the time of expiry and charges/penalty..
• If I have bought OPTIONS and by expiry it becomes : [ for instance, I BUY Adaniports SEP 350CE = 13rs ]
• ITM : there are 2 cases I need to understand
1. I didn’t auto square off – ?? what’s the penalty here ??
2. I wanted to square off but I didn’t find any sellers. The seller column under marketDepth was 0.
?? what’s the penalty here ??
• OTM : I think in this case there is no penalty..
• If I have sold OPTIONS and by expiry it becomes :
• ITM : there are 2 cases I need to understand
1. I didn’t auto square off – ?? what’s the penalty here ??
2. I wanted to square off but I didn’t find any buyers. The buyer column under marketDepth was 0.
?? what’s the penalty here ??
• OTM : no penalty
• If I have bought FUTURES and didn’t square off by expiry.
• If I have sold FUTURES and didn’t square off by expiry.
Please help me to understand. Appreciate your help.
1 & 2) There is no penalty. If your option is ITM, then you need to ensure there is enough margin to take delivery. As long as this is there, you will get the shares in your DEMAT, even if there is no seller at the time you want to sell.
Same as above for option selling and futures as well.
Thanks for prompt reply 🙂
Quoting your statement “Same as above for option selling and futures as well.” ..
..
A) you mean to say if I shorted an option, didnt square off and at expiry irrespective if its ITM or OTM, I will have to take delivery?
B) similarly if shorted future and didn’t square off from my side, I will have to take delivery?
No delivery if its OTM. Physical delivery is only for ITM options. Yes, if you’ve shorted Fut and held to expiry, then you will have to give delivery of shares
Hi karthik..
The way you are explaining each and every concept is awesome. It’s just like You are peeling off the banana and put it in mouth. Thank you for this valuable content. Thank you so much from the bottom of my heart.
Happy learning, Surya!
Maximum questions and doubts are clear in very little time…
Thank you Sir
Happy learning, Akshay!
Hello
I have a clarify if I am getting it right on the following-
1. When the spot price INCREASES, intrinsic value of a CALL OPTION also increases which implies that the BUYER of the call option is moving ITM and the seller of the call option is moving OTM. and vice versa when spot price decreases
2.When the spot price DECREASES, intrinsic value of a PUT OPTION also increases which implies that the BUYER of the put option is moving ITM and the seller of the put option is moving OTM. and vice versa when spot price increases.
1) No, the moneyness of the option works in a single direction. If its ITM, its ITM for both buyers and sellers, the P&L behaviour changes though
2) Same as above
As I have read till now varsity says that while calculating intrinsic value with different spot price strike price remain same . But as shown above in moneyness of put option here spot price is fixed and strike price is varying.WHY ??
That’s because there are multiple strikes available right?
Hi Karthik,
First of all I am really very very thankful to you, Karthik ; for providing such wonderful material. I am new to trading ,the material provided by varsity is very helpful giving me new perspective.
I have a doubt in the example given above for the moneyness of a put option i.e, the spot price given is 8202/- as per example. The intrinsic value is negative at strike 8200 should we consider that a ATM only because it is close to 8202 or should it be 8250/-. Also for calculations I think it’s a typo error that spot price is taken as 8200 instead of 8202.
Swarna, 8200 will be the ATM here, 8250 is ITM.
Karthik ,
Can you please clarify this reasoning
The intrinsic value is negative at strike 8200 should we consider that as ATM only because it is close to 8202 .I am sorry if this is a silly doubt.
Thats right. The strike which is closest to the spot value is the ATM strike.
Hello Karthik.
In Option Chain , there there are separate column for Volume and OI, Please explain the what Volume and OI is signify, means i aware of OI for option chain , how / what exactly volume signifies as. is Volume is no of contract traded including open and closed… and OI is the only open contract at given time..(?)
Yes, the volume is the number of contracts traded, and yes, OI is the number of open contracts.
sir after coming in the money(ITM) when should the option be sold? 3strikes in? 2strikes in?
3 strike.
Hi Karthik,
Some queries related to the option chain (OC),
How does OC data is helpful apart from identifying the ATM, ITM and OTM?
what do you mean by OI & Change in OI and how does it is useful?
Volume: I’m assuming it is total number of contracts traded, Please correct me?
IV : Might be intrinsic value. For the ATM it is the closest value, in the highlighted data IV is showing as 45.72. Could you please clarify, Am I missing something here?
Net Change: It is the change in the premium, please confirm.
And if you can through some highlight BID QTY, BID Price, Ask Price and Ask QTY related to Options.
Many Thanks in advance.
Regards,
Shashidhar
Identifying the moneyness of the option is the primary purpose of the option chain. Apart from that, as you mentioned, OI changes are also highlighted. Every other parameter is as you’ve stated, including the IV.
Thanks Karthik for confirmation.
I’m still confused with the IV, why IV is showing as 45.72 instead of 1.2?
Regards,
Shashidhar
IV is expressed as n annualized percentage. Hence you see that value.
Excellent explanation, I have never understood ITM/OTM and always under confusion. With this article my confustion is dispelled. Thanks again !!
Happy reading!
I am splendid with the efforts u have put to educate us and not misleading us like ther traders or youtubers..
I have been learning a lot and God bless u and ur writing skills trust me u r making everyone’s life easier. Could not stop myself to applaud you.
Anyways i have a doubt kindly resolve….
Q1:- hypothetically I bought Call option then how can i make money? WIth strike price being OTM ?
If yes then how ? If np then explain.,
Regards
Thanks for the kind words, Aishwarya!
If you bought a call option by paying a premium of say 15/-, then you will make money when the premium increases beyond 15, say it goes to 20. The premium will go up of the price of the underlying goes up.
Thank you so much karthik :).
One more thing, As i have heard that for every transaction made on zerodha a tax of some kind of rs 50 deduct on a daily basis . Is this ryt? and is there a fixed amount for every transaction
Coz i have read that STT deducts by some 0.005 I believe. Would like you to shed some light on it ??
Regards
That is not true at all 🙂
All our charges are explained here – https://zerodha.com/charges#tab-equities
Referring to CHIDA says:
April 18, 2017 at 2:20 pm
What do you mean by “when the sold OTM option becomes ITM option”?
It means the option has transitioned from being out of the money to in the money.
You said this statement
The intrinsic value of an option is equivalent to the value of money the option buyer makes provided if he were to exercise the contract.
But in real… money is made based on the change in premium for that strike price during the trading hours
I am confused Kindly clear my doubt
The above statement is calculated based on the stock price
Below statement based on the change in premiums
Thats right, Rajesh. Option premiums are tradable like stocks. You can buy and sell premium and profit out of it.
thank u….sir
Good luck!
Hi, I am a little confused about the concept of ITM an OTM. As mentioned above in the case of a Call option, if the spot price is 8060(means current market price is 8060), why would someone buy a call option of say 7500. And how is it that 7500 stike price has high IV? Please explain.
IV here refers to intrinsic value. 7500 is deep ITM, traders buy this for various reasons, dependent on their strategies.
Subject: Physical Delivery Short Delivery Penalty STT
——–
Greetings Karthik
Hope my query finds you well. I want to know some specific insight on ‘physical delivery/Short delivery’ consequences.
*** What I know! ***
ITM Put contract – Long put exercised result in [giving delivery]
ITM Call contract – Long call exercised result in [taking delivery]
?? Query ??
ITM Put contract – What if, I just don’t have shares to deliver ?
ITM Call contract- What if, I just don’t have enough margin to take delivery?
In these scenarios, what precisely is the amount I will have to pay as penalty?
Considering ,
1. Wipro lot qty = 3200 | CMP = 430(on expiry) | ITM PE strike = 440 on which I was long
2. SBI lot qty = 3000 | CMP = 250(on expiry) | ITM CE strike = 245 on which I was long
although my view went correct, but my once OTM PE/CE became ITM by expiry,
so can you tell me how exactly the penalty amount is calculated here?
*STT is on short side at the rate of 0.125% of intrinsic value (how much in-the-money the option is) and not on the total contract value. But,
My confusion : Lets say SBI case, is penalty(short delivery) calculated as :
penalty = priceDifference * lotSize * lotNumber
= 5*3000*1 = 15k ~ where priceDifference = 5 (250-245) | lotSize = 3000 | lotNumber = 1
Or I will have to have margin of 3000*250 =7.5lacs in my trading ledger to compulsory take delivery?
Please help me to understand correctly the consequences, & ways to deal with such situations?
Thanks
If you dont have shares, the position will be squared off leading to expiry. YOu need to have 100% of delivery obligation i.e. lot size * strike value.
Karthik, I must say, you have amazing writing skill, making it lot easier to understand. Thanks a lot. : )
Thanks, Suraj! Happy reading 🙂
Hi Karthik sir. I’m a MBA student. I’m consistently learning your varsity modules. I have seen many YouTube videos to learn about market, but non of them fulfilled my required knowledge. When i started to read your modules, honestly it gives me the essential and necessary aspects of market in lucid manner. I really loves it. Thank you so much. Eagerly waiting for your reply.
Sathish, thank you so much for letting me know, our efforts feel worth it when people like you leave such encouraging comments. Happy learning!
If I buy otm option and on expiry it becomes deep itm and I didn’t exit till it get expired what will be my option price . I ask this because I didn’t see any open interest on that strike .
1.price of option will be whole intensric value?
Please do read the chapter on physical delivery – https://zerodha.com/varsity/chapter/quick-note-on-physical-settlement-2/
Hi Karthik,
I am wondering about the OI Value and change in OI%. Also, I can’t calculate the IV value from the options chain link you provided here. I shall be thankful if you shed some light on OI, change in OI, the IV value column, and the reasons why Nifty has more OI data for the OTM option compared to the ITM option? Thanks in advance.
Debayan, I guess we had discussed these in the query thread. Can you please look through the queries once, please? Thanks.
If an option is ITM for buyer then it’s OTM for seller right ?
No, the status of the option is the same for both the buyers and the sellers.
This is the type of stuff you get from a paid course. Thank you so much!
May God bless you with all great things!
Thanks for the kind words, Ankit! Happy reading.
A crystal clear explanation. Thanks for making the whole learning process easier. Grateful to Zerodha varsity team.
Happy learning!
@Karthik, You are doing a great job! God Bless!!
Happy reading 🙂
Hello sir,
Sir you told that European option cannot be excercised before expiry but above you have traded intraday with option ce. Which one is correct ?
ty
Exercise an option is different from intraday trading of premiums.
Can you please simplify this statement with an example?
“The premiums for ITM options are always higher than the premiums for OTM option.”
I didn’t understand it clearly.
ITM options are more valuable compared to OTM options, hence they command a higher premium.
I have read everything till moneyness. U have explained it fantastically. Taken a lot of pain for us. I am new to stock market yet found it easy to understand Tried other platforms but urs is the best. Is there anyway i can also do practical training with u? Plz advise. Thank u
Glad you liked it, Jitendra. Unfortunately, that won’t be possible, everything I know has been documented here. Plus I’ll always be available to reply to your queries 🙂
IF BANKNIFTY SPOT IS TRADING AT 32000/-
and I buy an 33000 PE (DEEP ITM ) @1000
and on expiry market closes at 34000/-
What will be my profit & loss and how I can calculate.
IF BANKNIFTY SPOT IS TRADING AT 32000/-
and I buy an 33000 PE (DEEP ITM )@1000
and on expiry market closes at 32500/-
What will be my profit & loss and how I can calculate.
Since the market expires at 34k and you have 33K PE, the option will expire worthless and you will lose the premium paid. @32K, the option is 100 points ITM.
But IF BANKNIFTY SPOT IS TRADING AT 32000/-
and I buy an 33000 PE (DEEP ITM )@1000
and on expiry market closes at 32500/-
What will be my profit & loss and how I can calculate.
You will make 500 here. The difference between spot and strike is what you get.
Thank you for providing valuable info. I am reading the chapters from quite some time, just wanted to know if all the data provided is update regularly or not?
Thanks, Srinivas. Data won’t be updated, we use the data here to explain just the concept and not to provide the data as such.
If the spot price is 18500, and the strike prices closest to it is 18450 and 18550 then which is at the money.
I’d consider both in the absence of a 18500 strike.
Really an useful platform for the beginners who can understand the nuances of options trading.
Zerodha and in particular Mr.kartik Rangappa incite and instigate the beginners to probe this part of capital market where meticulously following, understanding and grasping the knowledge and becoming strong in such fundamentals throw up an opportunity to make it better if not big…Thanks Mr.kartik.
Happy learning, Mohan!
Is selling options based on premium price change more profitable or letting it exercise?
There is no straight answer to this, Siddhart. Everything is based on the market situation.
Hey Thanks for putting these concepts in very easy and understandable words.
Happy learning, Vinay!
Hi Karthik
please check IV in Moneyness in put option. here strike price is 8200 and spot price is changing.
it should be (Strike-spot) but it is calculated as (7500-8200).
please clarify whether it’s a typo or am i reading it wrong?
Looks like this is for a put option, if yes, strike – spot is correct.
Got it, I misunderstood it
Thanks
Sure.
Sir, are equity options based on spot prices or the prices of the Futures? Till now I was under the impression that equity options are based on spot prices, but today TechM closed at 1078 and its Futures closed at 1048. Sensibull is showing 1040 as ATM strike. What should we consider to decide the moneyness of options while deploying strategies, spot or future prices?
Equity options are based on the spot price. I think sensibull used the futures price to price the options.
Sir, what should we consider to decide whether an option is ITM, ATM or OTM while deploying strategies, spot or future prices?
This depends on the market situation and the trade that you are trying to set up. The reference price is the spot.
Thank you dear. You are making life simple. Keep up the good work..I used to joke options are greek and Latin for me..turned out to be having greek connections. I find future a bit non brainer but I want to learn options for hedging purpose..as any naked position is killing one unless and until you are damn sure of the direction
Surekha, wishing you all the best. Hope you find further reading easy 🙂
Very informative. Excellent stuff….great efforts. Thanks a lot.
Happy reading!
Awesome writing . Salute to you sir . It feels like im in the classroom . Magically written to understand it with ease . Thank you.
Happy learning, Abhijit 🙂
What happens with the premium when OTM option converts into ITM?
Premium increases.
Hi
If I bought Bhel 85 CE Oct @ 2 Rs and the CMP is below 85 means 75 Rs then my CE premium is reduced.
As this is last week of weekly expiry on 28 Oct 2021.
Q1 When i can square off this CE.
Q2 If the CE price become 0.05 on Monday then i can not square off the position.
Q3 When the physical delivery of stock comes in the above case.
Q4 What is role of open interest in option buying.
1) You can square off anytime, no need to wait till the expiry of the option
2) Yes, you can, provided the tree goes through
3) No
4) I’d suggest you check this chapter – https://zerodha.com/varsity/chapter/open-interest/
Hi
Can you please clarify : in the above example of Ashoka Leyland option chain, if I buy call option @ Rs. 47.50 (ITM) when the spot price is 68.50.
a) Does it mean that I am betting that The under lying prices will be above/higher Rs47.50 by the expiry date.
b) what does it mean by buying ITM options.
Regards
1) That’s correct. In fact, it holds true for any CE strike you buy
2) ITMs have a higher probability of expiring as ITM, which means to say you can exercise your right to either buy or sell shares. But of course, ITM options also command the highest premium.
Q2 If the CE price become 0.05 on Monday then i can not square off the position.
Ans 2) Yes, you can, provided the tree goes through
Can please elaborate the ans ‘provided the tree goes through’.
New Q 5 There is any penalty or magin is required to sequare off the position as we stand on the last week of expiry.
My god, don’t know why I said the ‘tree goes there’, must be a mix up/typo. Pardon me.
What I mean is that the strike is anyway worthless, so it is ok even if you don’t square off your position. No penalty as such.
Very well written and lucid
Happy learning, Rami.
6. For Call options – all option strikes lower than ATM options are ITM option. Hence they have a pale yellow background
6. For Call options – all option strikes higher than ATM options are OTM options. Hence they have a white background
sir, is there some mistake or i have not understood it properly
This is correct, Sunil. No mistake as such.
sorry sir, i get it now..
Is the price OTM premium increasing slowly compare to the ITM?
Ex: Market is bullish and I am on a long call with the OTM strike price.
Depends on how quickly the spot moves. The faster the move, the higher is the premium spike of OTM options.
Mr. Karthik, thank you so much for helping understand the option basics
Happy learning, Deepu 🙂
Hi Karthik,
Good day!
Should I square off the position on the day of expiry if my sold OTM CE or PE options are still in OTM on expiry day? or can I let it expire without doing anything and get the premium?
thanks,
Lingam
Since it’s OTM, you can let it be Lingam.
Hi Karthik,
Good morning!
My sold OTM CE options has become illiquid after i bought it and if it continues to illiquid until expiry day, what will happen?
Thanks,
lingam
Well, as long as it’s OTM, you need not have to worry about it. The issue is if it becomes ITM and you intend to sell it. Worst case, you will have to go to expiry and deal with the physical settlement.
Hi,
I have recently purchased the OTM PUT option in last dec’21 contract (Ultratech 7400put 1lot at Rs.31 premium, so my total premium is Rs.3100) since I did not square off the position on expiry day, the same was physically settled and have incurred Margin shortage ofRs.160000 . Please brief me as how this margin shortage occured . I was new to options trading and this is really confusing .
Please help
During the last week of expiry, the margins increase owing to physical delivery. I’d suggest your read this chapter – https://zerodha.com/varsity/chapter/quick-note-on-physical-settlement-2/
Hello Karthik,
First of all thanks for your efforts. Brilliant job.
But I am still clueless how it works. If the spot price is high at the current moment , why would i not buy a call option with strike price ITM. I guess everyone would do so.
But i thought option pricing was about speculating price move beyond any OTM strike price.
What am i understanding wrong? Thanks again
Alex, there are several moving parts with options. Yes, it is about speculating beyond the price movement, but also about the time to expiry and volatility. You need to take a call on these things while trading options.
Hi all, could you grasp all of these at one read? Am a bit confused after the first read.
Give it another read, and let me know if you get stuck somewhere, will be happy to help.
Looks like the moneyness concept illustrated in this chapter for put and call options have been reversed. Do you think this is so?
Nope, its correct only Sahin. But why do you think so?
Yeah, sorry, my mistake. This moneyness is a relative concept and hence I got confused by it.
No problem. Good luck!
Hi Karthik, thank you so much for your articles. They are concise and very clear. I am a newbie and on a learning path. I have a question. Would you mind answering please?
Here is a scenario.
Date Feb 23rd 2022.
Strike BN 37400 PE
Spot 37318 (This was the low for the day)
When the spot hit 37318 on the intraday, this strike should have turned ATM and there should have been a change in the premium. But there was no change there. The strike’s open and high just remained at rupees 374. Could you please explain this situation as to why the premium never changed?
Was it the weekly expiry you were tracking? If yes, then that’s not surprising since the expiry is close by right?
BN 37400 PE was a monthly expiring contract (Feb 24th). Technically speaking, it was just a day away for expiry. However there was another contract BN 37500 PE with the same expiry that opened at 319 and went to high at 335. So, I am not able to understand why one OTM contract turned ATM but not the other.
BN 37400 opened at 374 while BN 37500 opened at 319. Should I assume that BN 37400 was already over priced and that’s why the change in spot did not impact its premium?
Sorry, I was not tracking BN. So where did BN expire? Was it below 37400? If yes, then 37500 premiums going up is justified right?
Let say I bought deep ITM option of reliance whose expiry is tomorrow (1 day later). Lets assume some hypothetical figures-
reliance spot today- 2300
I bought reliance 2000 CE by paying premium of let say 500 rs.
expiry is in 1 day.
On expiry let say reliance closes at 2200. My call option will loose value. Let say it closes at 425. But still I am ITM.
What will be cashflow here? will I make profit or loss (which will be 500-425=75)?
The premium on expiry will be 300 and not 425. So in this case you get to buy Reliance spot at 2000, when spot is at 2300.
Thank you for clarification!
I couldn’t get the point of premium being 300.
Anyway so I will make profit here by 300 points of spot. And to enjoy this profit, I would have to go for physical settlement as option has expired ITM. Right?
Thats right, ITM options are physically settled.
Thank you for clarification!
Good luck!
Excellent explaination of options chain with illustration, thank you
Happy learning 🙂
महाशय कार्तिक तुमचे आर्टिकल मी वाचले मला ऑप्शनची भरपूर माहिती मिळाली आपण हेच आर्टिकल आमच्यासाठी मराठीतून उपलब्ध केल्यास फार बरे होईल धन्यवाद
Dear Karthik sir,
How far should be a strike price away from the spot price so as to call it a
ATM, slight OTM, Deep OTM, slight ITM and deep ITM option? I mean what should be
price difference. Kindly explain sir.
Regards
Dear Karthik sir,
In the above Dhananjay’s query, he said Spot = 2300, Strike = 2000 and premium = 500 and on expiry day, the spot = 2200.
and premium became 300. This means that settlement amount = 2200-2000=200. Loss = 500-200=300
Even though the option expired ITM but there is a loss of Rs. 300. But when Dhananjay asked you that there is a profit of Rs. 300, you said
YES. There I have the doubt. Kidnly explain how there is profit.
I’m assuming this is a Call option. So 2200 CE will have an intrinsic value of 200 upon expiry given that the spot is at 2200. Since premium paid is 300, loss is 300-200 = 100.
Dear Karthik sir,
How far should be a strike price away from the spot price so as to call it a
ATM, slight OTM, Deep OTM, slight ITM and deep ITM option?
I mean what should be price difference. Kindly let me know.
Regards
Sandeep, no set formula for this. I usually consider ATM + 3 and deep OTM/ITM.
Dear Karthik sir,
Could you please explain what you mean by “I usually consider ATM + 3 and deep OTM/ITM”
in your comment above? I could not understand.
Regards
So lets say spot is at 98 and the strike is 100. Here I’d kind of consider 100 strikes as ATM. Assuming the strike gap is 5, then I’ll consider 105 and 110 as OTM and 115 as deep OTM (for calls). 95 and 90 as ITM, and below 90 as deep ITM. Likewise for puts.
Thanks a lot Karthik sir for your explanation.
Sure, happy learning Sandeep.
My query why a trader will opt for premiums in OTM range, because then its IV value is negative (either in call or put)? Positive IV value what we are looking right to be in profit.
Sorry, I dint get your query fully. Can you add more context please?
Sir ,
Can you please explain what happens when my stock option call goes from atm to deep itm and theres no liquidity and im unable to square off !
Example : If I bought Balramchini 380 CE when spot was at 370 @25 rs and in 3 weeks it shoots up and spot crosses 500 , im extremly profitable but theres no liquidity as its too deep ITM now : So will I be able to square off or if not then what happens on expiry ?
Thanks
Yes, this can happen. If you don’t get an exit, hold to expiry and let the contract get settled by the exchanges.
Hello Karthik Sir,
I have to ask question about deep in the money options. For example I bought 1 lot of 17100 CE of April monthly contract at 478 now I see its price have gone up to 1029. I has turned very deep ITM and I am not able to sell it. Why this is happening? is it risky to have positional
trades in monthly options when they turn deep ITM..?
The risk is liquidity risk. Its fine as long as its a profitable situation because you will get cash-settled by the exchanges. If its unprofitable and you want to sell, then no liquidity is an issue.
Thanks for reply sir.. I got it.
Point no.13 from key takeaways from chapter 8 moneyless of an option, looks confusing. It says I.V is least for deep OTMs. I.V is least I.e 0 for an ATM option and thereafter higher Strikes will have zero I.V only.
Kindly throw some more light on this.
Thanks.
Hey, checking on this Palani.
We will now pick a few strikes above and below the ATM and figure out ITM and OTM options. Let us go with the following strikes and evaluate their respective intrinsic value (also called the moneyness) –
7500
8000
8200
8300
8500
@ 7500
We know the intrinsic value of the put option can be calculated as = Strike – Spot.
Intrinsic Value = 7500 – 8200
= – 700
Hello Karthik,
Thanks for detail explanation. Here Spot price of nifty is 8202 & but in calculation ATM is subtracted.
IV =7500-8202 is correct.
Correct me if am wrong.
Thanks in advance.
Since the intrinsic value is a non-zero number, -700 will be considered 0 and therefore the intrinsic value of the strike is 0.
Kartik thanks for feedback, But in above calculation you have subtracted 8200 in place of 8202. regarding that am asking.
Let me check that again.
Thanks for this insightful publication. More of it sir. It’s very easy to comprehend.
Happy learning 🙂
Hello Karthik Ji,
Why does the Open Interest shown in NSE option chain is different from Open Interest shown in Sensibull option chain? In fact OI numbers from these two website are nowhere to each other. Or am I missing something to read? E.g. On 14 July 2022 at 11:22 pm OI shown on NSE open chain for 16000CE & 16000 PE are 1,67,185 & 2,06,550 respectively where as on Sensibull website OI for same 16000 CE & 16000 PE are 86.3 Lakhs and 103.3 lakhs respectively. Or am I missing something to read? Please Guide.
Hello Karthik Ji,
Slight correction to previous comment.
Why does the Open Interest shown in NSE option chain is different from Open Interest shown in Sensibull option chain? In fact OI numbers from these two websites are nowhere to each other. Or am I missing something to read? E.g. On 14 July 2022 at 11:22 pm OI shown on NSE open chain for Nifty Index 16000CE & 16000 PE are 1,67,185 & 2,06,550 respectively where as on Sensibull website OI for the same 16000 CE & 16000 PE are 86.3 Lakhs and 103.3 lakhs respectively. Or am I missing something to read? Please Guide.
What if OTM become ATM in .how to calculate benifit .. using greek
The same way pradip.
IMPORTANT :(please read)
FNO PHYSICAL DELIVERY –
For in-the-money Long Option positions 45% additional margin will be levied at the end of the day by the exchange for contracts expiring on 25th Aug 2022. A margin shortfall in your account will attract penalty as per the Exchange norms.
Please ensure sufficient margins to avoid penalty.
What does it means sir plz illustrate
It means the option that you hold is ITM and it will be physically settled, for which higher margins are required. You need to ensure higher margins are available in your account to continue holding the position.
Awesome teaching. Technically very sound.I am fully satisfied.a
Happy learning!
Hello, I think you have made a typo
All strikes lower than ATM are ITM options (for call options)
Shouldn’t it be out of the money?
So assume ATM is 100, strike of 90 CE, which is lesser than 100 is ITM. 110CE is OTM.
Hi Karthik,
This question is regarding ATM. If the spot price is 8025 and nearest strike price available are 8050 and 8000. In this case which one we need to pick as ATM. Can we take any one or is it vary based on call or put.
Regards,
Rajaram
I’d pick 8050.
Very simplistically explained
Glad you liked it, happy learning 🙂
Nice. I know something from this type written which is option trading
Happy trading!
Nice explanation given…thanks zerodha team
Happy learning!
hlo sir first of all happy diwali to you my question is when the spot is 8070 and the strike price is 8050 and the expiry is 15 days ahead and i buy at 8050 strike so the difference between 8070-8050 = 20 is it my profit ? please help me with this question.
Thanks and wishing you a happy Deepavali as well. The premium you’d pay for the 8050CE will be much higher than 20, given that there is time to expiry. For example, it could be 25 or 30. You will profit only if the option price crosses the premium value you’ve paid.
Sir , next chapter link
How premium and price is decided
Thanks
Here is the index with links to all chapters – https://zerodha.com/varsity/module/option-theory/
I bought Nifty 18350 PE on an expiry day at the premium of 35 rupees. End of the day, Nifty market value went down to 18310. But the premium was around just 8 rupees. So what happened to the intrinsic value there? I was wondering after seeing this in my position.
The intrinsic value is 40, but then the option premium gets adjusted for STT and other statutory charges and usually tends to trade at a discount.
I have taken long position on expiry day in BankNifty 43100 CE expiry 24-11-22 at a premium of Rs 2.85 quantity 500, at that time Banknifty spot was trading around 43100.
so when banknifty spot moved up around 43122 at 15.20 pm my CE premium price didnt went up instead it was continuously decreasing.
The Zerodha kite showed the wrong data of banknifty spot and because of which it expires worthless on expiry day, even the banknifty closed at 15.30 around 43116 then also my CE premium didnt shootup.
It expired at 0.05, Because of which i have to incurred loss.
why it happened ?
Premium is a function of time, spot value, and volatility. Also, this was 16 Rupee ITM, which is practically worthless considering the statutory charge, hence the premium goes down to 0.
Hello Karthik
Today on weekly expiry i bought 42200PE Bank nifty at a premium of Rs.2 and spot price ramained around 42370 so my option was ITM and it should have some intrinsic value (30). but at 3.25 pm premium erode to almost zero. Although at the same time 42400CE premium value was Rs 9 even after -30 was intrinsic value. Now that is pathetic, it has never been taught why this should happen while options trading.
At a spot value of 42,370, the strike of 42,200PE is OTM right? It will be ITM only if the spot goes below 42200.
Thank you so much for simplifying this very precious information
Happy learning!
Sir
I am new to option trading.
Your lesson has enriched my knowledge.
Please advise about your next chapter, regarding how to choose premium while trading.
Happy learning 🙂
Hello Karthik,
I went through all the comments and observed in a couple of comments where you meant – If option is worthless i.e. OTM on expiry, we can leave it as it is and it doesn’t matter much. But my question is – doesn’t it cause higher loss to the trader?
A hypothetical example, Say I buy a CE @ Rs50/-, Strike Price 1000/-, when Spot Price was Rs. 800/- and on expiry the Spot Price was Rs. 900/- i.e. it is still OTM, if I leave the option to go worthless, I lose Rs1000-Rs.900 =Rs.100/-. In such cases had I squared off the position I would have lost lesser isn’t it?
I am not sure if I quoted the right example, but tried to put forth my question.
Thank You, looking eager for your explanation as usual.
So you leave the OTM option expiry as is, then you will get to retain the entire premium i.e Rs.50, if you sq off early, then you will not get the entire premium.
Thanks for the super quick reply.
I wouldn’t be receiving any premium here as I bought a Call option, I would rather be paying premium right.
So do you mean to say incase of option selling, we can leave the option go worthless on expiry and that way we will be left with premium?
It may not be the case with option buyer is it?
Yes. Upon expiry, OTM option goes to 0 and you will be left with the entire premium to pocket.
For ITM we know they carry intrinsic value as well as time value. But OTM option doesn’t carry intrinsic value they carry time value. Then on a particular day before expiry during live market how do we understand that time value of an OTM strike is at its fair value or it is inflated or it is dicounted?
Its hard to figure the fair value of time. You can make an assessment on intrinsic value…but as you gain more experience across market cycles, you will develop a sense of how time should be priced. It will come to you intuitively 🙂
Thanks karthik for making it simple
Happy learning 🙂
Very Lucid explanation.Thanks
Happy learning 🙂
Hey Karthik,
I think there is a correction in the Spot Price in calculation of IV for put option in 8.3 Moneyness of Put option section.
For this example, you considered Spot price (8202) as ATM which is 8200.
@ 7500
We know the intrinsic value of the put option can be calculated as = Strike – Spot.
Intrinsic Value = 7500 – 8200
= – 700
Sanket, intrinsic value cannot be negative. Also for PE, the intrinsic value is Strike-Spot. But anyway, let me recheck this.
If the majority of retailers and small individuals are trading in the derivative market ( especially calls and put) then what is moving the stock price because if I am right option buying and selling does not affect stock price but vice versa is true.
Its the other way actually…trading action in spot prices moves the derivatives contracts.
wonderful and very subtly explained. Best guide on Options, why dont you throw in a video lesson too on You tube
Here you go Manish – https://www.youtube.com/watch?v=-mO0YOTcCiQ&list=PLX2SHiKfualFiusiT9G5uE9jU3vetvW2x
Hey Karthik Thank You for this chapter can you please tell which strike are we supposed to consider as ATM. The call one or the Put one because as far as I understand there can only be 1 ATM strike. If I’m not wrong in short straddle you sell ATM call and ATM put so how do we decide which one is going to be the ATM, the first yellow strike price in call side or the first yellow strike price in put side?
Shaunak, there are two ATMs. One for CE and one for PE.
Thanks for the clarrification, could you please tell since there are 2 ATMs which one should one choose for short straddle and long straddle. I assume it will be the one that gives the best credit leading to higher BEP for short straddle. And opposite for long straddle where we choose the ATM option which can lead lowest Debit. Am I correct?
You will have to choose both, Shaunak since the strategy involves both strikes.
Hello Sir. Can you shed some light on “open interest” as many traders consider it as an important parameter ?
Hey Tejas, check this – https://zerodha.com/varsity/chapter/open-interest/
Hii
My question is
I have 16000 1 lot of PNB of 60 stirke rate with 26oct expirty
And current price of stock is 74.20
Currently am OUT THE MONEY
And current rate is.05
If i unable to sell those shares
Is it mandatory to physical settlements in this?
Since its OTM, you dont really have to worry about physical delivery. Physical delivery is applicable only for ITM options.
Hi Sir,
You are doing a great job, with this full knowledge of trading you have how much max profit you make per day..do you still have deviation from the guess you make or perfectly hit it? isnt it like eating a jamun for you to make money?
No, its not like eating jamun 🙂
No one at Zerodha is permitted to trade by rules.
can we place stop loss while buying call option
Yes, you can.
How to calculate otm value of an option strike from the spot
Sorry, I’m not sure what you mean by OTM value. Can you kindly elaborate your query?
Today NIFTY BANK spot is at 45818 but in the option chain they are showing 46100 as ATM option
Why is so far away strike shown as ATM option?
Please explain
Thanks!
Perhapse there are no other liquid strikes between spot and strike?
indeed there are liquid strikes
Sure, happy trading!
H karthik sir
I would like to Thank you for Taking such an effort to produce this learning i would really like to thank you from bottom of my heart. i appreciate your time and dedication to bring such and easy learning content
Thanks for the kind words, Mukund. I’m glad you liked the content on Varsity. Happy learning!
Dear Karthik, I noticed a weird phenomenon in Nifty Put Option today.
Day 1 28 Feb: The PE strike price was 22300 and 1 week to expiry. Closing price of Nifty was 21951. Hence, the Intrinsic Value of this ITM put option is 349 and last traded price of the option was 409.
Day 2 29 Feb: The Nifty closing price 21982. Hence IV for 22300 strike should be 318. But option price was 281.
How can option price be lower than the IV. This was the case throughout the entire day on 29 Feb.
Can you explain why an ITM Option was trading below its Intrinsic Value though expiry is still a week away ?
This happens due to taxes that get charged to buyers, hence the market adjusts for these charges and therefore on expiry day the market value drops below the intrinsic value.
Dear Karthik,
In the above situation, expiry is still one week away (07 Mar 2023) but still option was trading below its intrinsic value.
Ah, then do check for corporate actions?
Hi Karthik,
I didn’t get one thing – you buy call option when you expect spot price to rise and buy put option otherwise. So aren’t ITM on call side basically a put option? ie expecting price to go down What’s the logic here?
Not sure how you consider ITM CE as a PUT option. Can you share your rational?
I believe a better way to explain why IV can’t be zero is in the case of CE if the spot price is 918 vs the strike price of 920, one will not exercise the option as he can buy stock from the market at a cheaper price (918). Since you don’t exercise the option its IV is zero.
I agree, that explains too.
What happens if my Spot price is 100 ; premium 5 and strike price is 97 – At expiry am I at ITM out OTM?
Its OTM strike.
why is intrinsic formula for call option is different while calculating moneyness in strike price
Different from what?
Sir, to trade Index Options, which chart is to be referred Spot OR Futures?
I’d suggest spot.
Deep in the Money Put option has a strange behaviour that when time to expiration is high (and so is interest rate, let’s say) then the Put Value decreases. Why doesn’t Deep in the money Call Option at low interest rates show a similar behaviour?
I came here to ask this, I can’t quite figure out.
Put value decreases with respect to what? I’m guessing low interest rate in economy is good for markets and therefore puts lose value?
Hi Karthik Sir,
I Just have a Doubt on the premiums of Long Call and Short put of Ashok Leyland Option chain (in the image above).
To be on the bullish view on the stock, I have to have a long call option or the short put option Right?
Now for Ashok leyland Stock above assume i have a bullish view of Strike 75 for the future period. So the long call premium will be 1.05 and for the short put the premium will be 7.20.
My question is The long call is having less premium and the short put is having more premium. Does this make any difference? like explain this view on which side to choose.
I have a video on this topic, do check this – https://www.youtube.com/watch?v=0CnHdzTE66s&list=PLX2SHiKfualEyD05J9JsklEq1JFGbG6qJ&index=1
Good luck!
Hi Karthik Sir,
Thank you, I Just saw the video, Like you have spoken about Delta, Gamma and Theta (Greeks). Right from Quantifying the Stock price, Regarding volitality and First half of the month and the second half of the month (Theta). I could get some idea on it but to understand it completely i have to read the Greeks aspects. Just now completed moneyness of the option contract. Ill continue to learn the other aspects may be could understand once i read the other modules.
Please do and good luck to you Prashanth. Happy reading and do let me know if you have any queries, I’ll be happy to help.