We recommend reading this chapter on Varsity to learn more and understand the concepts in-depth.
Key takeaways from this chapter
- Buy a Put Option when you are bearish about the underlying prospects. In other words, a Put option buyer is profitable only when the underlying declines in value.
- The intrinsic value calculation of a Put option is slightly different from the intrinsic value calculation of a call option.
- IV (Put Option) = Strike Price – Spot Price
- The P&L of a Put Option buyer can be calculated as P&L = [Max (0, Strike Price – Spot Price)] – Premium Paid
- The breakeven point for the put option buyer is calculated as Strike – Premium Paid
Hi
Is the breakeven for that PE option is 2632.5 is that right:-Premium Paid+Strick Price
Yes, I guess ppl have commented on the videos as well.
Break even is 2487.50 i.e strike price minus premium
Yup, please do check the comments on youtube as well.
put option buyer & seller-breah even point-2487.50
Yeah.
I have a question and an errand:
Question: The premium is the only price that the buyer has to pay as in is that not any multiplication with lot size.? For more clarity based on reliance example taken:
Realised Loss = Premium Paid = 72.50
OR
Realised Loss = Premium Paid * Lot Size = 18,125 (72.50 * 250)
Errand: At 4 Mins when mentioning the Lot Size of trade we added the rupee symbol to it.
I all and whole thank you so much for this series. This is super super content to start things up. 🙂
Its premium * lot size, Jitin. Lot size is a number, not in Rupees 🙂
Selling put option is riskier as the loss is infinite?
Is that correct?
I mean, you can cut your loss when you think the risk is going out of wack 🙂
I want to know that while buying a lot we must pay the full amount which is at LTP of the call or put option (including premium) or we must only pay only the premium amount.
Breakeven for call is more than strike price, breakeven for put is just less than the strike price, am i correct?
Yes, Abhishek. Thats correct.
Hi Sir
Thanks for the great content and really enjoyed the options trading video. I have a doubt regarding the squaring off of a call option. Suppose i have bought SBIN NOV 620 CE and the premium is Rs15 and lot size is 100. So my breakeven is 635 rs. Imagine that one week before the expiry the the stock went high to 660, which means my profit 25rsX100= 2500 rs. If i want to exit now, will i get the entire profit of 2500, or is there any premium for exiting.
Yes, that’s right. You can book your profits and cash out.
So the breakeven point for the put option is, Strike price-Premium paid=2560-72.5=2487.5Rupees per share
NIFTY 16th March 17250 PE – Premium – 230
Strike Price is 17250
Expiry Spot Price is 17075
For the person bought PE at 17250 with the premium paid of Rs. 230 – Break Even Point is [Strike Price – Premium Paide]
In my case 17250 – 230 = 17020
Profit at this juncture (Strike Price – Spot Price) ] – Premium Paid
50 x [(17250-17075)-230]
50 x 55
Profit at expiry day is 2750
Check this chapter Vijai – https://zerodha.com/varsity/chapter/options-m2m-and-pl/
Breakeven Point for put option buyer is 2,487.50/-.
It is true that the realised loss = premium * lot size for option buyer’s perspective but it’s also true that he/she can have that much amount of maximum loss only while the profit potential is infinite for the position take if the market trends in the desired direction.
Theoretically yes 🙂
Hi Karthik
In the Buyer & seller payoff graph for the put option, shouldn’t we show the x axis from higher to lower strike price, so the reader will understand that profit is made as the price goes down and the graph is in line with that.
Not sure if I fully understand your query, but usually, the X axis shows a steady progression in spot prices, from lowest to highest. This is the generally accepted norm.
Breakeven point for Buyer of Put Option = 2560 – 72.5
Breakeven point for Seller of Put Options = 2560 – 72.5
Break even Put is 2487.50
put option buyer B.E.P IS 2487.5
PUT OPTION SELLER B.E.P IS 2632.5
IS IT CORRECT SIR?
Yeah, as explained in the chapter 🙂
Hello Karthik,
Thanks for wonderful videos, you are very calm and composed to explain everything very clearly.
My question is if call or put option buyer has higher profit probability & limited loss risk while on the other hand seller has limited profit against risk of unlimited loss. why would one want to be a option seller..?
Hiren, glad you liked my explanation. Each trader comes with a different point of view and risk-reward appetite, hence their trading choice is all a function of that 🙂
Dear Karthik Sir,
My question is related to covered calls.
My question may seem to you like very basic or idiotic and I’m sorry for that.
Hope you’ll appreciate all Q’s however silly they may be.
In Options related book written by Mahesh Chander Kaushik [SEBI registered & also he has written few more books (https://www.blogger.com/profile/01822348572318400909) ]
As per Mahesh Sir when I already have units worth one lot of say NIFTY selling option calls or selling puts is very safe or in others words it is loss proof.
He says by selling option calls of around 5% more than current NIFTY value we’ll get premium as mostly NIFTY will not cross more than 5% by expiry.
Say NIFTY goes beyond 5% then we loose premium as NIFTY crossed the strike price we chose while selling the calls.
As per Mahesh Sir though I lost premium and I’m in loss but as NIFTY number increased the value of my one lot worth of units of NIFTY also increased so I’m kind of not in loss.
Is this kind of covered option selling really very safe? No losses at all?
If it was so safe then everyone would have bought one lot worth of NIFTY units and keep selling option calls…
Karthik Sir, what is your view on this scenario?
Everything has a risk element, Santosh. Nothing is risk free. In this case –
1) You will have to buy ETFs as the underlying, which means there will be an impact cost.
2) While Nifty may or may not cross 5%, what about the volatility? You will need to keep enough margins as buffer.
3) What if the premium you receive is low?
can you make an excel calculation for put option seller and call option seller as well in case they recieve the premium
This is something that you can easily do with any option platform. This will be much faster too 🙂