4.1 – Two sides of the same coin
Do you remember the 1975 Bollywood super hit flick ‘Deewaar’, which attained a cult status for the incredibly famous ‘Mere paas maa hai’ dialogue ☺? The movie is about two brothers from the same mother. While one brother, righteous in life grows up to become a cop, the other brother turns out to be a notorious criminal whose views about life is diametrically opposite to his cop brother.
Well, the reason why I’m talking about this legendary movie now is that the option writer and the option buyer are somewhat comparable to these brothers. They are the two sides of the same coin. Of course, unlike the Deewaar brothers there is no view on morality when it comes to Options trading; rather the view is more on markets and what one expects out of the markets. However, there is one thing that you should remember here – whatever happens to the option seller in terms of the P&L, the exact opposite happens to option buyer and vice versa. For example if the option writer is making Rs.70/- in profits, this automatically means the option buyer is losing Rs.70/-. Here is a quick list of such generalisations –
- If the option buyer has limited risk (to the extent of premium paid), then the option seller has limited profit (again to the extent of the premium he receives)
- If the option buyer has unlimited profit potential then the option seller potentially has unlimited risk
- The breakeven point is the point at which the option buyer starts to make money, this is the exact same point at which the option writer starts to lose money
- If option buyer is making Rs.X in profit, then it implies the option seller is making a loss of Rs.X
- If the option buyer is losing Rs.X, then it implies the option seller is making Rs.X in profits
- Lastly if the option buyer is of the opinion that the market price will increase (above the strike price to be particular) then the option seller would be of the opinion that the market will stay at or below the strike price…and vice versa.
To appreciate these points further it would make sense to take a look at the Call Option from the seller’s perspective, which is the objective of this chapter.
Before we proceed, I have to warn you something about this chapter – since there is P&L symmetry between the option seller and the buyer, the discussion going forward in this chapter will look very similar to the discussion we just had in the previous chapter, hence there is a possibility that you could just skim through the chapter. Please don’t do that, I would suggest you stay alert to notice the subtle difference and the huge impact it has on the P&L of the call option writer.
4.2 – Call option seller and his thought process
Recall the ‘Ajay-Venu’ real estate example from chapter 1 – we discussed 3 possible scenarios that would take the agreement to a logical conclusion –
- The price of the land moves above Rs.500,000 (good for Ajay – option buyer)
- The price stays flat at Rs.500,000 (good for Venu – option seller)
- The price moves lower than Rs.500,000 (good for Venu – option seller)
If you notice, the option buyer has a statistical disadvantage when he buys options – only 1 possible scenario out of the three benefits the option buyer. In other words 2 out of the 3 scenarios benefit the option seller. This is just one of the incentives for the option writer to sell options. Besides this natural statistical edge, if the option seller also has a good market insight then the chances of the option seller being profitable are quite high.
Please do note, I’m only talking about a natural statistical edge here and by no way am I suggesting that an option seller will always make money.
Anyway let us now take up the same ‘Bajaj Auto’ example we took up in the previous chapter and build a case for a call option seller and understand how he would view the same situation. Allow me repost the chart –
- The stock has been heavily beaten down, clearly the sentiment is extremely weak
- Since the stock has been so heavily beaten down – it implies many investors/traders in the stock would be stuck in desperate long positions
- Any increase in price in the stock will be treated as an opportunity to exit from the stuck long positions
- Given this, there is little chance that the stock price will increase in a hurry – especially in the near term
- Since the expectation is that the stock price won’t increase, selling the Bajaj Auto’s call option and collecting the premium can be perceived as a good trading opportunity
With these thoughts, the option writer decides to sell a call option. The most important point to note here is – the option seller is selling a call option because he believes that the price of Bajaj Auto will NOT increase in the near future. Therefore he believes that, selling the call option and collecting the premium is a good strategy.
As I mentioned in the previous chapter, selecting the right strike price is a very important aspect of options trading. We will talk about this in greater detail as we go forward in this module. For now, let us assume the option seller decides to sell Bajaj Auto’s 2050 strike option and collect Rs.6.35/- as premiums. Please refer to the option chain below for the details –
Let us now run through the same exercise that we ran through in the previous chapter to understand the P&L profile of the call option seller and in the process make the required generalizations. The concept of an intrinsic value of the option that we discussed in the previous chapter will hold true for this chapter as well.
| Serial No. | Possible values of spot | Premium Received | Intrinsic Value (IV) | P&L (Premium – IV) |
|---|---|---|---|---|
| 01 | 1990 | + 6.35 | 1990 – 2050 = 0 | = 6.35 – 0 = + 6.35 |
| 02 | 2000 | + 6.35 | 2000 – 2050 = 0 | = 6.35 – 0 = + 6.35 |
| 03 | 2010 | + 6.35 | 2010 – 2050 = 0 | = 6.35 – 0 = + 6.35 |
| 04 | 2020 | + 6.35 | 2020 – 2050 = 0 | = 6.35 – 0 = + 6.35 |
| 05 | 2030 | + 6.35 | 2030 – 2050 = 0 | = 6.35 – 0 = + 6.35 |
| 06 | 2040 | + 6.35 | 2040 – 2050 = 0 | = 6.35 – 0 = + 6.35 |
| 07 | 2050 | + 6.35 | 2050 – 2050 = 0 | = 6.35 – 0 = + 6.35 |
| 08 | 2060 | + 6.35 | 2060 – 2050 = 10 | = 6.35 – 10 = – 3.65 |
| 09 | 2070 | + 6.35 | 2070 – 2050 = 20 | = 6.35 – 20 = – 13.65 |
| 10 | 2080 | + 6.35 | 2080 – 2050 = 30 | = 6.35 – 30 = – 23.65 |
| 11 | 2090 | + 6.35 | 2090 – 2050 = 40 | = 6.35 – 40 = – 33.65 |
| 12 | 2100 | + 6.35 | 2100 – 2050 = 50 | = 6.35 – 50 = – 43.65 |
Before we proceed to discuss the table above, please note –
- The positive sign in the ‘premium received’ column indicates a cash inflow (credit) to the option writer
- The intrinsic value of an option (upon expiry) remains the same irrespective of call option buyer or seller
- The net P&L calculation for an option writer changes slightly, the logic goes like this
- When an option seller sells options he receives a premium (for example Rs.6.35/). He would experience a loss only after he losses the entire premium. Meaning after receiving a premium of Rs.6.35, if he loses Rs.5/- it implies he is still in profit of Rs.1.35/-. Hence for an option seller to experience a loss he has to first lose the premium he has received, any money he loses over and above the premium received, will be his real loss. Hence the P&L calculation would be ‘Premium – Intrinsic Value’
- You can extend the same argument to the option buyer. Since the option buyer pays a premium, he first needs to recover the premium he has paid, hence he would be profitable over and above the premium amount he has received, hence the P&L calculation would be ‘ Intrinsic Value – Premium’.
The table above should be familiar to you now. Let us inspect the table and make a few generalizations (do bear in mind the strike price is 2050) –
- As long as Bajaj Auto stays at or below the strike price of 2050, the option seller gets to make money – as in he gets to pocket the entire premium of Rs.6.35/-. However, do note the profit remains constant at Rs.6.35/-.
- Generalization 1 – The call option writer experiences a maximum profit to the extent of the premium received as long as the spot price remains at or below the strike price (for a call option)
- The option writer experiences a loss as and when Bajaj Auto starts to move above the strike price of 2050
- Generalization 2 – The call option writer starts to lose money as and when the spot price moves over and above the strike price. Higher the spot price moves away from the strike price, larger the loss.
- From the above 2 generalizations, it is fair to conclude that, the option seller can earn limited profits and can experience unlimited loss
We can put these generalizations in a formula to estimate the P&L of a Call option seller –
P&L = Premium – Max [0, (Spot Price – Strike Price)]
Going by the above formula, let’s evaluate the P&L for a few possible spot values on expiry –
- 2023
- 2072
- 2055
The solution is as follows –
@2023
= 6.35 – Max [0, (2023 – 2050)]
= 6.35 – Max [0, -27]
= 6.35 – 0
= 6.35
The answer is in line with Generalization 1 (profit restricted to the extent of premium received).
@2072
= 6.35 – Max [0, (2072 – 2050)]
= 6.35 – 22
= -15.56
The answer is in line with Generalization 2 (Call option writers would experience a loss as and when the spot price moves over and above the strike price)
@2055
= 6.35 – Max [0, (2055 – 2050)]
= 6.35 – Max [0, +5]
= 6.35 – 5
= 1.35
Though the spot price is higher than the strike, the call option writer still seems to be making some money here. This is against the 2nd generalization. I’m sure you would know this by now, this is because of the ‘breakeven point’ concept, which we discussed in the previous chapter.
Anyway let us inspect this a bit further and look at the P&L behavior in and around the strike price to see exactly at which point the option writer will start making a loss.
| Serial No. | Possible values of spot | Premium Received | Intrinsic Value (IV) | P&L (Premium – IV) |
|---|---|---|---|---|
| 01 | 2050 | + 6.35 | 2050 – 2050 = 0 | = 6.35 – 0 = 6.35 |
| 02 | 2051 | + 6.35 | 2051 – 2050 = 1 | = 6.35 – 1 = 5.35 |
| 03 | 2052 | + 6.35 | 2052 – 2050 = 2 | = 6.35 – 2 = 4.35 |
| 04 | 2053 | + 6.35 | 2053 – 2050 = 3 | = 6.35 – 3 = 3.35 |
| 05 | 2054 | + 6.35 | 2054 – 2050 = 4 | = 6.35 – 4 = 2.35 |
| 06 | 2055 | + 6.35 | 2055 – 2050 = 5 | = 6.35 – 5 = 1.35 |
| 07 | 2056 | + 6.35 | 2056 – 2050 = 6 | = 6.35 – 6 = 0.35 |
| 08 | 2057 | + 6.35 | 2057 – 2050 = 7 | = 6.35 – 7 = – 0.65 |
| 09 | 2058 | + 6.35 | 2058 – 2050 = 8 | = 6.35 – 8 = – 1.65 |
| 10 | 2059 | + 6.35 | 2059 – 2050 = 9 | = 6.35 – 9 = – 2.65 |
Clearly even when the spot price moves higher than the strike, the option writer still makes money, he continues to make money till the spot price increases more than strike + premium received. At this point he starts to lose money, hence calling this the ‘breakdown point’ seems appropriate.
Breakdown point for the call option seller = Strike Price + Premium Received
For the Bajaj Auto example,
= 2050 + 6.35
= 2056.35
So, the breakeven point for a call option buyer becomes the breakdown point for the call option seller.
4.3 – Call Option seller pay-off
As we have seen throughout this chapter, there is a great symmetry between the call option buyer and the seller. In fact the same can be observed if we plot the P&L graph of an option seller. Here is the same –
The call option sellers P&L payoff looks like a mirror image of the call option buyer’s P&L pay off. From the chart above you can notice the following points which are in line with the discussion we have just had –
- The profit is restricted to Rs.6.35/- as long as the spot price is trading at any price below the strike of 2050
- From 2050 to 2056.35 (breakdown price) we can see the profits getting minimized
- At 2056.35 we can see that there is neither a profit nor a loss
- Above 2056.35 the call option seller starts losing money. In fact, the slope of the P&L line clearly indicates that the losses start to increase as and when the spot value moves away from the strike price
4.4 – A note on margins
Think about the risk profile of both the call option buyer and a call option seller. The call option buyer bears no risk. He just has to pay the required premium amount to the call option seller, against which he would buy the right to buy the underlying at a later point. We know his risk (maximum loss) is restricted to the premium he has already paid.
However, when you think about the risk profile of a call option seller, we know that he bears an unlimited risk. His potential loss can increase as and when the spot price moves above the strike price. Having said this, think about the stock exchange – how can they manage the risk exposure of an option seller in the backdrop of an ‘unlimited loss’ potential? What if the loss becomes so huge that the option seller decides to default?
Clearly, the stock exchange cannot afford to permit a derivative participant to carry such a huge default risk, hence it is mandatory for the option seller to park some money as margins. The margins charged for an option seller is similar to the margin requirement for a futures contract.
Here is the snapshot from the Zerodha Margin calculator for Bajaj Auto futures and Bajaj Auto 2050 Call option, both expiring on 30th April 2015.
And here is the margin requirement for selling 2050 call option.
As you can see the margin requirements are somewhat similar in both the cases (option writing and trading futures). Of course there is a small difference; we will deal with it at a later stage. For now, I just want you to note that option selling requires margins similar to futures trading, and the margin amount is roughly the same.
4.5 – Putting things together
I hope the last four chapters have given you all the clarity you need with respect to call options buying and selling. Unlike other topics in Finance, options are a little heavy duty. Hence I guess it makes sense to consolidate our learning at every opportunity and then proceed further. Here are the key things you should remember with respect to buying and selling call options.
With respect to option buying
- You buy a call option only when you are bullish about the underlying asset. Upon expiry the call option will be profitable only if the underlying has moved over and above the strike price
- Buying a call option is also referred to as ‘Long on a Call Option’ or simply ‘Long Call’
- To buy a call option you need to pay a premium to the option writer
- The call option buyer has limited risk (to the extent of the premium paid) and an potential to make an unlimited profit
- The breakeven point is the point at which the call option buyer neither makes money nor experiences a loss
- P&L = Max [0, (Spot Price – Strike Price)] – Premium Paid
- Breakeven point = Strike Price + Premium Paid
With respect to option selling
- You sell a call option (also called option writing) only when you believe that upon expiry, the underlying asset will not increase beyond the strike price
- Selling a call option is also called ‘Shorting a call option’ or simply ‘Short Call’
- When you sell a call option you receive the premium amount
- The profit of an option seller is restricted to the premium he receives, however his loss is potentially unlimited
- The breakdown point is the point at which the call option seller gives up all the premium he has made, which means he is neither making money nor is losing money
- Since short option position carries unlimited risk, he is required to deposit margin
- Margins in case of short options is similar to futures margin
- P&L = Premium – Max [0, (Spot Price – Strike Price)]
- Breakdown point = Strike Price + Premium Received
Other important points
- When you are bullish on a stock you can either buy the stock in spot, buy its futures, or buy a call option
- When you are bearish on a stock you can either sell the stock in the spot (although on a intraday basis), short futures, or short a call option
- The calculation of the intrinsic value for call option is standard, it does not change based on whether you are an option buyer/ seller
- However the intrinsic value calculation changes for a ‘Put’ option
- The net P&L calculation methodology is different for the call option buyer and seller.
- Throughout the last 4 chapters we have looked at the P&L keeping the expiry in perspective, this is only to help you understand the P&L behavior better
- One need not wait for the option expiry to figure out if he is going to be profitable or not
- Most of the option trading is based on the change in premiums
- For example, if I have bought Bajaj Auto 2050 call option at Rs.6.35 in the morning and by noon the same is trading at Rs.9/- I can choose to sell and book profits
- The premiums change dynamically all the time, it changes because of many variables at play, we will understand all of them as we proceed through this module
- Call option is abbreviated as ‘CE’. So Bajaj Auto 2050 Call option is also referred to as Bajaj Auto 2050CE. CE is an abbreviation for ‘European Call Option’.
4.6 – European versus American Options
Initially when option was introduced in India, there are two types of options available – European and American Options. All index options (Nifty, Bank Nifty options) were European in nature and the stock options were American in nature. The difference between the two was mainly in terms of ‘Options exercise’.
European Options – If the option type is European then it means that the option buyer will have to mandatory wait till the expiry date to exercise his right. The settlement is based on the value of spot market on expiry day. For example if he has bought a Bajaj Auto 2050 Call option, then for the buyer to be profitable Bajaj Auto has to go higher than the breakeven point on the day of the expiry. Even not it the option is worthless to the buyer and he will lose all the premium money that he paid to the Option seller.
American Options – In an American Option, the option buyer can exercise his right to buy the option whenever he deems appropriate during the tenure of the options expiry. The settlement is dependent of the spot market at that given moment and not really depended on expiry. For instance he buys Bajaj Auto 2050 Call option today when Bajaj is trading at 2030 in spot market and there are 20 more days for expiry. The next day Bajaj Auto crosses 2050. In such a case, the buyer of Baja Auto 2050 American Call option can exercise his right, which means the seller is obligated to settle with the option buyer. The expiry date has little significance here.
For people familiar with option you may have this question – ‘Since we can anyway buy an option now and sell it later, maybe in 30 minutes after we purchase, how does it matter if the option is American or European?’.
Valid question, well think about the Ajay-Venu example again. Here Ajay and Venu were to revisit the agreement in 6 months time (this is like a European Option). If instead of 6 months, imagine if Ajay had insisted that he could come anytime during the tenure of the agreement and claim his right (like an American Option). For example there could be a strong rumor about the highway project (after they signed off the agreement). In the back of the strong rumor, the land prices shoots up and hence Ajay decides exercise his right, clearly Venu will be obligated to deliver the land to Ajay (even though he is very clear that the land price has gone up because of strong rumors). Now because Venu carries addition risk of getting ‘exercised’ on any day as opposed to the day of the expiry, the premium he would need is also higher (so that he is compensated for the risk he takes).
For this reason, American options are always more expensive than European Options.
Also, you maybe interested to know that about 3 years ago NSE decided to get rid of American option completely from the derivatives segment. So all options in India are now European in nature, which means the buyer can exercise his option based on the spot price on the expiry day.
We will now proceed to understand the ‘Put Options’.
Key takeaways from this chapter
- You sell a call option when you are bearish on a stock
- The call option buyer and the seller have a symmetrically opposite P&L behaviour
- When you sell a call option you receive a premium
- Selling a call option requires you to deposit a margin
- When you sell a call option your profit is limited to the extent of the premium you receive and your loss can potentially be unlimited
- P&L = Premium – Max [0, (Spot Price – Strike Price)]
- Breakdown point = Strike Price + Premium Received
- In India, all options are European in nature
Hi Karthik, If I had bought an option with strike price 300 today morning at 10.00 AM, let’s assume the price goes to 320 by 10.30 AM, if i am Selling the Options (NOT exercising), will get Rs. 320 – Rs.300 = Rs. 20 as profit(exclude premium)?
Its like this –
At 10:00 AM –
Strike price = 300
Spot price = 300
Premium you pay = Rs.5 (just assuming some value here)
At 10:30 AM –
Strike Price = 300
Spot Price = 320
Premium = 25
You can choose to sell the option and pocket the increase in premium i.e 25 – 5 = 20 (this is your profit).
Hi Karthik,
I completed future’s and now in option’s module.
In Future, if you make profit its (lot size x diff b/w prices) but in option, its simply (diff b/w prices)?
Considering Sathish example wouldn’t that be (lot size * 20)??
Thank You!
In options its lot size into difference in premiums.
got it
Karthik where can I find Premium (http://www.nseindia.com/live_market/dynaContent/live_watch/option_chain/optionKeys.jsp?symbol=NIFTY&instrument=-&date=-)
and also its Premium/lot (or) Premium for 1 unit inside a lot
Thanks Karthilk 🙂
Premium = LTP (last traded price)
Premium is per unit. So if Infy 1100 CE is trading at 25, then the total premium value will be 25*lot size i.e 25*250 = 6250.
Hi karthik if i decide to sell a call option before the expiry then what will happen?
And if i decide to short a option on its expiry date then are the profit making rules will be same as in normal market or it will be limited as said above?
Ajit, if can sell the call option anytime after you buy it. No need to wait for expiry. Yes, for shorting options also.
But this calculation is according to American options.
India follows European right?
Yes, and the calculations are based on European Options.
Is it possible to sell option call buy before expiry date? I think in article i can understand, profit/loss we can book on expiry day only.
Yes you can.
Here in article written that if I buy a call option then it will get exercised on expiry date only then how can sell option on any date before expiry.And if I am able to sell then what will be difference between European n American option.
You can buy and sell options anytime you wish – this is essentially trading the premium. However, exercise happens only at the end of the expiry.
Hi Kartik i must say that there are no better articles than your on Stock Markets. I have a confusion on options contact if you can help me please. If i buy an options contract in the morning at Strike price of 2050 and a premium of 10. if the spot price goes up and above the Strike price plus premium lets say 2080. can i sell the options contact before expiry? If yes then can you explain what will happen on expiry day? And if no then what is premiums trading? Thank you
Yes, you can sell the contract before expiry. Since you’ve sold and got out of the trade, what happens on expiry will not be relevant for you.
What about Margin then?
Margins will be reversed when you square off the position.
Hi Karthik,
For saying, i have placed the order in KITE to buy the call option of INFY with the strike price of Rs.850 with premium of Rs.5 per share. The lot contains 1200 shares. The order has executed. Total premium i have paid is RS. 6000 (1200*5). Now i am having an open position. After 10 days but before expiry i have sold it (square off) for the premium of Rs.10 per share. I have received the amount of RS.12000 (1200*10). I dont have the position now. At the time of expiry the Spot price is Rs.925 (Deep In The Money).
If some one who wish to excercise this option, as an option seller, should i need to pay that call option holder.
When i buying the call option, From where i have bought it?. From a Pure option seller or intermediate sellers (Who are already bought the call option and Selling Intermediate of the month).
How this chain is Working…? On the expiry day, definitely somebody holds the call option. If He/She wants to exercise, How the NSE will choose the option seller to settle this contract.
Please clarify…..
Thanks in Advance….
Not really, when you sell at 12, you have essentially squared off the position, and hence you are out of the market, so you there is no expiry obligation for you.
If i have sell an option . Would i wait for expire for get the premiums or anytime i can exit the position to buy like share trading.
You can sell anytime you wish, no need to wait for expiry.
Hello sir! Can u tell me if margin is required or not while someone is selling his call option on or before expiry date . I mean he is a buyer of call and now wants to sell his call option.
Thankyou n plz plz reply.
If it is a fresh short/write then margins are required. However, if the trader is closing the already existing long position, then margins are not required.
Dear Sir,
From the article it is very clear, wot will happen to my short sold position of call option if i hold it till expiry date (given the spot price remains same or lower than my shorted strike price). However, in reference to Mr. Joy’s e example:
“Lets say, I sell the Infy Call option May750 at 5Rs.
1) Now after few days, the premium increased and reached 8Rs which will mean I am in loss. But I intend to wait till expiry.
Lets say at expiry, the premium is 10Rs but Infy spot closes at 745Rs. In this case do I make profit or loss ? I assume profit, as
spot has not crossed the Strike price. Please confirm..”
Helpful if you can please explain what will happen if i choose to close my position (buy back/exit) before expiry date.
Regards
shruti
Yes, technically its a profit. However, since you paid 5 as premium, you will neither make or lose any money on this.
can we sell the option in the same day or before expiry?? as per said, in european option rule, we can not sell our option before expiry. please explain
Yes, you can.
Hi,
Can short a call/ put be only for intraday or it can carry forward till expiry.. Pls clear.
Thanks
You can carry the position forward, Sunil, but ensure there is enough margin to hold the position overnight.
Karthik, going by your P&L explanation, if the spot price is between the strike price and the breakeven point, then the loss for the buyer is Premium minus IV (even if the IV is lesser than the premium paid) and the profit for the seller is Premium minus IV. But according to the European method, the option is worthless even if the spot price goes above the strike price, but not above the breakeven point. Please clarify.
Also, I’ve read that.. on the day of the expiry, if an option has any IV, then you should close your position and not wait for the system to automatically exercise the option (EOB) as that would mean having to pay transaction costs unnecessarily. So, should you close the position even if the IV of the option held is lesser than the premium?
The loss for the buyer is the gain for the seller. However I think you are confused with the calculation bit, so please allow me to give you clarity on that first –
Assume the strike is Rs.175, Premium paid is Rs.5, and spot is at 178.
Breakeven point for the buyer is Strike + Premium = 175 +5 = 180
Spot is in between the strike and breakeven point…
P&L formula for the Call Option Buyer –
P&L = Max [0, (Spot Price – Strike Price)] – Premium Paid
= Max [0, (178-175)] – 5
= Max [0, 3] – 5
= 3 -5
= -2
We will calculate the P&L for the seller
P&L = Premium – Max [0, (Spot Price – Strike Price)]
= 5 – Max [ 0, (178 – 1750]
= 5 – Max [0,3]
= 5-3
= +2
So as you can see the loss for the buyer is the exact gain for the seller.
Also, whenever the spot is above the strike then the option has some value for the buyer. Think about it, the buyer paid a total of Rs.5 as a premium (think about this as an initial loss of Rs.5), however when the spot is higher than the strike the loss reduced from Rs.5 to Rs.2.
Coming to your 2nd query, yes it makes sense to close your profitable options position yourself rather than let the exchange exercise your option. This is because of the money you will save in terms of security transaction charges. Of course we will talk more on it at a later stage in this module.
Thanks Karthik; You’ve explained it very clearly in the article itself. I was just wondering if the option is considered “worthless” (in the European model) even if the spot price is above the strike price but below the breakeven point.
The exact part I was confused about is: “…..Bajaj Auto has to go higher than the breakeven point on the day of the expiry. Even not it the option is worthless to the buyer and he will lose all the premium money that he paid to the Option seller.”
I thought you were saying that the option buyer will lose “ALL his premium money” even if the spot goes above the strike price, but not above the breakeven…and hence the option is considered worthless (in spite of going a bit above the strike price).
No he will not lose all his money when the spot if between the strike and breakeven point. In fact upon expiry if the option has an intrinsic value then it is not worthless to the buyer.
Please let me know if I’m not answering your query right, I’ll be more than happy to give it another shot 🙂
Oh, thank you so much! Now it’s all clear and I can’t wait for what’s coming next 🙂
The chapter on buying a put option will be put up sometime soon this week! Thanks for your patience.
Can you please answer this.
1 ) what is margin required for selling covered calls , do I have to still pay additional margin if I have my entire shares pledged?
2 ) what is Ur margin required for selling named puts her does settlement work and what margin is required?
First strategy I use for generating regular income from my stock investment
Second strategy I use to buy stocks below market price . However my clients have faced difficulties f Ur platform and unable to execute both of these strategies do u have any solutions
1) You get margins for pledging shares, so in a way its covered
2) Check this – https://zerodha.com/margin-calculator/SPAN/
Hi Karthik,
I don’t understand. Do you mean to say covered call is not an option in Zerodha. If i want to use my holdings underlying in my demat, to make some money it’s not possible without extra margin amount. Is there any plan in future to enable using underlying holdings for Future or Call option selling
Hi Karthik,
Another scenario
I shorted a call at 10:10 AM
lot size= 1000
spot price=285
strike price= 290
premium =5 RS
At 10:30 AM
spot price=287
strike price= 290
premium =3 RS
I squared off my position.In spite of trade moving against my direction.
I made a profit of 2000 Rs
Am I correct or missing something?
This scenario is not possible
At 10:30 AM
spot price=287
strike price= 290
premium =3 RS
because when spot price moves towards strike price, the premium will increase beyond 5 RS. Hence you will suffer a loss.
Hi kartik,
Is premium changes on per second price change or it changes on broader move
Suppose at 9:50am spot price is rs 8000,strike price is rs8010 and premium is rs 40
Now,at 9:51am spot price is rs8001,strike price is rs 8010 and is premium changes to 41???
The rate at which the premium changes is measured(and dependent) by an option Greek called the Delta. We will discuss this going forward in this module.
Hey!!
Selling call options of Nifty and Banknifty at 1.5% to 2% above the underlying price on the day of expiry right at the opening has proved to be a master strategy. Due to the time decay, one tends to eat all the premium available. The only trick is to have 4 times the premium available as stop-loss and in worst case scenarios, book out losses if the stop loss triggers.
Your views!
I agree, but like I said earlier in this comment thread, you get too little money for the risk you take on.
Why 4 times ? What is the reason behind the number. Why not stop after 1.5%
Sorry, unable to get the context here.
Hi, Can we square off the option writing on Intraday basis or it can only be squared off on option expiry day.
You can square it off anytime you wish, no need to wait till expiry.
So I get to keep the premium only if I wait till option expiry & it expires worthless. If I square it off in Intraday I will be only getting the P&L as per my position. Am I correct?
Bang on! You are absolutely correct.
So what happens to the premium?
When you square off you will get the difference in the premium as your profit or loss.
Could you please explain further on “all options in India are now European in nature, which means the buyer can exercise his option based on the spot price on the expiry day.” What if I wish to square-off before expiry, if my target price is achieved.
May be an example would help! 🙂
Thanks!
You need to note that there is a difference between exercising and square off. You can square off anytime you wish, but you can exercise the option only on the day of expiry.
Sir,
If yogesh square off his option then what will happen to buyer who is waiting for expiry, how he will get his profit, suppose by the expiry time he is in profit. Or buyer is always in risk that seller can square off his option and buyer wont get the opportunity to exercise his option ?
The exchange will ensure the contract will get settled. Remember, as long as there is an open position that means there is a buyer and a seller in the market.
I have further two question.
1) Why strike is always in difference of 50, what if seller create something different ?
2) What if buyer invest in that strike which has only 1 seller and then in that condition, can seller square off his position if yes then will exchange suffer the loss by giving profit to buyer ?
1) Strikes are decided by exchanges, sellers cannot create strikes as per their wish
2) In that case, until both seller and buyer agree to transact a position wont be created, and upon expiry, the position will be settled by exchanges.
Thank you Sir for clarifying my doubts.
Good luck!
Hi Sir
If seller has liberty of squaring off his position then he can write call option and collect the premium and square off his position before 1 day of expiry. He will be always be in profit. And other participants will continue to trade on premium. Where I am wrong ?
Thanks
Yes, you can initiate the position anytime you wish and close it anytime you wish. However, do remember, your profit or loss is dependent on premium. For example, if you have written and option at 96 and closed it at 100, then you will make a loss of 4.
Hi Karthik,
Firstly thank you so much for this study material.
sorry from your post I understood that even a option seller can square off his position and need not be at unlimited risk if price start moving against him. But just to confirm if my understanding is correct.
Suppose I Sold a Call option on 25th Aug
Lot Size: 100
Premium: 5
Spot price: 280
Strike price: 285
So basically Rs500 will get credited to my account right?
now if tomorrow I see
Spot remains at: 280
but due to Theta: Premium moves down to 2
and now I think Stock price might break out 285 strike price
can I square off the position and eventually Rs300 will be my P&L?
Yes, option seller can square off his position anytime he opts to do so. Yes, you will get a credit of 500.
Yes, you can square off and pocket the difference.
Hello Karthik, Can you please upload rest of the chapters and other modules? I have already completed chapters until here and waiting to learn other knowledge yet to be uploaded.
We are working towards writing content, its taking a bit more time than anticipated…Options is relatively a tough topic, simplifying it is a challenge. So kindly bear with us, and we really appreciate your patience. Thanks.
Normally we try to make profit in stock market as far as possible. After reading Call option selling chapter I prefer only Call option & Put option Buying where the loss is minimum and the profit is Maximum. Hope I am correct.
Yes for now 🙂 But when you discover option Greeks your opinion may change and you may want to be an Options seller!
karthik, i have asked this earlier but not replied, how to save loss in option writting. i sold 8900 ce @33/- and day befor it rose to 85/- what should be my srategy to save loss.
Sorry to have missed your comment earlier. Well, Option writing does have an unlimited loss potential, hence usually option writers prefer to hedge their positions. In your particular case I’m really not sure about the strategy behind initiating a short position. If you are also uncertain about why you initiated the short position, then I would advice you to square it off immediately.
Can an option seller square off his position before expiry like option buyer?
Yes, he can.
thanks karthik for promp reply, actualy shorting deep Nifty OTM call and put is my usual trading practice but not sure how to protect loss making trade. i am not sure at what level i should put stop loss ie on the value of premium or on nifty price spot/ future. or is there any other strategy, pls advise. your advise are very useful and educative.
You can reduce your losses by keeping an eye on 2 things – careful selection of strike price and incorporating volatility in your stoploss placement. We will discuss both the aspects in great length in this module, request you to stay tuned till then. Thanks.
thanks Karthik, for reply, these both points are very important to understand, pls blog on these point as the earliest.
I am always not able to decide between hedging a trade and puting a stop loss. Which way is better from P&L point of view. In both the case we want to limit our losses. This confueion is more in case of options. weather to put SL or hedge to minimise loss. Can you please through some light on this.
There is a difference between hedging a position and placing a SL. When you place a SL and it gets triggered you make a loss…however when you hedge a position you neither make a loss or a profit. Hedging or placing a SL should be decided on a case to case basis – its hard to stick to just one method!
Sir, This is a general question. I regularly watch ET NOW. They frequently use ” Consolidtion”. What is the meaning of this word. Can you please explain by giving some simple example with figures?
Consolidation is nothing but the stock trades in a narrow range for a long time. This is also called range based trading. The same is explained here – http://zerodha.com/varsity/chapter/dow-theory-part-2/
hi kartik
can you please explain what are small cap and mid cap share. is bse500 or cnx midcap are same as nifty, do they have futures and options??
Here is your answer – http://tradingqna.com/6934/what-is-a-large-cap-mid-cap-small-cap?show=6934#q6934
waiting for next chapter to come…
but waiting..waiting 🙁
Sorry for the delay and thanks for your patience, the next chapter will be uploaded on Monday or Tuesday.
Hello karthik,
Suppose i buy a BHEL ce 250 at premium of 4 rs. On expiry day spot price is 280 rs.The call will have IV 30.According to P&L formula my profit should be 30-4=26 rs.As it is expiry day i am not getting proper buyer ( best buyer price is 12 rs).Whether i should sell this at rs 12 or let it expire (will i get profit due to IV and how much) Please clarify ,regards
If the intrinsic value is Rs.30, you WILL get this settlement from exchange irrespective of a buyer is available or not. However there is an angle of taxes here which we have not discussed yet…we will discuss the same soon.
How can i choose call option strike price?
Strike selection is not really a straight forward method…we will discuss at length regarding this topic soon.
I make a call option buy 1000 numbers @ strike price Rs. 7.00 by paying Rs. 7000. Later Strike price goes down to 5.50. At this point if I square of then I will loose (7-5.50)*1000= 1500 or full Rs. 7000. Please clarify.
The Rs.7/- you are referring to is called the ‘Premium’ and not really the strike price. Strike Price in an options contract does not really change. Yes, in case the premium goes down to Rs.5.5, you will lose Rs.1500/-.
Karthik, while trading options is it preferable to read the charts of strike price selected or the underlying stock??
No it does not. You should study the underlying and take a call on what action you need to initiate.
Please guide one time:
I tried first time on 20-Apr-2015 I SOLD 25 qty Nifty CE 8550 @ premium 108.00. Now the premium is 94.00 & Spot price is 8520. Now if I square off I will get (108-94)*25=350 profit. Is this correct?
If I do nothing till expiry and the spot price is equal or below Strike price 8550 will I get (108*25=2700) on excise action.
Also if spot price reaches (8550+108=8658) then I do not make any loss or profit. Please advice what to do.
Yes, that is correct. You will get that profit if you square off right away. Alternatively if you hold till expiry and the market stays low you will get the entire Rs.108. You are also correct on the breakeven point.
Hi,
Taking this scenario.
Copied from above post:
I tried first time on 20-Apr-2015 I SOLD 25 qty Nifty CE 8550 @ premium 108.00. Now the premium is 94.00 & Spot price is 8520. Now if I square off I will get (108-94)*25=350 profit. Is this correct?
If I do nothing till expiry and the spot price is equal or below Strike price 8550 will I get (108*25=2700) on excise action.
Also if spot price reaches (8550+108=8658) then I do not make any loss or profit. Please advice what to do.
So user sold nifty option lot @ 108.
My questions below:
If market stays low on expiry, i.e. out of the money, is there any extra STT for this Sell Call (Allowing Sell Call to expire)? Or user will get full 108*lot size (excluding one time charges brokerage, STT, GST, stamp duty etc)? I hope you are getting my question. This question arose after reading Extra STT for In The Money call exercise.
Yes, thats correct. You square off at 94, you will get (108-94) and if you hold till expiry (assuming the option is worthless) you will get the full premium i.e 108. Yes, 8550+108 you will breakeven.
No STT for worthless options. He will get 108*lotsize
Thanks for giving more insights.
Happy learning!
Hi Karthik,
I wanted to know the exact steps on trading terminal for option writing.
regards
anil
Highlight the strike in your trading terminal and press F2 to sell it, thats it 🙂
Hi Karthik,
If I sell 2000 call option for premium of 10 and spot price is 1980, when will I need to bring in extra margin.
– If spot moves to 1985, premium is let’s say 15 or
– if spot moves beyond 2010( 2000+10)
Roshan, M2M is not there for options so based on premium alone margins won’t increase. As the contract goes into ITM or volatility is increased (or both) then automatically more margin is required to continue the position. It is important to note that premium received will be added into cash column, however, its important to note that Cash as margin + premium received should be maintained for ease of continuing the position.
Dear Karthik,
Although, options ( call n put) seems very easy to make money…but i have lost lot of money mainly because i was not aware of entry and exit points in options trading. Can you please take a topic about entry and exit points in options .
I have made some silly mistakes on allowing the options to expire worthless and exiting the market buy booking loses and the next day to see the same option premium price sky rocket.
Yes, selecting the strike price is the crux of this module. We will discuss that in great detail very soon.
karthik, waiting your blog on above subject eagerly.
New chapter has been added today, please review it when possible.
where to review it , on what link and chapter, pls advise
http://zerodha.com/varsity/chapter/the-put-option-buying/
When the market is bearish we trade Buy Put Option or sell call option.
When the market is bullish we trade Buy call option or sell put option.
Which one to select for more profit in each case? Can you please explain by giving figures?
Well, this really depends on the premiums. If the premium for call option is very high then maybe writing the call option may make sense…otherwise if the premium for put option is very low then buying put option may make sense. However to do this you need to develop a sense for option pricing which will help you understand how cheap or expensive the premiums are. Of course we will cover this topic in great length in this module.
In all your calculations for options you consider spot & strike prices. However when we trade options on trader zerodha we see premiums against option figures. We buy & sell on the basis of only the premium. For example if the premium is 95 we buy and sell when the premium comes to 115 and make profit. Similarly for sell we sell at 115 and buy at 95.So we don’t come to know how much is the profit or is it 115-95=20 in all types of options
The reason for dealing with spot and strike price is because we are still dealing with basics…as we now move forward we will shit gears to premiums and the whole thing will be much more intuitive.
If you sell @ 115 and buy it back @95 profit is 20.
Hi Karthik,
What is the difference between squaring off or selling my existing long call and exercising it?
Thank you.
Squaring off = This means you are closing an existing position. If you have bought something, squaring off suggest you sell that and close the position. Likewise if you have sold something, squaring off suggests that you buy it back to close the position.
Exercising means you claim your right for a settlement. Have explained the same here – http://zerodha.com/varsity/chapter/basic-option-jargons/
Thanks Karthik for clarification.I believe, most retail investors use this options buying to make cash profits by selling whenever premium increases from where we bought rather exercise the contract on expiry and take that stock as delivery.
may i know the process to exercise a option contract on expiry?
Satya – in fact all options are cash settled and there is no concept of delivery of stocks. Check this – http://zerodha.com/varsity/chapter/basic-option-jargons/
Process of exercise is very simple – assume you buy an option today…after doing so you just need to ensure you carry this position till expiry day. The exchange will figure out that you have an open position and they will do the settlement on your behalf. But then, there is no stock delivery, settlement is only on cash basis.
if that’s the case then why there is a difference in Naked calls & Covered calls?
What sort of difference are you referring to, Nilesh?
I sell Call Opt 25# at Strike price 8400 and received premium 110*25=2750. Later the Spot price goes up to 8405 against my view. I go for Sq off at 8405 when the premium is around 113. If you compare the premium I get a loss (110-113)*25=-75. But when you go by Spot/Strike price formula I receive (110-5)*25=2375 as profit. If this is the case Call Opt selling is good when the market is slowly up and close the contract before expiry. Or wait till expiry in case of bear market. Opt is very difficult to grasp the subject. Only practice will make us good.
Please advice
Yes, as you said practise makes you perfect 🙂
Loss will be just Rs.75 (110 – 113)*25.
Not sure how you got the (110-5)*25=2375 formula.
May be my earlier questions were wrong. Sorry. You may please ignore it. What I am requesting is how to calculate profit for Call option selling before expiry.
Profit for call option buying = [Premium paid while buying – Premium at the time of selling] * lot size.
I guess , he is adding up the premium collected while writing off. So i have the same question. If i square off at loss of premium , what happens to the premium i already collected.
You collected Rs.100 as premium, you make Rs.20 loss on it, therefore you pay back Rs.120 as premium, therefore incurring a loss of Rs.20.
It simply means that strike price does not matter or this formula is applicable only when strike price achieved? Please clear it as it is most important to understand the concept.
The premium depends on the strike. So in that sense it is important to know which strike you are dealing with.
Hi,
Appreciate your efforts!
I would like to know, if now in India, Options are European in Nature, how come Buyers could able to Sell/Square-off their hlding at anytime or day irrespective of the Expiry date?
In European options the settlement is done on expiry day…however you can buy and sell anytime you wish. Please note there is a difference between ‘settlement’ and the regular buy/sell activity. Request you to read this chapter – http://zerodha.com/varsity/chapter/basic-option-jargons/
HI Karthik
First i appreciate your tireless effort of educating the masses…
I have one doubt, consider below
Day – 1:
Stock – Reliance
Spot price – 1000
Strike price – 1100
Premium – 50
Expiry on Day 10
Only there are 10 lots in market, all 10 were written by Trader A, and 10 were bought by trader B.
at day 4:
Say same spot price and same premium (No change in last 4 days, as there are no buyer are seller). Trader B sells 10 lot and trader A bought 10 lots.
In this case, all open positions in market are squared off. will all the options are ceased to exist even before exipiry date (day 10)?
Not really, the contracts are available of others to trade.
But in above case, someone has to write new contract right?
No one will hold that old contract, then who can sell that
A new set of seller and buyer will have to do that.
hi kartik,
is trailing stoploss is available with options like futures ?
Yes you can trail the premium if you want.
Hi Karthik, pls elaborate the method of using trailing Stop loss on zerodha
Check out this post on Bracket Order and Trailing Stop loss – http://zerodha.com/z-connect/tradezerodha/zerodha-trader-software-version/bracket-orders-trailing-stoploss-sl
How benifit is using TSL in option trading as compared to normal trading?
TSL?
TSL = Traiding Stop Loss
Hi,
Very nice article…
I have a question…
currently NIFTY is trading @ 8336..
Expiry date : 30APR2015
just 6 more days to Expire..
So my question is ..what if we sell/write OTM calls…
Say 8800 @2.55 (current premium)
as there is no way that…NIFTY will reach above 8800..
so option writer here will keep his premium (110rs in this case) with him at the expiry?
in simple sentence..
what if we sell/write OTM calls/puts near to the expiration ? is there any issue in it?
I believe there is some thing in it..as every body will do it and get some profit 😉
I just wants to know the back ground in it…
The money received from writing this option will be lot size * premium
= 25 * 2.55
= 63. 75 per lot
and not really 110/-
Anyway, yes you can write the 8800 call option and collect the premium. Many people do it, even I do it from time to time 😉
However few things you may want to consider –
1) There is no guarantee that 8800 will not be hit over the next 6 days…events like this (steep up/down move in short period) have happened in the past
2) To make Rs.63.75 per lot you will have to deposit nearly 15K as margins …so therefore is it worth the risk?
3) Writing OTM options and collecting premiums is certainly a great strategy as long as risk-reward is justified. This really depends on the strike you select to write
4) Selecting the strike to write depends on 3 variables – time, volatility, and speed at which the market is moving. We will soon discuss all these variables and understand how to select the write strike for trade shortly in the module. So please stay tuned 🙂
That was info… Bro, in that case, we can also write 10,000+ and so on in general, the same question applies to Ops Stocks as well.
I’m an ameture, so wont hesitate to ask you :p
Yes you can, but remember the more number of of options you write, the higher the risk you carry.
Hii karthik
I am having the infra CE of strike price 35 and 32.5
But now no buyers are there
If no buyers turns up till expiry then my loss will be my whole premium amount
And one more those who have sold the option they will be buying it before expiry or they will remain in profit without buying also
Are you long or short, Nitin?
Sir, what is nifty lot size , i think 75 but you mention 25. plz explain
At the time of writing the blog it was 25.
Is Call writing with Deep ITM safe? Can you please explain by figures.
Writing deep ITM option is anything but safe 🙂 Please dont do this. Request you to kindly wait for the next few chapters as I will talk about this in details.
I had sold 8 lot april 2015 series nifty PE 8200 @20.20. At time of expiry it was 15.00 on 30 th apr 2015. i couldn’t square off my position till expiry due to internet breakdown. Now what will happen? Will assignment happen randomly? will i realise profit of of around 1000 and will my fund be blocked till assignment?
Thanks
As the expiry is through, the exchange would have taken care of this. You will get your profit credited to you account.
we are waiting eagerly your talk on new chapter on writting option.
doubt if i write nifty CE 1lot at 8 then if goes down to 6 then how to exit the profit position in option writing? pls explain
Just make sure you buy it back at 6, you will make 2 points on it.
Hi Karthik,
If i write a call option say
Bajaj 290 call option at 8Rs premium
At expiry day, If Bajaj stock is at 280 i.e. OTM.
Bajaj 290 call option is at trading at (0.5 – 0.10) range at expiry day, should we square off the call option ?
or Wait till end of expiry day time and get it exercised.
I want to understand whether after expiry time, if call write is OTM does it become 0 or still get exercised in 5ps to 10ps range?
You can leave to expiry, it will get settled at zero. There is a technical reason why there is a residual value of 0.1 or 0.5, I will talk about it when we take up the chapter of ‘Theta’.
In the middle of the current month contract , i am feeling that Nifty won’t cross 8500 within the contract expiry & i am shorting 8700CE @60 rupees and at expiry nifty closed at 8320. Obviously the premium came to 0.1 to 0.5 and my profit will be around 50-0.5=49.5?. My query is that if am shorting huge qtys, whether any open position will be there at the expiry time to buy back the contract for closing the position? whether exactly 49.5/contract will be credited or some thing else(any available open position rate)?
If you are shorting at 60 then your profit will be 59.5 (60 – 0.5). Yes, you will get this entire profit credited to your account. The exchange will ensure you are settled. Remember if you have an open short position there is someone in the market who has a similar but opposite position.
Karthik,
Am a bit confused with this – “Also, you maybe interested to know that about 3 years ago NSE decided to get rid of American option completely from the derivatives segment. So all options in India are now European in nature, which means the buyer can exercise his option based on the spot price on the expiry day.”
Let’s say i buy a call option today (forget the strike, premium etc…) and tomorrow the underlying has rallied to a point far above my strike+premium (am in profits), can’t i just square-off my position tomorrow? Do i have to wait till expiry day to do this?
Yes you can square off anytime you wish. There are two aspects here –
1) Booking profits
2) Exercising an option
Booking profits simply means realizing the profits whenever your position turns profitable. You can book profits anytime you wish.
Exercising an options is a more formal action – It refers to an action wherein you keep the option till expiry. If you are a buyer of an option…and the stock is moving in your favor then you can either book profits and take whats on table or let it just expiry (you are exercising an option here) and keep all the money that comes in your way till expiry.
SIr,
I want to check my understanding by the following example
Suppose I buy 1 lot (lot size=1000) of calls of JP Associates for the strike price of Rs.30 at a premium of Rs. 2. Next day, the underlying stock price rises from Rs. 26 to Rs. 28 and the premium increases to Rs. 3. Can I sell the option and pocket the profit i.e. the difference between the premiums (3-2=1)? 1*1000= 1000
And suppose I wait till the expiry and the underlying price goes to Rs.34, I exercise the option, will the profit be (34-30-2=2) 2*1000= 2000?\
Am I correct in my understanding?
You absolutely right here! Happy learning!
Sir
1.I offen seen that when expiry comes premium start decreasing so everyone of call option writer make profit .
2.
And suppose (assume date 1 june) I sell call option of nifty 8500CE AT Premium 100
And at expiry day premium of 8500 CE was 2
And due some reason I doesn’t close my position then
What is my profit. ( if position not closed on expiry and position closed on expiry at premium 2)
For your 1st query – yes as the expiry approchs the premiums tends to come down and this is because of the Theta effect. We will discuss this shortly in the module.
2nd Query – If you write 8500CE @ 100 and the premium comes down to Rs.2 your profit will be Rs.98 (100-2). If you let the option expire then you can get that balance Rs.2 also, hence your profit will be Rs.100.
sir how can he get 2 rs also if options expire, plz clarify
Thats the premium received I guess.
sir first of all thanks for such a simple explanation of option.
you said that NSE get rid of all the american option.but still we can sell our option at any time .then what is the difference between american and european option?
Aditya – there are two things you need to take note of –
1) Squaring off an option for a Profit or loss
2) Exercising or Settlement of options.
You can square off the option anytime you wish (irrespective of the option being European or American). However settlement on an European option is only on the day of the expiry. But in an american option you can settle whenever you think is right.
sir what is the difference between sell and settlement?
Sell is when you decided not to hold the position and book profits rightaway…settlement is when you decide to hold the position till expiry and get the profit or loss depending on the price that day.
Hi,
i have some basic questions here for options write off/short. Before that below is my understanding on real stock and futures stock trading. In both the options if we buy the stock at some level and if it gets increased, then the difference is profit. I assume this is same for short sell also.
Now i comes to my understanding about the options. I think options are like bet for the actual stock or product. is that correct? Still before i reading your article i tried Long Call and Puts options.
For example from the current Nifty value, if i buy Nifty 8600CE at Rs.41.60 with lot of 25. So if the Nifty increases from current range 8529 to like 8580 on tomorrow the premium(option value) will increase like Rs. 50 something. So the profit here for call option buyer is 50-41.60 = 8.40 x 25 = 210. So the same amount would be loss for if i go with option write off/short.
I am aware the current premium(Rs.41.60) will goes down like Rs.15 if the current Nifty value(8529) remains stay on 30th July(as the expiry date). So at the time the buyer would have loss 41.60 – 15 = 26.40 x 25 = 660. The same amount would be profit for option writer/shorter if both are closed the position.
My above understanding is correct right?
Now my big doubt based on your option write off theory is,
Doubt 1: On closures of 30th July the Nifty 8600CE option would trade at Rs.20 if even Nifty increases to around 8590 on that day. So there is loss for Long call and profit in short call. So if both person(buyer and seller of Call option) are not closing the position on expiry date what would be profit and loss for both?
Suppose if option buyer closes the position at Rs.20 and exited on expiry date, the loss(difference from 41.60-20) would be 21.60 x 25 = 540. This would be same for option writer right? Or option writer will get the entire amount 41.60 x 25 = 1040 as profit? If yes then how the extra amount(1040-540 = 500) to paid to option writer? i mean buyer only losses Rs.540 but writer/seller got profit as Rs.1040 right? where the extra amount paid from?
Doubt 2: As you said some other example, option writer will not have any loss until unless the Call hit the strike price. In the above example, there is no loss for option writer if Nifty does not hit on or above 5600 right? For example, if i write the 8600CE option at Rs.10 on 30th July, if the Nifty trades at same as current value 8529. Suppose at the afternoon on the same day if Nifty increases to 8529 to 8599, the option would increase Rs.10 to Rs.12 right? At the end of day the Nify ends at 8599 at premium at Rs.12? So what will be final if i am not closing the position? will i get loss Rs. 2×25 = 50? or no loss because of Nifty does not touches the breakpoint of 5600?
Sorry for the long query. Excuse me if any confusion/misunderstanding in the long query. Please clear my about doubts.
Wow! That took sometime for me to understand, probably the longest query on Varsity 🙂
See from what I understand your doubts stem from how options are settled, let me attempt to explain here –
Option Strike = 8600 CE
Premium Paid = 40
Days to expiry = 5
Spot Price = 8550
So assume I have bought the option from you by paying Rs.40 to you. You are the seller and I become the option buyer.
If after 2 days Nifty moves to 8590 then the premium may move from 40 to maybe Rs.50, in that case I make Rs.10…remember whatever money the buyer makes, the seller loses the same amount. So initially I have given you Rs.40 premium, from that you are losing Rs.10.
However after 5 days Nifty expires on 8599, then the 8600 CE will have no intrensic value, hence the premium will goto 0. So I as a buyer will not make any money…but you as a seller will make Rs.40. Remember the option seller will make money only when the spot price = strike price + premium paid.
Also, on expiry day even if you do not close the position, the exchanges will do it for you. Please do re read the chapter once again, I’m sure you will get a better clarity.
Thanks for your clarification.
Finally i assume has there is more advantage(2 advantages as you mentioned in the chapter) for option seller instead of option buyer.
Let us assume, Nifty options are expires on today for this month instead of 30th July. Currently the Nifty 8900 CE is trading the perineum at Rs.4.05. In this case, it is almost impossible the Nifty won’t go above 8900 today(even on 30th July also). So if i sell Nifty 8900 call now at Rs.4.05 with 100 lot(25 each lot) 4.05x25x100 = 10125. This Rs.10125 is my profit after end of today right? So i invested Rs.10125(apart from margin amount) and got the same amount as my profit right? If yes why most of people not trying these options for earning money? In this method it is almost(90% of time) always profitable right?
Sorry to disturb you again.
I think if the expiry is today then the premium for CE8900 will not be 4.05 but zero. (may be 0.05 or0.1 something like that, hence no profit, brokerage may be more than the premium. Ok a few days earlier the premium may be having some IV which again will be very small amount. More days left to expire means more probability of (risk) of becoming ITM on expiry, hence IV will be more so is loss.
Nope in fact 8900 CE is trading around Rs.3 today…and ard 4 y’day…do you see the theta effect 🙂
You are absolutely right on that. If you have the conviction that Nifty will not cross 8900 before 30th June, you can go ahead and write these options and collect the premium. There is no harm doing it. However the reason why traders don’t do this is because of they lack the required conviction. In chapter 17 we will discuss one of the ways to develop this conviction and identify all these strikes that are likely to expire worthless..so that the traders can short these options and collect premiums.
one very imp factor is margin required sir… for 100 lots you will need more than 12 lacs capital 🙂
True that!
Hello there!
Margin will be required only if we are writing the option otherwise only premium into number of shares? Actual cost of the trade, is it correct?
Thats right, margins required only when writing options.
Hi Karthik, have a query on margins for spread trades. Suppose if were to do a credit spread, are the margins lower as compared to just the naked option sell. If lower than by now much?
thanks, Vivek
Yes, the margins are reduced if you initiate a spread trade. Have you checked out Zerodha’s margin calculator? – https://zerodha.com/margin-calculator/SPAN/ . This will give you an idea on how the margins are reduced when you initiate a spread.
Hi Karthik,
First of all, thank you so much for explaining such a complex concept of options in very simplistic way.
I have one doubt regarding average buy price of Call Options. Yesterday I had bought 1lot (25 units) of NIFTY24SEP7950CE at Rs70 option price and other 1 lot (25 units) of same call option (NIFTY24SEP7950CE) at Rs 48, both through NRML product type, which means I have bought 50 units at an average price of Rs 59 ((48+70)/2) with total buy value of Rs 2950 (59*50). But today in my position book it’s showing Rs 46.65 as average buy price with total buy value as Rs 2332.50 (46.65*50). So, is my calculation of average buy price is wrong or Z5 position book is showing error or is there any some other angle which I am missing?
Also, in market watch it’s showing NIFTY15SEP7900CE, instead of NIFTY24SEP7900CE for all such strike prices. Again, is this some error or is there any other funda of mid month expiry?
Thanks,
Abhishek
Abhishek, I would suggest you speak to a support executive regarding this. Thanks.
Hi KARTHIK,
I sell call option of nifty 7500CE @30 and expiry day nifty closed Case 1- @7501/ Case 2- 7499 and due some reason I doesn’t close my position then what will be impact on my profit? any extra charges need to pay?
@7501 – you lose 29/-
@7499 – you lose 30/-
Hi Karthik,
I sell 7500 CE@30 means collected 30 rs premium and end of the expiry premium should be zero if Nifty closed @ 7499 and premium should be one if Closed @7501. Pls clear if I am wrong and my question is “due some reason I doesn’t close my position then what will be impact on my profit? any extra charges need to pay?”
You are right, it will be 0 if it closes @ 7499 (or 7500) and will be 1 if it closes at 7501. No, there are no extra charges if you choose not to close the position at expiry (especially when you are short). However it is advisable to close the position if you are long and the option is ‘In the money’ to avoid STT – have a look at this http://zerodha.com/z-connect/queries/stock-and-fo-queries/stt-options-nse-bse-mcx-sx
Karthik sir,
Mukul is “selling” the call option 7500CE at 30. So as per
Case 1: 7501- he will gain 29
Case 2: 7499- he will gain 30
He would not lose anything until the spot crosses strike + premium.
Please confirm
Nope, at 7501, 7500CE will have an intrinsic value of 1, he has paid a premium of 30, so his net loss will be 30-1 = 29. At 7499, the 7500CE will have no intrinsic value, hence his loss will be equivalent to the premium paid i.e 30.
Hi Karthik,
Copying the formula from above tutorial
“We can put these generalizations in a formula to estimate the P&L of a Call option seller –”
P&L = Premium – Max [0, (Spot Price – Strike Price)]
Based on this formula,
P&L=30-(7501-7500)
=30-1
=29
This is profit of 29 Rs right ?
Yup.
Hey Kartik,
In this answer the loss will be made by option buyer and not the option seller. The loss that you are talking is for option buyer not for option seller. The option writer will make a profit of 29 and 30 respectively
This is the formula for Option Buyer – P&L = Premium – Max [0, (Spot Price – Strike Price)] , Ravi.
I am now totally confused with Mukul’s question and your answer. There were many sub queries to this answer. But your replies really confused me thoroughly. Pls clear it.
Mukul’s Query
“I sell call option of nifty 7500CE @30 and expiry day nifty closed Case 1- @7501/ Case 2- 7499 and due some reason I doesn’t close my position then what will be impact on my profit? any extra charges need to pay?”
Your answer:
@7501 – you lose 29/-
@7499 – you lose 30/-
My confusion
Mukul sells a call option at 7500 @30 and the nifty closed at 7499. The spot is less than the strike price right. In that case the expiry date premium would be zero. He has already collected the premium of Rs 30. Therefore his proift would be 30-0 which is Rs 30. Please clarify how did you get 30 loss?
Nancy, my bad. I think I misread this as ‘buy’ position.
@7051 – he loses 1 and retains 29
@7499 – he retains the entire premium of 30
Thanks for the clarification. For a moment I thought I need to unlearn everything.
Good luck and happy learning 🙂
This is wrong…’lose’ should be ‘get’. pls clarify
Can you share the context please?
Hi Karthik,
I am holding Bank Nifty 24Sep 1800CE short call at Rs. 24. Now it is 62.. Can i hold till this month expiry or can cover this position at loss. Is Bank Nifty expected to bounce at 18000 on 24th Sep from current quote 16700? Please answer my query ASAP.
Thanks,
Sudhakar. R
Sudhakar I’m really not sure, you will have to take a call on this.
Hi Karthik, I have a doubt. If we follow European Settlement option then how come we can sell before expiry? Plz throw some light. Thanks in advance.
When you buy an option you can do two things with it…
1) Hold the option till expiry and figure out what will happen on expiry date…this is called holding till expiry
2) Book profits as soon as you believe its the right time to exit….this is active trading.
Its just that because options are settled European style, the settlement is done on expiry only.This does not impact the 2nd point…i.e selling when you feel the time is right.
If I sell 18000 strike call of Bank nifty and on expiry it close at may be 17000(below 18000). The Premium would be Zero right? and I will be in profit?? CMP of call of 18000 is 61. Hope my question is clear…
Yes, if you sell Bank Nifty’s 18000 CE @ 61 and bank Nifty expires @ 17000, you will be in profit and you will get to retain the entire premium amount of Rs.61/- per lot.
Say if today I have written a far OTM call of next month i.e.Oct,15 and collected net premium around Rs.500. by the expiry of this month suppose the value of that call option has become 300. once after selling i just sat as it is moving in my direction. since it Far OTM Call, it expires worthless(am i right here?) Now my question is will the Oct,15 expiry call also gets expire at the expiry in Sept,15? if not can i continue to hold my position till Oct,15 expiry? if not, what will be my profit at the expiry of Sept,15? Rs.500 collected – Rs.300 value at Sept,15 expiry = Rs.200? or full Rs.500/- irrespective of its value of Rs.300/- at the expiry?
Oct 2015 contract will expire in Oct and not in Sept. Also, if the value was 500 when you wrote it and it is trading at 300 by expiry of sept, then you can book profits (by closing the trade) and pocketing Rs.200. For you to pocket full Rs.500 (premium collected) the far OTM option has to expiry worthless by Oct expiry.
Does that mean on sept,15 my position oct,15 contract will not be sq off by exchange? And it will be continued w/o doing anything on my part?
Yup, thats right.
in case of call options , how do we place stop-loss or limit orders ?
1) are they based on premium value ?
2) are they based on strike price ?
attached is a query :-
suppose i wish to sell USDINR NOVEMBER 15 CALL OPTION AT strike price = 66
premium i am to recieve is 740 .
how sould i place stoploss or limit square-off order so that i get to keep 700 premium amount even after square-off ?
SL has to be placed on premiums. You will get to keep 700, provided the USDINR stays below 66 by expiry. Even otherwise if the USDINR starts going down, the premium keeps on reducing. The lower it goes the higher is the premium you can retain. For example if it goes to 680 you get 740-680 = 60. If it goes to 650, the you get 740-650 = 90. So on and so forth.
It’s mentioned in the comments: “margins required only when writing options.”
If I don’t have enough margin in my zerodha account, but enough premium, can I buy/sell options and square off?
Thomas – not sure what you mean by “If I don’t have enough margin in my zerodha account, but enough premium” – Can you kindly elaborate a bit? Thanks.
There’s a comment in which it’s mentioned:
– NIFTY is trading @ 8336
– 8800 @2.55 (current premium)
In the answer, it’s mentioned:
The money received from writing this option will be lot size * premium
= 25 * 2.55
= 63. 75 per lot
To make Rs.63.75 per lot you will have to deposit nearly 15K as margins.
I didn’t understand how “15K” was calculated.
——–
Today NIFTY15OCT8500CE LTP is 22.15
So to buy this option, premium needed is 553.75 (22.15*25) no?
If I’m only looking to square off based on premium values & not let it expire, then can I do that with 553.75 (for 1 lot)?
i write a nifty 7100 put at @3 rs premium when nifty spot =8000
on expiry; nifty spot = 7500 but nifty 7100 put @4 rs premium
will i keep my initial premium or suffer loss? if i suffer loss, how much ?
7100 premium on expiry will be 0 and not 4 if the spot expires at 7500…and in such a case you get to keep the entire 3 rupee as profit.
You will keep initial premium
Dint see your msg 🙂
what is moving averege written in pink (21)c
what is moving averege written in green (10)c
examples given in Bajaj Auto at top left hand corners in options chapter
They are the values of 21 day and 10 day simple moving averages.
Hi Karthik, Please explain what will happens if we don’t square off the option in below situations.
1)Bought a call/put option @10 – on expiry it is 11
2)Bought a call/put option @10 – on expiry it is 1 – (i don’t get any profit even if i square off, so i left it. What will happen, what is my brokerage and taxes)
3)Write a call/put option @10 – on expiry it is 0
4)write a call/put option @10 – on expiry it is 5
5)write a call/put option @10 – on expiry it is 20
1) Absolute profit of Rs.1
2) Absolute loss of Rs.9
For both the cases you need deduct brokerage and premium paid cost.
3) Option expire worthless, absolute profit of Rs.10.
4) Option has an intrinsic value of Rs.5, which means you lose Rs.5 form the Rs.10 premium received
5) Option has an intrinsic value of Rs.20, which means you lose Rs.10 premium received and an additional Rs.10/-
Hi Karthik,
Please make the change in highlight red. Correct on is highlighted by green. Thank for your great effort.
Hi,
I write the one lot HDFC NOV 1220 CE on 24th Nov @8.1, but if HDFC closes @1219.5 on the option expiry day (i.e., 26th, NOV ), But I have not squared-off the trade, so what amount exchange will settle to me?
Thanks,
Govind
In this case the option will expire worthless…so you get to keep 8.1 fully.
Hi Sir, This is Abhilash.
I know only BUY CALL and BUY PUT. With a small example I am asking a doubt on SELL CALL Option. Please do have a look on my example.
As of I understand about BUY CALL Option is,
Eg : UNIONBANK of CMP : 160. I am expecting a BULLISH. Let the STRIKE PRICE be there for some time. Let’s talk only about Premium.
BUY UNIONBANK 170 CE : 4 ( Premium ).[ QTY : 3000]
If the Premium is increasing from 4 to any price like 4.5 , 5 , 6 , 7 or etc … that is our Profit. If it come down from 4 to 3.5, 3 , 2 , 1 or etc… is our loss.
In SELL CALL Option, I understand this way,
I am expecting a BEARISH.
SELL UNIONBANK 160CE : 8 ( Premium ). [ same QTY]
If the premium is decreasing from 8 to 7, 6 , 3 , 2 , 0.50 or etc, if we exit here, ARE WE IN PROFIT NOW ?
If the Premium increasing from 8 to 9 , 11 , 13 , 15 or etc , if we exit now, WILL WE BOOK LOSS ?
I have few more questions, the main thing in Options are TIME VALUE.
1 ) I have seen many stocks with some STRIKE PRICE in the beginning of the month trading around 95 , 250 , 50 and etc . But at the end of the SERIES with the same strike price it is trading around less than 5 , 3 , 0.5 or etc. This is a pure loss in BUY CALL. Is it a Profit in SELL CALL ?
Then we can SELL these CALLS and exit @ 0.10 on the day of expiry after 3 PM.
2) If we are sure about BEARISH. Can we BUY PUT option instead of adding huge Margin like FUTURES and all ?
3) what about TIME VALUE in SELL CALL ?
4) Can we do LONG STRANGLE calls ( i mean FAR Strike Price ) in SELL CALL / SELL PUT ?
Please give me a valuable feed back. Waiting for your reply 🙂
1) Your assessment on call option is right
2) In Put option you mentioned 160CE, it should actually be 160 PE. So if you buy 160 Put option @ 8…you will make money of what you bought increases in value…i.e from 8 it should go to 9, 10, 11 etc. The increase in put option premium will happen only if the price of the underlying in spot starts to decrease
3) For understanding time value you need to read this – http://zerodha.com/varsity/chapter/theta/
4) The decision to either buy a futures or sell a call depends on premium value and to a large extent on Volatility.
5) Will be talking about straddle soon.
Hi Karthik,
BUY CALL / PUT at any STRIKE PRICE and acquire any Premium. The premium should go up then only we will be in Profit.
what I mean above, I want to SELL a CALL option of UNIONBANK160CE @ 8 [ It is not BUY PUT, 160PE ] .Now my premium is 8. It is a SELL CALL Option. Hope it is right.
I will be in Profit when the premium come down from 8 to 7 , 6 , 4 , 3 till 0.05 also ?. This is my question. :).
Yes, got it 🙂
Option selling will be profitable only when the premium goes down !
Karthik, One more question,
While we are doing HEDGING in Options near to Result Announcement Days or some other news, I used to take BUY CALL ( Bullish ) & BUY PUT( Bearish) of the same stock at nearest STRIKE prices together. Because if the trend goes in anyway at least one will be in a good profit and we can exit other one asap. But now I am thinking, instead of taking[ BUY CALL and BUY PUT ] it is better to take BUY CALL ( Bullish )and SELL CALL ( if expected trend is BEARISH ) together. RIGHT ?
1. BUY PUT and SELL CALL for BEARISH Trend, BUY PUT Pre should go up, SELL CALL Pre should come down. AND
2. BUY CALL and SELL PUT for BULLISH Trend, BUY PUT Pre should go up, SELL PUT Pre should come down. RIGHT ?
Hope it is right.
Ah..these are synthetic option positions Ablilash..
Buy Call + Sell Put = Same as buy futures
Buy Put + Sell Call = same as short futures
Buy Call + Sell Call of two different strikes = Bull Call spread, explained in the up coming chapter on option strategy.
Hi Karthik,
Want to understand auto sq off in case of option writing. Say i have 1 Lakh in my account and sold two lots of call option blocking a marging of 80K.where 40 k is span maring while 40 K is exposure marging. Option were sold at premium of 100 rs. So at what premiumof Option these trade will be auto sq off? will the amount left in my account that was 20K comes into picture here?
Regards,
Sumit
20K should really be sufficient in such cases…however this really depends upon the broker you are trading with. If you are with us then the position will be squared off moment the value dips below SPAN margin.
Thanks Karthik for reply. I am still not very clear, when you say value dip below SPAN margin. Which value? Could you please explain with an example, that would really help to understand and take trades accordingly? If its a long explanation, happy to call if you can provide your number.
Regards,
Sumit
Sorry if I’ve confused you.
When I say value, I’m referring to all the M2M losses. So you have parked 80K (40K SPAN + 40K exposure) as margin..you can get to keep the positions open as long as all the M2M losses don’t go below 40K. In other words you can lose exposure margin (as M2M losses), but the losses cant go below the SPAN margin requirement. If you foresee such a situation make sure you have additional money pumped in so that at any point you have at least 40K in your account.
Sir i have read somewhere that when market is flat, on that day the price of options decreases and the price of option either CE or PE trends heavily on a trending market. Is this true?
And if this is true then can we short a option on flat market and after receiving the premium we can square off the position instantly to lock the profit?? Is it possible. I am a new to option trading therefore i got this question in my mind
Not true Praveen 🙂
Why is such a huge margin required for writing an option
Mainly to cover for the unlimited risk that options writing carries.
Hello Karthik, Thanks a lot for the module. It really gained me lot of basics on options trading.
I have a doubt .
Suppose I sell nifty CE 7900 at premium 100 (75 lot), and the spot price is 7500 today. Suppose Only 3 days to expire.
At the expiry if it trades below 7900, and I don’t squareoff, the exchange will do it.
My profit will be 100*75= 7500
Practically I don’t make any profit, as I have to spend 7500 while shorting.
So I don’t get any profit , right???
If you sell the 7900CE @ 100 and the market expires below 7900 then you are in Profit!
You can choose not to square off the trade and the exchange will settle this for you.
But sir how can I get profit. I will receive 100*75=7500
This amount already I have used while selling 7900ce.
so my net profit is 0.
When you sell only margins are blocked and will be released when you square off the position. So you wont be spending any money.
Please answer following questions:
1. My currency option strike price 67.5 and premium 0.2100 and i am seller , So my breakdown point is 67.71 . If spot prices on the expiry reaches 67.71 , then no profit and no loss : greater 67.71 then loss :; less than 67.71 then profit. Am i correct?
2. How can i exercise the sell option on the expiry from my trading platform? how premium is received?
3. On the expiry day if i square off (at premium difference of sell and buy price) with profit then this profit and received premium as my total profit or not ?
1) Yes, you will start making a loss at 67.71 (67.5+0.21). You are right about no loss, no gain.
2) All exercise is in the form of cash settlement, no question of physical or any other type of settlement.
3) Yes, if the spot goes lower you do end up making a profit.
No my question is can i make two profit . one from price difference and another from premium received.
Oh, no…you will only make the price differential between the premiums.
On the expiry ???? Some misunderstanding.
Can you please elaborate on what you are missing?
I have bought a call option of HDIL @ 0.10 and some one has sold it for that rate he might be planning to square of or short it out.What in case on expiry I have kept this order to sell @ 1.0 wil it get traded or not.As I assume all the shorter’s have to square of their positions,so they have to but @ the rate I have placed it?or it will end @ 0.5ps.Pls explain request you to provide your mobile number .
Sachin..upon expiry the option value is set to its intrinsic value and the option will get squared off at that price only and not at a price you’ve set.
Hi,
If I write an option (Stock option) on expiry day at .05 and does not cover it (Buy it)
Assume Lot size 8000 with 10 lots short.
then what will be my position as far as P&L is concerned ?
will there be any penalty / tax/ charge for not covering my position ?
Also what will happen If I buy an option and it ends in ITM and I dont sell it due to very low price say .05 paisa only ITM so it automatically gets exercised and How much Charges/ Penalty/ Taxes are levied by exchange or anyone. Assume lot size 8000 with 10 lots bought.
ANYONE pls
In first case you will make 40K. Lot Size * Number of Lots * Premium = 8000 * 10 * 0.5.
You can let it expire and you will not have any levies.
In 2nd case you will have to bear STT costs, check this – http://zerodha.com/z-connect/queries/stock-and-fo-queries/stt-options-nse-bse-mcx-sx
Thanks for answer.
Just a final check that except STT also will there be any levy by Zerodha/ Exchange on anyone at all on Out of the money options written @ .05 on expiry day with full Margin.
Means I get this .05 per lot in my pocket without paying any levy ?
Happy just to clarify @ 0.05 your profits will be 4k and not 40K as i previously mentioned. I misread the premium as 0.5 as opposed to 0.05.
Since you would let the option expire as such, there wont be any trade, since there is no trade there is no brokerage charged.
Hi Karthik,
So, to summarize from reading your article and above comments regarding option selling:
1) if you square off (i.e not waiting for expiry) then you get difference in premium.
2) if you wait till expiry then you get the full premium (well, if it is still OTM)
3) today is 26 jan and expiry is on 28 jan what if I write an option? How much premium would I stand to receive?
Thank You
from what I understood its like if premium is @ Rs.300/- during the start of the series and just 2 days prior to expiry if I purchase(shorting option) this same option @ Rs.4/- then I stand to get Rs.4/- at the time of expiry correct?
Yes, you will get 4 provided the intrinsic value is zero.
1) Yes, before expiry you get difference in premium.
2) At expiry P&L is equal to the option’s intrinsic value of the options. CE intrinsic value is Max[Spot – Strike,0] and PE intrinsic value is Max[Strike – Spot,0]. From this you have to adjust for costs
3) Depends on which option and the premium associated to it!
yup got it thank you brother 🙂
Sir why is it that the option premium of nifty falls on expiry date??
Today both call and put options fell due to expiry date??
Why both put and call fell??
Hi,
I would like to know if I write nifty call option 8000 (currently nifty is at 7400). Its premium is say 10 rs.
after 10 days, nifty is at 7600 but the premium of nifty 8000CE is 6 rs. If I square it off, then will I earn rs.10-rs.6 = rs.4 profit per option. The expiry is 8 days away from the date of squaring off. So Instead of waiting for expiry, i square it off before expiry. Kindly guide me if I am correct. If I am wrong, please let me know how.
Thanks,
Yogesh
Yes, you do earn Rs.4 in profits and you can choose to square off the position even before the expiry.
Thank you very much for your reply.
Welcome!
what is the margin on amount required to sell 10 put option contracts of nifty suppose I sell nifty 6800 strike price @ premium of 16 rs
The margin required to short options is similar to futures margin. You can use this calculator here to find out for this case – https://zerodha.com/margin-calculator/SPAN/
confused . Can understand Call Option Buyer / Seller. But then, what is meant by Option Writer ??
Both Option writer and option seller refers to the act of selling options. They are the same, so please don’t get confused.
Thanks….
Cheers!
Dear Sir,
thank you for this amazing explanation in plain and simple language.
My query is
if i am selling an option contract, and if i do not close my position and let it be exercised at expiry, then my profit at expiry is the difference of my sell and buy premiums OR its the difference of my selling strike price and spot price at expiration…
Example…
IF i sell 100 quantity of nifty 9000 CE @ 100 and if nifty expires at 8500, then at expiry my profit will be ((100-0)X100=10000) OR ((9000-8500)x100=50000) ?
Awaiting your reply.
Thank you.
It will be (100 – 0)*100 = Rs.10,000/-.
Thank you Sir for your quick reply.
Welcome!
Dear Sir,
thank you once again for this amazing explanation.
My query is
if i am buying an option contract, and if i do not close my position and let it be exercised at expiry, then my profit at expiry is the difference of my buy and sell premiums OR its the difference of my buying strike price and spot price at expiration…
Example…
IF i buy 50 quantity of nifty 9000 CE @ 100 and if nifty expires at 9300, and at expiration nifty 9000 CE is @ 200, then at expiry my profit will be ((200-100)X50=5000) OR ((9300-9000)x50=15000) ?
Awaiting your reply.
Thank you.
It would be the difference of your buy and sell premiums. If Nifty closes at 9300, the 9000 CE will have an premium value of 300. So you will make 300 – 100 = 200*50 = 10,000/-
Thank you Sir for your quick reply.
Welcome!
Hi Karthik, firstly Thank You for imparting the knowledge in a such a lucid manner and making it such an interesting read !!
My query, again based on the above : ‘all options in India are now European in nature, which means the buyer can exercise his option based on the spot price on the expiry day.’
1. So if I buy CE today and sell tomorrow (considering in profit) – when will I get to see the profits in my accounts ? At eod or upon expiry ?
2. In case the above is possible, it wont be incumbent on me if the premiums of my strike price have gone down and someone else has to bear the loss ?
3. Could it be like an intra day trade – buy low, sell high even though its European style ? So on the expiry day I wont be responsible for this trade (considering I have booked profits). So how does the expiry matter if I am an intra day trader except for the month on month time period ?
Regards
Glad to know you liked the content here Rudra 🙂
1) Yes, you do. Do remember exercising option and booking P&L are two different things. You can book P&L whenever you want, even after 15 secs of you buying the options, the necessary debit or credit will reflect by EOD.
2) If you have bought the options and the strike price goes below your purchase price, then you will suffer a loss.
3) Yes, it would be an intraday trade. Expiry does not matter to in case you are doing intraday trades.
Hi Karthik – very informative stuff …thanks for the guidance; however, I still have a query – is it prudent to short put options or buying call options when the market outlook is positive while at the same time it is just 10 days away from expiry?
I’m not too comfortable sorting Put options for the simple reason that fear spreads faster than greed. For this reason I’d rather buy an ATM call option than short a PUT.
Hello Karthik,
I have query with respect to selling call options of nifty. On 1st Jan 2016 if i sell 750 qty of nifty call option Feb 2016 series @ 18.90, I collect a premium of Rs.14175. Now during January and Feb the premium rises upto Rs.190 making huge loss, but I dont square off the position but plan to stay till expiry. Now on expiry day the premium comes down to Rs.3. What would be my position? Will I be in profit or loss?
Thanking you in anticipation.
Regards!
Well since you held on to the option position despite the volatility, you would be in profit as you sold short @ 18.9 and now the options are trading at 3. So your profit will be 15.9.
Hi karthik,
In the above case, from Jan 1st till Feb end, there have been some fluctuations. And margin also kept on hold.. That margin will be released or we lose it? Please clarify.
It will be released as soon as the position is closed.
Thanks a lot Karthik, much appreciated!
Welcome!
I have a question regarding option writing.This is my first time writing an option. Today i tried to write hindalco call option@110 the premium is 0.15, but when i tried to place order it says margin required(I have 50,000). I also checked on your span calculator it also indicating that i need 66,000 . I dont understand why is that am i missing somthing(obviously i am ) but i dont know what.please clear this to me. Thank you …..http://www.nseindia.com/live_market/dynaContent/live_watch/option_chain/optionKeys.jsp?symbolCode=1230&symbol=HINDALCO&symbol=hindalco&instrument=OPTSTK&date=-&segmentLink=17&segmentLink=17
Option writing requires margin deposit. In this case you need 66K, but as you seem to have 50K, therefore 16K is a shortfall…therefore the order got rejected.
But option premium is 0.15. And lot size is 5000. So don’t I receive 0.15*5000.That’s my question.how that 66000 came. Please tell me the calculation.
P.S thank you for the quick reply. I am new so please don’t mind if it is a stupid question..:). I just couldn’t find how they calculated margin.
To receive the premium amount, you first need to write that option. To write the option you need margins, and in this case the margin is 66K. So unless you have 66K in your account, you will not be able to write it.
HI , Karthik i must thank you for making my confusions your article has cleared my thoughts … my approach to the option market is trying to deal with binary numbers that is 0 and 1 , would like to discuss with you more on it to find the correct quote of USD/INR , the biggest fortune point … would be interested to speak on skype … would be waiting for your reply
Thank you
Abhilash, suggest you post it here for the benefit of all!
I have a doubt.. I sell an option for 0.05 in Normal order and let it expire… Will nse close my position at 0.05 or 0.00 during settlement ?
If the option expires worthless, then technically it will be 0.00.
sir
i sold 7900 CE 450 nifty 50 shares @ 105.1 on 9th 0f may. so for the premium is not credited to my account. can i buy and square off now?
You can choose to square off the trade anytime you wish. The differential amount will be credited to your account by EOD.
now 7900ce nifty is trading around rs 73.if i buy, i may get rs 32 know sir? r should i wait till expiry sir?
Yup, you will.
Suppose I hold 2000 shares of RECLTD at an average price of Rs.161. The CMP is Rs.155.15. Though fundamentally a good stock the price has been declining sharply and there is a possibility of it reversing if the third quarter results are good and the dividend track record is maintained. Now in such a scenario would it be a wise decision to sell call option for strike price of Rs170/175 30June2016 Expiry ( currently the closing premium EOD 25-05-2016 is Rs.2.55/1.6). The idea is that if the price indeed moves-up upto or beyond the strike price, I may not suffer an unlimited loss in that the stock I already hold will also appreciate and give me profit upto the level of strike price. If the price doesn’t increase the premium amount would be a profit. Kindly tell me whether such an approach is right when one is uncertain about the upward movement of the stock because of apparent bearishness.
It does, in fact this is a covered strategy and quite popular with investors who hold large quantity of the underlying shares. You need to make sure the quantity you hold approximately matches the lot size so that the loss / profits to even out in case the markets move up.
Hi Karthik, in this case for writing that RECLTD call any margin will be held by Zerodha? Because already 2000 equity positions are held and again writing a call of lot size 2000. As a security, equity positions will help. Right?
No, when you write options, you need to pay up the margins applicable.
Thanks Karthik.. but the margin this case is far less than the margin when you write an can option without equivalent lot size quantity equity positions.. right?
For ex: RECLTD only 200 CE I am writing.. let margin be 1 lakh
2nd case.. I am writing along with equivalent lot size of shares.. for ex if lot size is 2000 then I am buying 2000 quantity equity in CNC.. in this case margin for option will be considerably less(around 20k or less than 1 lakh any amount).. right?
Vamsi, I’m confused with your query. All derivative contracts have a standard lot size.
If I Short Hdil(Spot price =100) with Strike Price 120 and premium of 1Rs(6000Rs),Suppose if the premium rose to 2Rs(12000),I want to know that will I lose 6000(12000-6000) or 12000 from my account?
You will lose 6000, because when you short you will get 6000 as credit, that will be gone plus 6000 since the premium doubled. So total loss is 12K of which 6K is the credit you received.
Hi Karthik,
I started reading the Options theory last night and I’m amazed how lucidly you have explained it. You are an AWESOME teacher !! Thank you
Thanks Nikhil, guess all the loss making option trades have taught me what not to do 🙂
Dear Sir,
Please advise me whether the SPAN margin and Exposure margin are recalculated and debited from the trading account daily or it is charged only on the initial day of trade for Call writing. I am not referring to the M2M amount debited daily.
2. i am using Pi software for trading. suppose I have 1 lot future short in my account. If i place order for 2 lot buy of the same scrip future using F2, how much will be the margin requirement looked by the software: ie margin for 3 lot or margin for 1 lot. The net position will be -1+2=1. If i first square off the short and they go for buy only one lot margin is required. sorry for the out of topic question. The same applies to options also.
You will be required to maintain the margin (SPAN+Exposure) for as long as you intend to hold the position. Moment the margins go below the stipulated amount (especially SPAN) you are required to top up. This happens automatically if there are extra funds in your account.
In this case you will have to have enough margin for 1 lot as you are squaring off lot and going long on 1 lot. Its better you initiate the position one at a time.
Hi Karthik,
2 questions…
1) Hows the strike price calculated on expiry day? Is it the closing price or is it the day’s High / Open? I’m wondering what happens is on expiry day, the value of the underlying option crosses the strike price, but closes below the strike price for a call option. Say i have nifty 6500CE and on expiry day nifty trades between 6475 and 6525 and closes at 6499
Strike prices are dynamic, exchange creates them as and when they deem necessary. The call option is profitable only if the spot is higher than the strike upon expiry.
Karthik,
To clarify on my question, whats the value taken to match the strike price on the expiry day. Say i have sold nifty 6500CE at 50/- and on expiry day nifty trades between 6475 and 6525 and closes at 6499 do i get to keep the 50/-? whats the price on the expiry day thats used for expiry calculation? is it the closing price or the day’s high?
Think from a buyers perspective – A call option buyer is profitable only if the spot price is above the strike price. In your example all call option strikes above 6500 would be profitable, and if the spot is at or below 6500, the all call option strikes below 6500 expires worthless. Which means the call option buyers will lose money (people who have bought 6500 call option). Naturally if call buyers are losing, the call sellers are gaining.
the 2nd question..
2) So lets say the price of a call option is at 4/- 2 days before expiry and i write this, and the strike price is not reached does it still work in the same logic? Doesn’t it mean that there are always some short term profits to be made? or is it that selling becomes difficult at that stage as there are no interested buyers?
If you write the option @ 4, you get to retain the entire premium if the spot is lesser than the strike. You need not really worry about liquidity as the exchange will settle this for you.
hi sir
a small doubt in IF THE OPTION WRITER’s DIRECTION GOES WRONG
if the spot increases than strike on expiry date ( is there any possibility for the option seller to get rid of that unlimited losses), for ex: by buying the same lot of call options (long call) can he hedge his position.
another doubt P&L = Premium – Max [0, (Spot Price – Strike Price)] what is the reason for using ‘0’ in the formula. please give some clarity on these doubts sir.
Well, he just have to close the trade and exit the position. Or he can hedge his position by taking on a futures trade. For example if he has written a Call option, he can buy a futures as a hedge. But hedging will limit the profitability and increase the cost of trading.
Sorry for disturbing you again and again sir, In the previous doubt you said “he just have to close the trade and exit the position”. but how can a writer of the option exit the position ,because he have the obligation but not the right. is there a possibility for the writer of the option to exit before the expiry and how can he exit? please explain it sir
He just transfers the obligation to someone else, the new person who comes in now has the obligation. In fact this is the beauty of derivatives. You can choose to close your position anytime you wish.
Hi Karthik! I can’t stop appreciating the beautiful work you and your team are doing! Wonderful for people new to share markets.
Just waned to know, if you have any pseudo trading tool (or know of any such software/tool available anywhere), which mimics the exact market scenarios and people new to trading can use it to gain confidence before starting with actual trading? If not, I would kindly suggest your team to roll out something similar, as it will go a long way in implementing the beautiful theories you have given in the modules and get a hands on experience along with confidence before trying out the real thing with real money!!! Best wishes!
Thanks Arup 🙂
A mock trading platform is on the cards but cant really commit a timeline here. Meanwhile you should check NSE’s Pathshala.
Thanks Karthik, really looking forward to this !
Cheers!
Hi,
I bought a Marico Jul 260 CE at 7.60 and wrote off a Marico Jul 280 CE at 3.00. On the date of expiry, do I need to take any action or the option will be automatically exercised, if it is in the money?
Option will be automatically squared off. If your option is in the money, then its always better to square it off yourself to avoid the STT trap – http://zerodha.com/z-connect/queries/stock-and-fo-queries/stt-options-nse-bse-mcx-sx
Respected sir , i have one ques suppose i write a nifty OTM call 8950 for premium 1 rs so i will get 75 rs for 1 lot , what will happen on the day of expiry if the option remain OTM and there is no liquidity ( no buyer for that option ) …how settlement will done ….
In that case the the exchange itself will settle this for you, you need not worry about finding the counterparty.
sir is p&l formula only applicable if i buy on 1 day sale on exp day or it is applicable if i buy inbetween and sale on exp day
Applicable for trades in between as well.
Hey Karthik,
Appreciate your team’s effort for raising awareness on financial education with such easy to comprehend material.
I have a small conceptual doubt.
I assume for every option buyer there must be a corresponding option writer. ( for an agreement to happen ).
Suppose i am an option writer , and i decide to sqaure of my position before the expiry.
What i ll gain/loose is the difference in Premium if the market is bearish/bullish.
But the option buyer ( associated with my option selling ) wishes to continue with this contract till expiry.
How would things work for him ?? ” As the agreement says, seller has the obligation to sell the underlying at the strike price on expiry “.
In this case i am already out of the agreement as i squared off.
I hope i am clear with my doubt.
Rakesh – this is the best part. The ease of getting into and getting out is what makes it interesting. Its a market place, you just transfer your risk to someone else and you can be out of the market. As easy as that.
sir, a basic question. please clarify. Say I sell nifty 8700 CE for a premium of Rs. 40. say Spot Nifty is 8400. Now on the expiry date let us say the spot nifty is 8600 and the premium (of same 8700 ce) is Rs 50. If i square off my trade then I will incur loss. If i just leave my trade without squaring off, then will i get profits because the spot value of nifty is 8600 and not 8700? Pls clarify on how to approach this scenario. Thx.
Yes, if you decide to square off you will incur a loss. If the spot remains at 8600 upon expiry then there is no loss.
Thank you Sir. So I would be making profit If i just leave it and do not square off. Likewise, if I buy INFOSYS 1080 CE at Rs.30 and spot price at 1080. And on the expiry date INFOSYS spot price is 1085 but premium is at Rs 25. Now if I square off, i will be at loss. Can I leave the trade as is and the market would settle my trade and give me profits? Am i correct or will there be any hidden catch / charges. Thanks.
If you buy 1080CE and the spot expires at 1085, then the value of the option is just 5…since you have paid a premium of 30, you will lose 25. There is no hidden charges as such, but you will have to pay a hefty STT for not squaring off an ‘In the Money’ option. More on that here – http://zerodha.com/z-connect/queries/stock-and-fo-queries/stt-options-nse-bse-mcx-sx
Sir if I sell a call which is in my favour till expiry but I don’t buy that call till expiry. In this case how my position will be settled. The market will automatically square off my position or I have to buy back.
Yup, the exchange will automatically settle this.
As i am progressing through Zerodha Varsity, superb experience getting to learn new things:). As per example in writing of call option Bajaj 2050 CE , we require margin of Rs.31762 for buying 1 lot of bajaj futures and require Rs.36706 for selling 1 lot of bajaj 2050 CE. Why this difference? Also as stated in explanation above we receive premium of 6.35, then is the premium received also blocked along with margin
Glad to know that 🙂
When we buy options we just pay the premium, however when we sell options margins equivalent to buying/selling futures is blocked. You can use our margin calculator to identify the margins – https://zerodha.com/margin-calculator/SPAN/
How much percentage of returns expectation is safe in a month by selling options,.?
There is nothing like safe returns. This really depends on your options strategy.
Hi Karthik
I have a question on the following information given in this chapter ;
“So all options in India are now European in nature, which means the buyer can exercise his option based on the spot price on the expiry day
”
My question is – Can the option be exercised by the buyer anytime during the trading hours of expiry date or it is exercised only based on the closing price of expiry day (after market hours)
No, it can be done based on the closing price of the expiry day.
Hi, I have a question regarding squaring off a call option position. Suppose if i buy nifty call option (1 lot of 75) in morning at 100 rs premium and at noon i square off that because it went up to 110 rupees, Am i leaving behind any liability for myself towards the options excercise date? I booked the profit of [(110-100)*75] = 750 rupees on the premium and squared off my position, now if on option expiry date if this premium value become 10 rupees also, I should not care because I washed my hands off the position – Am I correct? Please let me know. What I am worried is, am I still an option seller and will I still be vulnerable to possible infinite loss after squaring off position? I feel I am not, but please let me know. It might be a very stupid question also.
Hetal you are absolutely right. You are out of the market once you square of the position. Once you match the buy order with the sell order (same quantity)…the position is considered squared off. There would be no liabilities, you need not have to worry about it.
Will the sell order get executed at the same premium rate while selling or the premium price while settlement?
It is likely to get executed at the last traded price.
Hi Karthik,
I have a question regarding call option writing. For example, NIFTY 8600 CE is trading at 100/-. I want to write 1 lot at 100/-.
So, for this let us assume that 40k margin is needed. And I have 1 lakh in my wallet. So after I write this call, I will have 60k in my wallet.
Now, against my wish call premium is going high to 120, 130, 140 like that.
1) As it goes high, extra 60k in my wallet keep on getting reduced? Or if this is not the case, for that day it ends in 140 let us suppose. Then will extra margin be taken from my wallet at one shot?
2) If it is so, if 60k is over and I’m unable to provide extra money will the shorted position be bought and squared off?
Please help me. Thanks in advnace.
Yes Vamshi, Call option writing requires margin, if the position goes against you and if you wish to continue to hold the position then you will need sufficient margins, else the position will be closed.
Hello Karthik Sir,
A quick question, today 29-Sep-2016 was the last day for option expiry of September series.
1. I had shorted 2 Lots of NIFTY 8600 Call at 54 in morning, at what price that call be auto settled by exchange?
Here are some details:
NIFTY ends at 8591.25
NIFTY 8600 Call at expiry day end
Bid Price 0.15
Ask Price 0.20
LTP 0.15
2. I bought 5 Lots of RCOM 37.5 Put at the beginning of the September month at 0.05, at what price exchange will auto-settle this put on 29-Sep-2016
Here are some details
RCOM Spot at 29-Sep-2016 day end 42.35
RCOM 37.5 PUT
Bid Price 0.00
Ask Price 0.05
LTP 2.70
In the first case, Nifty 8600 CE expired worthless hence you get to retain the entire premium of 54.
On your Rcom trade, 37.5 PE expired worthless, hence you will lose the entire premium paid for the put option.
Sir i shorted nifty nifty call 8800CE@50 rs on expiry day CMP of nifty is 8650.
On end of day premium increases up 70 but i did not square off my position. What will happend.Is there any loss i.e. 70-50*75(lotsize)
or since it is OTM i will get enitre premium as profit i.e (50*75)=3750
In this case you would be profitable and Rs.20*75 will be credited to your account (assuming you let the position expire).
Karthik,
On exercise isn’t the difference between Spot and strike taken? E.g. for a call option buyer ( say 1 lot Nifty) the difference between spot price (say 8200) minus the strike price say 8100 X 75 should be calculated. The premium comes in the picture only on sq off. Is it not so?
Yes, thats how it works upon expiry. However, if you are trading, then only the difference in premium is taken.
Kartik, do you know why margin for selling banknifty weekly option same as monthly?
No, I’m aware. However, if i were to guess writing weekly options is as risky as writing a month end option, if not for more. So in a way it makes sense for both the margins to be similar…but then as I mentioned, this is just a wild guess. I’ll figure out the right answer for you soon. Thanks.
So basically when I sell a weekly option I will get less premium, but I have to keep higher margin. Were you able to find the reason of my previous query. Any ways Happy Diwali to you and Zerodha team.
Not yet Vishal, will figure out soon.
Wishing you and your family the same 🙂
Sir, what is the WEEKLY option Vishal and You are discussing in this thread? Please give me some light.
Bank Nifty weekly options – https://www.nseindia.com/live_market/dynaContent/live_watch/get_quote/GetQuoteFO.jsp?underlying=BANKNIFTY&instrument=FUTIDX&type=-&strike=-&expiry=28SEP2017
sir,
is selling option and exerciseing option are different?
since, in the begening of this module u mentioned we can only exercise our right only on expiry, but in this chapter u said we can exercise our right any time..
please clearify me..
THANK YOU..
No, they are different. Selling means shorting or writing of options. It can also mean that you are selling an option which you had bought earlier. SO it really depends on the context.
Exercising is when you buy the option and decide to hold it till expiry.
SORRY SIR, BUT MY QUERY WAS SOMETHING ELSE, IN SIMPLE WORLS MY Q IS, AFTER BUYING A CALL OPTION WILL I HAVE TO WAIT TILL EXPIRY TO SELL/EXERCISE MY RIGHT OR I CAN SELL/EXERCISE MY RIGHT ANYTIME AFTER BUYING..?
SINCE IN THE 2ND OR 3RD CHAPTER U MENTIONED AFTER BUYING CALL OPTION I CAN SELL/ EXERCISE MY RIGHT “”ONLY ON EXPIRY”” BUT IN THIS CHAPTER U MENTIONED THAT AFTER BUYING CALL OPTION I CAN SELL/EXERCISE MY RIGHT ANY TIME THEREAFTER IF I GET AN OPPERTUNY?
PARDON ME FOR ASKING AGAIN,
THANK YOU..
After you buy an option, you can choose to sell it anytime you wish. For example, if you bought it at 10:00 AM, you can choose to sell it at 10:05 AM…in this case, you are just trading the premium. However, you can even choose to hold the option till expiry…in this case you holding the option to excercise.
NOW I UNDERSTOOD..
THANK YOU..
Welcome!
After the strike price, you said that the loss for the seller increases exponentially. But I think that statement is not correct as loss increases linearly (after the strike price) with a slope of 1 as for every Rs 1 increase in spot price the loss of the seller increases by Rs 1 per share. Exponential function is of the form a^x and its graph is strictly convex in nature while it is clear form the above graph that it is a straight line and thus linear.
Between my query marks 300th response ?
Wow! 300 queries 🙂
Well, the linearity is true at the expiry. However, you will not experience this linearity before expiry. Yes, I agree with the a^x form and the convex nature of an exponential curve…in fact this is exactly what you will experience as an option seller, in terms of P&L, before expiry.
How much i needs to get invested if i am first sell(writing) call option @Rs.25 for 20 lots(1500) at any strike price? and it is possible to buy it when the price comes down to Rs.10?
Also please explain can i make the above process at any time within the expiration date i.e., within 30 days?
You can use this calculator to identify the exact price – https://zerodha.com/margin-calculator/SPAN/
Yes, you can short the option anytime you wish!
Dear Venu,
Thanks for your details.
And one more doubt is that if i am invested with Rs. 1,20,000/- and if i am writing nifty call option of 10 lots(750) @Rs. 20 on any strike price and if the same strike price goes to Rs. 40 or beyond that then what will be the scenario? In other terms how much of my money will be deducted from invested amount Rs. 1,20,000/-
Also please advise your suggestion for writing nifty call option in Jan 2017 series that at which strike price can i write off and also how many lots for my value ofRs. 1,20,000/-
I am a beginner so please don’t mistake for these type of queries.
Warm Regards,
Vasist
Well, the price has doubled from your entry ans since you are short, you will lose all your money!
Sorry, unfortunately I cannot advice on trades.
Hello Karthik,
Thank you so much Zerodha for providing such a nice/easy study for beginners.
i have once doubt – from your earlier chapters i understood that we can square off the position only on Expiry date , i mean profit/loss we can book on expiry day only , but here you have mentioned that we can square off the position any time after we purchase option call.
Please confirm me again , can we move out from option call to book profit before expiry date ?.
Thank you so much for educating us. _/\_
profit/loss we can book on expiry day only
Yes, you can. There are two things – booking the P&L and exercising the option. Both are essentially the same. If you choose to close your position before expiry its called ‘booking the P&L’. If you choose to hold your position till expiry its called exercising the option. Either cases, you are just closing the position.
Addition to above Query , if i go to NSE site for option call, in quotation they given Underlying value (Spot price ) 294.25 and strike price 290 means how is it possible , strike price should be more that spot price right ?
For this, you will have to understand how the option chain works. This is explained here – http://zerodha.com/varsity/chapter/moneyness-of-an-option-contract/
After reading above all Comments ( Queries ) and there answers , i got my answers , ignore my above questions, thank you so much 🙂
Nevermind 🙂
Hi, Dies a situation arise when you write/ sell an option and nobody buys it.
Yes, this can happen especially in underlyings where the liquidity is low.
Dear Kartik,
But how will this happen for and contract to take place both the buyer and the seller have to participate. It means the contract will not take place. Is that right?
Contracts are available, however, a trade will take place only if there is an agreement on price between both the parties.
Hi Karthik Sir,
I am Rohit a 16 Year Trader from Jaipur.
I have one question to you that “How would we know that at Which Strike Price People/Traders are Selling Options”.
Thanks
Usually the strike which has highest OI, has the highest sellers (and buyers).
i have some doubt on option trading from my point of view i am saying about option trading if it is worng pls correct it
1)option market has two option
a)buy
b)sell
2)again buy and sell option has two option
a)buy call
b)buy put
C)sell call
D)sell put
3) the differences these option are
buy call option one who think market will goes up will choose this option if the market goes in opposite direction means he/she will loose only the money which he/she pay as premium else the profit will be unlimited
buy put option one who think market will goes down will choose this option if the market goes in opposite direction means he/she will loose only the money which he/she pay as premium else the profit will be unlimited
sell call option one who think the market will goes up will choose option if the market goes in opposite direction means he /she will pay the loose amount if he/she get the profit means he/she receive the money which he/she paid as premium
sell buy option one who thinks the market will goes down will choose this option if the market goes in opposite direction he/she will pay the loose amount if he/she get the profit means he/she will receive the money which he /she paid as premium
the main differences between the buy and sell option is
buy – profit unlimited loss limited
sell – profit limited loss unlimited
4)can i close my open position before expiry date
5)can a individual(INDIAN CITIZEN)trade future and option on gift stock exchange
Your understanding of options is right until buying of call and put.
When you sell a call – you expect the price to stay flat or go down. Profit is limited to the extent of premium received, loss is unlimited.
When you sell a put – you expect the price to stay flat or go up. Profit is limited to the extent of premium received, loss is unlimited.
Dear sir,
Can you explain if I have one position in short side in put option but when I do not buy till expiry. So what is happened?
And what is rollover???
All open position in F&O, expire on the expiry day, this means your position will automatically close. By the way, if you have an ITM option you will have to square this off to avoid STT, check this – http://zerodha.com/z-connect/queries/stock-and-fo-queries/stt-options-nse-bse-mcx-sx
Rollover is an act of closing the current month contract and opening the same position next month.
Hi Karthik, I just sold Nifty option both call and put. March 30 expiry. I was not aware that my money will be blocked against the required margin. What is the way to release my funds? Can I buy the above options back? Please advice, I am stuck here. Thanks in advance.
Margins will be blocked as long as you intent to hold the position. It will be released as soon as you square them off. So if you need the funds for something else, then please go ahead and square off the position.
Upon selling the call option if loss arises, will it be booked to my ledger on MTM basis, if I carry forward the trade? i.e. just like in futures trading. Kindly clarify
Nope.
Hello karthik
I have some queries
1) kindly let me know which chapters have the information regarding ATM, ITM & OTM OPTIONS
2) what i have understood from this chapter is …… if I buy/sell options and if i square of my positions before expiry then the difference between the premium comes into picture for P/L.
If i exercise it then difference between the spot & strike price comes into picture for P/L.
Am i right ? Because your answer to mr romeo on 17th march 2016 was contradictory. Please clarify.
3) Is it possible for the option wherein spot & strike price increases and premium decreases?
Thanks in advance
1) Chapter on moneyness of an option – http://zerodha.com/varsity/chapter/moneyness-of-an-option-contract/
2) Yes this is correct. I’ll recheck what I’ve to Mr.Romeo
3) Strike price does not increase. But yes, there could be situations where the spot increase but premium decreases. Check this – http://www.thehindubusinessline.com/portfolio/technically/when-options-strike/article7596687.ece
Hello Karthik i have two questions to clarify if you could kindly answer them
1. Suppose if i buy a call option for a total premium of 1000 rs. and on the day of the expiry i can see i will be making some profit if i exercise my order. Now the strike price is 100 for 100 units. so do i need to pay 10000 rs. again in order to exercise the buying and then again sell it for the profit ? or i can just book the profit directly by exercising the buying of the options? the options markets is cash settled in India.
2. Suppose i bought an call option with an expiry one month after with a premium of 10 rs. .
Now for that particular options the premium went up to 15 rs. . now i want to book profit from the premium which is 5rs. so i sold the options. after selling the options am i liable to settle the option on the expiry date which makes me open to an large loss in case the price of that stock drops? Please remember altough i bought the options i did not have the chance to exercise my buying rights at the first place.
1) No need to pay again, you can close the position and book profits
2) You can book profits anytime you wish. There is no need to wait till expiry to exercise the option.
Thanks Karthik for the reply theres one more doubt iw ould like to ask ab out
I noticed for currency options on USD is available.
Now in case of currency options what will be my underlying price ? the reference price from the RBI ?
The underlying would be the RBI ref rate aka the spot price.
thanks that was helpful
I would like to point out a problem with margin calculator– I tried calculating options margin for usd as that is the only available currency option but the script was not available instead it shows the futures script which generates an error if used. I hope you can fix that.
It seems to be working fine. Did you make sure you clicked on ‘sell’ at the bottom of the page? Remember, margins are applicable when you sell options, not when you buy it.
Yes i did check and it is still the same i can send screenshot if want me to
Let me pass this msg across to my team, they will figure out if there is bug. Thanks.
I am having a query on m2m related to option selling
Suppose at live market around 11 am at spot maket the stock was trading at Rs 91,i open a sell position i.e i Sold a Call Option Contract (Strike 92.50) and premium was quoting at Rs 2.10 and the trade gets executed for that price.
i.e lot Size 7000 * 2.10= 14700 is the approximate premium received
i am aware that margins gets blocked while initiating an option sell position
suppose at 2 pm at the spot market the stock is trading at Rs 91.50 (still otm) the premium is quoting around Rs 2.30 per share,here is my query if m2m is done on my open position i will be at a notional loss of 1400 so at the end of the trading session let’s say premium stays at Rs 2.30, will the 1400 will be debited from the blocked margins.
No, there is no M2M for option sell position. Margins will be increased and you will be required to park more funds.
So what about the notional loss of Rs 1400 for that particular day
Margins are increased and the P&L is adjusted upon squaring off.
Dear Sir,
I want to know about options selling. Here i am putting some question so plz help me by solving these questions.
1. Suppose i short sell Bank Nifty 21000 call at 20 and that time spot price is 20850. If expiry day spot price is 20950 and premium is 0.05. So i am in loss or profit ?
2. Can i buy back my short position at 0.05.
3. What will happen if i forget to square off my short selling position in the expiry day.
4. Suppose i short sell 21000 call and i am in loss and i want to hold my position till the expiry. So is it possible and if yes so how ?
5. I short sell Bank Nifty 20800 call at 30 spot – 20720 and the expiry day Bank nifty close at 20900 and premium became 55. So am i in loss ? if yes so how much loss i have to bear.
I want to answer just five question and i hope you will give proper response.
1) You make a profit
2) Yes, you can
3) Exchange will settle it.
4)Yes, possible
5) Your loss will be 25
Sir I want to know if I short or long on put or call ITM options, then my position do square off automatically on the same day (day is not expiry day)
No, you can hold it as long you want. But its best if you can square off the position before expire to avoid STT. Check this – http://zerodha.com/z-connect/queries/stock-and-fo-queries/stt-options-nse-bse-mcx-sx
Sir, can i sell (short sell ) weekly bank nifty contracts..? And if Yes then How to to calculate margin required for that for intrady ..? Because in margin calculator there is only monthly expiry contracts available of bank nifty
There is no weekly futures in Bank Nifty…whereas weekly options are available.
Sir. This is my first question.
I have short nifty 9350 c.e @ 9 rs (when nifty spot is 9350) and received Rs. 882 . Next day nifty spot is at 9210 and my position showing loss of 750 if at this point I exit what will be my p/l
Technically you are under profit here as you shorted Nifty 9350 CE and the spot has fallen to 9210. I’ve explained how this works in the chapter above.
Hi Kathie sir
Thank u and u r team for providing such a wonderful lesson ,with such a detailed explanation with example.I am cleared with every possible doubt except one.I would like to ask it with u r permission
1.If i short sell Nifty CE option today @Rs. 88 (premium) , since we know that option premium are time decay and it’s value will decrease in expiry week, so can i buy it again tomorrow or day after Tomorrow.?
2.If we short sell,is it compulsory to buy it today or we can wait for square Off on any day
1) Yes, you can. No need to wait till expiry
2) You can square off anytime you wish.
Thank u so much sir ,for such a quick reply and great lesson ?
Cheers!
Suppose i bought 1 lot of xyz stock @ 85 ( in cash ) and sold 1 lot 100 CE .. Now suppose the stock closes @ 102 on expiry date . what will happen to the shares i am having in my demat .. Will they be sold @ 100 to the option buyer ??
You will make a profit on 17 in the stock and a loss of 2 in the option position. Net net you still make 15.
hi!
if i have bought A option call 390ce @ 2.70rs yesterday & today i am selling same at premium of 2.7 rs with stack trading below strike price then i will make loss or be nutral??
You will neither make money or lose any money on the trade. But you will lose money in terms of paying brokerage and other associated charges.
I would like to confirm my understanding; I would like to short Call option May 2017 Nifty at 4 lots (300*9600), it is showing LTP as 10.75 on NSE, so I am entitled for Premium – 300*10.75 – 3225. Can you pls Check NSE & confirm if my understand is corrrect. Also my second question is, at May expiry assuming nifty would be 9550 but 9600 premium would be something less. Hope I would still get Rs. 3225 i.e my orignal premium irrespective of current one.
Yes for both.
Sir, i want to know, can i buy and sell same call options. ex- 9300 call options sell and 9300 call options buy. plz help.
You cannot, the position will be net off.
sir , i will be truly grateful if you could give me the excel sheet with calculations , for both selling put and call options as im not very good with excel sheets
regards
anil bhasein
RA1486
Check chapters 3 through 7 – http://zerodha.com/varsity/module/option-theory/.
Dear Mr Kartik .
Your exell sheet for calculating the bull spread was God sent to me . It has really helped me to hedge my positions . A request is if you could prepare an exel sheet of the similar kind where we sell options both call and put similarly and see what our break even points and p/l could be . I would be grateful
Regards
Anil Bhasein
Ra 1486
Happy to know that Anil 🙂
Are you taking about excel sheets for plain vanilla call/put buy and sell? If yes, we already have them through chpaters 3,4,5, and 6.
thanks mr kartik ,
i like your example of the movie deewar , hahaha ,
joke apart , will i be wrong is assuming that if the nifty is at 9400 now max theory says max pain at 9300 , so if i short 9100 put @ 10 and 9600 call @ 10 i get to keep both the premiums if the nifty does not breach either of the strike prices ?? pl correct me if i am wrong
Dewar is one of my all time favorite 🙂
Yes, you can short both these options and pocket the premiums, provided market stays at 9300.
Hi Karthik,
I have a query.
For example, I write a JUSTDIAL 580 call option(expiry May 25th) at the premium 6/-. My idea is to hold this till expiry and buy it at .05 and exit. Now on last day(Thursday, May 25th), as expected my call option is ending in OTM, so it is dropping to 0.05 and I want to exit at .05 but nobody is ready to sell it. So now I am able to close it before 3:30 but mine ends in OTM(Let us assume JUSTDIAL ends at 560). So what will happen in this case? Will I lose anything or what will be the case with my profit/loss?
Correction — I am unable to close this position as no sellers..
Yup, the exchanges will settle it for you.
No problem here, you can just let it expire, the exchanges will settle it for you.
Sir, What is the difference between call option sell and put option buy? Because both the view is expecting down trend in market.
The difference is in its characteristics. When you buy an option you only pay a premium and carry unlimited profit potential. Whereas when you sell the option you have margins blocked and also carry the risk of unlimited downside.
Hi Karthik, I didn’t understand this senario When Bajaj Auto’s is trading @ 2026 why will anyone sell call option for 2050 strike prize ? He/she should be selling it for less than 2026 ? Since price is either not going to move or going down ? PLease clarify this ?
Because 2050 is an OTM call, and perhaps the person feels the stock price wont call beyond 2050.
I had a long position of lot size 75 in NIFTY9700CE @ rs. 51 as premium. Now I want to sell it and get profit out of difference in premium. The premium is now say 78. If I sell call options am I exposed to unlimited risk or I can just square off without any risk?
You will be exposed to unlimited risk if you initiate a fresh short. In this case, you are squaring off an existing long position, so you are essentially getting out of the trade. Hence you wont have any exposure to the market.
Thanks man!! So I can happily short and collect premium. 🙂
Yup, as long as you know what you are upto 🙂
Hi Karthik, suppose I want to sell a option 50 units with current premium of Rs 20./- then how much fund I need in my account to do this trading with a stop loss of say rs. 30/. As per the basic calculation I should have an amount = 50*(30-20)=rs 500 to initiate that trade. But when I go for this type of trade it shows a huge amount requirement for that trade. Why so am I missing something here?
Firstly, you cannot buy/sell any quantity. While trading derivatives, you need to stick to the lot size as prescribed by the exchanges. When selling option, margins are blocked hence the amount to short options is much higher when compared to buying options.
Dear Karthik, I have just given an example. The qty I am trying to buy or sell is of course a multiple of 1 lot size. But I am not able to understand why the margin blocked is much more greater than the Qty *(Stoploss price buying premium-selling premiun). I hope I clarifiy my point
Margins blocked is a function of volatility and trading frequency, which are all factored in by the SPAN calculator. Remember, when you sell option, the potential risk is unlimited, hence margin blocked is also higher.
hi sir, now nifty @9600 premium of 10000 put is 400. if I supposed to write10000 put what happen upon expiry. if nifty expires @9700.
Can you please quote a specific example? I’m not sure what you are trying to convey. Thanks.
Hi Karthik,
Greetings of the day !! please let me know if my understanding is correct ?
Suppose I have bought 1 lot of nifty 9800 call options for the premium of 30 today, (30*75 = 2250),
a. So going forward do I need to maintain margin for this order.
b. Up to what loss this money will exist in market is it until the loss amount will go to 0 ?
a) No, when you buy options – you just pay the premium. There is no concept of margins.
b) Yes, the maximum loss (when you buy options) is to the extent of the premium you have paid. Nothing beyond that.
Thanks for clearing my doubt on this.
Welcome!
I have encountered a peculiar situation last Thursday. I don’t know if I should ask this in this forum or not. But I need some help here. I have a trading account in ICICIDIRECT also where I trade only on expiry day
Last Thursday I sold banknifty 23700 Put option at approx rs. 8 with a Stoploss trigger to buy at rs 13 and I was monitoring the levels. Suddenly at 2:59 pm I saw that my positions is executed at Rs 14 which I thought little abnormal as I was monitoring the levels and to me it never crossed even Rs 10. Then I thought might be for a moment it may have reached rs 13. Since I have a account with Zerodha also I checked the chart for the 23700 put contract and to my surprise the chart also showing that during that time the price never went beyond rs 10. In fact as per Zerodha chart the price never went beyond rs 10 even before and after 30 mins of the trade execution time. Can anybody suggest me what to do? I talked to icici rep but he said price must have gone beyond Rs 13 otherwise it should not have happened.. Pls help me
Two things here, Subhasis –
1) You order must have been SLM, hence you got stoplossed at 14. I’m assuming you are aware of this
2) Charts dont capture all data – please check this post – https://tradingqna.com/t/why-does-two-charts-of-the-same-timeframe-look-different-on-the-same-platform/4715/3
Is not the SL price can be observed from 1 min candle stick which should show the OHLC?
Sorry, I quite didn’t get that, Ajeet. Can you kindly elaborate?
Thanks Karthik for prompt reply. Probably this would have happened. Can I see the historical chart of this particular option contract in some other sites may be in nse website. If you can give any reference it will be helpful. Also Is it possible that ICICIDIRECT server wrongly triggers the SLP. It is not only the Zerodha chart I referred I was also monitoring the level in ICICIDIRECT itself and to me also the price never seems to exceed even Rs 10 during that time
No two charts, especially intraday are the same. No, ICICI servers could not have wrongly triggered the SL. Brokers cannot do this.
Karthik,
First of all I would like to say thanks for explaining options in such a easy way. Following is my question.
If I short a call in second week of month ( 15 June, 2017) and buy it in third week (23 June,2017 i.e. before expiry) then spot price matters or not?
Example –
LT Date 15 June, 2017
Spot price = 1730
Strike Price = 1720
Premium Price = 39
Date 23 June, 2017
Spot price = 1735
Strike Price = 1720
Premium Price = 25
in above example what will be my P & L.
Thanks
Thanks Praveen 🙂
Spot price matters as the spot price would influence the premium of the option. Premiums is what matters when you trade options.
Karthik,
Thanks for your reply. Would be great if you can let me know P&L in above example in figures.
You’d make a profit of 39-25 = 14. Multiply this with the lot size to know the exact P&L.
Thanks for your reply. So here my price is ITM. I won’t have to pay difference between SPOT and STRIKE price?
No, as you are not holding to expiry.
Thanks Karthik for the reply… Though I am doing the option buying in Zerodha I am not feeling comfortable while writing the option through KITE. I have the following question :
1. Can I see the margin requirement in KITE. If yes then how to i see it and if no then where to look for
2. Does the margin requirement is governed by the Broker or the exchange. I mean at the particular premium at a given time does all broker requires the same margin?
3. Does Zerodha provide any spectial product on Expiry day like ICICI Option plus
.
1) Margin requirements can be see here – https://zerodha.com/margin-calculator/SPAN/
2) SPAN is set by exchanges, so in a sense margins are same throughout
3) No
Sir, We cannot do Writing Options as Intraday ?
I didn’t see an option in F&O Margin Calculator for Intraday Margin …. It shows total Initial Margin as NRML till expiry ..
Of course you can write options on intraday basis.
So, we have to pay the full amount showing in F&O calculator as Initial Margin for Delivery as well as Intraday .. I didn’t see segregation like MIS and NRML there ??
You need the entire amount for delivery. If you intend to do intraday, you can use MIS for additional leverage.
I have one confusion… Karthik as you have said that like option buyer, option seller can also square off any time before expiry…Can you explain this with numbers.
I mean like if buyer has the right to the contract how can a seller sqaure off the contract.
Example: CE bought at 5 Rs with strike price of say Rs 100 and after 30 mins Spot price of the stock went down to 90 Rs with premium of say Rs 3, so here seller is in profit and if he square off, buyer is in loss of 2 Rs (which has the option to claim)
When a seller squares off his position, he is merely transferring his risk to another seller. So yes, at 3, the writer of the option can decide to square off his position and pocket Rs.2 as profit. At this stage, another seller will sell at Rs.3 with a hope it will further drop to 1 or 0.
Thanks for replying….
So Karthik, Seller is just selling his/her lot to some another person who beleives that the price will fall even below the current levels, but is it necessary for the buyer of that contract to buy the shares even if he has the option/right to buy or not???
No, in fact, options and futures are cash settled in India.
what if i buy a sell call option before the expiry date.do i get the full premium??
Yes, but you can retain the entire premium only if you hold the position till expiry and the option expired worthless.
sir,
i have a question,
suppose abc ltd. spot price is 20rs.
strike price- 22 rs
premium- 3
Quantity of share-1
& i sell the call option at premium of rs 3. what will happen if ;
1) spot price rises to 21 and i decided to sqare of my position with increase in premium to rs 3.50, will i have to suffer the loss of rs .50?
2) what if i will wait till expiry, will the calculations be like this;
IV=>21-22 =>1
p&l=> 3-1 =>2 rs
in this case i am having the profit of rs 2.
3) in case of squarringoff, do we only deal with change in premium price?
4) in case of exercising, we deal with change in the price of share in spot market?
2) Yes, you will retain Rs.2
3) Yes
4) Yes
Yes, you will suffer a loss of 0.5 multiplied by lot size.
hi can u pls explain formula of how n on what basis the exchanges create future and option contracts of different category stocks…….thank you
Check this – https://www.nseindia.com/products/content/derivatives/equities/fo.htm
Hi
Here is my query
if I sell stock 60CE at 2.7 premium(25000). after few days before expiry and i buy 60CE at 2.1 premium(18000).
what is my profit difference of premium 7000. right?
You will make the difference in premium i.e 0.6 * lot size.
Today I buy a call option of nifty 10200 @81.But unfortunately it is squared off at 88
My target of 10200 not reached.will I get the premium amount or it is vanished?
You will get Rs.7 as profits.
Hi Karthik,
If I sell a call option, then is it mandatory to square off my position before expiry. Incase I forget to square off then what will happen.?
If your answer is that square off is mandatory then what will happen if liquidity fall to zero and I find no way to square off.
No, you can hold till expiry. However, if you buy a call option, and it turns profitable, then you are better off selling it before expiry for reasons stated here – https://zerodha.com/z-connect/queries/stock-and-fo-queries/stt-options-nse-bse-mcx-sx
Hi Karthik,
You said that all options in India are European in nature but on NSE website, it is written that index options are European in nature and stock options are American in nature, but I see only CE and PE options in zerodha. It means NSE website have old information ?.
Bank Nifty options have weekly expiry, it means it will favour more options seller because now expiry day will come every week and options seller will collect premium every week ?
One more question if Nifty seller square off his position on expiry day, will he collect full premium or just change in premium value…confused here…
Yes, all options are EU in nature now. I’m surprised NSE has not updated this info. Can you please share the link?
True that on bank Nifty.
They will collect full premium if the option expires worthless. Else, the difference in premium.
https://www.nseindia.com/content/press/prs_derivatives.pdf
Section: 6
Thanks
Not updated I’d guess 😉
Hi Karthik,
If call option seller wait till expiry(assuming he is in profit) then selling option is different, otherwise just playing in premium is equivalent of buying put options.
Put Option buying == Call Option Writing (if no one is waiting till expiry, they are just playing in premium) ???
Am I right ?
Yes, you buy a Put and sell a call when you have a similar intention. However, they have two different characteristics in terms of P&L.
Suppose I have written a Call Option for Strike 10200 at premium 7.55. Now Margin Amount will be blocked. Till expiry Nifty fluctuates some day it crosses 10000 mark and premium get increases and call option buyer book the profit and square off their position but I, call option seller wait till expiry and now nifty is around 9800 means, it expire worthless,
1) Will I collect full premium ??
2) In between option writing and till expiry premium increases will I suffer loss on expiry day ?? I maintained huge balance in my account so that position don’t get squared off automatically.
3) Will there be chance of liquidity problem ??? (in my opinion yes, because no option buyer will wait till expiry when he knows he is going to lose full premium…he will try to square off his position so that he won’t lose full premium, save something)
4)If liquidity problem occurs then it means it is common thing because above scenario is very common then how exchange ensure option seller get his due ?
1) Yes
2) No, you will be settled on the price of the option on expiry day
3) No, exchange will ensure your options are settled
4) Liquidity will affect you only if you wish to square off the position before expiry. Nifty, Bank Nifty, and few top stocks have good liquidity. Beyond these names, liquidity is a problem.
Hi Karthik
One more thing, if call option buyer Buy 9900 nifty at 61.65 premium and on expiry day nifty is at 10000 and premium decreases to 20 because of time decay. Is it possible that premium value decreases even if nifty touches 10000 mark ? If Yes then call option buyer will always be in loss on expiry day because if he square off his position because of fear of STT and as he is dealing in premium, so loss and if let his position exercise by exchange then he will be paying STT and that will lower his profit (or make him loss).
Am I correct ?
Not really, if Nifty expires at 10,000, then 9,900 CE will have an IV value of at least 100. It makes sense to square off the ITM before expiry to avoid STT.
Hi
I am not able to see margin requirement for bank nifty expiry for tomorrow 17th August in Zerodha’s margin calculator. It is showing only for month not for week.
The margins are similar, Waqaar.
Hi Karthik,
First of all thanks a ton for your effort to provide us this informative modules .I got the confidence to trade only after reading these modules.
I am bit confused between the selling the option vs exercising the option .I understood that in India one cannot exercise the option before the expiry date but can sell the option .
Now what is the exact difference between the two ? How does the P&L vary wrt buyer and seller when the option is sold ?
You just have to remember this –
Exercising an option = means you hold the option till expiry. The P&L will be the difference between strike and spot
Selling/Buying the option before expiry = trading the premium. P&L will be the difference between the premiums.
आप्शन ट्रेडिंग के अंतर्गत अगर किसी स्टॉक को खरीदना या बेचना है तो ZERODHA KITE के साईट पे कहाँ से सेट करते है STRIKE PRICE… COMPANY NAME कहाँ पे SHOW करता है … मुझे नही मिल रहा है …. PLZ HELP ME AND CLEAR MY DOUBTS….
Sorry, my Hindi reading skills are quite bad.
When you login, on the left side of the dashboard, you can see market watch, there you write scrip name, like NIFTY 9700 CE and you will get a drop down list where you can choose which scrip you want to add. You will get options for different expiry dates (month). If you want to trade, best option would be to choose the month you are in. For example Nifty 9700 CE September (It is something like that only).
Take the mouse over the scrip you want to add and you will see a little + sign. Click on that and the scrip will get added to your market watch.
Now when you take mouse over that scrip (or may be click on it) you will get option to buy or sell it according to your choice. In the order window pop-up, you can also choose what kind of order you want to place, i.e. CO/BO (Upto 20x margin in equity intraday), MIS (upto 13x margin in equity intraday) or NRML (Normal order for holding position for more than one day).
Just mess around a bit and you will be able to find everything.
Also, if you actually place an order and want to cancel it, you can do so from orderbook (link in the top navigation), provided the order has so far not been executed. Else, you can check the “Position”, to square off or exit your trade depending on order type you placed.
Hope it helped.
Thanks for pitching in, Sumit!
Hi Karthik,
This tutorial is very long (sorry for being lazy), and will take quite some time getting it into my head. So, if you can simplify this for me, it will be great.
Today I attempted selling option and placed an order but just cancelled it soon after as I had questions and also, I was just checking if I had sufficient margin.
So I wanted to sell 1 Lot of nifty option at premium 110 and strike price 10000 CE. And in the day it favorably dropped to 72 as well :).
So :
1. According to your tutorial, and span margin calculator, would I have made Rs. 8258.00/- as profit (calculated by span margin calculator); no matter where I squared off my position; a. At 109 or b. 108 or c. 85
2. So I could have made different trades at 110, 109, 85 etc. as soon as I was able to close my current position?
Selling option is very risky and I just want to know how the bridged can be felled so that I can add extra support at those points so that it remains afloat.
Thanks 🙂
P.S. How can I calculate (formula) my profit/loss for above position?
P.P.S. How much loss would have I made, if the price went to 115? Would there be MTM for it or just book loss when I square-off?
1) Your P&L would be the difference between your buy and sell price of the premium multipled by lot size
2) Yes
3) Difference between premiums * lot size
4) You can do the math 🙂
ok, thank you, got it 🙂
So if I trade, it is somewhat just like buying or selling any other instrument. Things change only if I exercise my option. Which is Rs. 8528.00/- at expiry, if I take the option to it and not trade it before that? Right?
Yes, its just that the moving part that you trade here is the option’s premium.
Very well written.. but you should not use IV for Intrinsic value, this builds confusion with general usage of IV for Implied volatility.
I understand 🙂
Hi Karthik,
Hope you are well. Yet another question based on a live incident.
I had sold 1 lot RIL 1500 PE Sep series before stock split and was eating premiums. After split, saw it was made 2 lots of 750 PE each but was shocked to see that avg cost has become 0 (and im in -ve). This means i just cannot make money from this and the best that can happen is that it expires worthless at expiry.
Could you please explain why avg cos became 0? Many thanks in advance. Keep up the great work!
Regards
Pratheesh
It was a bonus issue, Pratheesh and not really a split. Bonus issues are issued at zero. I’d suggest you give a call to our support, they will help you with this.
Hi Karthik
Just want to do hedging on my holdings so thought to try ‘Covered Call’ strategy , i have read all these options module and got a solid idea but has got a confusion on a scenario below , your kind clarification would help me a lot !
For instance i bought RPOWER @ 40 , 12000 qty from spot market today , at the same time i have written RPOWER 28SEP 42.5 Call option at 0.30, for sure i will get the premium paid 0.30 x 12000 = 3600. i planned to carry this until expiry , tomorrow underlying RPOWER slightly gone up same time the 28SEP42.5 options premium also gone up to 0.40, what will happen to my position ?,
1 : End of the day will this difference 0.40 – 0.30 = 0.1 x 12000 = 1200 be debited to my account because my short position was at 0.30?
2 : If this price goes up until 42.5 and premium reached to 0.60 then each day the difference will be debited to my account and all the premium i received will be eaten day by day ?
3 : If thats the case then how an hedging ‘Covered Call’ will protect my holding ?
Regards
Shabeer
1) Your margin requirements will also go up
2) Again, your margin requirements will go high
3) The covered call works because the loss in short Call is offset by gains in the spot.
Thank you Karthik for the prompt reply .
My understanding was being as a call writer i will lose only when the spot price goes above the strike price , and the usage of Covered Call is to cap profit between my spot entry price and call strike price, correct me if i am wrong please.
Here is a points from this module about call writer :
Generalization 2 – The call option writer starts to lose money as and when the spot price moves over and above the strike price. Higher the spot price moves away from the strike price, larger the loss. (Yes this sentence i can see that above strike price all of my profit from spot will offset by options loss, but why i am losing when it is still under strike price ?, if i entered spot at 40 and call option written at 42.5 until expiry if the spot stays below 42.5 the option will be worthless and i make the premium pocket but why until 42.5 also i am losing the money because premium rate ?.
Sorry a bit confusing thats why asking , may be the question you might find childish !!.
You will lose only when the spot goes above strike is true if you hold options to expiry. The profit capping really depends on the call option premium you pay. Its best if you can plot the pay off for the entire strategy on excel.
Yes, you are losing because the premiums fluctuate before expiry.
Thank you for that confirmation ,
I am very new to Options and your modules gave very good learning opportunity !, all in one place to learn by keeping simplicity !, appreciate you guys effort and knowledge , keep it up..
one last query about above discussion, as i said i am very new so have never analysed Options price movements but as soon as i came to know about Covered Call thought use the strategy instead of simply sitting with bleeding portfolio ., when you said Covered Call works if i hold until expiry and the spot price is still under strike price , what happens on the expiry day ?, i can see on NSE every contract has 0 price as ‘Settled Price’ on expiry day , so as per above case i asked lets say my Call Write price was 0.1 and until expiry price gone up and down so each day my account will be debited with the obligation amount based on options previous close price , but on next day after expiry date will i be getting a debit based on ‘Settled Price’ ? which would be normally 0 i guess, or would i not get anything ?, the reason is that i want to make sure the amount i am loosing until expiry will be getting back on expiry day if underlying price is below strike i mean ..
thank you
Shabeer
Thanks for the kind words, Shabeer 🙂
There is no guarantee that the strike will settle at zero. This really depends on the moneyness of the option. Frankly, I think there are few gaps in the way you’ve understood options, and its quite expected at this point. I’d suggest you read through this module completely before going ahead with cover calls 🙂
Hi Karthik,
Yesterday, I wrote 1 lot of Bank Nifty Call Option ’17SEP24000CE’ at Rs .80 (Total: Rs 32 (40 x .80)) around 2 p.m just to know how P/L is calculated and Bank nifty closed at 24008. Today I looked my contract note, it says Rs 32 is credited to my account (right now, I am skipping brokerage and tax money). Why I got full premium money when my option is ITM ? I am thinking, I should get Rs 32- Rs 8 = Rs 24. Can you please explain where I am wrong in calculation.
Thanks
Although the 24000 option has an intrinsic value of Rs.8, as the spot expired at 24008, the call option buyer will not be willing to exercise it as he has to pay a hefty STT on it. Hence he would have opted not to exercise the option (the brokers do it automatically). Hence you have got the full premium.
Thanks, I was just thinking how it can be happened never thought about STT angle.
Check this, Waqaar – https://tradingqna.com/t/no-more-stt-trap-on-exercised-in-the-money-options/18977
Hi Karthik sir,
I have a small query regarding shorting ITM Options
query,
Suppose Spot Market of Nifty is Quoting at 9788.
Now say if sell Deep ITM CALL Option of strike 8700 by paying margin and collected premium of Rs 1090 per unit i.e (75*1090) 81750.
At Expiry suppose the Nifty Spot quotes at 9300 and the end of the trading session.
Now here I want to know that in this Scenario what will be my P&L i.e my position would be in a Profit or loss, because I believe that at the expiry premium is left with Intrinsic value i.e 9300-8700=600 with no Time value.
Firstly, you should not risk by shorting an ITM option. The probability of an ITM option remaining ITM is quite high by expiry….and therefore the chance of losing money.
In this case, you will lose 600 points multiplied by lot size.
But as per chapter what i learnt is:
P&L= Premium- IV for shorting call option
=1090- (9300-8700)
=490 profit.
Plz correct me whether i m right or wrong??
When you write option, the maximum profit is restricted to the extent of the profit received, while the loss can be quite steep.
That’s fine but in the above example my profit calculation is right or wrong?
Sorry, in the previous comment, I meant ‘to the extent of the premium received’.
Anyway – P&L when you sell an option is –
Max Profit = Premium received
Loss = [Intrensic Value – Premium received]
My main query in my above comment is with regards to P&L i.e
1) what will be the P&L if i let the contract to get exercised
2) what will be the P&L if i square off my position at expiry around 2.00 pm considering that nifty at that point is also quoting at 9300
1) Number of points * lot size
2) The same calculation above holds true at 2:00 PM as well.
Hi Karthik
2) Don’t you think P/L will be on premium rather than on IV ? Because at that time premium will be very low, he may lose more than the exercised option because in my case(above query), I made a profit of Rs 32 after I let my option exercised but if I exit my position around 3.15, I was losing around – Rs 248. But when my shorting call option exercised on expiry day, so I made a full profit according to IV.
By the number of points, I meant the difference in the premiums.
Thank you sir for your response,
Actually I was aware that if I open this type
Position there is high probability I will end up with loss,
But confusion was here, as you said
No of points*Lot size
I.e incurring a loss of 600 points * lot size 75 Which comes to 45000.
But when I opened sell position I collected premium of 81750
Yes, of which you will end up losing some of the premia. Please do avoid writing ITM options.
paid , not able to register aadhar card and getting server error when go ahead after bank info form. quite frustrated , doing it again and again just because I paid 500 🙁
Can you please write to [email protected]? Meanwhile, I’ll also forward your query to the concerned team.
hi, Karthik Rangappa,
I am on the 4th chapter selling of call option had a question in the ending of chapter u have explained that American call option can be exercised before or at maturity and European call option can only be exercised at maturity and in India, we have European call option right.so my question is can I sell an option just one hour after the buying the option? if yes then what does it mean I am transferring the contract to someone else .as I can only exercise the option at maturity as explained in your chapter.
Yes, in India options are European in nature. Yes, you can sell the option anytime you wish…by doing so you are just transferring the risk to someone else and by virtue of which you are exciting the market.
I forgot to thank u as. I am gaining so much knowledge for free I never thought option learning could be this simple but exhausting at time but getting there .genuinely the way u wrote the material and with every chapter revising previous concepts and explaining the theory with real-world trading examples the learning becomes much more solid .once again thanks
Thanks for the kind words, Sahil!
Happy learning! Stay profitable 🙂
Dear sir ,
I want to know about options selling. I have a question sir please help me by solving my question.
Suppose if I want to sell 1 lot of nifty call option at Strike price of : 8500
Current Ltp is 1550 (premium) and I recive the premium of 1,139,78 which is credited into my account
The current livemarket price of nifty is 10059
By next day morning at 11am if I square off the position at LTP 1555
What is the profit/loss for me in this trade
I hope you understandmy question
Please help me by solving my question sir
Thank you.
Your P&L will be the difference between the buy price and sell price of the premium. Here you bought it at 1555 and sold it at 1550, so a difference of 5, multiply this with lot size of 75 i.e 375.
The only different thing about this trade is that you’ve sold first and bought back later.
I would like to sell an option automatically when the underlying reaches my target value, is it possible?
Yes, but automation of any sort requires exchange approvals.
You can use a Black-Scholes calculator to know what the premium for the contract will be, when it reaches the target underlying price.
For example, say you buy a Nifty 10200 CE(4 days to expiry) at ₹3 when spot is at 10000 and you want to sell it when Nifty reaches 10100. You can calculate the premium having Spot selected as 10100. You can calculate the premium based on days to expiry and accordingly place a target everyday
Thanks for the reply Karthik & Faisal. I think Zerodha as a platform can support this. and i don’t want to monitor the price. Does this facility is offered by any other platform?
Hi
Kindly please let me know that if i have shares of infosys 950/ share price in my demate account and if i am not applying for buyback offer will i be in loss after price adjustement after the ex date or record date
No, you wont be under any sort of loss by virtue of buyback. Your only risk is the price of Infy going down, which is the regular market risk anyway.
As you stated in your example above “if I have bought Bajaj Auto 2050 call option at Rs.6.35 in the morning and by noon the same is trading at Rs.9/- I can choose to sell and book profits”.. Will the increase in premium also be considered as gain irrespective of changes in Spot prices?
sorry one more question, as you said we follow European option where i will have to wait until the expiry date therefore when premium moves to 9, how will i exercise?
You can book a profit any time you want, but for exercising, you will have to wait till expiry.
Yes, that is considered as a gain.
in this case how much gain i get.. 9-6.35 per lot and if stock moved to say 3000. i have not experimented FNO practically so My confusion is change in premium + change in spot will be my total loss/gain.
Ah, no…I’d suggest you read the entire module one 🙂
Sir I had question, If I sold (write) Nifty Call option before 2 days expiry, say 10500CE with premium 2.50, so If on expiry day nifty doesn’t go beyond 10500 and premium goes to 0.10p, so can I book profit my trade before market close taking profit (2.50-0.10=2.40), please correct me if I am wrong.
Yes, you can. However, if Nifty goes beyond 10,500, then you will make a loss on the 10500CE.
At this juncture i have a doubt wrt to trading premium in option:
When i buy , i pay the premium and when i sell i receive the premium,
so a call option buyer will profit when premium increases(if he is trading the premium)
and call option seller will profit when premium decreases(if he is trading the premium)
am i right karthik??
Absolutely! Happy learning 🙂
hi. i bought nifty option at 43.45/- it closed at 47.03. i carried forward my position. today my acquisition price appears as 47.03 instead of 43.45. How?
I’d suggest you write to Support for this, Amit.
Hi Karthik,
How can we buy BankNifty Weekly Expiry options, as in Kite Latest 16NOV10600CE is not showing..
Correction : BANKNIFTY 16NOV26000CE is not showing up
Ah, its showing up, Ajay. I just looked it up.
You are looking at Nifty, Bank Nifty is in the range of 24K.
Hi Karthik,
Very nice article.
I trade mostly in index options. I have 2 doubts if you can please help me :
1) Sometimes i have seen the difference between the bid and ask price is huge, and at times it is close (Nifty and bankNifty). What factors does it exactly depend on? Does it depend on any timings (like during expiry dates or mid-day sessions the difference is more?) The problem is, even if we buy it at the best rate, selling is an issue due to this difference.
2) If we buy/sell multiple options (after square off) – Lets say, i buy a Nifty10400 CE at 103, and square off at 107, and then buy again at 105. Does the next buy at 105 is considered an average of previous buy – (103+105)/2 = 104 becomes my buy price? Or is considered afresh since i square the previous one off.
Please suggest.
Thanks much.
1) Nifty and Bank Nifty are highly liquid assets to trade, timing really does not matter. Some of the stocks are illiquid, maybe time matters – like for the first few minutes at the opening.
2) Yes, it gets averaged out.
Thank you so much for the reply Karthik, it was really helpful.
One very last question, if you can please help me.
So, lets say the option prices for Calls and Puts are very close to each other. And i wish to profit from the falling (bearish) market.
If i am dealing in pure intraday, whether i buy a put option or sell a call option, it doesn’t make any difference right? (Considering both the calls and puts i choose are at the money or in the money)?
Yes, since its intrday it does not. You can even choose to sell using MIS.
Hi Karthik,
Thank you so much for the article and for patiently clearing our doubts.
When I sell a call option, Upon expiry the maximum profit i can gain = Premium * lot size(I understand the loss can be exponential)
But that may not be the case if i decide to square off before expiry . Am I right?
Yes, if you decide to sq off before expiry, you will not get the entire premium.
Hi Karthik,
How to calculate average of option buy and sell? and How could we evaluate Buy and sell points and averaged points?
for example i bought at (1)[email protected] and sold at @23.2 120 qty,(2) buy @34.8 and sold @33.3 80qty (3) buy @41.15 and sell @42.6 40qty
what would be the average of this calls? and P&L.
Ok, here is what I’m assuming –
1) You bought 120 Qty @ 36.15 , [email protected], and [email protected]. So total qty is 240 and the total value of the buy is 8782. Hence, your buy average is 8782/240 = 36.59.
2) You sold 120 Qty @ 23.2 , [email protected], and [email protected]. So total qty is 240 and the total value of the buy is 7152. Hence, your sell average is 7152/240 = 29.8.
Hi
When an option writer is writing option , number of lots also specified? For eg: reliance 28 nov 17 call option. Strike price 1000, lot 1000 shares and number of lots in that particular strike price ____?
Doubt is for an option seller only the first premium he gets? As option is traded, the difference in premium is exchanged bw buyer and seller only.
Yes, the number of lots has to be specified. Yes, option sellers receive only the premium, no exchange of premium on a daily basis.
Hello,
I have a small doubt. Excuse me if this is naive.
Can we sell an OTM on the expiry day, say 2-3 hours before the market closure, and collect the premium? How feasible is that? Will it have any movement?
Yes, you can short OTM options on expiry day but highly unlikely to find buyers. You will see plenty of sellers on expiry without any buyers. In this screenshot, you can see the same(today being expiry of December 2017 contracts)
if i sell the call option of RNAVAL at strike price of 70 for a premium of Rs.0.20 per share for 9000 quantity. it means i need to pay Rs.1800 only while placing the order, but it is asking the margin of Rs80,000 to sell order. If i pay and complete the oder how much amount it wll deduct and if i buy back the call option with strike price of 70 for a premium of Rs.2.00 per share for 9000 quantity as a normal stock it will come (9000*2=18000). And i taken only for Rs1800. so i will get the profit of Rs.16200. Is it possible to short sell & shot buy of CALL OPTION, please suggest.
YEs, you can short a call and you can short the put. When you short or write an option, margins are blocked.
in the chapter “4.6 – European versus American Options” definition of both European and American option is given
European Options – If the option type is European then it means that the option
buyer will have to mandatory wait till the expiry date to exercise his right. The
settlement is based on the value of spot market on expiry day.
American Options – In an American Option, the option buyer can exercise his right
to buy the option whenever he deems appropriate during the tenure of the options
expiry. The settlement is dependent of the spot market at that given moment
and not really depended on expiry.
and at the end it is written that ” Key takeaways from this chapter:8. In India all options are European in nature
Practically we are setting off premiums and we can do it during the months also, than how in India all options are European Options?
You can buy and sell options anytime before the expiry, but exercising the option happens only at the end of the month.
Hi karthik,
If i wrote 10450 CE of expiry 28DEC2017 at Rs 80 on 22nd Dec and the Spot value is at 10490. My account is credited by Rs 80×75=6000Rs.
Nifty closed at 10480 on 28Dec ie.
on expiry day and Closing price of 10450 CE is Rs 35.
My question is can i make a profit or loss if my position is exercised.?
What is the breakeven point?
Please let me know through calculations.
In this case you will lose 35 and make a profit of Rs.45. You are covered upto 10450+80 = 10530, beyond which you will start making a loss.
My qn is :
if the option is exercised
Profit= 80- (10480-10450)
=Rs 50/share
Is the calculation correct?
True.
Assuming Short Call for 11000 when Spot was at 10700, LTP @ Rs 3. Now, spot is at 10850, LTP @ Rs 10. So, current loss is Rs 7.
If spot expires at 10950 with LTP at Rs 20, does this imply, a loss of Rs 17 – or is it a profit of Rs 3 since spot did not get to the short call strike of 11000?
After reading again, I believe the answer is a profit of Rs 3, and not loss of Rs 17 because at expiry, the spot price is considered and not LTP. So, the breakeven point would be 11003. Any expiry above 11003 would result in a loss. Am I right in understanding this?
What if 2 lots are bought (lot size 75). So, premium received is 3*150 = Rs 450. Does this imply, that the breakeven point is 11450?
Yes, that is absolutely correct. No breakeven will still be 11003.
11000 CE would expire worthless, hence you get to retain the entire premium of Rs.3.
I have a question, consider this – ‘A’ writes a call option for a strike price of 100 and sells it to ‘B’ at a premium of Rs. 2, consider the lot size to be 100. B keeps the contract till the expiry. The price of the stock is Rs. 200 at the time of expiry, and B exercises his right, and hence A has to pay him.
Now, let’s say B doesn’t hold the contract and sells it the next day to ‘C’. C holds the contract till expiry and the price of the stock is Rs. 200. Now, here’s my question, who pays to C, A (option writer) or B (option trader)?
Please explain. Thank You!
Think from this perspective – its always the buyer paying the premium and the seller receiving the premium.
So, unless the person I sold the contract to sells it further, I have an unlimited risk. Is that right?
If you are a seller of an option, then yes, you carry a significant amount of risk.
hello sir,
first of all really hats of to your continuing efforts for zerodha varsity…
i have a doubt which is not covered in this topic. why there is increase in stock price (cash market) at the time of short covering in futures and options?
also let me know the chapter/module if you have already covered the same topic. thanks..
This is is short term effect, have discussed this extensively across the TA module. Request you to kindly check this. Thanks.
sir, i went to TA mudule. but am unable to find my answer. i want to know why there is increase in spot price at the time of short covering.? futures are derived from spot price so futures price move according to spot price. so i m wondering how do spot changes according to futures at the time of short covering?
please explain.
When you cover the short, you essentially buy the futures back. Buying the futures obviously increase the futures price and for a short time this can cast an influence on the spot, hence the price tends to increase.
ohkk..it means this temporary effect is due the pricing formula ..m i right?
Yes.
thanks alot sir..
Cheers!
Dear Sir / Madam,
I have doubt regarding writing stock options on the day of expiry.
For example,
BHEL stock spot price = 93.5
Strike price = 95
Lot size = 7500
Premium in BHELFEB95CE = 1.5
So, I write stock option BHELFEB95CE at 1.5/- , I received premium of (1.5 x 7500= 11250/-). But, on the day of expiry BHEL spot maket closed at 95.5.
And, BHELFEB95CE at 0.7/-. As, options are cash settled in India.
Then, what will be my profit / loss? Explain in brief, thanks.
Regards,
PRAKUL JOSHI
ZR3054
Prakul, request you not to share your client IDs in public forum.
In this case, the option will be ITM, and you will lose 0.5 from the premium of 1.5 received.
Thanks.
But, in above case at 3:30pm on expiry my order will be automatically close or what?
And, after deduction of 0.5 premium, Will remaining 1/- premium directly credited to my account?
Thanks,
PRAKUL
Yes, this is after accounting for all the applicable charges.
If I didn’t put my stock option square off order, so will this automatically square off by zerodha on expiry 3:30pm?
Suppose I short Nifty at 7500 PE and get a premium of Rs 100. At expiry, if the spot is at 7300 and LTP for 7500 Put is Rs 300, what is the formula for calculating my loss?
a) Strike – Premium Recvd – Spot@Expiry => 7500 – 100 – 7300 = Rs 100
or
b) Premium Recvd – LTP@ Strike => 100 – 300 = Rs 200
Max[Strike-Spot, 0] is the formula for PUT option intrinsic value.
Karthik Sir, Thanks for giving knowledge & great module,chapters.
My doubt is –
If I write BHELFEB95CE @ Rs.1/- having lot 7500; i.e. (7500 x 1 = 7500/- premium received)
On expiry BHEL @ 93, And BHELFEB95CE @ Rs.0.05/-.
(1)But, if I won’t get to square off my position….who will take this resposibility / settlemet to buy?
(2)Finally, Will I buyback @0.05 or @0??? 🙂
1) In this case you will be in profit, the exchange will settle this
2) The price will be 0.
How exercise of option can be done? Is there any option in Kite / Pi?
Thanks Karthikji!!!!
If you leave an ITM option in the system without squaring off, then its considered that you are willing to exercise the option.
I have two questions :
1) Say i am bearish on an underlying.How to decide whether to buy a put or sell a call?
2) when to sell a OTM call?
1) If the premium has shot up significantly, then you are better off selling an option. If the premiums are inexpensive, you are better off buying an option.
2) When you expect the volatility to reduce or when you expect the time decay to accelerate.
Karthik, Deewar is my favourite movie……! 🙂
My question is: Suppose, I write DISHTV18FEB90CE at 1.5 having lot 7000; So, premium received ( 1.5*7000 = 10500 ) & spot price is 87.
(1) @expiry day, if dish tv stock closed at 89.95…..then what will be my profit & loss?
(2) @expiry day, if dish tv close at 91 & didn’t square off my position at 3;30 on expiry…..then what will be my profit & loss?
Thanks Sir :-O
1) You will get to retain the entire premium of 1.5, as the option has expired worthless
2) You will lose 1 and end up paying STT. Have shared the link to STT calculations earlier in the post.
Deewar is cult, will always remain special 🙂
Karthik thanks for prompt response!
In above case of Dish TV, can u explain profit calculation for case (2)
This is based on the intrinsic value of the Call option.
Intrensic value = Max [ Spot – Strike, 0]
Since its 0 for Dish TV, the seller gets the retain the option.
we try to make profit in stock market as far as possible. After reading Call option selling chapter I prefer only Call option & Put option Buying where the loss is minimum and the profit is Maximum. Hope I am correct?
Every instrument has its own risk-reward characteristics, Amar. Nothing is really 100% safe in markets!
Karthik, you are a best teacher & knowledgeable person…..salute to you for writing the article.
My doubt = Wrote INFY at 5 lot 600….If option expired worthless & didn’t square off my position at exchange, then what will be the premium received 5 or 4.95??? Kite showing 0.05? Plz clarify.
And, Happy Valentine Days!!!
Thanks
Thanks for the kind words, Sakshi and happy Valentine’s day to you too 🙂
You will receive the entire premium of 5.
1] Why option expires worthless?
2] What is open interest?
3] What is span ?
4] What is exposure ?
1) Its worthless if it has no intrinsic value
2) OI – https://zerodha.com/varsity/chapter/open-interest/
3) & 4) https://zerodha.com/varsity/chapter/margin-m2m/
How to select strike price?
I’ve explained that across this entire module, request you to read that 🙂
As per stt trap…..while writing options, the side of buying options can’t deduct stt charge…..as buying side doesn’t exist any charge….. because stt deducted at the side of write…..Is it correct?
Yes, thats true.
Suppose, I write At premium 0.05 and remained open till 3:30 on expiry….what will be my P/L?
Technically you will get 0.05, provided the option expires worthless.
Dear SIr, after 3:30pm on expiry, how much time required for exercising & obligation from exchange settlement?
It happens by late evening.
In case of stock options, why some stock options ban for how much period?
Plz explain….
Thanks in advance 🙂
This happens when the open positions in the stock hit the limit. The ban is in order till the limits reduce, which means you can only reduce the positions and not really increase.
Hi Karthik,
I have clarifications in options selling and buying.
In options selling, for jsw steel, and this is for delivery and not intraday.
Today values
lot size= 3000
spot price=302
strike price= 305
premium =11,550 or 3? because in margin calculator, i see that premium receivable is 11,550. 3 is the LTP at that time for strike price 305.
Next day values
spot price=296
strike price= 305
premium =1.5(1.5 is the ltp)
What will be the profit here if i close the position? Also instead of intraday, if i do delivery, will the amount be debited or credited from my account during market closing time everyday depending on profit and loss? because in futures,it will happen everyday.
Also, if i do selling and buying between 1st of every month and before expiry day, STT will be 0.05% only or 0.125%?
Because i found that one trader lost 24lakh because of STT.
Premium is quoted on a per share basis, since lot size is 3000, the total premium payable is 3000* 3 = 9000. The P&L is always the difference between your buy price and sell price of premium. STT is on the sell side.
Hi Karthik,
Thanks for the reply. I really appreciate your patience in answering our questions.
But my question is STT will be 0.125% only after contract is expired and if the spot price is in the money. is it correct?
If I do options selling and buying on any other day apart from contract expiry and even if the spot price is in the money, then STT will be 0.05% only and not 0.125%. is it correct?
Also in my scenario which I given, lets assume that there is lot of consolidation and spot price came to 306. Premium will be 1. Now i am getting profit only right because in options if there is a consolidation and if spot price exceeds strike price 305 too, premium will become less. Like for ex, initial premium was 3. Later it came to 5 and again came to 3 and went to 1. Now i will be getting profit only right as the difference between buy and sell is 2*3000= 6,000/-
Yes, the STT is applicable only for contracts which are ITM. Yes, if you square off the option before expiry, the STT charge is lesser. This works pretty much like a regular stock – your profit is the difference between the buy and sell price of the premium.
Thanks Karthik.
Yes, I got a perfect reply for the STT.
In this chapter, at the beginning, you have given a formula where it says
P&L = Premium – Max [0, (Spot Price – Strike Price)]
Will this be applicable only if the spot price exceeds strike price?
i.e Now if the spot price is 300, and strike price is 305CE, and premium is 3 and lot size is 2000. I sold it at premium of 3. If the spot price goes to 309 and premium goes to 7, then as per the formula, i will be losing -1. Does this mean i am losing 1*2000 and also 7-3=4, 4*2000, a total of 10,000 in this case?
Kiran, the formula – P&L = Premium – Max [0, (Spot Price – Strike Price)] is applicable for a Call option, only upon expiry. If you are trading the premium, then what really matters is the difference in the buy and sell price of the premium.
There are buy & sell position always remains open on expiry at 15:30.
Who will responsible for closing automatically?
Broker?
If its an intraday order, then the broker will close it in case you dont.
Karthik, I know i am asking many times the questions. please don’t feel bad as i am starting options selling and do not want to go for loss. As you said, “the formula – P&L = Premium – Max [0, (Spot Price – Strike Price)] is applicable for a Call option, only upon expiry. If you are trading the premium, then what really matters is the difference in the buy and sell price of the premium.”
So it means if i do options selling and buying on any other day apart from expiry day, profit and loss will be only difference between buy and sell and formula – P&L = Premium – Max [0, (Spot Price – Strike Price)] will not be considered even if the spot price exceeds strike price too. correct?
Kiran, this forum is meant to learn from each other, so no question of one feeling bad about asking too many questions. Ask them till you are clear with all concepts, I’ll be happy to respond.
The formula ; P&L (for Call option) = Premium – Max [0, (Spot Price – Strike Price)] or P&L (for PUT option) = Premium – Max [0, (Strike Price – Spot Price)] is applicable only if you buy and hold an option till expiry. For all other cases, what matters is the difference between the premium.
The formula quoted is for selling option and not for buy”.
Karthik nice modules thanks!
My 2 questions:
1) Was there any unsettalement issue happened in past when options gets converted into European ?
2) Is there any possibility in future, to convert options from European to American options?
1) No not really. Also, I don’t know what NSE switched to EU options
2) No dont think so. Also, I think EU options are much better to trade than American option.
Beautiful explained Sir
Thanks and happy learning.
Dear Sir,
Which is more important for premium in 100% scale.
Intrinsic value or time value?
Both matter, cant really assign a value.
I am earning continue & confirm profit from Buying call options…… ?% accurate results in buy call options!
Thanks buy buy buy
Good luck and happy learning 🙂
SIr,
im new to option trading
my question is if i SELL NIFTY 10600CE@ 50
and on expiry day suppose its price is 10600CE@ 0.5
FOR 1 LOT
then how to calculate PROFIT OR LOSS ?
In this case, the call option has no intrinsic value and the option will expire worthlessly, hence you will retain the entire premium of Rs.50/-.
sir ji one more que
IF
PNB SELL [email protected]
THEN BUY [email protected]
LOT SIZE 4000
PROFIT=(2.2-0.5)*4000
AM I RIGHT??
Yes, that is right.
Sir , thank U
Welcome!
Hi Karthik,
Can we buy and sell options starting from 9:15am or do I need to wait upto 9:30am.
Starting from 9:15 AM.
May I know the approximate publishing date of this chapter?
“Writing/Shorting of call options”?
Thanks 🙂
Ah, that was about 2 years ago 🙂
Why do you ask?
Such a awesome chapter I’m reading 2 year later…bad luck!
???
Its never too late, markets are full of opportunities. Its just that you need to be ready for it 🙂
Hi karthik,
please help me in getting the options greek calculator as i am not getting either excel calculator or relevant software to calculate it. please help me in locating it.
Check this – https://zerodha.com/tools/black-scholes/
Karthik,
In this link, i need to mention volatility, dividend and interest. Where exactly i get this? because i see volatility as 2,2,5 in nseindia. not sure where exactly i get this values.
Have you checked this, Kiran? https://zerodha.com/z-connect/queries/stock-and-fo-queries/option-greeks/how-to-use-the-option-calculator
Suppose, current month is March.
So, can I write stock option of April in this month?
If there is unliquidity what will happen?
Yes you can.
Selling a call option requires you to deposit a margin. But, margin is credited to broker’s account or exchange?
Plz clarify teacher…
Exchange.
Hello Sir,
My query is related to squaring-off the call writing and not exercising the option on expiry day.
1) If the premium increases, the call option writer will be suffering a loss right??
2) Suppose as a call option writer, I collected Rs.5 as premium, if the premium decreases to Rs.3, my profit wil be 2*lot size. As I have already collected the premium, the exchange will debit the amount (3*lot size) from my margin??
3) Its bit confusing, when can I retain the whole premium collected?? Suppose i collected premium 10rs, when the premium increases, I will b in loss and when it decreases, I will be in profit?? But when to square off my position to retain the full premium i have collected?? How does it work??
Thank you so much sir for all your efforts.
Aishwarya
1) Yes
2) Yes, 2 will be your profit. When you write the option, you will get a margin benefit
3) When you write (or sell) options, the maximum profit is to the extent of the premium received. However, you will retain this entire value only upon expiry, provided the option goes to 0. For example, if you have written at 10, but on expiry, the value is 6, then you will only make 4 as profit.
Dear sir
1) Is M2M not applicable to the SELLER of the option(due to unlimited risk till the date if expiry / time of square off whichever is earlier) ? IF the answer is YES kindly explain with an example OR quote the chapter of the module of zerodha varsity.
2) What is the % of margin to be deposited by the seller of the option ? Is it exactly like the futures?
Thank you
V.VEDANAYAGAM
1) No concept of Mark 2 Market in options. The margins are updated on a daily basis (actually also on an intraday basis), if you are making a loss (as a seller of the option), then your margin requirements will be higher
2) Similar to futures. You can check for the exact rates here – https://zerodha.com/margin-calculator/SPAN/
Suppose, It’s must to deposit a margin for writing options, but what is the safety of that huge margin?
Is broker take responsibility to payback margin to client’s account after squaring off position?
Your margins are blocked and its the broker’s responsibility to release the margin as and when the trade is squared off.
at 1.10 NIFTY is at 10197 and if I buy nifty 10200CE for 129rs later at 2.00 NIFTY jumps to 10230 and If I sell the Call option will be in profit.
Yes, you will make a profit here.
1- If I buy Dishtv @2/- & sell @2.10/-.
What will be profit?
2- If I sell Dishtv @2/- & buyback @1.90/-
What will be profit?
3- What happened if stock splits? Or any corporate actions on options?
4- American options means there will be Daily expiry @3:30pm….?
5- What happened on expiry if I’m writer & didn’t square off my position?
6- How can I find out open interest of particular stock options?
Thanks ☺
1) 10 paisa per lot minus the applicable charges
2) Same as above
3) The effect will get adjusted on the lot size, the details will be on the NSE circular
4) All options in India is EU, but yes, in American you can settle anytime you wish
5) The exchange will settle this for you
6) Check this on Pi
Hi, I am a option seller but nowadays it is very hard to trade in zerodha becouse most of the OTM options strike are blocked to trade…other brokerage house allows to write any strike….why so??
Plz clarify!!
All ITM/ATM/OTM options are free to trade except for weekly Banknifty options.
For Banknifty options, Zerodha as a broker keeps hitting the 15% Exchange OI limit. To maintain OI within the limits, we have blocked trading in deep OTM options.
Sir,
Are squaring off and writing an options are same? If not, does a squaring off also carries unlimited risk? Please clarify.
Thanking you,
Dr. Nagaraj
Squaring off is a term used when you intend to close an existing position. However, writing option is when you sell the option to benefit from falling premiums. To square off an written option, you need to buy back the option. Yes, writing option carries unlimited risk.
Thank you very much for your guidance. I just want to confirm: when once the call or put option option is squared off (closed) , there will be no more risks connected with those contracts. Am I right sir?
With great regards.
Nagaraj
Yes, when you square off the position, you are completely out of the markets. So you don’t carry any risk.
Sir,
As i am entirely depending on Zerodha module and the Varsity blog, and as I am self learning trading in options, I am asking these questions before venturing into investing in options.
One more doubt: what is the rationale behind buying back the written option after squaring off that option?
Regards,
When you buy back the written option, you are essentially squaring off the position. Remember, squaring off means you close an open position. YOu do not create a fresh position when you square off.
Thank you very much. I am obliged.
Regards,
Nagaraj
Good luck!
What is span & exposure in margin used?
Margin = SPAN + Exposure.
Karthikji,
On expiry if I write 1 lot (7000) of ASHOKLEY18MAR30CE @ 0.05.
And, market expire @ 28.
I didn’t close my position because there is no seller below 0.05.
In this case, if exchange will close my position…..then what will be my profit in Rs ?
Thanks Sir
Exchange will settle the position and your broker will ensure you get the credit to the extent of your profits.
Sir,. I’m asking about profit.
I know exchange & broker will do their job well!
What is profit?
You will get a credit of Rs.350 (7000 * 0.05) to your trading account.
Hi Karthik,
I buy an option and can square it off at any time before expiry.
How does selling option work, if i sell an option do i have to wait till expiry to make profit or do i have any option to square it off too before expiry?
Option Selling also works similar to options buying. You can square off anytime you wish.
thanks Karthik
Welcome!
How much should i have in my account while selling the option?
Like if i buy an option, i have to pay = premium X lot size.
When you sell options, you will have to park the required margins. You can use this to find out how much margin is required – https://zerodha.com/margin-calculator/SPAN/
thanks a lot Karthik.
How do we pick option stocks?
Which stock will go up and which will go down?
what is going to be the target price and stop loss for a particular stock?
Ankit, these are very generic questions, your guess is as good as mine 🙂
Hi Karthik,
Another scenario
Date Of Expiry 28/03/2018
Date On 25/03/2018
I Buy a call Option at 10:10 AM
lot size= 3000
spot price=180
strike price= 220
premium =0.50 RS
At 1:30 PM
spot price=190
strike price= 220
premium =0.65 RS
I squared off my position.In spite of trade moving against my direction.
I made a profit of 300 Rs Or Strike Price is Matter To Exit my Trade before Expire Date
Am I correct or missing something?
The trade is moving in your direction right (assuming you are long). YOu make a profit of 0.15*3000 = 450.
can option seller square off his postion whenever he wants?if yes then how?
Yes, he can just like the way the option buyer can. All you have to do is buy back the same strike, same quantity – essentially you square off the position.
Is there any strategy which is combination of a future contract & a options contract?
Is there any such chapter written by you?
🙂
There are few strategies like boxes and synthetics. For example, you can go long on futures, buy ATM put, and sell ATM call. This becomes a delta-neutral strategy, check this – https://zerodha.com/varsity/chapter/synthetic-long-arbitrage/
Thank You So Much ?
Cheers and happy learning 🙂
I wrote HCC18MAR30CE @0.10
Hcc market Spot is 24. Lot is 15000.
1] As seller available at 0.05 so that I will get profit = 0.10-0.05 = 0.05 correct?
2] If I didn’t square off my position, then how much premium will I get? Is it 0.10?
3] which option is more profitable?
Thanks for your teaching efforts……I love your angle of giving education to people! I wanna touch your feet ?
1) IF HCC closes below 30, you will get the entire premium of 0.1
2) 0.1
3) How can I answer that? 🙂
Happy learning 🙂
Dear Sir,
Today 28/3/2018 expiry day. As, I write option & option became worthless.
But,
(1)problem is that I didn’t buyback or square-off my position.
(2)What will happen? Now at late night still any settlement not happened from NSE?
(3) When will my all fund released from unsettled position?
🙁
Thanks Karthik Rangappa
Firstly, congrats on the options trade!
1) Not a problem, the exchange would have settled this
2) You can check the account balance, the funds will reflect the profits
3) The same day, please check for the updated funds.
Yeeeee…..Profit credited 27000/- on expiry day.
Thanks Karthik Sahab…..I liked your “Deewaar Style” 🙂
Happy for you, Sushil 🙂
Good luck and stay profitable!
But, Sir I invested 14 LACK for 1 day of expiry & profit is 27000-/ for expiry day.
So, Is it ordinary or extraordinary?
🙂
That’s roughly about 2% for the day…not bad I’d say 🙂
(A) Suppose I’m trading in series of march…..but want to extend same contract to April series. Is it possible?
(B) what is rollover? How is it possible?
1) Yes, that is called roll over.
2) You sell this month contract and buy the next month contract or the other way round.
(2) Suppose I write DISHTV18APR90CE @0.50. But, on expiry of April –
(A) dish TV spot price = 82 then it expires worthless…..so need of rollover?
(B) If dish TV spot = 92 then what are the steps for rollover?
(C) where is option in kite for rollover?
(D) Is there any article regarding rollover?
Thanks Teacher! 🙂
a. No, since you have sold the option at 0.5 and the option is worthless, so you get to keep the entire premium. No need to roll over as such for any settlement reasons, but if you want to as a strategy, then you can
b. You will lose 2 as the option is worth 2. However since you wrote it at 0.5, then your loss will be 2 – 0.5 = 1.5
c. You will have to do this manually
d. Rollover is just the act of closing this months position and buying the next month’s position in the same quantity.
Oh My God………700+ comments…..all credit goes to Karthik Rangappa who teaches us by very easy way & simplified language!
Hat’s off Sir.
🙂
700 for this chapter, Prakul. There are over 30K comments in Varsity 🙂
As long as you all love what we provide, we will continue to do this without thinking twice!
Cheers!!!!
Dear zerodha,
First of all I want to appreciate u for your efforts (kite 3.0 , UPI, Support portal ) to take Zerodha to high levels. I have referred and recommended Zerodha to many of my friends and family members & many are using Zerodha.
Very sad to say this, Now a days there are errors in the Contract notes especially while SELLING the options and also the average price is being adjusted wrongly while the sell position was carry forwarded.
I have mentioned about the issue to the support team via phone and also by ten days time span I have raised Two Tickets about the issues.
Ticket N0: #20180321398351 on March 21 2018 while selling options I made a profit of nearly Rs 7000. But profit money was not added to my account instead they deducted money nearly Rs 7000. I called the support team they argued regarding it , as I had trust and confident on Zerodha I thought myself there was some mistake on my side. After that I had closely watched my trading activities.
Again the problem happened on March 28 2018 I raised compliant Ticket NO :#20180328347323 this time I made a profit of nearly Rs 9000. Instead of crediting profit to my account they send me a contract note that I made a loss of Rs 11880.
Before days if we write to Support team they used to analyse the problem and the reply will be in a prompt manner. While I sent the problem they telling the difference between Option Buying & selling. As I m experienced in trading, so only I m selling the options. The reply I got from support team was annoying and unacceptable, while the average price problem happened initially the support team didn’t accept it, later the problem was corrected. Now a days these things forced me to take screen shots daily because the support team always denies when there is a error.
Now a days I m always facing problem in selling options in terms of Average price and booking profit. Daily making calls to the support team and sending mails which is very tried during hectic trading sessions .I hope u can understand how difficult it is in a traders point of view.
Please do take necessary action as earlier as possible as i m daily representing to the support team either through phone or mail.
Thanks,
Rani
Rani, have escalated the query you raised. Someone from our Support team will call and help you with the same
Sir, I’m telling about my today’s opening position:
2 days ago, I write INFY18APR1260CE @4.81 & lot = 600.
I write 7200 quantity of Infosys. My investment = 15 Lack.
But, today I placed for buyback 7200 quantity in kite – mobile app.
But,my limit order is rejecting continuously & message is showing :
(RMS:Rule: Check circuit limit including square off order exceeds for entity account-ZR30** across exchange across segment across product)
Whats is this? Why can’t square off my position. I already in profit = 9000/-.
Thanks Sir.
What price did you specify for the premium? Was it lower than 1.1?
0.05 & 0.10
I’m afraid this is lower than the dynamic circuit limit for the stock. More on that here – https://support.zerodha.com/category/trading-and-markets/trading-faqs/articles/what-does-circuit-limits-i-e-price-bands-mean
See, I write @4.81 & I’m placing limit order of buyback @0.05. I am already in profit!
So, there is no any loss……so y my order getting rejected?
The order will be rejected because this seems to be out of execution range – https://zerodha.com/z-connect/queries/stock-and-fo-queries/deciphering-nses-execution-range-circular .
Also, you are profitable only if the trade on both the sides get executed at the desired prices. Else you won’t be.
Kindly give me more numbers of zerodha….other than 080 4040 2020 & 080 3310 2020.
Because both numbers getting continuously busy!
Also, give compliance officer’s number!
Thanks Karthik!
Anil, regret the inconvenience. Request you to please try and call again. You will be able to reach the compliance team via these numbers. Thanks for all your cooperation.
Could you please clear my following doubts taking the following example and values:
Here is the case:
Currently Nifty Spot is at 10480.
I shorted one lot of 10650CE @ the current price of Rs 15. i.e. I received the premium of Rs. 15 for one lot sold.
Case 1:
If after 3 days Nifty spot goes up 120 points to 10600 and the 10650CE price increased to Rs 20.
Now, if I square-off the trade around 10600 thinking/worrying it might cross 10650 soon.
Case 2:
If after 3 days Nifty spot goes up 220 points to 10700 and the 10650CE price increased to Rs 50.
Now, if I square-off the trade around 10700 thinking/worrying it might go up more from here bringing more loss to me.
Case 3:
If after 3 days Nifty spot goes down 80 points to 10400 and the 10650CE price decreased to Rs 10.
I square-off the trade around 10400 thinking/worrying it might bounce back from here.
So what will be my Profit or Loss in the above mentioned both the cases.
I would appreciate if you can explain to me with calculations. Thanks for all your help.
The thumb rule is this when you write options – you will get to retain the entire premium if the option expires at the money of out of the money at expiry.
1) You will lose 5 as you chose to square off at 20
2) You will lose 35 as you chose to square off at 50
3) You will make profit of Rs.5
1) What happens when a covered call is exercised? Will it be settled in cash or in securities?
2) Also do I have a choice to choose from either 2
3) And what will be the implication on STT and other charges if I deliver my securities (when the options are called) instead of settling for cash?
1) Yes, everything is cash-settled
2) Nope, its all-cash settled
3) Check this for the latest details – https://tradingqna.com/t/no-more-stt-trap-on-exercised-in-the-money-options/18977
Hi Karthik
I was reading Option strategies document published by Zerodha.
In option strategies we always consider profit/loss assuming different spot prices at expiry which pre assumes that we are not squaring off position during period and holds both leg of trade throughout period.
My doubt,is it always better to NOT TO square off position in option strategies leaving everything on market while we know max gain or max loss we might encounter at end of expiry and let exchange settle our trade…
or
Squaring off both legs before expiry might turn into more profitable or more loss making compare to max gail/loss calculated through strategies.
Please note I have just started understanding Spreads strategies.
This really depends on your risk appetites. There are times when you make more than 100% even before expiry. You may want to square of then and not really wait for expiry.
Agreeing to your point..but when we use strategy for example Bear Call Spread (view moderate bearish) wherein I am entering below contracts,
Buy Call10600 OTM @ 41 Premium
Sell Call 10300 ITM @ 228 Premium
Net credit premium I am getting right away is 187 i.e.(228-41)
We know now as it is strategy my max benefit is 187 and my max loss is (-113) (Spread(300)-Net Credit Premium(187) irrespective of any spot price at expiry.
Need clarification
Theoretically is there any situation possible, where if I DO square off my above both contract simultaneously,my profit/loss can go beyond range of +187/-113 as calculated above in strategy.
Or no matter whether I square off or wait till expiry profit/loss range bound to be same under strategy.
This one is hard to generalize as the premiums also depend on volatility and general demand and supply. In case of heavy swings in any or both, the P&L can go beyond the boundaries. However, the chances are low and even if it does, I’d guess the premiums would revert to its fair price. In fact, you could even consider it as an opportunity to trade.
Thanks a ton..Now I understood better.
Good luck!
Sir,
Please make me understand one thing. As i had sold nifty 10600ce @15. Then when till what level my short position will be safe side on expiry day?
Till 10600+15=10615 or till 10600 nifty spot price. Any of above that how it will settled on expiry? Please answer that with little bit in brief. I request you please.
Thanks
Gautam, your position will be safe (as in you won’t lose any money) till 10615. For every point more than 10615, you will lose a Rupee. This will be cash-settled at any point you decide to square off – on or before expiry.
Thanks a lot sir for your valuable reply. Hope same for put side sell also. If on expiry i square off above call option when nifty at 10650, what will be the option premium of 10600? Please tell. Is there any tool available to get the idea of that?
Thanks once again
The intrinsic value of the 10600 CE when the spot is at 10650 would be 50. You dont need any tool for this Gautam, just take the difference between the spot and strike and you will know the premium upon expiry. Have explained more in the chapters.
When you reply is it possible to get an email notification? I usually come and check the website to know whether I got any response
Nancy, we used to have that option earlier but were forced to remove it as the comments run up to few 100’s and users get spammed.
Fine no problem.
Cheers!
Sir .
Frist of all i want to say that i am using zerodha from last 1 year . and i am very happy with zerodha in each and every service provided by zerodha .
i am little bit confused about call writing .. I will be grateful if you can give answer of my few questions.
1. Suppose i have 3000 shares OF sbin @ 200 share in my D mat account of Zerodha , and i want to hedge that with the help of call writing . Does i require any Margin money in my account Even than when i have sufficient quantity in my d mat account ?
2. i bought that share @ 200 in past and now i selected 300 Strike price of “Next Month ” option writing and received 9000 R.S as premium @3 rs . Now i don’t want anything Except selling my 3000 share on the date of expiry of option with the help of put writing . No matter what the actual price in cash market . Can i do this ?
3 . On the day of expiry , how the price of share in cash market affect my 900000 lac r.s ( Strike price 300 * lot size 3000 ) . if price on expiry , lower then my strike price or higher then my strike price ? what will be effect ?
4 . i want to exercise my call writing then what is all charges of govt. and what will be brokerage of zerodha . plz take example of sbin which was mention by me above .?
Thank you very much .
Happy to note that you happy with our services 🙂
1) Yes, selling options would require margins even though you have shares in DEMAT
2) I’m a little confused with this, can you please elaborate this a bit?
3) If the option has no intrinsic value on expiry, then you will get to retain the entire premium
4) Everything is cash settled, charges are mentioned here – https://zerodha.com/charges
Buy HCC at premium = 2 & strike = 22.5CE
On expiry,
HCC spot at 3:30 pm = 22.90
22.50CE premium = 0.35
What will be exact profit/Loss?
Plz elaborate?
Thanks
The value of the premium is 40 paisa. Since you paid 2, you will lose 1.6 on this.
Is there any minimum loss method for option writing ?
No, technically options can have unlimited loss potential.
hello sir!
I bought pcjeweller320ce at 5/- now its at 2.60/-
Suppose i dont sell it and let it expire, what wlil be my loss (whether 7500/-or more). Will the settlement amount be deducted from my account?
thank you
If the stock expires below 320CE you will lose the entire premium of 5.
you mean 5×1500=7500 right?
Yes, its aways multiplied with the lot size.
thanks sir!
Welcome!
Where I can get historical data of stock options on NSE?
Plz share link!
Check this, Devi – https://www.nseindia.com/products/content/derivatives/equities/historical_fo.htm
Greattttttt Sir….thanks 🙂
Good luck, Devi.
(1) I buy INFY MAY 1140CE @premium = 38. If on expiry Infy spot expired @1260. Then, what will be my profit?
(2) I write INFY MAY 1140CE @premium = 38. If on expiry Infy spot expired @1260. Then, what will be my loss?
(3) If I didn’t closed my position then how it will close? Clarify plz.
Thanks Teacher!
1) You will a profit of 1260-1140 = 120 minus the premium paid of Rs.38, so net profit of Rs.82.
2) No loss
3) This is deemed exercised, hence the exchange will settle this.
In case (2), How there’s no loss?
Ah, I didn’t notice you said you write the option. You will make a loss of 82 here. Remember, the buyer’s gain is the seller’s loss in Options.
For Case 2, I write INFY MAY 1140CE @premium = 38. If on expiry Infy spot expired @1260. Then, what will be my loss?
Question: If I write this I’ll receive premium of 38. But, If spot expires @1260 & I closed my position through exchange!
(1)Then, 1260-1140 = 120 is my loss.
Then, how 82 points is my loss? Elaborate Plz 🙂
(2) How much loss points will debit by exchange / DP from my account?
Thanks Sir You are simply Great!
Yes, the total loss is 120, but you have also received 38 as premium. So if you adjust for the premium received, then your net loss will be 120-38 = 82. The Profit of loss is always credited and debited from your trading account and not your demat account.
1) SEBI launched a circular that tells, derivative timing extended? But cash market will normally closed on 3:30pm. How does it possible?
2) How option price is derived? If cash market will closed??
3) If derivative trading hours extended then is it benefit for buyer & writer of options?
4) Future price is mimic of cash market price….if cash market will closed then how it will derived?
Very bad circular
1) The derivative market can continue no problem with this
2) There won’t be any change. Closing price will be taken as the reference
3) No one really as the cash market timing won’t change
4) As I said, there won’t be any change. Last close is taken as reference.
(1) But Is our module of option strategies able to withstand against this increase in timing?
(2) Can we use normal options trading strategies against this module?
(3) And, breakeven point concept of buyer & writer will be same or what?
1) Yes
2) Yes
3) Yes
Nothing really changes.
Sir, sorry for disturbing you!
I’m asking one more question regarding writing of ITM.
Example = I write INFY MAY 1100 CE & received premium of 70.
(1) On expiry spot closed @1100…What will be profit/loss?
(2) On expiry spot closed @1150…What will be profit/loss?
(3) On expiry spot closed @1050…What will be profit/loss?
(4) On expiry spot closed @1200…What will be profit/loss?
Here’s I’m writing ( CE ITM ). Little bit confused!
Thanks for your great sopport! 🙂
1) You will start making a loss only if Infy moves higher than 1100 upon expiry. Hence, in this case, you will get to retain the entire premium of Rs.70
2) Your loss will be 50, but you have 70 received as profit, so you will actually make a profit of 70-50 =20
3) Since its less than 1100, you will retain the entire premium of Rs.70
4) Loss will be 100, but you have received a premium of 70, hence your loss will be 100 -70 = 30
Remember, when you write a call option, you will make a loss only if you the spot starts to move higher than your strike price, if not you will retain the entire premium.
Write stock premium@123 & 1300PE.
On expiry day, @3:30pm stock = 1280.
What will be exact loss for me?
The option is ITM by 20, so you will lose 20, and retain 123-20 = 103.
1) means my profit is 103, correct?
2) 1300-123 = 1177 is my breakeven point correct.
3) As above you mentioned, amount credited & debited from trading account not from DMAT account!!!!!!!
Are trading account & DMAT account same? Asking silly question 🙂
4) My account is in ZERODHA, so which is this?
Thanks
Trading account is transactional, helps you buy sell stocks and derivatives. Stocks bought or MF units bought will be stored digitally in your DEMAT account. Both are linked to facilitate ease of transactions.
Hello Karthik,
Firstly kudos for all your efforts in educating everyone. Especially, clearing each everyones queries patiently, this really needs a big heart to do so.
Please let me if my below understanding is correct.
1. Lets say I am writing an option@ premium Rs.10/- @strike price 1000 @10.00AM which is trading @950[spot price]
2. I will be credited with the Rs.10/- as profit
3. And I am squaring my position @10.01AM during which the spot price didn’t change
4. Now I got a profit of Rs.10/- in this transaction.
Does the above type of trading can be claimed as sure shot to make profit? Can I do this over and over again to be in profit always?
Dheepak, think about it like the way you buy and sell stocks. You buy an options premium at 10 and sell the same premium at 11, then you make 1. Alternatively, you sell it at 10 and buy it back at 8 (same as buying at 8 selling at 10, but in reverse order) then you make 2. Yes, you can buy and sell (or sell and buy) as quickly and as many times you want. No need to hold the option to expiry.
Good luck and happy learning 🙂
Thanks for the answer Karthick.
It’s my bad that I forgot to mention in the above scenario, I will be selling the Call option for which the premium [which will be my profit in above case] will not change. I guess above strategy will be profitable always.
Might be I am wrong as I am just trying to understand clearly.
Sure, but please do remember, there is nothing like “will be in profitable always”, in the markets 🙂
Is rollover possible in options?
Rollover is just a concept, yes, it is possible with options.
(1) Sir, I think selling OTM call option gives more success as compared to buying options, what say?
(2) Suppose I have 15 Lack & I have divided this amount within 7-8 stocks with writing deep OTM….most of them gives profit correct?
(3) I gain experience that stock moves downward very much quickly & drastically…..but for push upward it requires more time as compared to stock moves downward, correct?
1) I agree. I have discussed this in a couple of places in this module as well
2) Depends on the stock and how it moves. The chances of making a successful trade by writing OTM CE is high, but there is no guarantee
3) Yes, this is generally true.
Sir, Thanks for such wonderful lesson! I write deep OTM in 2-3 days before from today’s expiry…..14.80L investes & earned 32019/-.
Is it okay as per investment?
Almost credit goes to you 🙂 🙂
But when will my profit balance reflect?….bcoz I kept my positions open!
What is the effect of dividend on stock?
And hence on the options premium?
Theoretically speaking, the call option premium reduces and out option prices increase when dividends are paid out. However, this gets priced well in advance and you won’t see a big difference in the premiums, especially if the dividend is small. Example 0.75 paisa or 1 Rupee dividend on a 10 Rupee face value stock.
Sir what I’m pure writer! I have some doubts:-
1) from Oct. 2018 derivatives Trading timing increased? Is it official declared?
2) what is option settlement mechanism for physical delivery as per new rule?
3) Except 46 stocks given by NSE & SEBI, all settlement is in cash ?
Means as usual way, correct?
4) Cash market timing will be same….then how derivatives Trading market will vary continuously after 3:30?
5) How we can work from 9am to 11:55pm?
6) As per new rules, Margin = span + exposure!
But, Zerodha client didn’t get any change because they already charged same span + exposure, correct?
Means no any change for Zerodha client?
1) No, but there is a possibility
2) They are drafting one, will have to wait for the final draft
3) Yes, for now
4) Yes, for now
5) You can decide your own timing, this is in fact, the best part of markets 🙂
6) Yes, we have always ensure we collect SPAN+Exposure, so no change.
Can u explain (4)
Which point, Neha?
Is there any possibility in case of nifty f&o to transfer for physical delivery?
Nifty will remain always cash settled? Hope I’m right?
Waiting for the final draft on this, Watson. Yes, Nifty has to be cash settled.
(1) Profit / loss calculations are same for writer & buyer as per cash settled & physical delivery?
(2) Cash settlement or physical delivery better for call option writer ?
1) Yes. But we need to wait for the final draft to see if any modalities change
2) Like I said, we need to wait for the final draft to figure these things.
Dear Kartik,
in case of call options , how do we place stop-loss
1) Do we have to place stop orders based on premium value ?
OR
2) Do we have to place stop orders based on strike price ?
FOR EG :-
Nifty 10900 CE – premium is 80 ..How do I place the stop loss in kite?
ALso u had mentioned that a writer has the risk of unlimited loss incase the trade goes against him. But when one places strict stop loss and does proper risk managing then how can we say writing has unlimited risk of loss?
You need to place it based on the premium value. The unlimited loss part is theoretical. Obviously, if you place SL, then you are covered.
Hi Kartik,
The above query was related to selling call options.
Regards,
SHyam
I’m guessing the time value of options increases, hence the option premium will be higher.
Hi Kartik,
With NSE about to increase the timing for derivative traders what impact will it have on trading ? especially writers?
Regards,
Shyam
(1) expiry on 28/6/18 cash settled or physical delivery?
(2) expiry on 26/7/18 cash settled or physical delivery?
(3) What is the mechanism of physical delivery?
(4) Wll nifty remain always cash settled or physical delivery?
Anu, I’d suggest you check this discussion here – https://tradingqna.com/t/how-does-the-new-physical-settlement-of-stock-derivatives-work/37830
f&o physical settlement mechanism launched or not?
Check this – https://tradingqna.com/t/how-does-the-new-physical-settlement-of-stock-derivatives-work/37830
hey if i dont buyback my otm short call and let it expire worthless then i dont need to pay the brokerage right because i didnt buy it back and i only have to pay the charges when i sell it
Yes, the brokerage is not applicable here, Shivansh.
Hi Kartik,
1. After going through options module in last couple of days i thought of writing bank nifty OTM 26900CE and pocket what ever premium i could collect. But I got a error message when i placed the order. When I spoke to your customer care exec she asked me to refer the eq/fut columns in margin calculator website where the contract range to be traded was mentioned . Indeed the contracts allowed for trading was 26200 -26800 ce and PE. What is the reason behind this? I didn’t know about this.
2. Now do these keep changing everyday?
3. Is the trading range specified by NSE or Zerodha?
Shyam, check this link – https://tradingqna.com/t/banknifty-bracket-and-cover-order-blocked/14152/2 , you will get all your answers.
Hi kartik,
1. From what I could understand is that a broker cannot have more than 15% OI in bank nifty options. If 15% OI is already there in zerodha then there must be some big HNI and big traders who have already written FAR OTM options and hope to profit from time decay? Is my understanding right or is there more to it?
2.Does this mean we need to open a seperate account with another broker for only writing bank nifty OTM options? With Small capital cant afford to write a call in specified range especially in BN options as the movements are wild and unpredictable. ANy huge upside will end up wiping out my capital.
3. Is this trading range applicable for nifty options also?
1) Not really, its just that we have a vast majority of retail participants buying OTM option, shooting our OI limits. Buying OTM options can be scary, check this – https://economictimes.indiatimes.com/markets/stocks/news/view-the-perils-of-buying-deep-out-of-the-money-options/articleshow/60129310.cms
2) We are working on a solution here, Shyam. Hopefully, you should be able to write options with us itself.
3) Not yet 🙂
(1) How much can I buy NIFTY options contract, what is maximum limit per client?
(2) How much can I write NIFTY options contract, what is maximum limit per client?
thanks
Check this – https://tradingqna.com/t/i-wish-to-know-whether-there-is-any-limit-on-maximum-number-of-nifty-future-a-person-can-hold/440
With NSE about to increase the timing for derivative traders what impact will it have on derivative trading ? especially writers?What about volatility?
Since there is more time to expiry, option premiums will go higher.
For example, if I have bought Bajaj Auto 2050 call option at Rs.6.35 in the morning and by noon the same is trading at Rs.9/- I can choose to sell and book profits
Here in above example call option buyer became seller by afternoon.. if the stock price goes up continuously will he end up in lose? as he became seller now?
kindly reply me sir.. confused!!
Once you offset your buy position with a sell position, you are out of the market so it won’t matter if the premium goes up or down post that. Think of it as buying a stock in the morning and selling the same by afternoon.
Will nifty remain always cash settled in expiry month July-18, August-18, September-18 & so on…
Hope I’m right?
Nifty can only be cash settled, Sachin.
Hi,
I’m very confused about selling/writing a call option. Here it is-
Today I bought 10700 NIFTY 50 at 2.80 premium and sold it for 3.10 premium.
I did this on the Zerodha app by simply clicking buy and sell while buying and selling respectively.
When I sold this option, did that make me a seller/written of the call option? If yes, then what about the Margins and everything?
Everybody tells me I’m NOT a seller/writer of the call option but they are not able to tell me what position am I taking while selling this call option I purchased at 2.80? Because at the end, I am selling the call option, ain’t I?
Chirag, consider this – you buy 10 shares of TCS @ 1800 and sold the same at 1850. Does this mean you have a fresh position in TCS? No right? You just squared off your original position in TCS. Likewise, you bought the call option at 2.8 and sold the same at 3.1, this means you just squared off the existing position. No fresh position here.
To short/write option, you will have to initiate a fresh position wherein the margins will be blocked.
Dear Sir, according to new rule, suppose I trade in writing of HCC & it remains OTM & becomes worthless on expiry.
Then, I need to give physical delivery or not?
Nope, not necessary.
Sir…
I bought call option at 4.4 premium..lot size 2750..I hold it 3 days..and sold at 4.5..
4.4*2750=12100
4.5*2750=12375
My funds shows
Previous balance=14050(net value)
Free cash = 17800
Why my fully amount 12375 not added to free cash or net value
Mohan, can you check your tradebook and ledger from Q-Backoffice for the period?
I see no issues in your account(The credit for the sell trade has been added correctly with which you have initiated a fresh position).
Sir, i am requesting you to write chapter according to new physical delivery settlement? Waiting…………… 🙂
Hartik, I’d suggest you check this – https://tradingqna.com/t/how-does-the-new-physical-settlement-of-stock-derivatives-work/37830
I have pledged 7000 shares of BALRAMCHIN and sold July 2018 80 CE. In reference to NSE Circular # 67/2018 dated June 15 2018; if 80 CE ends In-the-money and I am not able to square it off for some reason, shall I be able to meet my obligation of physical delivery of shares by placing an unpledge request on 27 July 2018 (the day after expiry)?
I’d suggest you read this wrt to physical delivery – https://tradingqna.com/t/how-does-the-new-physical-settlement-of-stock-derivatives-work/37830
Awesome post Karthik.
I have two queries
Suppose I write call or put (Intraday)
1. What is the risk if I square off call/put(Sell) before expiry if my target achieved or I stopped out?
2. Option Writing (Limited profit, Unlimited Risk). If I always put Stop Loss while selling option, then does unlimited risk still exist? As unlimited risk always threatens retail traders.
Your answer really help me to setup my trade
1) No risk in terms of compliance. You can get out of the trade whenever you want, no need to wait till expiry.
2) No, your loss is predefined to the extent of your SL. So no unlimited risk.
Thanks for your insights.
Cheers!
Hi sir,
I have heard that SEBI is going to introduce physical settlement compulsory for some stocks in f& o
Very soon index derivatives will also be involved,if this happens then what would happen to banknifty weekly series will it be continued or not
Thanks
Thats true, Rohit. Check this – https://tradingqna.com/t/how-does-the-new-physical-settlement-of-stock-derivatives-work/37830/3
I have 3 CE write positions in HCC at strike prices 17.5CE (1 lot) & 20CE (2 lots).
Currently, HCC is trading at 9.90/-.
My strike prices are 77% to 110% away from spot price of HCC.
It’s absolutely impossible to grow HCC 77% to 110% in just 4 days remained to expiry.
And, my trading account value is 15.18 Lack.
So, don’t close my position in HCC without my permission.
Your positions will not be squared off as long as you have enough cash to service the stock payin. I’d also suggest you call/write to our support desk. Also, please be aware that this is the first month of physical delivery, we are ironing out the process.
But, HCC expires otm, then I don’t need to give physical delivery??
Yes, no need of physical delivery if the contract expires OTM.
Hi Karthik,
I’m not sure if this has been answered already. If I have sold an OTM option and the option expires worthless, I understand brokerage will apply when I initiate the position but will there be any exit brokerage costs as well ?
No, no additional costs.
Here is the comment in Chapter 4,
” So all options in India are now European in nature, which means the buyer can exercise his option based on the spot price on the expiry day.”
My question – Is the above conclusion correct? We can exercise our call buy option anytime before the expiry! If so the conclusion needs to be modified. But I am not sure of Call Sell Option.
Exercising and selling are two different things. You can sell the option anytime you want, but exercising happens only on the day of expiry.
Hey Kartik,
As your article said the Indian market follows European Options,
then how can we buy and sell a call option on the same day, please explain.
ThankYou
Buying-Selling of options is one thing, exercising the option is another. These are two different things. The European options mandate that the exercising the option happens only on the day of the expiry, not before.
So i recently invested a lot of my life saving up to $459, 000 into zulu options. I was told i was going to make huge returns and i was close to my retirement hoping to make my long term plans come alive, only for me try to withdraw my profit and that was it, i never got anything. I was devastated and my life was almost in ruins and almost forgot i had saved any money in my entire life. My friend came by to my house and recommended adler.frank50 At Gmail. com and i have received over 80% of my investment as of last week. So if you invested in binary options be sure you are registered with a regulated broker or firm. They are mostly scammers.
Bank nifty was around 27800 and when I tried to sell CE on 14/08/2018 for expiry of 16th Aug of strike price 28400, I was unable to do so with Zerodha. I am getting error as : “Option strike price based on Ltp percentage for entity account – across exchange across segment across product”
What does that mean? Why I wasn’t allowed to sell CE for 28400? Any idea?
I buy 1 lot of bank nifty ( weekly expiry = 16 august)
I buy BANKNIFTY16AUG1827800CE = 8 premium.
On expiry banknifty closed 16 august 3:30pm = 27826.55
I didn’t closed my position. Since, it gets exercised.
What will be my profit?
You would make 8 points premium minus applicable charges.
How options turnover calculated?
Suggest you look at this chapter – https://zerodha.com/varsity/chapter/turnover-balance-sheet-and-pl/
20-08-2018
Is Shorting INFY 1200 CE a good idea for 21-08-2018. CMP 1388, 2SD 1,263. Premium ~200
Well, that depends on what you think will happen to the stock 🙂
= 6.35 – 22
= -15.56
it will be -15.65
Suppose, BHEL announced final dividend on 11/9/18 Rs.1.02 per share.
If I buy BHEL shares NSE before 4-5 days of dividend declaration date.
1) Then, Will I get credited dividend directly to my bank account or what?
2) After getting dividend, can I sell BHEL immediately?
1) Yes, you will be entitled to receive the dividend. The same will be credited directly to your DEMAT account
2) Yes, you can if you want to.
What is affect of dividend on option premium on dividend declaration date?
Nothing really.
If HCC is trading at 14.6 rs spot
Buy 1 lot of HCC before 1 day before of expiry 12.5CE @2.20 premium.
Market closed on expiry HCC = 13 spot.
So, I will get physical delivery, correct?
Yes, since this is an ITM option. You are obligated to buy stock, so you have to bring in funds.
Here Lot size of HCC = 18000 & premium paid = 2.2. Therefore, I paid ot buy HCC lot = Rs. 39600/-.
So, currently HCC spot = 14 rs per share & Lot size of HCC = 18000.
(1) So, Will I get fund = 14 x 18000 = Rs. 252000/- or Will I get 18000 shares of HCC.
(2) When will my account gets reflect with funds / shares? (within how many days)
Here, I’m at buying side. And, exercising contract.
Then, how you told me I’m obligated to buy shares…….and bring funds??
I’m from buyer’s party…..receivable physical delivery?
Please clarify?
Since you are long call options and it is in the money, you will be obligated to a physical delivery(Receive 18000 shares at the price of the strike price- Rs12.5). You are required to maintain funds equal to Strike Price * lot size.
After expiry, your call option premium will expire at 0.
The shares will reflect in your account in Expiry+2 Days.
Derivatives timing increased confirm or not from 1 Oct???
Although SEBI has approved the request from the exchanges, no official confirmation received from the exchanges if they will extend the timings from October 1st
Dear Sir Faisal Mohammed, you had written comment on above HCC example of physical delivery.
If I will receive shares of HCC = 18000 quantity.
Then, why to maintain funds equal to Strike Price * lot size.
If HCC current spot on expiry = 14.50 rs then, what will be my profit exactly?
Your cost of acquisition of the physically delivered shares will be equal to Strike Price + Premium, which in your case is:
Rs 12.5 + 2.2= Rs 14.7. Your Profit/Loss will depend on what price you choose to sell the shares that are delivered to you.
Read more here.
1. If you sell Nifty Options 11800CE Aug Expiry at a premium of 3.00 and try to buy it at .05, will the Kite system allow? i am not sure if it has anything to so with Circuit limit etc.
2. Can this be a profitable trade if actually done?
Yes for both 1 and 2.
Hi Sir,
If the market up by 20% in a single day (similar to 2009 election results time), The option writer initial margin is not sufficient for this upmove. If the option writer is unable to bear any extra amount and he doesn’t have time to close his position, How this situation is handled. Who will pay the option buyer.
Thanks
Satya.
Usually, when such a situation is expected, the margins are increased the previous day. In the absence of margin shortfall, the position will be cut by the broker.
Hi Sir,
Thanks for the response, In case the situation is unexpected like global war over night or something, How it is handled from broker side.
Thanks
Satya
The margins will be varied during the day as and when the event unfolds. It is the client’s responsibility to ensure sufficient funds are maintained in the account.
Hi Karthik
By selling put/call, i will get premium. Can i use this premium for further trade?
Yup, you can.
Karthik,
Suppose i sell put call for canara bank with strike price 280. From zerodha margin calculator, i can see that i will get the premium 11 points and total margin required is 91970 rs. Now this stock starts falling and i have only 91970 rs in my account. Premium i just withdrew from my account then when i will get margin call from zerodha?
Yes, you need to ensure you have enough margin to maintain the position.
Karthik,
For the last question, will i get the margin call when canara bank stock goes below (280 – 11 = 269)? If stock stays >= 269 then will i get any margin call?
Dont think about the call from a stock price perspective. Think about it from the margin required perspective. You will get a call if the funds go below the stipulated margins.
Is there a way to know the breakthrough of margins which is blocked in futures trade or in sorting options in our account as margin calculator provides informtaion related to previous days which is not accurate .My problem is to know the real amount blocked in any of my open positions which are more then one to know how much margin would be released if I square off any particular position. position.
Our SPAN margin calculator is live and linked to our trading terminal. For short options, only the premium is not live and is the previous day’s close.
Dear Karthik Sir,
I am new trader in option mkt and mainly deal in Banknifty..Have some basic question.Pls pardon me for so many question but cant help.All questions are related to banknifty 6th Sep weekly option
1) I sold one lot of banknifty 27400 call at Rs 86 in the morning and hold it till expiry..How much amount I need to pay back at the time of exchange exercise….Spot price at closing was 27468.70
2) 27400 CE close at 58 where spot price was 27468.70….Only Rs 10 impact of STT,,,,,Should not it be much lesser??
3)At 3.20 pm when Banknifty Spot was trading at 27433 why 27400 CE was trading at 67.05?? It should be much lower.
4) Why 27500 PE was trading at 12 on 3.20 pm when spot was 27433 it should much higher,and when spot close at 27468.70,the same 27500 PE price increased from 12 to 17?
Can you pls help me out..my theory is not working.
1) The Option is in the money by nearly 69 Rupees, so considering you sold the option and received 86, you’d make a loss of 86-69 = 17 Rupee.
2) 58 must be the last traded price, I’d suggest you look at the settlement price
3) These near ATM options are super volatile around closing, getting the exact price (theoretical) won’t be possible.
4) Hmm, again, I think this is the STT effect.
Thanks for such a prompt reply
Point no 1..You mean to say I made profit of 17 rupees.Isnt it?
Point number 2.Where from I can chk the settlement price?
1) Yes
2) Its made available on NSE’s website.
The close price that you’d see on Kite (post 5PM) is also the settlement price.
Sir,
For example if i write call/put option in bank nifty on expiry…say for tomorrow(12Sept)
if I write(2 Lot= 80) call option 28000CE – Preminum prise Rs-2 at 9:30am…. Suppose at 2:00pm(onward) its trading with premium prise Rs-0.05
1) What would be my profit if i square-off at 2pm
2) What would be my profit if its exercise by it self at 3:30pm
3)If order in MIS , what would be the brokerage i have to pay in above example
Thank You!!
1) You’ll make a profit of Rs.1.95/-
2) 2 Rupees
3) 20 per executed order
Hello Sir,
I have a lot of confusion regarding options buying and selling, can u plz help me with that:i
For ex: Powergrid stock price is trading at 191 around 10.00 a.m, the market is bullish so I brought 2 lots of call option of Powergrid (each lot is of 2000 shares) with strike price at 192.50 at premium of rs. 3.50 so amount which i paid for purchasing is (2000*2*3.50) = 14,000 now at 2.30 p.m the stock price is at 195 and now the premium for the strike price 192.50 is at 5.50, so now i want to make profit by selling or writing or squaring off .
As per my understanding my profit will be 5.50-3.50 = 2*14,000= 28,000 IS that correct?
If yes how will i sell them for profit and do i need to have capital in my account as margin to sell those options, or will that be taken care of my broker just like they provide margin for intraday as this trading is intraday too.
Please explain sir, it may sound like silly question, earlier i thought i was clear on options concept but it’s still confusing.
Hoping u dnt mind me posting any further questions too.
Thanks,
Dilip
Dilip, you can sell the option anytime you wish. No need to hold till expiry. Btw, your profit will be (5.5-3.5)*2*2000 = 8K.
You can sell them just like the way you bought it. I’d suggest you call the support desk to get more clarity on this.
suppose i write off one call for taking some premium and on expiry its value becomes zero but there is no buyer to square off my call, what will happen in that case.
In this case you get to retain the entire premium and the exchange will ensure the contract gets settled. You need not have to worry about it.
Thanks karthik.
When do we need a margin in options:
While selling them when it crosses the strike price and we profit by the premium difference (3.5-5.5=2) or
While exercising the option on expiry date
And also can u brief the basic diffetence between sell or squaring off an option and exercising an option with an example.
Thanks,
Dilip
Margins are required when you sell options. Square off is a term used to close a position. Selling is when your first leg of the trade is a sell and you square off the sell trade by buying back later.
Hi,
What are the margin requirements for covered calls, i.e. selling Call options against stock held. Say I hold 75(which is the lot size) stock of Maruti and then I want to sell a lot of Call on Maruti, Do I still need to pay any margin? Also are margin requirement same when selling Call against Futures or different margin is required.
Thanks,
Vibhore
Unfortunately, there is no margin benefit for covered calls. Traders usually pledge shares and use the funds to short options, but you’d need at least 50% cash from your side. Check this for more on pledging – https://zerodha.com/z-connect/tradezerodha/margin-requirements/online-pledging-of-stocks-for-trading-fo
According to new NSE circular, Sub: Additional Surveillance Margin in Equity Derivatives Segment. My question is –
(1) Is there any margin requrement for buy CE & PE of bank nifty & nifty before 1 day of expiry (wednesday)…..?
(2) Will I need to pay only premium or what? Because, by definition as an option buyer need to paid on ly premium??
Plz clarify
1) Buying options do not require any margins, you have to pay the full premium amount.
2) Yes, only premium.
Karthik sir, He was asking about new circular: Additional Surveillance Margin in Equity Derivatives Segment.
So, this circular will not affect on buyer ?
It will affect both buyers and sellers in terms of increased margin deposit per trade.
But, buyer need to give pay only premium?
Yes.
Hi Karthik,
Thanks for clarifying all the douts about options trading . I have one dout assume i have sold an call option(call writing) but the price still says with in the range and did not cross the strike price but if i want to buy as it was last day of expiry there are no sellers for that instrument . in that case what is the risk of the call writer as he already sold it for a strike price but the stock did not hit the strike price . As it was last day of expiry as there are no sellers for that option how can i buy that option on expiry as i already done call writing for that strike price . In this case what is the risk investor should bear . Thanks you
As long as the spot price remains lower than the strike, the option will remain worthless and you will retain the entire premium. Even if there are no buyers available for you, you need not worry as the exchange will ensure your trade is settled.
Still derivatives timing not increased from 1 October, correct?
Nope, I think SEBI deferred this as well.
Still derivatives timing not increased from 1 October, correct?
Any official notification?
Nope, no official confirmation.
Hello Karthik,
My question to you is in continuation to my previous one. I buy stock call option at strike price 250 at premium 3.50 on the same day the premium reached 5.50 and i sold it to profit on the premium. now my questions are:
What if the strike price crosses above 250 ?
As i sold my call options which means i sold my ownership too? Then why is need of margin?
What happens to the margin amoumt?
Thanks,
Dilip
1) The premium will increase further, but since you have squared off the position, you’d not benefit from it.
2) There is no margin required when you sell an already bough option. Margins are required when you sell (write) options.
1) if i sell the ITM call or put and remains ITM and exit on expiry then what will be the STT charges and Exchange txn charges ?
Check this – https://zerodha.com/charges
I want live updating excel sheet which is automatically updated as per market in live market hours???
Plz help
You can possibly do this with an excel macro plugged into Pi.
Is it possible to always make profit selling a call option?
Assume that I’m a call option write and I can sqaure off anytime since I do not have to wait till expiry. As soon as I collect the premium for selling the call option can I just sqaure it off since as don’t have to wait till expiry?
Yes, you can sell the option anytime you wish, no need to wait till expiry.
So that means I collect the premium amount and immediately sell. Does that Mean I always make money?
Am I missing something here?
Assume you receive Rs.100, but the very next minute if the same thing costs Rs.110, then you are making a loss of Rs.10. But if it goes down to Rs.90, then you will make Rs.10. So there is no guarantee that you will make money by writing options 🙂
Hi,
I did read the chapters till options delta so trying to clarify this here.
Lets say nifty is trading at 11100. I sell call of strike price 11200 so this is an OTM option.
Now immediately I collect a premium of Rs,100 lets say. And within 30 mins I plan to sell. Now if the price moves to 11120(up) or 11080(down) it is still below my strike price. So won’t I end up making a profit? As it does not reach the break even point which should be above 11200 right? What would be the break even point here if its not above 11200 and how? This will clarify most part of it.
Firstly, you can buy back the option anytime you wish. The P&L can be estimated by taking the difference between the sale price of the premium and the buy price of the premium.
Hello karthik,
Just wanted to know abt bhavcopy on NSE and what info does it has abt securities and hw can one use this?
Thanks,
Dilip
It has the OHLC and volume data, Dilip.
Dear sir,
I have a few questions.
1) Suppose Bank Nifty is currently at 25600 & i assume that’s there no way that it would reach 27000 just in the coming week expiry & hence i sell the call option ( only 1 lot) at strike 27000. For this my 63,486 gets blocked as total margin & i receive 1090 as premium. Now suppose it starts rising & rising & i feel like it’s too close to 27000, so i square it off at any strike before 27000, say 26950, so would i get back all of my 63,486 or i had i loosed something ?
2) & suppose i sold the call at strike 27000 as described above & received premium as 9 / per lot, but it starts to rise to 10, 11 & further, so would i still lose anything if i square off when premium is above 9, even though my strike is still far to be breached ?
3) Is it possible to trade bank nifty & nifty on expiry days ?
1) You will get back the margin and also the difference in premium i.e the difference between buy and sell price
2) Yes, the difference in premium i.e the difference between sell and buy price is your profit & loss
3) Nifty yes, bank nifty (monthly expiry), yes.
Sir this, “difference in premium” part is most confusing. Because it’s like just sell a call option, you get the premium, but no need to hold it till expiry , just square it off immediately & you get to keep atleast something, if not the whole premium. Isn’t it crazy ? It literally means one can do this numerous times in a day & keep on getting a bit of premium, but no need to fear loss until strike is breached…. & even if it’s about to be breached just square it off right before & still no loss…. So crazy ?
Easy as it sounds 🙂 Premiums keep changing every second, so there is no guarantee 🙂
Sir, very sorry to bother you again on the same topic but i promise this is the last time.
This thing could only be understood with a practical example, hence –
a) Suppose i sell the call option of Nifty at strike 11,300 , then 55,466 rupees are blocked as margin & i receive
4969 as premium, which i would get only if i hold it till expiry.
But suppose i square it off in the same day, or just in few minutes, then what would be my profit/loss if i received premium at 30 per lot, but i am squaring it off when premium is at
1) 29 per lot
2) 31 per lot
b) & what total amount would i have with me after margins unblocked in above cases
c) do zerodha provides leverage for option selling ??
P&L is always the difference between your buy and sell price.
1) You make a loss 1 Rupee
2) You make a profit of 1 Rupee
3) Check this – https://zerodha.com/brokerage-calculator
4) Yes, you can use MIS, but this is only for intraday.
d) Sir, suppose suppose Bank Nifty is trading at 25,596 & suppose just tomorrow is thursday & i think that it wouldn’t be able to cross 26,000 in just a single day, so if i want to short 10 lots at strike 26,000 , then although i need to have 8,58,667 as margin but if it do really not reach 26,000 until expiry on thursday so do i really get to keep the whole premium 1,77,600 as calculated in brokerage calculator ?? I mean it sounds too easy like if anyone if having a huge capital he can just buy otm strikes in bank nifty every week & easily eat all the premium if the strike is not breached. Also, since only 10 lots or even 100 are to be dealt with so no problem even with low open interest for that particular strike. Isn’t it ?? Sounds easy, that’s why i am a bit suspicious ??
Yes, many options expire worthless and traders end up pocketing the premiums. However, it is not easy to sit on a short option position. I’d suggest you try it with 1 or 2 lots and experience it once 🙂
Thank you so very much sir for replying. But sir, when i checked out span calculator, i tried to calculate the margin requirements for strike 26000 ( bank nifty ) only 1 lot , it shows that i receive 17,760 as premium, whereas the current premium for strike 26000 is 106 so i should receive only 106 x 40 = 4240, then why is it showing 17,760 ??
The margin calculator is not updated. Its taking values from Thursday close (which is displayed on the screen). The premium was around 444, hence you see 17K as premium receivable. I’ve informed the team about this.
Sir what is the leverage provided by zerodha for selling options intraday ? & what is this physical settlement of shares ? I hope it has nothing to do with indexes ?
Check this -https://support.zerodha.com/category/trading-and-markets/margin-leverage-and-product-and-order-types/articles/how-much-margins-leverage-does-zerodha-provide and this – https://zerodha.com/z-connect/tradezerodha/policy-on-settlement-of-compulsory-delivery-derivative-contracts
Sir, it was all about stocks. Nothing written about how much leverage on selling options intraday.
Also i saw someone had a question there that he opens his account & founds 1.5 lakh negative balance. Can this really happen ? I mean if suppose i have a position either long or short & it goes completely against me, then all the capital i had in my trading account would be finished that’s understandable, but still the broker doesn’t square it off & value going into negative & that too in lakhs. Shouldn’t the rms square it off immediately when the whole capital is finished instead of carrying it forward & putting such high liability on client ?
Nakul, the broker obviously has risk associated with every client position. He will cut the position as soon as he figures that the margins go below the SPAN requirement.
Sir, suppose i sell a call option on expiry day of any contract, say bank nifty, so that means that someone is obviously “buying” that from me. But sir, why would any person do this stupidity of buying a call option just on the expiry day, knowing that the premium won’t increase very much now & usually expiry day is a win win for option seller ??
Different opinions is what really makes the market, Manas 🙂
Am confused on point:
For example, if I have bought Bajaj Auto 2050 call option at Rs.6.35 in the morning and by noon the same is trading at Rs.9/- I can choose to sell and book profits.
I thought we can only sell on expiry date, if we are selling in intra day basis on expiry date who will have right to exercise.
Quoting 1st example
At 10:00 AM –
Strike price = 300
Spot price = 300
Premium you pay = Rs.5 (just assuming some value here)
At 10:30 AM –
Strike Price = 300
Spot Price = 320
Premium = 25
You can choose to sell the option and pocket the increase in premium i.e 25 – 5 = 20 (this is your profit).
Here after if I have sold this on same day, on expiry date of option I will not have right to exercise?
Yes, you can choose to sell the option anytime you wish. No need to wait till expiry.
Sir, i have observed that put option premium doesn’t change as much as call option premium. Why is it so ?
Depends on multiple factors, Manas.
I have big investment in Derivatives market in options. I earned alot & have more successful experience.
But, now I have idea to form a firm like Pvt. Ltd. company for futures & options transactions.
If I formed Pvt. Ltd. company, then,
(1) How can I open through ZERODHA?
(2) Currently, I have personal account with Zerodha in my own name. But, If I formed Pvt. Ltd. company. Then, bank account will be current account with Zerodha.
(3) What is procedure? If I want to trade derivatives through my company account?
plz explain in detail
1) You will have to open a corporate account
2) You will have to link a new account
3) Its the same, just that the account would belong to a corporate as opposed to an individual.
Hi Karthick thanks for the excellent module,
please clarify regarding this example
“For example, if I have bought Bajaj Auto 2050 call option at Rs.6.35 in the morning and by noon the same is trading at Rs.9/- I can choose to sell and book profits”
My Doubts
1. Lets assume I have brought the above bajaj option can I choose to sell even even in couple of hour if i have brought the call option through NRML instead of intraday (MIS).
2. Even if I have brought the CE through MIS, can i change to NRML once order get executed if the market has reversed, hoping to earn profit next day.
1) Yes, you certainly can. No need to wait till expiry
2) Yes, you can.
Good luck.
Sir suppose i sold the nifty call option at 26000 but suppose it crosses 26000 just on the expiry day, so do i have losed all the margin blocked or it will start losing after 26000 is breached ?
I meant Bank Nifty
Your loss will be to the extent of the difference in the premium. Margins will be unblocked once you close the trade.
Yes sir i know that, but i meant it in other way. I meant that if i have 70,000 as total capital & the lot i want to short also needs 70,000 as margin, then whole 70,000 will be blocked & i will receive something, say 1000 as premium. But on the expiry if my strike is breached, say if i shorted it at premium 25 but now it’s 35, & i decide to square it off so would my total loss say 10,000 would be cut from the blocked margins & final amount with me would be 60,000 ,isn’t it ? Or would it be 70,000 + 10,000 = 80,000 loss ??
It will be 10K loss, Nakul.
” Option Strike price based on ltp percentage for buy orders for entity account ……… across exchange across segment across product ”
& because of this i wasn’t able to earn 10,000 rupees 😞😞. That strike went from 20 to 43
Same thing again. Can’t it be resolved ? Seems like larger client base than other brokers is more of a curse than a boon in zerodha because that 15% open interest thing may never change, but zerodha’s clients will keep increasing so i don’t think anythings gonna happen.
We are working on a few solutions for this, Manas.
OK Sir
Welcome!
If I write call option & obligated due to spot closed slightly ITM. Then, STT trap / STT charges is applied or not when exchange released my position?
Because, STT is only applied for selling side. As, I’m writing option first. So I already paid STT. Plz clarify?
Yes, thats right. But if the option is slightly ITM, there is a change that the buyer may not exercise his option owing to higher STT, hence you may just get to retain the entire premium. This really depends on where the option expires.
Suppose i have short option position on expiry day say 2lakh and the option expire worthless and i did not square off position , will my blocked margin would release on same expiry day only and would i be able to withdraw that amount on same evening or not.
Yes, margins will be released the same day which you can withdraw.
thank you in the same way i think if i place mis intraday trade shorting option the same should be release same day ,but i think the profit that i make would be available to withdraw next day not same day.
Your P&l will get added post the trade process, which runs by the end of the day. So your funds will be available for withdrawal the next day.
Suppose, I bought 1000 shares of XYZ @Rs 400 and then I pledge my shares. After getting the collateral I sold one lot(with 1000 qty) call of 410 @ Rs 15 (the premium)…. If the share price goes stays below Rs 410 I will be in profit but….
My question is what will be the senario if the price of the share reach Rs 460 assuming that I don’t have enough cash in my account to maintain MTM and how do I keep the premium of the call even if it goes above Rs 410 because that’s what a covered call is supposed to do.
Thanks
Lino, in case of a covered call, the loss in options will be offset in the gains in the underlying.
Sir what is meant by volume beside open interest in a strike ?
Volume is the actual number of lots that gets traded in the market.
Ok sir, thank you
Happy learning, Nakul!
Sir, suppose i sell a call in bank nifty on wednesday just at market closing time, & suppose next day it’s a holiday on expiry. So do i get to keep the entire premium this way ?
When you write an option, you do get the premium. However, you will get to retain it only after you square off the position, for which you will have to buy back the option.
Sir, that’s when we square off. I meant that i want to the option to get exercised, & since if thursday is a holiday, it would get exercised itself, isn’t it .
If thursday is holiday then expiry will be on Wednesday. And, all contracts will release from NSE only on Wednesday.
Got it. If Thursday is a holiday, then the previous working day is when the expiry happens.
(1)Can we trade stock F&O in BSE?
(2) Derivative timings not increased from 1 October 2018?
1) Yes, but there is hardly any liquidity in BSE. You are better off trading F&O in NSE
2) No, not yet.
I saw lot of times the prices of same stock in NSE & BSE are gerally same, Why?
Even if seelers & buyers are different?
Think about it, its the same stock but different market. For example, if you buy an iPhone in Delhi or Bangalore, it will cost the same right?
As u mentioned, in case of a covered call, the loss in options will be offset in the gains in the underlying collateral..
As far as I know I have to maintain MTM…So what will happen to the shares if I have don’t have enough free cash to maintain MTM Loss? Will my shares be squared off the day my call expires or everytimeI don’t have the required MTM?
There is no MTM in options, Lino.
Sir, is there any restriction on how many lots we can buy ? Like if i want to buy 100 or more lots in nifty or bank nifty, can i do that ??
In one order, you can buy upto 60 lots. The quantity freeze is applicable once your cross 5% OI.
Sir suppose open interest is only 100,000 for a strike in nifty so 5% is 5000 which translates to 5000 ÷ 75 = 66 , so i would be able to buy only 66 lots ?
Thats right, Kavita.
& sir, this limit is only for a particular strike, isn’t it ? I mean i can buy 5% OI in as many strikes as i want, isn’t it ?
Sir, i also found out that when i look at the volume of an otm option in the nse website, it appears to be very low like 100, 250, 1050 but when i check kite, the volume for same strikes is 100,000 , 500,000 or even more. Why is it so ? On which one to calculate that 5% limit ?
I’d suggest you look at volume data on either Kite or NSE on an end of day basis.
Dear sir,
I have a few important questions to ask you
1) That 15% open interest thing may be there in options, but i hope that in equity market we can buy as many lakhs & crores of shares if we do have the required capital & the shares has required liquidity.
2) If the above is true, will any deal that i do above 5 lakh shares or 5 crore value will automatically become a block deal ?? & if not then why do large amount investing is done through this so called block deal procedure ?
3) If i buy shares worth crores then sure there would be atleast some paise movement in my favour if not a complete rupee, so can i immediately scalp that movement ? Will that be allowed ? I hope it wouldn’t be considered as market manipulation
4) FIIs & other rich investors first take big positions & after that they are free to sell the shares anytime & reap the profits, leaving retail investors in deep trouble as those shares fall badly, but if they do it & it’s legal, then why, what Harshad Mehta did is considered illegal ?
1) Yes, you can buy as much as available in the open market
2) Yes, it will be. So you will have to talk to your broker and work around on the block/bulk deal window
3) These are off-market transactions, so won’t affect the price movement
4) Like I said, if the transaction size is large, then the trades have to go via the block/bulk deal. These are off-market transaction, so it won’t really impact the prices.
But sir, if my amount is less than 5 crores or less than 5 lakh shares then ?? Like 4.5 crores or even just 1 crore, it would still make some paise movement & it wouldn’t have to be a block deal, isn’t it ?
& what about the sudden spikes we see in some shares especially after 2 pm. Isn’t that some same thing ??
Yes, but that’s the very nature of the market, isn’t it?
Hi Sir. I am very new to FNO. Struggling to find out profit way. I have one query – In case I write Bank Nifty 23600PE @104 premium. This is deep OTM. I would receive 4160/- as premium. Spot price is 24400. Now…1) What would happen if I don’t exercise the trade till expiry irrespective of spot is price is up or down than that of existing? ….2) What would happen to margin money which is blocked for this transaction?
1) If Bank Nifty expires above 23.6K, then the option would expire worthless and you will retain the entire premium. If it is lower than 23.6K, then you will have a loss to the extent of the spot below the strike
2) It will stay blocked as long as the spot is above 23.6K, if its starts going lower, then the position will be squared off (unless you bring in additional funds) and margins will be unblocked.
Thanks for the reply. Point no. 1 is clear now.
Point No. 2) Suppose…
a) Since spot price is 24400 and difference between strike and spot is 800 points, it is unlikely to cover in one day. Suppose, transaction is MIS. Spot price at EOD is 24100. Obviously, premium will increase. Say if is now 125. I will suffer loss of 125-104=21 points. Please correct if I am wrong.
b) In case spot price at EOD is 24700. Premium will decrease. Say if it is now 80. I am in profit of 104-80=24 points. Please correct if I am wrong.
c) In case expiry is in next week. Spot and Strike remains flat throughout days. Due to time decay, premium will decrease. Can I square off my transaction at this reduced premium?
Regards,
Sunil
a) Yes, you will lose 21 points upon square off.
b) Yes
c) Yes, you can. No need to wait for expiry.
Many Thanks Karthik ji. Regards,
Dear sir,
The volume traded of Nifty Oct futures today ( Oct 11 ) according to kite was 1,95,83,025. Does it mean that these many lots were traded today or we have to divide it by 75 to get the lots ?
You will have to divide it by 75.
Ok Sir, Thank You .
& yes, may this Navratri bring prosperity to you & your loved ones 🕉️ 😊
Wishing you the same, Manas!
HI I have a very basic question regarding margin requirements when selling a Call Option.Here it goes:
So let’s say at a given day Nifty Spot was trading at 10,235.I sold a 10,300 CE @ 136 ₹.Now at the end of the day Nifty Spot closed at 10,472 and hence the 10,300 CE is now trading at 254 ₹.Initial margin (SPAN+EXPOSURE) *as per Zerodha’s margin calculator was ₹60,618.Now the premium has increased and the call option is ITM as well (and I am having a short position) so now what will happen?Will I have to cough up some more funds?Will the margin increase ? Basically what I want to know is, is there any MtoM settlement in option selling as well ?
And also Karthik, the premium which we receive by selling a call or put is free to use or not?
or
Is it blocked until we square off or wait for the option to expire worthless at expiry day?
You receive it, as soon as you square off the position.
Archit, there is no M2M in options, but yes, if you wish to carry the position forward, you will be required to park more funds as margin.
Dear sir,
I recently downloaded an app from playstore named Technical Indicators Explained by Jio Developer. As i opened the app, i was shocked to see that whenever we click on any indicator’s name, it is directing us to varsity & some other sites. Please check immediately sir
Yeah, we are aware of this Manas. We will look into this, thanks for sharing it.
Sir, kindly tell us strategy which gives small return but consistant returns
From whatever I have experienced so far, writing far OTM option at the beginning of the series is something you can consider.
Trying to pause and retrospecting to get a holistic view, It seems like derivatives deals with a precise point of view ( a fact) , and that could be achieved by having a very strong fundamentals of a broader economy (macro) and drilling into different sectors and then further drilling into the specific stock , basically a top down approach.
At the end it is a game of whose fact is more accurate and the winner takes all.
Obviously this could be achieved by investing intellectually (stay up to date with news, articles etc..) , emotionally (greed/fear in tact) to correctly use various financial instruments at the correct time.
Not really sure how TA helps in derivatives as i believe It is just a study of the effect of these decisions taken in the past and expecting that similar decisions will be taken in future should the same occasion arise. But may be it could be too late to take action before opportunity disappears.
Bharath, I agree with you. But along with this, you also need to get a price based perspective, which is where TA helps to a certain extent.
Sir, there may be a problem of liquidity in certain strikes in options,but if i specifically say Nifty Futures, then i can trade 10 or 100 or even some more lots easily, isn’t it ?? I checked it has great volume
Yes, Kavita. Nifty contracts do not have any liquidity issues.
Sir, since in options there is liquidity problems & also the major problem of premium decaying as the expiry approaches near, but in futures there is no such problem & the also the benefit of leverage, so shouldn’t we always trade futures if we are strongly bearish/bullish on a stock rather than options ??
Each instrument has its own set of advantage, Kavita. You need to select the right instrument at the right time and deploy the trade. For example, if you are moderately bullish, then there a no point buying a futures contract, you are better off buying a call option instead.
Is there a limit for how much quantity of option can one person short in one day in one script. for example if the volume traded xyz script of particular strike is 500000 would I be able all of them in one day.
I’m copy-pasting this from NSE’s website –
The gross open position across all futures and options contracts on a particular underlying security, of each specific client, FPI (Category III) or scheme of MF, should not exceed the higher of:
1% of the free float market capitalization (in terms of number of shares)
or
5% of the open interest in all derivative contracts in the same underlying stock (in terms of number of shares) whichever is higher
The position limits underlying-wise, are available to members on NSE’s website.
https://www.nseindia.com/products/content/derivatives/equities/position_limits.htm
Thank you very much for reply. This is what i understood,
for example total number of shares hold by public of sbin is more then 300 crore so i could minimum buy or sell options till 1 crore shares . Please correct me if i am wrong.
Also is this contratc limit is same for both futures and long and short options contracts or not because there is huge difference in margin required to trade futures and short options while options could be bought much cheaper therefore is this quantity limit same for futures and long and short options.
Again thanks very much.
Yes, the contract limit is same for both F&O.
if my short option expire worthless then will i have to worry about phsical settlement in any of the stock or should i square off before expiry . ALso please provud elist of compulsory delivery stocks
If the option is worthless, then there is nothing to worry about. Here is the current list of stocks for physical delivery – https://docs.google.com/spreadsheets/d/1XDcruUPTawKeC7AQyoIJDN7tvT9SaLv-YuTAzjDnYI4/edit#gid=0
also currenlty i having short positons of canarabank, sbin, reliasne, pnb, hdfcbank, and nifty. Can i just let them expire without worrying about compulsory delivery, thanks,
Here is the list of securities for physical delivery, request you to check the stock names here – https://docs.google.com/spreadsheets/d/1XDcruUPTawKeC7AQyoIJDN7tvT9SaLv-YuTAzjDnYI4/edit#gid=0
Dear sir,
I saw that stamp duty charges are levied according to different states. At present i am in Delhi, so the charges are according to here, but if i move back to my state Uttarakhand, will the charges be according to there or same as Delhi since i opened my account here ?
Hey Manas,
Stamp duty is charged based on your correspondence address registered with us. So unless you inform us about your relocation and have your address changed, the stamp duty will be charged based on whatever data is existing with us.
Is it necessary to change ? I checked out that Uttarakhand charges much more stump duty than Delhi ? So can i keep the delhi address as fixed or i have to change it compulsory if i move to another state ?
Dear sir,
I saw in television that Bank Nifty lot size is going to change to 20 from January. Does that mean that margin for taking short positions will also be reduced ? & if not then what’s it use ??
Yes, please check this – https://tradingqna.com/t/banknifty-lot-size-reduced-to-20-from-today/49135
Sir despite being in a clear uptrend or downtrend, sometimes a share’s both put and call option premium falls. Why do this happen. Shouldn’t one rise when another fall ?
So it’s not just the direction of the market/stock that influences the change in premium. The increase in volatility cause the premium to inflate and the cooling off of volatility tends to cool off the premium as well.
Thank you sir
Sir, what would be consequences of selling an ITM option ? Like if i think an itm option is soon gonna become otm so premium will fall off very fast just like it increases in vice versa case & i would benefit from it. Is this possible ??
ITM option have high delta, and the delta is also an indicator of the probability of ITM remaining as ITM. Given this, it may not be a great idea to write ITM options…unless of course, you are highly convinced on the direction.
Hi
I have some doubts about option writing .
1)Being said that option writers are subjected to unlimited risk why don’t an option seller put a stop loss and come out of the trade if the trade goes against his expectation. Is the margins (span and exposure) immediately released once we buy square off the option.
2)Is the method to exit the trade the same way we do in option buying.
3)When I check the margin requirement today using zerodha’s calculator the premium received is based on yesterdays closed price. Assuming that If I take a trade today is it the same?
4)Suppose I take a trade today and the premium I received is 5 and if the same day or the following days the premium eroded to 3 and the bids are 1.5, 1,0.75etc and offers are 3.5, 2.5,2 etc. at what price I’ll be able to close the positions.
5)On the expiry day if the underlying price is below the strike price do we need to do anything to physically claim both premium received and the margins or it’ll be automatically credited to our trading ac?
1) Traders do place stop-loss. Yes, margins are released once the position is sqaured off.
2) Yup, you have to buy instead of sell
3) The margins won’t vary much, unless the option price has changed drastically
4) Based on the best bid and quantity you will get a full
5) Assuming this is a call option, this will be worthless. So no question of physical delivery.
sorry 5th point is not clear for me actually I was thinking in a call option writers perspective, stock price haven’t reached the strike price means we get the whole premium right?. In that case at the expiry day do we need to do anything?
Yes, if you have written the option and it turns out to be worthless upon expiry, then you do get to retain the whole premium.
Dear Karthik,
I am new to option trading, I have a question about squaring off on expiry date.
Suppose If I buy an option of a particular strike price which will not reach and the value becomes zero. I cannot close or square off the position when the value is zero. If I try to exit with minimum price of 0.5 paise even then it does not get squared off. Then what happens, will I be charged heavily since the exchange will exercise to close the trade?
please clarify.
You need not have to worry as the option is expiring worthless less.
I have doubt in Option writing stop loss.
For example, If I write 1 lot of BHELNOV75CE @1/- premium credited to my account.
Then, my this order gets executed.
(1) Such case I already have Writing position & I want to buy back at lower value of premium. So, when I am trying to buy there I selected Price as 0.50 & trigger price is 1.50. Is it correct?
(2) Here, either 0.50 or 1.50 is executed or what? Tell me exactly.
(3) Is trigger price means stop loss price?
(4) Is price means target price?
(5) Both target price & stop loss price can be place through single order?
Plz clarify. I’m confused
1) Yes, you will be profitable when you buy back at a lower price like 0.5 or 0.25. You don’t need a trigger price here. Trigger price is applicable when you are placing a stop-loss order
2) Since you are setting the price, it will be executed at the limit price
3) Trigger and stop loss are different. Trigger price is associated with stop loss order
4) This depends on the context
5) Yes, you can use a bracket order for this.
If I var existing WRITING position in BHELNOV75CE @1 PREMIUM.
(1) So, during buy back can I place target & stop loss at same time?
(2) How is this possible?
(3) Steps plz
You will have to do this manually, Sushil.
1) Zerodha provide bank nifty options writing leverage?
2) How much leverage for bank nifty options writing MIS & NRML?
3) Is this only for intraday or delivery?
Sir pls reply my query
1) You can use MIS as product type, you will need 35% of NRML margins or 2.5x leverage
2) https://zerodha.com/margin-calculator/SPAN/
3) Intraday
Sir if i am having a stock future of this month but on the expiry day, i want to roll it over, then how would i do it ? Do rollover simply means to square off your position & buy new contract or it works differently ?
Yes, its just that Varun. Roll-over means we close this month’s contract and initiate the same position in the next month’ contract.
Can we apply overnight stop loss for NRML order of options writing & buying options?
Nope, overnight orders are not available yet.
Hi,
Suppose Im selling a call option. When should I exercise my right. Should it be when it comes to 0.05 (even if it is 2 days before expiry) or at the end of expiry day (3:25 PM) or let it expire by itself. Thanks Karthik. Varsity gave me confidence and comfort.
When you write an option (call or puts), ideally the option should go to a near-zero value. If this happens before expiry, then you should close the position as you have no advantage of holding to expiry. However, if you are very confident that the option will continue to trade at the near zero value upon expiry, then you may as well let it just expiry.
Good luck!
1)So if i square it off 2 days before expiry i.e when it reaches 0.05 will it mean that i have exercised my option. by which I mean will i be able to pocket the premium of that particular strike which i wrote into.
2)If i let it to expire (i read somewhere) the stt charges differ right.
1) No, exercising is a term used only if you held something to expiry. In this case, you just closed a profitable trade.
2) STT is applicable for long ITM option and not short ITM and OTM options.
If I have long in the money call option and let the call option expire. Then I only get profit on call option or I have to buy a whole lot.
If the stock belongs to physical delivery, then yes, you will have to buy the stocks. Else, you will just get the profits. Check this – https://zerodha.com/z-connect/tradezerodha/policy-on-settlement-of-compulsory-delivery-derivative-contracts
Sir suppose i sold an itm call option ( lot size = 20 ) worth 100 rupees & at the expiry time it is 150, so would my loss be 20 X 100 – 20 X 150 = 1051 rupees or i would lose my entire blocked margin also ?
Your loss would be 20 *(150-100) = 1000.
Hi Karthik,
If I sell a Call Option (OTM) on a particular date (1 week prior to expiry), when the Premium was say Rs 10. Post this lets say the Spot Price remained below my Strike price and the Option expired worthless. What is the amount I get, as I understand Premium will not remain same till expiry. Will it be the Premium at which I had sold the Call or the Premium as on the Expiry Day.
Regards,
Dheeraj
If the option expires worthless then you will get to retain the entire premium.
Dear sir,
I came to know 2 strategies know as Long Box & Short Box, in which profit is very tiny but risk is zero. However i am not able to find any content about them. Can you please tell how it works ??
Check this Manas – https://zerodha.com/varsity/chapter/synthetic-long-arbitrage/
Sir i saw in the comments people saying that buying present month futures & selling next month’s give some sort of benefit. Is it sir ? I am not able to get it at all
Check this, Kavita – https://zerodha.com/varsity/chapter/calendar-spreads/
If I buy BANKNIFTY06NOV1825800CE @100 premium. I want to apply stop loss. So, I applied from sell-window in Kite mobile app.
If requirement is when premium comes to @ 50 then, my position should automatically closed.
So, in selling window, I select SL-type order. I put trigger price = 50.20 & price = 50.
(1) When, premium comes to 50.20 my order gets trigger & send to exchange & my SL-order gets converted into normal-sell-limit order. Hope I’m correct?
(2) After trigger of 50.20, whenever premium comes to 50, then , my order gets executed. And, I exit the trade @50 by making loss of -50 premium. Hope I’m correct?
Thanks Karthik Sir.
Wish you & your family Happy Diwali 🙂 🙂 🙂
Prakul, you will not be able to place SL at such faraway prices due to the execution range, check this – https://zerodha.com/z-connect/queries/stock-and-fo-queries/deciphering-nses-execution-range-circular
1) Yes
2) Yes, thats correct.
Thanks for the wishes! Wishing you and all the other readers the same 🙂
Means we never apply SL ??
Of course, you can for intraday positions and even NRML positions.
A very Happy Deepavali to you sir.
May this Deepavali bring health & prosperity to you & your family. 🙏🏻🕉️🙏🏻
Thanks, Manas! Wishing you and all the other readers the same 🙂
“When an option seller sells options he receives a premium (for example Rs.6.35/). He would experience a loss only after he losses the entire premium. Meaning after receiving a premium of Rs.6.35, if he loses Rs.5/- it implies he is still in profit of Rs.1.35/-. Hence for an option seller to experience a loss he has to first lose the premium he has received, any money he loses over and above the premium received, will be his real loss.”
Hi Karthik,
Please help me understand…
In the above quote and in the P&L calculation part, you are assuming that the premium of the 2050 strike contract is going to remain constant at 6.35/- right?
For e.g., if we short the 2050 CE @ 6.35 in an intraday trade then towards the end of the day what would happen if the spot is still below 2050 strike but the premium of the contract has risen to 7/-? So when the auto square off happens that would result in a loss right?
~ Abudhar al Hassan.
It wont be constant obviously, but with respect to your position, it will be a constant, because you have received the premium. In the example you have quoted, it would be a loss of 65 paise. The explanation I have given is wrt to expiry.
I have 2 doubt regarding SL order:
Suppose Banknifty15thNOV25700CE = 250 pemium
(1) If I want to write this @125 premium, when it comes to 125. Then, I go through SL order. But, this order requires futures margin. I agree with it.
(2) But, when already I have buy position @250 premium. And, I need to apply SL @125 premium. So, will this SL-order take futures margins or what? Because in this case already I have buy position.
Plz explore…………………
No, Prakul. Margins are required only when you are writing options as a fresh position and not required when you are squaring off an already existing long position.
lets say i having 1000 shares of reliance in my zerodha demat account and i want to write a covered call that is sell out of money call option . Will i be required to put any additional margin for this .
As of now, there are no margin benefits for a covered call. Hopefully, we will have this in place soon. Thanks.
[…] Selling/Writing a Call Option […]
(1) How much margin for BANK Nifty call & put options writing?
(2) BO & CO order can give more margins for BANK Nifty call & put options writing?
1) You can check this Amitabh – https://zerodha.com/margin-calculator/SPAN/
2) No, BO/CO is available only for Bank Nifty futures.
If I will use MIS product for BANKNIFTY CE & PE option writing, then when my position will be closed by RM?
3:20 / 3:30?
It will be closed at 3:20 PM.
[…] Selling/Writing a Call Option […]
Sir, the general perception is that option buyers loose 90% of the times and sellers win very often. Option buyers are like insurance buyers and sellers are like insurance company. (of course, there is a contradictory statement saying ‘ Eating like a sparrow, shitting like an elephant’). But, for a particular strike of a same expiry, we see both call sellers and put sellers. Assuming nearly equal open interest for both call and put option. Means, sellers are betting on both ways. Then how is it possible that both put and call option sellers win?
They could be different traders, Santhosh 🙂
By the way, when the market remains sideways selling both calls and puts makes sense.
Yes. They could be different traders. But they both are option sellers. Of course, Both of them will be winners in range bound situation, which does not happen always. But, if market move, one of the sellers (either put or call) should loose, right? Just cant get the logic… may be either one of them is hedging their portfolio/future contracts. There is no way to know by just seeing the OI numbers that whether they are hedging or having a naked option contract. is that right?
Yes, if the market moves then the sellers (either CE or PE) will lose money. OI does not give you the information. In fact, both OI and volume on a standalone basis does not give you information. You need to club this with price and derive information out of it.
Hi karthik,
Appreciate your hard work in putting this together.
For an option seller, is it absolutely fine to allow OTM options to expire worthless and pocket the premium?
Or is it advisable to square off before expiry (for option seller).
Is there any merit/demerit in doing either way (square off vs allow to expire – for OTM short positions).
Yes, you need not have to worry if the option that you have sold turns OTM upon expiry. Its worthless anyway.
Thanks Karthik
I think, Mr. Karthik is the right person to comment about this on this platform. However, I take the liberty to try answering your question.
It is absolutely fine to let the OTM option expire worth less if you have sold an option. You should be careful if it is very close to underlying price (near OTM), as the market tends to be very volatile near the expiry (after 3 pm). Keep an eye on max pain too. If you are very sure that your OTM strike will not be reached, it is fine you let it expire and pocket full premium.
Thanks Santhosh for your valuable input
Santhosh, thanks for pitching in. We need more voices on this platform 🙂
Hi Karthik,
Suppose I am selling bank nifty call option on Friday for premium say Rs. 100,
1) Can I close my position on Monday or should I need to wait till expiry on Thursday?
2) If I can close my position on Monday, will I get complete premium amount on the same day?
3) If I can close my position on Monday, can I again sell bank nifty option same day?
1) You can close the position anytime you want
2) Yes, you will. Remember you will make the difference between the premium received and the premium you squared off the position at
3) Yes, you can.
Hi Karthik,
Thanks for your reply. It will give me confidence in trading options. If in future, I will need any help, I know the correct person to contact with i.e. Mr. Karthik Rangappa. Thanks once again for your valuable help.
Vinayak, we are always here to help 🙂
Happy learning!
What is dabba trading?
People place trades based on verbal confirmations. They just agree on price and direction and avoid paying taxes and applicable charges. The biggest risk here is counterparty risk.
In Black & Scholes Option Pricing Formula calculator: ( for bank nifty)
SPOT= 26000
STRIKE= 26000
EXPIRY= 2018-11-29 15:30:00
I inserted these parameters.
But what about following in case of bank nifty options:
VOLATILITY (%)= ?
INTEREST (%)=?
DIVIDEND=?
Kalyani, check this – https://zerodha.com/z-connect/queries/stock-and-fo-queries/option-greeks/how-to-use-the-option-calculator
Hi Karthik,
Thanks for the hard work. Have been learning a lot from varsity material.
I have learned a lot about options but a fundamental question remains unanswered. Please provide a detailed answer if possible.
If very first day two traders enter the options market say “A” and “B”. “B” sells an option and “A” buys the same option hence one contract gets created. “B” is paying from his margin but now on the second day there is a new buyer “C” in the market and “A” wants to square off his long position to “C” means ultimately “A” wants to become a seller,
1. Then, in this case, will “A” be paying the margin to “C” or “B” will be paying the margin on expiry day?
2. Does it not lead to Two sellers ( “A” & “B”) and only one buyer?
3. How will it affect all three traders and the contracts in this scenario?
Please, this is making huge confusion, it this gets clarified lots of doubts will be cleared.
“A” wants to become a seller — > No, B is still the seller. A is just closing his position and getting out of the market.
Thanks, Karthik
That means B will keep paying the margin if the trade goes against him.
Margins are blocked at the time of initiating the position and will remain to be blocked till the position is closed.
[…] Selling/Writing a Call Option […]
If u see today after market closing = BANKNIFTY 25600CE = 150 & 25600PE = 145.
but, after that day; if you see both prices i.e. 25600CE = 156 & 25600PE = 143.
These changes in values are after market closing……..why? If derivative market closed @3:30pm to 9:15am?
Why such changes in premium?
It is the weighted average of the last 30 minutes, Aishwarya.
Not understood?
But why this happens? Because next day market will open some gap up or gap down……. premium will already gets adjusted correspondingly…..
Aishwarya, I’m afraid you have seen the LTP on the previous day. LTP is different from the closing price of the day. The closing price depends on the weighted average of the last 30 minutes of trading. The exchanges do this to avoid manipulation.
Plz share link of historical data of bank nift OHLC
Check this – https://www.nseindia.com/products/content/equities/indices/historical_index_data.htm
[…] Selling/Writing a Call Option […]
Sir is there any strategy by which we could earn consistent profits, be them small but consistent
Sir, please reply
Sorry, I guess I missed your comment. You will have a loss to the extent of the intrensic value i.e the difference between spot and strike (the provided spot is higher than strike).
Sir, how much otm shall one write bank nifty options ?? Like at present bank nifty is at strike 26800, so the strike 28000 would be safe as it is almost 1200 points away, but then if risk is less, so premium is also very less. But if we chose closer strikes, then there’s more risk. So how far is considered as safe if we don’t know any strategy to save ourself, & we are just selling an option ??
Kavita, you will have to strike a balance between strike and time. So writing far OTM early in the series is a good idea. Helps you pocket sufficient premium.
Sir, i read an article about PR Sundar, India’s largest option seller a while ago & saw that in his social media handle that he earns millions per day & he has even posted a pic with 53 lakh profit in a single day. But when i saw a video in youtube where he’s explaining his techniques, i couldn’t find even a single positive comment for him. Everyone was like “don’t ever follow what he said”, “best way to become bankrupt”, “never sell options for pennies”
Can you please tell sir what’s wrong with his ways ??
I don’t follow him, Manas. So I don’t really know 🙂
sir if i do putwriting ex:-banknifty-strikprice-25500@130 @sell a lot at 130 and buy it at 80 –profit is 50 what will i get after all charges
Gurjeet, you can use this – https://zerodha.com/brokerage-calculator
Hi Karthik,
I am new to options trading and willing to trade in options I have below doubts could you please clarify me.
Ex: NIFTY (As on Dec 17, 2018)
Spot price : 10872.25
Strike price : 10900.00
Premium : 94.70
Bid QTY : 150
Expiry : 27DEC2018
1] If I first place call options ‘Buy’ order @10 AM and on next day(18DEC2018 before expiry) @2 PM if Premium raises to 96 then I decided to ‘Sell’ options will I make profit here and does it required extra margin balance of 73,043(as per margin calculator) in my account to place sell order?
2] After placing call options ‘Buy’ order, Suppose if I hold the stock and ‘Sell’ on Expiry day 27DEC2018 morning @10AM then, will I make profit here and does it required extra margin balance of 73,043(as per margin calculator) in my account?
3] After placing call options ‘Buy’ order and then ‘Sell’ order for the same, will I become Seller or I will be exited from the trade ?
4] Does ‘Sell’ and ‘Square off’ both are same or different ?
1) You are squaring off an existing position, so there is no margin required.
2) You need margin only if you are initiating a new short position. You are closing an existing buy position, so no margin required. The profitability depends on the difference between the premium paid and sale price of the premium
3) Exit the trade
4) Square off means you close an old position. Sell can be used as per the context.
Hi Karthik,
First of all I would like to thank you for clearing my doubts with wonderful answers, I have few more below doubts by continuing of above.
5] Can I ‘Buy’ more than 1 ‘Options calls’ of different strike prices and ‘Sell’ the same in a day, does it carries any risk ?
6] Is there any difference in charges or taxes when I ‘Buy/Sell’ call options as ‘MIS’ or ‘NRML’ type ?
7] If I am placing call options ‘Buy’ by selecting ‘NRML’ type and ‘Sell’ withing 10 min, is there any difference in charges or taxes as compaired with ‘MIS’ type ?
8] When I refering to NSE india ITM is 10900(Yellow color) and OTM is 10950, if the spot price is 10952 then ITM will be 10952 or 10900 ?
9] If I place options call ‘Buy’ & then ‘Sell’ again ‘Buy’ & then ‘Sell’ and so on in day, then which type I have to select ‘NRML’ or ‘MIS’, is there any maximum limit to trade in a day ?
10] Is there any ‘Risk’ involved in trading options call ‘Buy’ of different Indices & squaring off on the same day without holding it ?
5)Yes, you can buy and sell the same day. No issues with it.
6) Nope, there is no difference
7) Nope, there is no difference
8) It will be 10950
9) NRML
10) The only risk is the directional risk
Where will I get historical chart of bank nifty strike prices for weekly expiry?
No, Devdatta. Not available.
As per NSE Circular Ref. No. 124/2018
Nifty Options also introduced in weekly expiry date manner like bank nifty.
It’s very good news…… 🙂
Yes, more trading opportunities.
Nifty is less volatile as compared to bank nifty!
Less volatile with large time decay 😀
Sectoral versus diversified 🙂
Sir missing you 🙁 🙁
Plz make chapter on technical indicators like parabolic SAR, Rainbow, supertrend, VWAP & their use……
I’m available on Varsity, almost all the time, and soon, we will make an interesting announcement 🙂
Meanwhile, check this – https://zerodha.com/varsity/chapter/supplementary-notes-1/
Sir,
I am unable to grasp this one basic point on Selling/Writing a Call Option: When somebody is bearish about a scrip he can buy a put option. Why should any body sell/write a call option where the loss is unlimited ?? In situations selling/writing of options is preferred. Pl clarify.
What if the premiums are very expensive? In that case, selling the option and pocketing higher premium is a better option than buying one right?
Can we apply overnight stop loss for Nifty Bank Nifty and stock options?
No, you cannot really carry forward the SL positions. However, I’d suggest you check this alternative – https://zerodha.com/z-connect/featured/introducing-baskets-on-sentinel
Hi Kartik, I see many OTM call options with ask price & no bid price. This means that these options are illiquid & can’t be sold? But I see many options like SUZLON DEC 18 strike 16 having LTP of .05 despite showing no bid prices. How is it possible to have no liquidity & still having a traded price?
https://www.nseindia.com/live_market/dynaContent/live_watch/option_chain/optionKeys.jsp?segmentLink=17&instrument=OPTSTK&symbol=SUZLON&date=27DEC2018
Yes, that is because of lack of liquidity. The price could be a stray trade that could have happened earlier in the day.
Karthik Sir, first thanks for writing this wonderful chapter & modules. Specially for this chapter. I earned so much in 2018.
I have 1 doubt- relatives & peoples ask me What are you doing nowadays? 😀
I’m telling them – I’m derivatives trader which is underlying asset of NSE. But, they didn’t understood in 1 line. And, it’s time to my marriage may be in next year.
So, tell me What should I have to tell these peoples & relatives, so that they understand my stock, index option derivatives work in 1 line?
Plz help me…… 🙂 🙂
Aishwarya, this is a very tricky problem and I really do know the right answer 🙂
If I were you, I’d probably say, I deal with Financial Derivatives. I’m sure, most would not understand this, probably a follow-up question on what derivatives would crop us…for which I’d say, its the largest market in India, with a turnover of over 4L Crore on a daily basis 🙂
Dear sir,
A very very Happy New Year to you & your family 🙏🏻🕉️🙏🏻
Sir, i also have a question that suppose if i buy a deep ITM option for, say Bank Nifty & it has premium of 1000 so i would be paying 1000 x 20 = 20,000. Now sir suppose on the expiry day the value for it can be profitable say it’s 1100 now or loss say it’s 900, but what if it has no liquidity left now & it doesn’t have a single person who wanna buy it ? Will i lose all my 20,000 ??
Thanks, Manas. Wishing you the same.
No you will not lose any money, the option will get exercised and you will get the settlement from the exchange.
But that’s the main problem sir. If an ITM option gets exercised, then that STT trap would kill us, so it’s very necessary that we sell it before expiry but since now there’s no one interested in buying it, i had to let it get exercised & kill me. Isn’t it ??
No denying there Manas, hence the need to trade liquid options 🙂
Thank you sir.
Sir please tell how to calculate STT if option is exercised. Suppose i buy an ITM bank nifty option with premium 1000 & on the expiry day it’s 800 & i let it exercise. So apart from 4000 loss how much do i pay as stt ??
Manas, check this – https://tradingqna.com/t/no-more-stt-trap-on-exercised-in-the-money-options/18977
Sir if i sell an itm option with premium value 600 & if on expiry it becomes 500, so i would profit 2000 rupees but since it is still itm so i don’t think i would have any problem with that & would get that full profit without any implications
It is best if you can square off the position before expiry, Nakul.
Yes sir, but i am curious to know that if it just gets exercised then it isn’t a problem for option seller, isn’t it ?
Nakul, as long as you are aware that the risk is unlimited, there is no problem 🙂
Hello, Can we sell banknifty option first and then buy? It is possible?
Means First i Sell option say 27000 CE first at a premium of 100 and before expiry i sell at a premium of 50?
if it is possible then how can i do that? how much margin require for that?
Yes, you certainly can sell first and buy back later. This is called Option Writing or Option Selling.
If I buy bank nifty call option @230. But, if go upward….but if I want to exit @no loss no profit. Then, can we place SL-M ORDER SL @230.
After 230 buy execution, placing SL-M @selling side require any margin or what?
No, you are squaring off an existing position, hence no margin required for this.
SL-M is a market order, so there is no guarantee that the execution will occur at 230. You need to place an SL-limit order if you are particular at the price at which you’d like to execute.
SL limit order does not get execute for quick moments. But SL-M order execute 100% at best available market price. Hope I’m correct.
Thats right, but with any market order, there is no guarantee in execution price.
Hello Kartik Sir,
Please correct me if I am wrong.
In the Bajaj Auto Sheet, underlying price is 2026.
Consider I sell call option of Bajaj Auto with strike price of Rs 2200 and receive a premium of Rs 0.65
Therefore if spot price stays below 2200, I make a profit of Rs 0.65
But logically, for a share to go from 2026 to 2200 in a month have very low probability.
So does that mean that this is a win situation for seller. Although the premium is low but the risk here is negligible.
Therefore profit earned = 0.65 x lot size, which is not a bad deal to earn profits.
Please correct me if am wrong.
Thanks.
Yes, here the bet is that Bajaj wont hot 2200 in a month. In fact, you can calculate the monthly swings and get a perspective of how much movement to expect in the stock.
So, this is a win condition.
Generalizing, this can be applied to all stocks and the index too.
We just need to bet on a strike price that seems impossible to achieve.
Well, like I have said earlier, there are no guarantees in the market.
Hi Karthik..!
I have been trading in only 8-10 individual stocks (futures) instead of Index(Bank Nifty,Nifty50) and since I have dealt with these 8-10 stocks for a longer period, so for obvious reasons I am very comfortable trading them.. But every where I see traders are always referring to Trade in Index only..
Is there something that I am missing by not trading in Index?
Dont get swayed by that Anitesh, do what you are comfortable with 🙂
Thanks..! BTW what are the stocks you consider to trade frequently?
Usually the Nifty 50 pack.
Sir i saw that sometimes futures of a particular stock is more than it’s spot price & sometimes it’s less than spot which they call in tv as discounted. What does these scenarios mean & why do it happen ?
Kavita, I have discussed that here – https://zerodha.com/varsity/chapter/futures-pricing
If I sell a Bank Nifty Call option at the present premium of say Rs. 500 * 20 qnty i.e., 10000/- and wait till expiration day when premium value goes to near zero say Re. 1. Will this Rs. 10000/- sell (minus) buy at say Re. 1/- i.e., 9999/- be my profit at the end. If this is yes, then option writers can always make profit at expiry. Even if spot price hit my strike price and goes down, at the end of the expiry I will remain profitable. Please clarify.
The profit you make when you write an option depends upon the price you receive for writing option and the price you pay for buying it back. If the option is left to expiry and goes worthless, then the buy back price is 0 and hence you get to retain the entire premium.
Sir last week i shorted 27500 CE bank nifty when the premium was 59 thinking that market won’t reach there, but given the sudden upmove it has in this week the premium has gone very high now & i am in a good loss. But sir i hope that i don’t have to face stt trap as although the call has became itm but i have sold the call first, isn’t it ??
The STT is applicable for option buyers, Shubham and not for option sellers.
Thank you sir, i was very worried about that thank you. But sir if such is the case then how is option buying profitable in any way ? Problem of theta decay, requirement of strong move, even if it goes itm still the need to have liquidity to avoid stt trap, seems like all havoc breaks on option buyer.
Well, for these reasons you need to write the right strike 🙂
Sir which strikes are considered liquid enough to trade ? Like many strikes have open interest more than 1 million but some strikes are there with only 100,000 in open interest ? Is that considered enough liquid if someone had to trade like 100 lots ?
Liqudity is relative, it depends on how much quantity you are trading. If its 1 or 2 lots, then even 100,000 is good enough.
Congratulations…..11 Feb 2019 nifty weekly options expiry chain start….. happy for writers
Really ? I can’t find the link…. Please share
Thanks, Mukul 🙂
https://www.nseindia.com/circulars/circular.htm
Kindly check circular on dated 7 Feb 2019 in FUTURE & OPTIONS department.
Sir can you please share the link, i can’t find it on nse website
can an option seller write means sell a contract at a specific premium and then after some days like 2-3, square off his position by buying the same contract ?
just like we do it in CE or PE options like first buy and then sell to square off
or he has to hold it till expiry once he writes it ?
Shubham, the seller can write options and buy it back anytime he’d want. No need to wait till expiry.
how to develop a sense for option pricing which will help you understand how cheap or expensive the premiums are
This will happen over time, Shubham. But as a quick check, you’d want to check the option price and volatility. High volatility implies higher premiums.
sir why would i write a call option for a meager gain of some rupees when for same amount of margin i can buy 4-5 lot of options and can easily make that of much of money. i dint understand either futures or this option writing with so much margin getting blocked and on risk i can use that money in better place. but i have read that smart traders make more money by shorting options. how do they do that. i dont get this.
Well, it is not about how much you make, it is about the probability of ensuring the outcome of the trade is in your favor. This is on the higher side for the option Seller.
Hello Karthik!!
Suppose I sold Nifty 10900CE. I would be the option writer/seller. Some of my cash would be blocked as margin amount as I sold CE option. I receive premium if trade favours me or else I would be losing my money on the last day of expiry.
My doubt is that :
1. Can option sellers trade on intraday basis?? i.e., selling options today and buying them back on the same day!!
2. If possible to trade on intraday what would be the profit/loss if nifty moves in my favor??
1) Yes, boh option writers and sellers can trade on an intraday basis.
2) This depends on the premium price. For example, if you sold at 125, bought it back at 120, you will make 5 as the profit.
To one of the above question on sqaring off the profit , you had stated , just buy back the option and you will make 2 points . Bit confused . Does it mean , we should always buy back the contract while existing any profitable trade ? Was this in reference only on the day of expiry ? What if we want to profit before the expiry and we know we are making the profit. How do we exist the trade ? Am sorry need bit clarity on this .
You buy back if you have shorted the contract. You can square off the contract anytime you wish, no need to wait till expiry.
I have a doubt regarding options here. let us say i sell a call option for rs.2 premium at 10th of a month. The person to whom i sold the option, held it till expiry. now note that i was the last seller to that person. now if the person exercises the option after expiry (say the market price of the underlying stock is very well above strike price+premium), am i obliged to pay an amount equal to the market price of the stock at expiry, to that person? if not where does the person get his money from ? please clarify me on this. Thanks in advance.
If you have sold, then the margins would have been blocked from your end. The margin will be released only after you square off the position. If you have been assigned, then the margin will P&L will be debited from margins.
On bank nifty expiry day,
(1) If I write @100 premium & lot size=20. And, kept SL @200 premium. So, if when premium reached @200 my loss is = 100 x 20 = INR 2000/-.
(2) After that, once again if I write @200 premium & lot size=20. And, kept SL @300 premium. So, if when premium reached @300 my loss is = 100 x 20 = INR 2000/-.
So, from case (1) & (2), total loss = 100 points + 100 points i.e. Rs. 4000/-. Hope I’m correct??
(3) After that, once again if I write @300 premium & lot size=20. And, kept SL @400 premium. So, if when premium reached @100
I exit my position , my profit is = 200 x 20 = INR 4000/-.
So, from case (1) & (2) & (3), total loss = -100 points – 100 points + 200 points i.e. Rs. 0/-. Hope I’m correct??
So, on expiry day, If we book losses & go upward by multiple of premium. So, me in above example we maintained 100 premium consistently. Is it right? Explain plz
I’m not sure if I understand this question right. But yes, in this case, the SL is constant at 100.
1) Correct
2) Correct
3) Yes
4) Yes
Yup, the calculations are correct, but you will end up losing a little bit of money on transaction and brokerage charges.
Plz share link of nifty & bank nifty daily turnover on NSE site!
Check this –
https://www.nseindia.com/live_market/dynaContent/live_watch/option_chain/optionKeys.jsp?symbolCode=-10006&symbol=NIFTY&symbol=NIFTY&instrument=-&date=-&segmentLink=17&symbolCount=2&segmentLink=17
and this –
https://www.nseindia.com/live_market/dynaContent/live_watch/fomwatchsymbol.jsp?key=NIFTY&Fut_Opt=Futures
You can also download the bhav copy at the end of the day.
Sir, do american stock futures have also the system of lot sizes ?? Because i searched for it like apple stock future lot size & so but found nothing. Just curious to know ☺️
Manas, as far as I know, it is in multiples of 100 units across all stocks.
Hi 1st thanks for sharing this detailed info.
I have a zerodha\also it may applicable to any broker as NSE premium and lot size will always remain the same.
account and just wanted to get to know from you a margin amount requirement..
Question:-
If I did short sell\writing in NRML mode of Bank nifty which has the premium of Rs. 300.
And now after some time (1-2 days before expiry) the premium moved or started going up between 301 to 400.
So extra Rs. 1 or 100 premium getting added right !!
Hence considering normal margin requirements, how much approximately I need to have extra money in my account to save the position to get it auto square off.
Is 12-15,000 is good enough???
No, Jatin, the increment in premium is a loss to you. What matters is the price at which you have written the option, that is your reference point for the trade.
For example, I have written a nifty option at 10900 strike for a premium of 100 if the nifty the nifty expires at 11000 and let it expire, then what are the charges, and how much is my loss sir?
You will lose 100 points here, Mani.
same applies for equity options sir, will there be any charges for letting a short option position expire in the money
No STT on short options.
(1) What is maximum fall of Nifty 50 in gap-down opening in a single day (in %) NSE indian market history till now?
(2) What is criteria of NSE Nifty 50 maximum fall circuit limits for 1 day?
1) I remember a near 15% gap when the 2009 elections happened. About 3-4% gap downs were common in 2008
2) Check this – https://www.nseindia.com/products/content/equities/equities/circuit_breakers.htm
keeping these scenarios in mind, how does one writes strangles/straddles sir, especially incase of gap openings.
Well, these are delta neutral positions. So it should be ok as you lose on 1 position and gain on another.
[…] Selling/Writing a Call Option […]
Sir,
1.when to consider an option worthless and itm.
2.In futures we place the stop-loss on the underlying price,but how to place the stop-loss on premiums here if I have bought call option at 10850ce at 100 I have to place the stop-loss at yesterdays low say 10750 how I will be knowing the exact premium for that price
1) It is worthless if the strike has no intrinsic value, ITM otherwise
2) You will have to place based on the spot. However, you wont know exactly where the premium could be in case of 10750, hence for this reason, few traders place this the SL on premium as well.
So can we place the 10750pe premium price as stop-loss for 10850ce long call.
That will be way too convoluted, not advisable 🙂
So if I am option seller if the price starts moving above 2050 can we consider it as option expiring worthless and if it is going below 2050 can we take it as itm.
I can’t see the exercise button to exercise my option contract on the platform, only square off button is visible. So, will the exercise button be available only on the day of the expiry?
There is no button as such for exercise. If you let your deep ITM option stay as is, it means you intend to exercise the option.
Thank you so much for your reply Sir. I would like to know the tax implications of my options contract, if I let my deep ITM contract stay as it is I.e. if I choose to exercise it. Does it mean that the system will automatically exercise it for me resulting in me losing my premium?
Yes, deep ITM option will require you to pay high STT. Check this – https://tradingqna.com/t/no-more-stt-trap-on-exercised-in-the-money-options/18977
Very thankful to you sir, nice job doing .. what ever i learnt only from yo.. sir my Q is : can i sell option price money in spot price or can i buy spot and sell future i mean stock??
Yes, Kunal. You can buy spot and sell the future, there is no problem with it.
Very informative article.
Kindly answer my following query.
Suppose I hold 1 lot of bank nifty 28900 CE with expiry date of 28.03.2019.
On the date of expiry, the Bank nifty closes at 28936.
I presume that the settlement will be done at 20 x 36 (28936 – 28900) = 720.
What are the charges payable for this settlement and what will be the pay off ?
That’s right, you stand to gain 36 points. However, the STT on this will be nearly 30 points or thereabouts. So you’d not end up making much on this trade. Check this – https://tradingqna.com/t/no-more-stt-trap-on-exercised-in-the-money-options/18977
I write Call option of BANKNIFTY Lot one
and received premium 80×20 = Rs1600
Exipary date 4 th April
Now If I square off same that is I buy BANKNIFTY Lot one before expiry suppose 2 April . As you know while buying call option can I have to pay premium suppose Rs 100 ×20 = 2000
to minimize my loss
Please note sir I buy same BANKNIFTY , same lot, same expiry
means I want to Close my position ( square off) Then is it compulsory to paid premium at time of buying ( square off) position
You are not exactly paying premium here, Pankaj. You are squaring off an open short position here. This is not equivalent to fresh writing.
Hi Karthik,
I have one doubt regarding the Option Chain .Consider YES BANK option chain for today i.e 01.04.2019 .What I can see is at Strike Price 280/290/300 both PUT WRITING and CALL WRITING has been done.
What can we conclude from this kind of Option Chain when at both the ends WRITING is going on,will the price increase or decrease.
Regards,
Rohit
Rohit, since both CE and PE have been written, one thing that can be concluded is that the market participants expect Yes to be in the range of 280-300 before April expiry.
Respected Kartik sir
According to your trading experience which are more liquid Option or Future
Nifty/Bank Nifty/ among the indices. SBIN, Tata Motors, Infy, RIL, HDFC, Kotak, TCS among the stocks.
I want to know which are more
Liquid
A ) FUTURE
B) OPTION ( call Put)
Answer A or B
Depends on the contract.
If I write ITM BANKNIFTY call 28000 at premium Rs 2160 BANKNIFTY spot 30121
Now Next day If BANKNIFTY move at 29840 at Premium Rs 1860
If I square off my position What will my Profit
Please tell me method to calculate
Pankaj, you will have to take the difference between the buy price (1860) and the sell price (2160) to arrive at your P&L. In this case, it is 300.
It means in ITM call write ( sell) option as premium decreases profit increases Is it right?
That’s right. In fact, when you write options you want the premium to reduce, irrespective of calls or puts.
In zerodha kite app weekly series not available,
ex. Nifty 18th apr 11600 CE not showing up in kite.
Its there Ramesh. Type ‘Nifty 18th’ April in the market watch and you will spot the option.
I open my Dmat account at zerodha
Today I placed order of BANKNIFTY 30400 CE but it get rejected with notice that your order is out of range
At same time my friend who had account at Sharekhan he succesfully placed same BANKNIFTY 30400 CE order
In zerodha kite app why such problems create
We have an OI restriction Pankaj, check this – https://support.zerodha.com/category/trading-and-markets/kite-web-and-mobile/articles/why-did-my-bank-nifty-option-order-get-rejected
Sir, i have a doubt.
If i am holding sbi shares equal to a lot ie., 3000 and then i sell a call option whose strike price is higher than the avg price of those equity shares i brought.
Eg: let my avg price of 3000 sbin shares be 300
Call option sell at strike 320@3/-
Then at expiry, sbi closes at 330.
Sir, what is my situation now?? Am i at loss??
Can i sell my equity shares and end in profits??
Or else, do i have to take loss of Rs.7/- Intrinsic value??
Plz clear my doubt.
THANKS In advance sir.
In this case, you will make 30 in the spot and lose 7 in the CE. So net you gain 23 in the overall transaction.
Hi, You are doing a great job man. Learned a lot. Keep it going.
I have very basic question(may be silly or already been discussed) but still need your assistance.
Let’s assume, I sell one option(call or put) at the premium of Rs 10 and lot size is 1250. After 2-3 days its premium becomes Rs 7.
So the question is, can i square of my position? or do i need to wait till expiry? If yes, then how?
P&L will be (Sell Price – Bought Price) * Lot Size i.e (10 – 7) * 1250 = 3750(excluding taxes and brokerage) is that correct?
Hi vishal, you can square off at anytime you want. And yes your p&l will be like you said 3*1250.
U will face problem only when there is no liquidity in options. (U wont find a buyer.)
Thanks Lokesh for quick response.
So conclusion is i can square of position at any point of time irrespective of buying or selling, no need to wait till expiry.
Yes, you can square of the position anytime you wish. No need to wait till expiry. You will make the difference between the buy and sell price i.e Rs.3 here.
hello, I sell a call option today at 15 rs premium, if after 2 days, underlying price remains same, price comes down to 12, can i buy it again to square off the position? correct me if i’m wrong, it means i’ve earned the profit of 3 rs right?
they say writing option carries unlimited loss potential, if i square off position before premium value increases, i’ll earn right!
That’s right, you can square off when you think the time is right. No need to wait till expiry.
Hi Karthik,
Thank you for the article.
Can you please clarify my query. I am just trying to understand the theory.
Lets say, I sell the Infy Call option May750 at 5Rs.
1) Now after few days, the premium increased and reached 8Rs which will mean I am in loss. But I intend to wait till expiry.
Lets say at expiry, the premium is 10Rs but Infy spot closes at 745Rs. In this case do I make profit or loss ? I assume profit, as
spot has not crossed the Strike price. Please confirm.
2) So does it mean that it does not matter what ever the premium variation(up or down when compared to our sell price), in case of Shorting a Call option, a trader will make profit,
if the spot price remains below the strike price at expiry. Is that correct ?
Regards
Jay
1) If you sold a 750 CE, and the spot expires @ 745, then the option expires worthless and hence you get to retain the entire premium and therefore a profit. It does not really matter where the premium is trading at
2) Yes. The CE seller makes a profit if the spot remains at the spot or below.
Good morning. Is it true that option seller is not required to buy back sold option on expiry day and will get settled automatically. Only option buyer is necessarily required to sell his position before expiry day closing or do I have to complete cycle in both cases.
Kuldeep, the flexibility is there with both option buyer and seller. They can choose to stay invested or square off their position before expiry. It is up to them and should decide based on the market situation.
Thanks & Regards
Rangappa sir
My sold strike is far away from the nifty or banknifty expiry day strike, I mean to say it expires as OTM for both call and put sold strikes
Yeah, this is independent of the strike. Although, for the buyer, it makes sense to square off an ITM option before the expiry to avoid paying STT. More on STT and its impact on ITM options here – https://zerodha.com/z-connect/queries/stock-and-fo-queries/stt-options-nse-bse-mcx-sx
Sir,
If I have sold an option on Friday and buy/square it off on Monday, then when do I get my margins in my account for further trading?
Anticipating your kind reply.
The margins will be blocked as long as you have a short position open. Once you close the trade, margins will be unblocked.
Sir,
If I have sold put option of RELCAPITAL JUL 60 PE at price of Rs. 10 on 01/07/2019 then
Q1- If I’ll buy this Put option on 02.07.19 at price of Rs. 8 then my profit should be Rs. 2 X Lot Size (eg. 3000) for RCAP ?
Q2- If I’ll buy this Put option on 02.07.19 at price of Rs. 11 then my loss should be Rs. 1 X lot size i.e. Rs 1500/- loss ?
Q3- If I’ll not be able to close this trade before expiry then what would be its implication, considering it as NRML trade, if price on expiry is Rs. 5 for same.
Q4- How in writing put option my loss is unlimited ? Is it not limited to the extent of margin I used to write put option.
PS- I have read many chapters here and comments also but these points are still in my mind. Please try to explain in layman’s language as I’m new to trading.
Thanks in Advance.
1) Yes
2) Yes
3) Then you will be entitled for a profit of Rs.5 minus the STT applicable
4) Sort of, but there are times when it can exceed beyond the margins parked. However, before this can happen, most likely your position will be square off by the broker
Can Sell Today Buy Tomorrow Nifty options in Zerodha?
I want get time decay benefit through short straddle and also please give your opinion on this strategy.
Yes, you can harish.
Sir,
NSE has started weekly options but i am not able to calculate margins on zerodha span calculator and can i keep my share holdings as margin instead of cash to write options.
Shubham, the margins are similar to that of the monthly options. By the way, you can always place a limit order and check the applicable margins. Yes, you can pledge the shares and get the margins. I’d suggest you check this – https://support.zerodha.com/category/q-backoffice/portfolio/articles/what-is-pledging
Dear Karthik, Hello
I am relatively a beginner in options trading. Can you please clarify below two doubts:
1) When an exchange introduces a new strike price, can i sell/short before even a buyer is interested in it. If i can sell anyway as the first seller, how do i decide premium & what happens if no buyer turns up.
2) Why people buy deep OTM options (Either put/call) eventhough the probability of spot price reaching it are very negligible.
1) Yes, you can always place an order and wait for the buyer to act. You can set the premium as per your wish
2) They treat it as lottery 🙂
Hi Karthik,
Thanks for the article.Can you please clarify my below query.
Iam doing the backtest using SD1 for call option writing and during my analysis on 07th Mar’19 the underlying nifty50 value is 11058 and using SD1 i choose 11300 strike price @ 7/- but at the close day of expiry the nifty is trading around 11343 more than strike price and the premium is at 35.75.Considering 75 in a lot
the total loss for this call is 7-35=27*75 = 2025/- per lot.Am correct.
Thanks & Regards
Sai
The calculations seem alright. But then, we have no control on how market closes 🙂
Hi Sir,
Could you please clarify the below,
1) I have sold some OTM nifty options and now they are at ITM, so if I buy back these options before expiry with some loss, will there be still an STT, as I have sold options first. (If present how much it can be?)
2) If these options I have sold are in ATM and OTM on expiry day, then I can leave them to expire right and no STT will be charged after market is closed.
I really appreciate anyone’s help Tq.
1) No, STT is charged when you sell. So no STT implication when you buy back the option
2) Yup, that’s right.
Please let me know if I have understood correctly:-
Let’s say if am a buyer of a call option. So,
1. If I decide to sell(or square-off) before expiry my P&L will be: (Difference in Premium)*(Lot Size)
2. If I decide to exercise my rights on the day of expiry, my P&L will be: (Spot Price – Strike Price)*(Lot Size)
Also, if I am a seller/writer of a call option and the spot price starts to increase, I can’t cut losses before expiry and will have to wait till the expiry to see my final loss, right?
1) Yes, that’s right
2) Yup
You can write/buy and square off the position anytime you wish. No need to wait for expiry.
Sir,
If I bought nifty 10500ce at say 10,750(10*75(lot size)) will be debited from my account. The very next day the premium is up by 10 bucks.so that now the premium is rs20.
1.if I sold it right now do I need to maintain any margin(selling/writing an option require margin equal to future contract)?
No, since you are selling an already open position, no need for margins.
Hi Sir,
Could you please clarify the below,
1) If I sold nifty options first then STT I would be paying is (0.05% of premium) , even though if I let it expire in OTM or ATM or If I bought them back in case options move to ATM.
2) If I sold nifty options first and left them to expire at ITM then I will be paying (premium recieved – (0.125% of overall contract value) right.
tq for helping me out on previous queries.
1) Yes, that’s right
) No STT when you buy an option. It is applicable only on the sell-side.
Hello Sir,
suppose today If I bought nifty 10000 call at say (10*75(lot size)) premium i have paid from my account. The very next day or on the same day the premium is up by 5 rs say .so that now the premium is of Rs 15
1.if I sold it right now do I need to maintain any margin(selling/writing an option require margin as calculated from zerodha margin calculator )?
2. Is this case same for same day i.e (MAINTAIN THE MARGIN IN THE ACCOUNT TO SELL/WRITE/EXIT FROM THE TRADE) for same day ?
3 .Is the same applicable to buy a put option and selling it again on some day when i m in profit ?
No, you dont need to have margins when you sell the position (square off) from your account.
Sir, If i sell the call options on expiry day, order should be to make normal instead of MIS because If MIS system square off the position because i raise the doubt as scenario of if i sell 1 lot of Nifty call option at strike rate 11200, i received premium of 1000rs then Nifty spot closed at 11188. This is OTM so exchange only square off the position then only i get my premium. if you square off at 3:20PM while spot at 11230 then i will loose my premium. please guide me.
You can choose to sell in NRML right? Why opt for MIS?
Karthik sir,
How to keep a stop loss for Straddles or Strangles (long or short)? Suppose we short a Strangle and we receive certain premium for it. Now the problem is, we have received total premium on short Strangle and we have 2 open positions (Short OTM CE and PE). And I want to keep SL on total premium. If total premium goes above certain level (above my total premium SL), both positions (Strangle) should get squared off. How can I do that?
Arpan, unfortunately, this has to be done manually.
Is it possible to execute trades from Excel (using API or Bridge)? (sorry for asking this here)
Nope, but you can try Kite Connect – https://kite.trade/
Hi Karthik,
If we have one lot of shares, is margin required for covered call writing or the shares enough to cover the margin?
Thanks & Regards
Satya
Yes, you’ll need the margins, Satya.
subodh says:
October 17, 2015 at 3:50 am
i write a nifty 7100 put at @3 rs premium when nifty spot =8000
on expiry; nifty spot = 7500 but nifty 7100 put @4 rs premium
will i keep my initial premium or suffer loss? if i suffer loss, how much ?
Karthik Rangappa says:
October 18, 2015 at 2:29 pm
7100 premium on expiry will be 0 and not 4 if the spot expires at 7500…and in such a case you get to keep the entire 3 rupee as profit.
dear karthik
thanks for the wonderful series.
after going thru the series and according to what i understood,
in the above case, as subodh has gone short (he has written put option) than his view on the underlying must be bullish.
but, the spot price of rs 8000 has come down to rs 7500 o expiry date.
that means the nifty has gone down. and hence he should incur loss.
please correct me if i m wrong.
thanks so much
Rupesh, the strike in question is 7100PE, hence it is still OTM, which means the premium will be 0, and since you are short, you will get to keep the entire premium.
hi, thank you for uploading this important content.
my question is
can we exit the buying position in option before expiry of contract.
or exit the selling position in option before expiry of contract.
Yes, you certainly can, Sam!
Why margin required for putty ng option is higher.
Yuva, I’m not sure what you mean by this. Can you please explain?
My miscalculation OR fraud from zerodha over wrong deduction of amount from my account
I have been involved in few option trades last week. I was wrongly charged huge amount for my trades. I can’t put my all trades here, but will explain what happened. please clarify my doubts
1. I shorted nifty 11200 CE (Rs. 220/-) and shorted 11300 PE at (Rs. 190/-) and certain amount of margin is blocked from my account
2. I exited my short position of 11300 PE (Rs.30/-) with profit of Rs. 160/-
3. I exited 11200 CE at 420/- with a loss of 200/-
3. So my total P/L should be +160 -200 + any charges for trades , which in my case should not exceed more than 50/- (so 1 lot of nifty i.e; 75 * 50 = 3725/-
4. But the problem is I was charged for Rs. 42000/- (whole premium deducted when it was not a buy option) ( It shows like I buy calls and deducted whole premium, while I actually squared off my short position)
5. Now I contact the great zerodha support . They have no clue what they are talking about and absolutely don’t know about options but still try to explain which is very naive . I asked her to transfer the call to higher executive only with no luck. the call gets disconnected
It’s very frustrated and scary to trade when something happens like this.
what if I don’t check my trades
what if I get charged wrongly for lakhs
Maybe I’m missing something here. I have had a very hard time contacting zerodha in a prompt way. so I’m posting my question here . please shed some light on this
Thanks
Apologies for that bad experience. I’m sure there was some confusion. Can you please create a ticket for this? Thanks.
Please correct me IF I am wrong.
1. If I am going to allow the options to expire and exercise it, then the fluctuation in the premium prices are immaterial to me. For profit or loss calculation only the spot and strike prices are used along with the premium PAID.
2. Can I say this
Squaring off = change in premium prices
exercising it = Spot and strike difference and the premium paid
1) Yes, what matters is the intrinsic value of the option upon expiry
2) Yup, thats right.
hi !
i have completed reading upto this module . Just i wanted to ask that to be always to be in the profit(i am not considering how much it is )i mean just profit.Suppose i buy 20 shares of infosys at 650 and give a option to “option buyer” to buy it in 675 in future, so 20*25 will be profit + the premium he paid suppose 5 rs per share (not conisdering the lot size “i am using simple term to understand it”) so premium will 5*20.So total profit will be (20*25+5*20) so i will be in the win-win position irrespective of how much the current price increases, I just want to be in profit so i appplied this concept.is this thing possible?or I have to give the option buyer to buy premium at what price i have bought the shares of infosys at (650) Can i increase the price and give him option to buy so always i will be in win win position.
Alekh, I think I’m kind of confused with this query. Can you please elaborate this a bit more? Thanks.
can i sell a cnc order for options?
No, CNC is only for equity delivery.
Hi Team,
It would be of great help if you can make me understand the below scenario, i am new to nifty options, hence want to know how loss in option writing happens.
Say i do option sell of banknifty with a strike price of 31000 and the current price is 30000 at a premium of 50 and lot i guess for banknifty is 20.
So till the date of expiry, if banknifty doesnt reach the strike price, i earn the premium which is 50*20 = Rs 1000.
But say if banknifty goes beyond the strike price of 31000, and i decide to sell it at (or reaches at expiry) 32000, will my loss be (1000*20) -1000 = Rs 19000 ?
Thank you in advance, this will really help me understanding option writing.
Yes, you get to keep the premium as long as the spot remains within the strike price. The profit of loss (before the expiry) is the difference between the buy and sell premium multiplied by the lot size.
Hello Karthik Sir !
Very helpful article on such a complex topic !! Kindly confirm if my understanding is correct.
If as a call option buyer I chose to sell the contract before expiry then I will be making a Profit (Rs X) assuming Spot price (Rs Y) > Breakeven price (Rs Z).
Now IF this Spot price (Stays at Rs Y) till expiry date then the profit I will be making in exercising the option is Rs X — same as profit made on sell date right ?
The X,Y, and Z are confusing me a bit 🙂
As a buyer of an option, you will make the intrinsic value of the option upon expiry (assuming you are profitable).
I wanted to Sell Straddle for Commodity Options on Silver with Strike Price @ Rs. 44,400.
Let’s say,
The Call premium = Rs. 500
Put premium = Rs. 600
Lot Size = 30
No. of Contracts = 1
Currently the Spot Price of Silver = Rs. 44,385
Break-even Point (up) = 44,400 + 500 + 600 = Rs. 45,500
Break-even (down) = 44,400 – 500 – 600 = Rs. 43,300
I will collect the Total premium = (Call Premium + Put Premium) x Lot Size x No. of Contracts = (500 + 600) x 30 x 1 = Rs. 33,000
Please inform what will be my profit in the following scenarios:
1) Spot price = 45,000
2) Spot price = 44,000
Also,
As per Sensibull, the Capital required/ Margin required is huge ! ( though it’s given for NIFTY – not given for commodities) – I couldn’t understand the calculations, for the same.
How is Capital required/ Margin required calculated while Selling Commodity Options , in general, as well as in this case , in MIS ?
Is there leverage provided in MIS, or we have to pay full premium ?
When can I exit an Option on MIS ? Is it anytime during market hours ? Or is it at End of Day i.e. @11:55pm
@45K, the 44400 CE will be ITM by 600 and the PE will expire worthlessly. So you will lose 100 on CE (considering you have written it for 500) and get to keep 600. You can think similarly for the 2nd scenario.
Margins will be high considering the fact that you are writing 2 options. You will have to put in full margins.
So, you mean , in this case , I will have to pay Margin ( or get ? ) INR 33,000 initially, while I sell this Straddle ?
And with Spot price = INR 45,000, I will end up getting paid (600-100) x 30 = INR 15,000 finally ?
Margins will be blocked and yes, you will receive the premium in your account for writing these options. Yes, I’d suggest you use Sensibull payoff charts to visualize these payoffs.
Also, what is the Time Span validity for Options in MIS ?
Is it the same as Futures ?
I mean, can I Exit the order within 10-15 minutes after placing it, anytime during market hours ?
Or I need to wait till 11:55pm , when market stops ?
Rahul, this is similar to futures. You can exit these options anytime you wish.
Dear sir,
If I sell call option of tata Steel 430 strike price at Rs. 4 premium (1 lot) and then if the premium goes down to Rs. 2, will I make a profit of Rs. 2 if I square off my position? And if the premium goes up to Rs. 6, will I make a loss of Rs. 2?
So, when we sell call options, we make profit when the premium goes down and we make a loss when the premium goes up. Isn’t it?
Thats right, Sunil.
Dear Mr. Karthik,
If spot price of stock is say 100, n option seller anticipates it to rise to 110/- at time of expiry, will he sell call option for 90/- strike price n collect premium?
Plz correct me if i m wrong-
Sudhir, it depends on the type of option. Option seller should look at selling call options above 110 and put options below say 100.
Now i got the point! Thx-
It is both way seller can think n based on his anticipation regarding price rise or fall, he may sell put or call option.
Yup, good luck Sudhir.
Sir if I sell a Call Option (CE) of a particular strike and if it is a far off strike and if i don’t square off and the premium goes to zero ,what will happen to the SPAN Margin & Exposure Margin
Upon expiry, the option contract will cease to exist and therefore you get to keep the entire premium.
Sir if I sell a Call Option (CE) of a particular strike at Rs 2 and if it is a far off strike from LTP (Far Out of the money and has no intrinsic Value) and if i don’t square off and the premium goes to zero ,what will happen to the SPAN Margin & Exposure Margin.Will i get that back or I will lose it?
Margins will be released and you get to keep the premium.
My Profit will be (2-0=2 * lot size ,but what about SPAN Margin & Exposure Margin
It will be released.
Hi, my query is if i buy a ITM call for say Rs 200 on Nifty and sell 2 OTM calls for say Rs 99 each. What would be margin required to carry the position overnight? And how would my Profit and loss be calculated?
You can use this to check the margins – https://zerodha.com/margin-calculator/SPAN/, the P&L is dependent on how the spot moves. YOu can plug in the values here to check the P&L – https://zerodha.com/varsity/chapter/bull-call-spread/
sir,P & L for a call option buyers, as per you, premium is considered at the time of buying. but , premium of spot price is not considered. only spot price – strike price only will be considered. can you pls. clarify on the same pls.
Umesh, the premium is not considered for spot price.
sir,
one example.
bank nifty strike price – 33000CE , PREMIUM – Rs. 10/-
spot price is – 31946.10 and the premium is 11.50.
as per the call option buyers formula, which is P& L= Max(0, Spot price – Strike price) – premium. what will be the profit ?
pls. clarify.
Umesh, I think you are getting confused. From where do you see the premium of 11.5? There is no premium for the spot price.
When we talk about PCR ratio & Option Pain, whom are all the people who might be interested in writing options ?
Big Investors or Brokers ?
Can be anyone. Even someone who wants to write a single lot of option.
But mostly ?
sir,
can i sell(writing)/buy the options (Call and put) above the upper and lower circuits of the any stocks?
syed
Yes, provided the strike is liquid.
pl sir,
can u explain me with example.
Stock X is trading at 100, with an upper circuit of 120. You buy the 125CE.
can i sell the ACC stock, ( writing put option) at the strike 1580 at premium 144/ December option. what happens if the market at 1500 on expiry day.
In this case, the option will have an intrinsic value of 80, hence you will make 144-80.
Hello sir , May i know whats the difference between exercising an option and selling the option ? can you explain it with the help of an example?
Disha, exercise is when you hold the position to expiry. Selling has two contexts – a fresh sell/write/short position or you sell with the intention to square off your long position.
Hi Karthik,
What if spot price is lesser than strike price and still as a buyer I insist on purchasing the stock on spot price incurring loss of premium? Is it possible to do that?
Nope, the value of the option upon expiry is derived from its intrinsic value.
Hi Karthik,
“Now because Venu carries addition risk of getting ‘exercised’ on any day as opposed to the day of the expiry, the premium he would need is also higher ”
I am clear on what benefit Ajay is going to get if it is exercised any day. But I am not clear on what is the risk for Venu in this example. Either Ajay exercises after 6 months or before that, the amount Venu will receive is same right? Deal was done for 6 months, if its exercised in 1 month, then from Venu’s perceptive the amount which he is supposed to get after 6 month will come after 1 month itself right?
Hmm, if you think about it, both of them carry the same risk, i.e. the price risk driven by the market.
My doubt was from Venus perspective.
From the view of Ajay, if he has an option to exercise any time, the site rate might go up in 4 months, he can exercise it and sell it to someone else in 5th month and again in 6th month the rate might fall. So Ajay can make profit here.
From Venus point of view. The money what he is going to get in 6 months, can come before hand. The only risk is if he doesn’t have the actual land in hand. If he has to buy from someone (in case land rate is volatile) and sell it to Ajay, then there is a risk. Since in 6 months it can move up and down any time. Anything else apart from this?
True, that is the risk anyway for the option seller.
Karthik. You are really doing a great job. Hats off.
For example, if I have bought Bajaj Auto 2050 call option at Rs.6.35 in the morning and by noon the same is trading at Rs.9/- I can choose to sell and book profits –
The above statement taken from your Records.
Will you please explain in detail what it means
Yes, you certainly can. No need to hold the option till expiry.
Thanks for all the answers above, getting to learn a lot. I have two questions.
1. if I sell an option call in strike price is 150, spot price is 100 and the premium is 20, on expiry the spot price is 130 and premium is 30, which means the option is out of the money even though premium is higher than my sell(20), will I still profit 20 x lotsize.
2. Do I have to cover the sell call or buy call before expire to make profit if the IV is positive? or will this be taken care by exchange automatically, cause many times the sell or buy offer on expiry date is less than IV.
1) Yes, on expiry this option will go worthless and hence you will get to retain the entire premium
2) You need not have to worry about it, as long as the option if expiring worthless
Thanks for your response. just need clarification on my second question, will I get the IV as profit even if I don’t cover my position and let it expire. if IV is positive?
Yes, after accounting for applicable charges.
Thank you for such valuable study material. I have a question. As you said all the options are European in nature in India and can be exercised only on expiry date but then how can we trade options be it stock or index options before expiry. Kindly explain with an example if possible.
Exercising and trading are two different things, Vishal. You can exercise only on the day of expiry but can trade options i.e. buy and sell the premium anytime.
When i Sell Call option for Rs 3 (3*75)(Nifty) after some hour point raised from 3 to 5 Rs so what is the loss am getting please suggest, because margin required around 30k right is am looses all the margin amount or i loose only (5*75=375).
The loss is 2*75, basically the difference between the premiums.
WOW WHAT A WONDERFUL ARTICLLE
SEHR GUT
Hi thanks for your reply, may i know why that much margin required when selling CALL option, when we buying its not required.
Selling options involves a lot more risk, Santhosh. Hence more margins.
hi karthick
very good explanation on option selling
i have a question here
suppose if i sell 1 lot (3000 shares) of SBI Feb 335 at a premium of 2 rupees, lets assume i do a intraday trading for this option selling and i square off my position after 5-10 minutes of initial trade(short selling)
at the time of square off the price of the premium would be increased to 3 rupees
now how my profits from option writing will be calculated
i assume the below calculations
when placing trade
spot price (Current market price) : 305
strike price: 335
option type: call
short/buy: short
premium: 2 rupees for 1 lot (3000 shares)
total premium : 6000 rupees
during square off
spot price: 339
premium: 3 rupees
total premium calculation= (3-2)*3000=1*3000=3000 rupees will be the profit received after square off
please let me know if this is the correct way of understanding.
Since you are short @ 2, you want the premium to go down to be profitable here. Since its increased, you will make a loss. The difference in premium multiplied with lot is your P&L. So, in this case, it is (3-20)*3000 = 3000 loss.
so in this case 3000 is loss put premium received is 6000
still i would be under 3000 net profit right ?
No, when you write the option you receive 6000, but when you square off pay 9000. So 3000 loss.
Thank you for the very informative article. I have 2 questions on covered call writing:
1. I own 500 shares of HDFC Bank (I have not pledged the shares), which is equivalent to 1 lot of options. I want to write 1 lot call option now. Do I need to maintain any margin for this (or the shares will serve as margin)? If yes, approximately how much margin will be required?
2. I own 1 lot futures of HDFC Bank. I want to write 1 lot call option now. Do I need to maintain margin for both futures and for the option, or will the futures position serve as margin? Approximately how much is the margin requirement?
Thanks a lot in advance.
1) Yes, for now, you will have to bring in the margins. You can check the margin calculator for this
2) You will get a margin benefit for this. You can check the extent of the benefit on the calculators
https://zerodha.com/margin-calculator/SPAN/
Hi Karthik,
Excellent article as always!
If I am an option seller, and if my sold options expire worthless, are STT, stamp duty and brokerage still applicable to me? In general, for an option seller, does it make more sense to square off the positions rather than letting the options expire worthless, to save these costs?
Thanks!
Nope, not applicable. You can let it expiry worthless.
Hello Karthik,
Lets say i have shorted a call option based on an intraday strategy.My strategy works and call options premium drops fir next 15-30 mins. So what will be profit here? Will it be entire premium or difference between my hugher entering and lower closing price.
Lets say I shorted a CE at Rs.50 , CE fell to Rs 30, so will my profit be Rs20 (difference) or Rs50 (entire premium).
And if entire premium is not case, does that mean we get entire premium for writing a CE at expiry only?
Thanks
The intraday profit will be the difference between the buy and sell price of the premium. Yes, only upon expiry will you get the entire premium.
Sir, please clarify my doubt, if I write a call option and during expiry day it become deep in the money(scrip moves sharpely against me), if I am unable to squareoff the position because of no sellers in deep itm call. What will happen?
Is there any problem if it expire like that only(of course I will be in huge loss). I want to know about the settlement. In that case I don’t have shares in my dp to sell it and give to the buyer( for settlement).Then how it is settled if option buyer exercised the option on expiry?
Whether it will be settled by paying the diff amount to the option buyer or I have to give the actual shares(which I dont have).
This question is nothing to do with P&L, please clarify about settlement by exchange in above scenario.
Thanks.
Mohan, to continue carrying the position, you will have to have enough margin money with you. Assuming you do, then the contract will be physically settled. More on that here – https://zerodha.com/z-connect/queries/policy-on-settlement-of-compulsory-delivery-derivative-contracts-update-oct-2019
Thank you sir, incase if I have long futures and short itm call option open positions in expiry
1)Then it will be settled with out any problems right?
2) in this case no physical settlement required?
3) is short delivery problem arise in this case?
Kindly reply giving Sl. No 3 more importance.
1) Yes, long fut offsets short call
2) Yes
3) No
Sir, Please help to clarify my doubt, if I Buy a call option Say Banknifty 1 Lot(20 Nos) at Strike Rate 29500, Spot Price is 29300 at that time with premium 350. (Premium Paid- 20*350=7000/-).
1. after next two Days if spot price goes up and premium goes 600 also before 2 days of Expiry – will 1 be in profit of premium Diff 20*250= 5000/- Or My profit will be after break even@12850, if i sell before expiry.
2. Should i have to Square off position or Sell Position. I am little bit confused between Two Terms.
3. What price i will start making profit?
4. If spot price is goes up is it necessary premium also go up?
Dear sir,
considered that i sell the nifty OTM , wait for expiry date (spot value same as initial ) , i am in profit but i dont get the buyer , what will happen?
The contract will be settled by the exchanges, Arvind.
Hi Karthik,
I have sold one lot of SBIN CE 240 when the spot was 225. Now spot has gone up to 242 and hence my total required/blocked margin (span + exposure) is now 265000. My query to you is that do I need to maintain entire margin of 265000 as cash? I thought I am allowed to maintain 50% of 265000 as cash and remaining can be adjusted against my pledged 3000 SBIN shares (I have enough balance from my pledged shares). Please clarify.
Thats right, 50% from cash and the other from collateral.
Dear Kartik
I have bought Call option of ITC @ Rs172 one lot qty 3000 for a strike price of 250 for expiry in Apr 2020. I know the price will not reach or go beyond 250 but may reach 180 in next few days. If i want to square off at 180 before expiry what are my losses or profit. Kindly advice.
Regards/
Hmm, tough to say. Depends on the number of days to expiry. If there are more number of days, then you will get some premium, maybe make a profit as well. If less number of days, then I’m afraid you may not make much. This is assuming it goes upto 180.
Hi Karthik,
Suppose I sell a call option and let’s say receive a premium of 5 Rs per share and don’t square it off till the expiry.
What will happen to my option if it gets exercised automatically on the expiry day?
Strike Price 115
Spot price 80
Premium 5 Rs
total quantity: 1000 shares
The above data is for expiry day.
As long as the spot is at or below the strike, you can retain the premium. You wont have a loss.
Thanks a lot Karthik for clarifying this, I was worried what happens if it gets exercised, as we get the shares in case of call option buying and the strike price is below the spot price of the share.
Ah no. I’d also suggest you read through the physical delivery aspect.
Hi….can any help me.
Infty March 12100 Purchased 70 thousand shares but while selling it accepting 7500 can anyone help.
Can you please call the support desk for this?
Dear Karthik,
That “Two sides of a coin” cartoon is so on point that it made me chuckle, will you please convey my thanks to the artist for bringing in such a subtle humor?
Thanks for letting us know. I will convey the msg 🙂
Hi.. Karthik I bought call option of lower strike and sold call option higher strike price to hedge my position and my total margin blocked in trade can you explain if
i hold this position till expiry and market is high volatile so premium price increase/ decrease faster than normal. So I have required additional margin for hedge position or initial margin is sufficient.
Thanks
Dinesh, you can use this calculator to figure out the margin required – https://zerodha.com/margin-calculator/SPAN/
Hello I have 1000 shares of reliance as holding from 5 months .. Now I want to write call options in reliance .. Do I still need margin or not .. thanks
Yes, you will need margins.
How to pledge my shares
Check this – https://support.zerodha.com/category/console/portfolio/articles/how-do-i-pledge-my-shares-to-get-collateral-margin
I got an overview of your explanation but I get stuck when I implement them. (Small Example)
I do a short call (Buy) Nifty 30th APR 8000 CE, One lot (75), at the striking price of 600. When I tried to calculate the F&O Margin at Zerodha website it dint give an answer due to some reason. Can you also please explain what is SPAN and Exposure Margin are?
1. What happens, when after 30 min the strick price comes to 400? And I want to sell it (or technically
how do I Sell the short call (Sell)?
1.1 What happens at the expiry of the call option and still hold this short buy? The Nifty is at
7500 points and the strick price is 350.
2. What happens when the strick price touches Zero at the expiry date?
SPAN and Exposure margins are two components of the overall margin required to carry forward your F&O position.
1) The strike does not move, its fixed. Option premium does. The P&L is based on the difference between buy and sell price of the premium
2) The option will get settled.
3) Expires worthless
If I sell the NIFTY option, (writing call option) at the strike 8300 at premium 250, 9th April Expiry.
What happens if at expiry NIFTY closes at 8350.
Will I lose all my premium and have to pay the difference (8350-8300*75) of Rs.3750?
Or,
I will still gain Rs.15,000 (200*75)?
If it expires at 8350, then you will lose 50 from the premium.
Dear Team ,
I am new at share market i have que regarding short selling , can we short sell only intraday purpose or we wait for expiry day ?
Yes, you can short sell on an intraday basis.
Simply said, I will still gain Rs.15,000 no?
In 4.2 – Call option seller and his thought process, Intrinsic value shown Rs 35.22 against Strike price Rs2000 (Spot price:2026.9) whereas point no 2 of table showing IV =0.
Kindly clear the concept
IV that you see here refers to implied volatility (which was not updated) and not intrinsic value.
In sensibull, how does one put stop loss on any CE or PE option trade? Even in a spread trade?
Its best of you can check with them on this 🙂
Hey Karthik, at what price are the options expiring OTM & not being squared off on expiry day settled at? Since they’re not being squared off, it should be 0 right? Or is it 0.1 (LTP)?
Thanks!
OTM options are 0. Could be 0.1 due to some technicality, if yes, I’m not aware of it, well figure this out.
sir, i read an important article about dividend adjustment in historical price on a site, here it is
Historical prices are adjusted by a factor that is calculated when the stock begins trading ex-dividend. The amount of the dividend is subtracted from the prior day’s price; that result is then divided by the prior day’s price. Historical prices are subsequently multiplied by this factor.
Let’s look at this example. A stock closes at $40.00 on Monday. On Tuesday, it begins trading ex-dividend based on a $2.00 dividend. If the stock opens unchanged, it will be trading at $38.00. Unless we adjust the prior prices, the chart will show a misleading $2.00 gap.
To calculate the adjustment factor, we subtract the $2.00 dividend from Monday’s closing price ($40.00 – $2.00 = $38.00). Then, we divide 38.00 by 40.00 to determine the dividend adjustment in percentage terms. The result is 0.95.
my question is ,why is it so?
When dividends are paid, cash goes out of the balance sheet, this gets adjusted in stock price. Usually when small dividends are paid, this change does not affect the stock price much, but matters when large/special dividends are paid.
Sir
Suppose I am the buyer of a call option at a certain premium. Next day, the premium shoots up and I book the profit. When I have already booked the profit before expiry then how does it matter that the option is European option or American option except that I have to pay higher premium for American option ?
Thanks
It does not.
I want to take Put Option Delivery as share . Is this Possible ?
how much Margin required
e.g i want to buy share to ICICI bank instead SELL PE 300 Option want awaited till expiry . and price goes below 300. Can I take as delivery my option.
How much Margin I required and Cash in my account
Yes, that would be possible. Check this Aparna – https://support.zerodha.com/category/trading-and-markets/margin-leverage-and-product-and-order-types/articles/policy-on-physical-settlement
Sir,
I am still confused about these two sentences in this chapter –
1) ”So all options in India are now European in nature, which means the buyer can exercise his option based on the spot price on the expiry day”.
2) “Most of the option trading is based on the change in premiums. For example, if I have bought Bajaj Auto 2050 call option at Rs.6.35 in the morning and by noon the same is trading at Rs.9/- I can choose to sell and book profits”.
These seem contradictory to each other.
Suppose I buy call option (“Long call”) of X on 13-04-2020 at strike price of say 100 at premium of say 5. I have few doubts –
1) I will have to wait till the expiry date to get the profit (provided spot price is more than 105) or lose the premium (partially or completely).
2) Suppose I sell the above position on 15-04-2020 for premium trading (suppose the premium that day is 6) – I will get only the difference in premium (i.e. 6 – 5 = 1 * lot size). It will not be considered as a separate trade (ie. 1st trade on 13-04-2020: Buy call options at 100/5. 2nd trade on 15-04-2020: Sell call options at 100/6). And the existing trade will be closed (not exercised) and I don’t have to wait and watch till expiry date. And the ‘Exercising’ a call option is different than ‘premium trading’ of call option.
3) If point 2 is correct, is premium trading possible in case of “Short call”? If it is possible, can we close the “short call” in a similar way as point number 2 and minimize the risk if trade is going in opposite direction?
Thanks.
1) Not really Parag, exercising an option and trading an option premium are two different things. You can buy and sell an option within a day. This is possible. However, if you hold your ITM option to expiry then you are essentially letting in expire and it gets exercised.
2) Yes, you will make a profit of 1. No need to wait to expiry
3) This is not a short call, you are just closing an open position. This is also called a square off.
Example 8000PE premium 120
Normal order
Qty 75
To buy = 120*75=9000 amount needed for normal order
To sell= How much needed for normal order.???????
You don’t need anything to sell off, unless you have few other position open with the cross margin situation coming into play.
Hi!
-As options in India are cash settled, does it mean that there are no such things as covered put options in India?
– also, which are the ETFs having options and futures?
Thank you!
1) Not sure what you mean by this
2) No ETF has F&O contracts
Hi!
Sorry, I meant covered call options!
Covered call options means that you write a call option only for the stock that you actually own and can deliver if assigned an exercise note.
I figured as much 🙂
Hi,
Is an App providing automation of option trading strategies for Zerodha.
My requirements is have a strategy to exit option write position(1 call sell + 1 Put sell) if sum of premium is greater than X amount.
Thanks,
Shravan Kumar I
Nope, no automation.
When long call option expires above strike price we say it is “In th Money” but correspondingly for seller it is loss so can seller call it” out of money” or exchange will determine from point of view of buyer
No, the moneyness of the option remains the same irrespective of the position. Btw, strike greater than spot is ITM only for CE, its the opposite for Put.
hello,
I want to sell an option in banknifty.
ex: current strike is 20000
I will sell 24000 *same day expiry* with premium of 10rs (10 lots = 200 quantities).
it will decay as the expiry is on the same day & comes to 2rs . (8rs profit which is 1600 for 10lots)
my question is that, how much money should I need to sell an option for the above example.??
Is it like option buying.? 10X200=2000 investment.?
thanks in advance
You can check this to figure out the margin required – https://zerodha.com/margin-calculator/SPAN/
Sir a trader told me that just short bank nifty current month futures & long next month. & this strategy will always give profit, although just a few points, but always. So sir if someone if having a large amount of money & can do this with 100s of lots, that person is having a ball, isn’t it ??
It does not work always, there are no foolproof strategies in the markets 🙂
Sir suppose Reliance share is at 1000 & future is at 1010. Now to gain this 10 point difference i would buy 500 shares of reliance ( lot size ) & short futures. But suppose if i didn’t get a chance to get out during the month & have to wait till expiry & the shorted futures get settled themselves, will there be a penalty, as i have heard about something called necessary settlement of shares. & if there will be how much will be it ?
Hmm, short futures requires you to bring stock, which you already have. So no obligation here. You can read more about it here – https://support.zerodha.com/category/trading-and-markets/margin-leverage-and-product-and-order-types/articles/policy-on-physical-settlement
That means that if i let it expire, then not only my futures position is over, but also those 500 shares will be sold automatically, isn’t it sir ??
Yeah. Best to square off the position before expiry.
Ok. Thank you sir 😊
1.Buys call option ,spot price 1000,strike price 600, premium 10, expiry on 30 april ,100 quantity,on 20 april the premium is 18 now i want to square off my position
So my gain is 18-10*100=800 is answere correct
2.give the example for option writer square off.
1) Yes, the P&L is +800 minus the applicable charges
2) The opposite is true for option writers i.e.the P&L is -800 minus the applicable charges
Sir is there any way to get historical data about indexes. Like i want to know the closing prices of nifty futures & bank nifty futures for the past 100 days. Also i want to know about a closing price of any strike say 20,000 CE of last 100 days, so is there any way do it ?
Manas, yes you can download from NSE’s site itself https://www.nseindia.com/market-data/live-market-indices
Sir if I sell a nifty option of April expiry today at a premium of 50 rs at a strike price of 9000..
Q) Should I square off today itself?? (As your agent told me that i can’t carry forward till the expiry & short selling in options only for intraday, is that true???)
Not true, Raj. YOu can carry forward the position as long as you have the margins required.
Sir i want to ask that rms squares off the position at 70% loss, so that means that if i am holding a future contract for 1 lakh rupees & i incur 70,000 loss in it & not able to add more funds then my position will be cut off but suppose if this happens overnight, like suppose the stock whose future i was holding is 100 rupees, the lot size is 1000 & next day for some reason it opens with a fall of 90 rupees, then i have would have incurred only 70,000 rupees loss sir right ? The rest 20,000 is not my concern right ?
Yes, the RMS team decides the cut off based on the market volatility and margins stipulated. At the end of the day, if you have a position then you need to have enough margins to carry the position forward.
Yes sir but my question was that suppose the stock i am short on shows a heavy gap down the next day, so the most loss i would have incur is that all my capital will be wiped out right ? I hope my it will not show negative balance & i wouldn’t be asked to pay anything after my whole capital is wiped off
Not really, look at what happened in Crude oil on 20th April, the prices went -ve and the loss was much higher than the margins. Of course, I’m not saying this will always happen, but then you never know 🙂
So sir that means that all those who were long on crude oil just lost their entire capital only right ? not that their accounts showed negative balance & that they had pay the broker extra thousands or lakhs of rupees from their side right ? Because if something like that happens with my trade i can only manage to lose my entire capital, i can’t manage to give extra lakhs because of such uncertainty
In crude case, the losses went way beyond the margin required. So yeah, more than what was in the account.
& what if the person doesn’t agrees to pay that extra amount ? Will there will be legal action then ?
Yeah, the client is obligated to pay broker dues.
But sir suppose this happened on intraday basis, like the crude was constantly falling & suppose my 70% capital has eroded & i got a margin call from broker, but since i am not able to get any more money my position will be sqaured off, but the thing is that there were no buyers for the crude at the time, then how would the broker square off the position? In such a case of illiquidity is it the broker’s headache that how to square off the trade or again the client will be forced to rope in more margin ?
The onus is always on the client, Raj. Would you part with your profits if the opposite were to happen and you make a ton of money?
hi karthik,
1.suppose i have sold otm ce or pe option in nifty .my position is in profit . 100 – 50 = 50 profit
it is mandatory to square of my postion before expiry or on expiry .(buying it)
stt trap is there etc .plz explain this thanks
2.if i dont square of my position wat will happen
1) No not mandatory
2) You will continue to hold it, you can continue till expiry
HI KARTHIK .
WHAT IS STT TRAP IN OPTION BUYING AND SELLING
https://zerodha.com/marketintel/bulletin/230019/no-more-stt-trap-on-exercised-options-from-today
Sir i went on to the link you told me for historical data, but sir not able to understand how to use it 😐 sir market erupted on the day taxes were removed on Sep 20 2019, i want the data of option strikes for that expiry & also for it’s next week, what shall i type in the search bar for this ?
Historical options data may be tough to get, Manas.
Hi Karthik,
This is very good information and main thing is that it is in very simple language.
I have question on IV , In above example of BAJAJ Auto NSE site snap shot , How the IV shown as 25.01?
IV = Spot Price – Strike Price
IV = 2026.90 – 2050
IV = -23.1
As, IV of an option is a non negative number.
Regards
Avinash
Yes, the intrinsic value is a non-negative number. The IV you see on NSE stands for Implied Volatility.
Hi All,
I am a Call seller right now of Britannia for April Expiry. Let’s assume some numbers. I sold Strike Price 3000 CE lot at OP Rs 80. The OP two days before expiry is Rs 160. The Market Price of share today is Rs 3200.
Now if I wait till expiry, will I have a loss of CMP as on expiry- Strike Price or Option Price as on expiry – OP received?
Thanks
P.S. The ex-date is 1 day before expiry; I hope to reduce some of the losses, therefore, I am thinking of holding till expiry. Would love some feedback on this, if anyone has any.
Yes, as of now your loss will be 80/- per lot. However, you can choose to hold to expiry if you are convinced that the price will drop below 3000. Sorry, I’m not tracking the stock, so won’t be able to comment on it 🙂
Thanks Kartik for replying.
I just received a mail asking for 100% margin money deposit in the last two days of expiry.
I am a little worried. I don’t and can’t do physical delivery.
Will I be able to hold the position atleast till tomorrow expiry? Or do I have to have full margin money for the whole day?
What if I don’t have that much of margin money/actual 200 shares of Britannia in my acc? How is the position squared off practically?
Please help.
Unfortunately, without the required margins, you cannot carry forward the position. In the absence of which, your position will be squared off by RMS.
Consider below scenario.
Day 1 Nifty spot price 9000
Short Nifty 9000CE @Rs. 275 1 lot So Total premium paid Rs. 20625
Now at end of day 1 I will get Rs. 20625 to my account as premium assuming premium per lot is same at Rs 275
Day 1 another scenario
Suppose premium increase from 275 to 300 then how much premium I will get at end of day 1
1) Yes, that right
2) Since you are short options, you want the premium to reduce. At 300, you will lose 25/-
Hi Karthik,
Thanks for your efforts.
I’ve shorted a put & call of Bank Nifty using strangle strategy on Thursday. The premium I’ve received is 600(300+300). Also I wanted to wait till expiry day for the premiums to decay to ~0. Now on Monday suddenly the bank nifty raises and the premium of call increased to 400, but on expiry the bank nifty lowers and ended between the strike prices of my put and call.
Now, what happens to my position(short call) if the buyer of my call option exits on Monday after seeing the profit of 100(400-300).
Regards,
Ramya
The buyer can exist, your position will stay intact. You need not have to worry about it.
Hi Karthik,
How to calculate SL and Target in stock option. (Call option or Put option).
Regards
T Karthikk
That is based on the underlying price, Karthik.
Karthik Sir,
Could pls explain little bit. I have gone through your option strategy but still i have confusion to mark SL and Target of Stock.
Example : The underling price is 79 and strick price is 80 and the premium is 6.10.
Thanks in advance for your reply on this.
Regards
T Karthikk
So you buy the 80 strike when the underlying is 79 by paying a premium of 6.1/-
You put a SL at say 75 on the underlying…if it hits that, you sell the option no matter what the premium is. Likewise, let’s say you target on underlying is 85, if it hits that, then you sell the option at whatever premium it is at.
Essentially, you track the underlying, premium is a function of that.
Hi Karthik and everyone who is reading this,
I have a question regarding an option which is Close to money on the day of expiry. I have read that if someone has bought an option and, does not exit from his position then If his option is in the money(“close to money” in other words), it will automatically be exercised by the exchange. So my confusion is, how would exchange treat this kind of situation where the closing price is slightly above the strike price(for call option) but not above the stike+premium paid by the buyer to help him gain any actual benefit. Do exchange consider the premium paid by the buyer before automatically exercising such an option?
for Example:
If X has sold 1 lot of HDFC bank RS.900 call option to someone say Y at Rs.10 premium and now Y did not exit from his position anticipating a big new (or any other reason) but contrary to his expectation on the day of expiry the share closes at Rs.905 making it technically in the money option. However, in theory, Y is not getting any benefit from his position due to the fact that HDFCbank has not closed above 910 which is breakeven for him, therefore, he would no want the exchange to exercise such an option to prevent taking any unnecessary delivery of lot and associated taxes. At the same time for the option seller, he would not want the exchange to automatically exercise such an option to prevent the sale of his holding of the share.
How would the exchange look at the above situation?
Also, another question that may be extremely basic but I am not sure is that do Indian exchanges allow exercising of equity derivatives before expiry something like American option or everything happens on the day of expiry such as European style. If it allows American style then how would an option seller get notified to sell or buy stocks/or make balance available in the trading account if the contract becomes in the money for the contract buyer to actually gain benefit?
Cheers
American options are not available in India, so that’s out of the way.
The close to money options, even though has a non zero value to it, are not worth exercising by the buyers as the associated charges makes option exercise a futile affair. Hence these are kind of worthless. Do read this – https://tradingqna.com/t/what-are-close-to-money-contracts/42989
Thanks Karthik Sir.
Regards
T Karthikk
Happy reading!
hello sir,
Suppose I short /write a option say 10 days before expiry taking a premium of total say 6000rs. As written in the module the premium decreases with time getting closer to expiry for call option. Now if I clear out the position by buying the option 5 days before expiry , I will have to pay less premium, right? Say I pay the premium 3000rs. So I can make clear cut profit of 3000rs or any amount for the matter in any case .
I feel something is wrong with my understanding here. Please help.
That really depends on not just the time but also on the direction of the underlying. So you will have to consider all aspects.
I have 500000 capital in intraday how many lots of nifty or how many lots of Axis bank or how many lots of IGL can short or buy . No overnight position to carry
Please check the margin calculator for this – https://zerodha.com/margin-calculator/SPAN/
Also if I want to write a call and put how many quantities both sides I can write in nifty or Banknifty if I have 500000 capital.
Please suggest for both nifty and Banknifty.
Again, please check the margin calculator for this.
Hi,
To play around with options strategy, I was trying with Sensibul virtual trade combination of Option call and sell as follows
Trade 1: Bought 1lot NIFTY 21 May 2020 9250.0 CE@300
Trade 2: Sold 1 call option NIFTY 21 May 2020 10100.0 [email protected]
I see the total premium to be paid for the above is Rs 14325 which includes a premium of Rs 9175 receivable from Trade 2.
Few questions
1. When I analyze the strategy, it says max profit is Rs 49,425 for the above trade combination. How is this derived?
2. Is the max profit receivable only if I stay till expiry?
3. After 15mins, when I check the P&L, it says Rs 1353 as profit. What does this mean?
4. Does Q3 mean, if I exit now that the profit I will receive then what about the premium amount?
-Prashanth
1) This is a bull call spread, so the max profit is capped. More on bull call spread here – https://zerodha.com/varsity/chapter/bull-call-spread/
2) Yes, usually the max profit is calculated keeping expiry in perspective
3) This means that the strategy is working and you are making 1353 at this point. If the strategy continues to work in our favor, you will make the entire expected profit
4) Yup, everything will be settled and you’ll pocket 1353.
Hello sir,
suppose if one lakh rs has been blocked as margin(both span and exposure) for my option sellcall position and available cash balance is 50k in my account after taking position, then next day if my sellcall position is 10k loss at the close of market, (1) will 10k deduct from the shown exposure margin amount or will it be deducted from my cash balance 50k and show 40k for the next day with my open position intact….(2)can you explian with an example when should ineed extra funds ,is it when exposure margin went zero or for every rupee loss ineed to bring rupee to cash balance irrespective of span and exposure intact. please explain sir thank you
The 10K loss can be adjusted with the margin blocked. In fact, based on volatility it can go up to 20 or even 30K. Fresh funds will be required post this.
Sir,
If I purchased call options at some premium & as you are saying we can sell option anytime before expiry, then if I sell call option before expiry whether I am not becoming call option seller/broker & making risk of losing unlimited money ?
No, you are just closing out an existing open position, Nikhil. So you won’t be creating a new position.
Hi Karthik
-If I am selling an option say for Rs.5(lot size is 500 shares) then would I get premium of Rs.2500 immediately after order execution or after expiry?
-another question related to the first is, if the put option I have sold goes in the money on the day of expiry and I am willing to take delivery of shares and make payment rather than squaring off my position in that case do I get to keep premium along with the physical delivery of share or the premium amount will be adjusted from the amount I need to pay to option buyer? how doe this work out in kite terminal? Can we keep option premium regardless of moneyness of option on expiry?
I really appreciate you for your efforts in making these contents available to us and the way you are helping many like me in getting better understanding of this market. thank you so much for your time and effort.:)
1) It will be added immediately, you can withdraw on T+1
2) No, it won’t be adjusted, you will have to bring cash.
Good luck )
hi sir ,, is it possible to become option seller with capital of 1lac ?
Yeah, look for the margin requirement here – https://zerodha.com/margin-calculator/SPAN/
Hi Karthik
If I am a call writer,
1. can I use the margin money for squaring off the positions?
2. Do I need to have twice the margin requirements (SPAN& exposure) on the last two days of expiry even if spot price is trading OTM?
3. If the spot price is trading in the money, the margin required during the last two days of expiry would be twice the margin requirement or 100% of actual contact value provided I will be squaring off on the day of expiry?
4. If the spot price is trading way out of the money and I am going to allow the contract to expire, Do I need to have 100% of contact value as margin requirement or the original margin requirement is sufficient to allow it to expire?
Thanks
1) Hmm, I’m not sure what you mean by this. Can you share more context?
2) Yes, this is due to physical delivery
3) Depends on volatility as well, hard to generalize it
4) Hmm, again depends on the market situation.
Thanks for the reply,
To be more specific about 1st question,
Call writers have to provide margin for selling options. To square off the position we need to buy back the premium(difference between OP) for the underlying at a later stage. Can we use the money provided as margin for buying back and squaring off the position or do we need to bring in fresh cash for buying it back and squaring off.
You don’t need margins (unless you have a pending order) to square off the position. You can just close it directly.
Hi Kartik,
If i have bought or sold any Call option or put option on Zerodha. After executing the order, profit or loss started showing in my position.
1.This profit or loss is after taking consideration of whatever premium received or paid. The showed profit or loss is real or something else.
2. How to know whether i am in profit or loss in a trade in view of paid or received premium.
3. After selling option, we know our profit is limit, but still i have seen sometimes profit is more that the premium received.
Hope, you will clear my doubt about premium received or paid concept & profit and loss concept in option.
Regards,
Priyanka.
1. Yes, that is keeping the premium in perspective
2. The position tag gives you a sense of this
3. Hmm, I’m not sure if I get your query completely here.
Recently, I BOUGHT MANY CALLS AND PUT OPTIONS AND SOLD THEM later on with some on profits and some on losses in May month before expiry. I read an article in the newspaper that from Septemeber 2019 it’s mandatory to square off your position before expiry otherwise, you have to take delivery of stocks. In my case, what I have to do to SQUARE OFF all my Call and Put Options which I bought and then sold.
Newspaper Link:
https://www.thehindubusinessline.com/markets/stock-markets/beware-of-your-risk-all-fo-stocks-are-now-physically-settled/article29538217.ece
PLEASE HELP.
I’d suggest you read this – https://zerodha.com/z-connect/queries/policy-on-settlement-of-compulsory-delivery-derivative-contracts-update-oct-2019
Dear Karthik,
Sorry for bothering you. I checked the link. I was not able to understand it.
PLEASE GIVE ME ANSWER TO THIS QUESTION ONLY:
IF I HAVE PURCHASED CALL AND PUT OPTIONS THEN SOLD THEM AFTER 2-3 DAYS, DO I HAVE TO SQUARE OFF BEFORE EXPIRY ALSO?. IS THERE ANY FURTHER LIABILITY ON ME?
PLEASE HELP. THANKS A LOT
No, once you square off the position, you are out of the market. Nothing to be worried about.
Sir it’s very frustrating that nifty options allowed range is very narrow this week just 300 point range…are you doing anything on this issue??????
Yes sir, this is a primary concern to us as well. Working on solutions.
Hope we will get the solution soon
Can you please share more context?
Dear Sir,
I have a query please help
If I sell a call of HDFC Bank for say 900 strike price quantity 500 and premium 20 rs. for 25 June 2020 expiry.
Let’s say date is 5 June 2020.
I receive the premium of rs 10000
1.What if I square off my position on 20th June with a premium at 15 rs? Can I do that? What will be my liability after that as per contract? If stock price crosses my strike price, do I have to still buy or sell shares or pay to the buyer on expiry date?
Please help…
Thanks
Yes, you can sell the trade at any point, no need to carry it to expiry. Once you close the position, there is no liability.
Hi, I’ve a small doubt. I read that India follows European Style options and that means that you can sell your option only on the expiry day. In that case, I didn’t understand how can you sell it at any point of time? Also, trades which are closed before expiry, are they usually taken based on a change in the spot price or on a change in the premium rate? Which one is the profitable change?
Exercising options is only on the expiry day, but you can sell it anytime you want. Selling and exercising are two different things. For trades closed before expiry, change in premium matters. Otherwise, for expiry change in spot matters.
Alright. From what I understand, exercising my option or selling my option, both are settled by cash, right? So the difference is that if I exercise my option, my P&L will be the difference in the spot price and the strike price multiplied by the lot size. If I sell my option, my P&L will be the difference between the premium rate multiplied by the lot size. This is the primary difference. Am I right?
Need to update this chapter, stocks are now physically settled. Check this – https://support.zerodha.com/category/trading-and-markets/margin-leverage-and-product-and-order-types/articles/policy-on-physical-settlement
Dear Karthik Ji,
Please answer my quesion:
I have a query please help
If I sell a call of HDFC Bank for say 900 strike price quantity 500 and premium 20 rs. for 25 June 2020 expiry.
Let’s say date is 5 June 2020.
I receive the premium of rs 10000
1.What if I square off my position on 20th June with a premium at 15 rs? Can I do that? What will be my liability after that as per the contract? If the stock price crosses my strike price, do I have to still buy or sell shares or pay to the buyer on the expiry date?
Please help…
Thanks
Yes, I guess I’ve answered your query earlier as well.
Hi Karthik
I have a question in mind. Suppose I Short an option and doesn’t exercise till expiry. What will happen?
How to exercise option bought or sold?
Regards
Satish Baichwal
Check this – https://support.zerodha.com/category/trading-and-markets/margin-leverage-and-product-and-order-types/articles/policy-on-physical-settlement
Hello Sir, (1) suppose in market hours if ihave two positions sell call in 10k loss and buycall in 10k profit with zero available cash balance,then will my sellcall loss adjusted with the buycall profit as my net profit and loss is zero OR ineed to bring extra funds to the account for the sellcall loss at that point of time with holding both positions…
(2) suppose if my sellcall position is in 10k loss and available cash is 10k in market hours and position running then will my loss 10k deduct from the available cash balance(10k) OR the exposure margin which was blocked before taking position at that moment…can you please elaborate how margins work
1) Since options don’t have M2M, you need not maintain 100% all the time during the day, however by 3PM you need to ensure full margins if you wish to carry forward the position
2) You need not worry as long as there is additional cash in the account
yes, zero
Dear Karthik
I had a question in mind that what happens if I Short an Option and don’t exercise for which, you advised me to read the article at – https://support.zerodha.com/category/trading-and-markets/margin-leverage-and-product-and-order-types/articles/policy-on-physical-settlement
I read the article. However, I could not understand it properly I think. I am not asking about stock options. I want to know about INDEX options
Just guide me on
1) Suppose I short CE of NIFTY / Bank Nifty, i.e. INDEX and do not exercise. I am in profit. Will I get that profit automatically or I will compulsorily have to exercise my option?
2) How to exercise options? Just squaring off or any other method?
Regards
Satish Baichwal
1) If you let it expire, then the settlement will happen and your profit or loss will be credited/debited
2) It is deemed exercised if you let your ITM option expire
Sir i have made a payout request for 50,000 rupees from my demat on Friday. It showed processed the next day but the amount has still not received into my account. What should I do ?
Please contact the support desk for this, Manas.
The amount received yesterday sir on Monday at noon.
Ok.
*on Tuesday
Suppose me nifty 9500 CE Sell karta hu @100
To usko sell karke mujhe premium milega 7500
Strike price 100×75 = 7500
Then immediately kuch minute baad me nifty 9500 CE buy karke leta hu to matlab mera position square off ho jayega
To jo premium mujhe mila tha
7500 wo mujhe mil jayega ya wapis chala ho jayega
Your P&L will be the difference in the buy and sell premium.
Hi
what happen(profit or loss) ?
if nifty spot 9300 Expiry 25-june-2020
i am writting the 9800 CE with primum is Rs 90 on may 27th-2020 and that time nifty was trading at 9300. after few days, means on 29-May-2020 nifty was trading around 9470 and my already taken the writting position 9800 CE primum Rs 90 was increase to 140 rupees on 29-May-2020,but nifty spot prices are below of my strike price on 29-May-2020. My question is if i close my position on that day(29-May-2020) with primum 140, shall i get profit or loss?
You will have a loss since you have written the option/short on option.
ok
If i calculate my loss from the above scenario is
For writting premium received for the 9800 CE is 90*75(lot) = 6750
(writting position 9800 CE primum at Rs 90 was increased to 140 rupees on 29-May-2020)
loss is = 140-90 = 50 — > 50*75= 3,750 , so this 3750 will be subtracted from the (9800 CE writting at 90) premium received amount right? means 6750-3750 = 3000 So my real loss is = 0
Is that the above calculation for real loss is correct?
No, you sold @90 and bought back @ 140, so loss is 50.
if i buy nifty CE 1 lot(75) at strike price of 9700 and spot is 9690. premium 50*75= 3750.
if spot price rose to 9770 and premium also rose to 75 from 50 and then i decided to square of my position.
how would my p&l look like?
is it (9770-9700)70*75 – 50*75 (prem. paid)
or difference of premium 25*75?
The difference in premium is what you make.
This is related to sell-to-close(exit the writting option).
Current close NIFTy 10145.50 . 25-june-2020-Expiry
For writting the 10250CE with premium Rs 84.15. for this required margin is as per zerodha margin calculator as below
Span Rs: 1,14,493
Exposure margin Rs: 15,213
Premium receivable ? Rs: 14,955
Total margin ? Rs: 1,29,706
Here the total margin required is 129706
For Buy the 10400CE is premium 39.55
Let we consider my account has only 30000 rupees. i want to take this both position
if i taking the position with basket order with this spread ,the total margin requirement is Rs: 26,068(as per zerodha calc).
Span Rs: 10,855
Exposure margin Rs: 15,213
Premium receivable ? Rs: 4,530
Total margin ? Rs: 26,068
1. My question is , can i take the first buy position means 10400CE is premium 39.55 and after i take the writting position 10250CE with premium Rs 84.15 with total of available trading account value of 30000 only? because the total combined spread margin requirement is Rs: 26,068 only.
2. Similarly, while closing the all position also ,first i have to close the writting position(10250CE) and after i have to close the buy position(10400CE). is that correct? can i save from the requirement of huge margin money if i following this steps?
1) Yes, you can do this. You are better off by buying the option first and then writing the option
2) Yes.
Hi Karthik, I have gone through all the modules, I shall say its really impressive you really went into the depth which is required.
My question is if I have 2 leg position, today the nifty spot is at 9900 I buy a nifty call for strike price 10200 at 50rs premium and sell a nifty call for strike price 10500 at 20rs premium, my first question is will the margin automatically reduce for sell position since I booked a call position first?
Assuming there is some time to expiry, I want to square off any one position. My second question is will squaring off one of the position affect the margin? If yes then can you explain in zerodha will I get any notification to add more margin or do I get fined ?
I have been wondering if someone can answer this for me. Thanks.
Yes, thats right. Yes, if you are closing your buy position, then you will need to bring in more margins. You can close the sell position first before squaring off the buy position.
[…] Calls dominating puts can be explained by an influx of bulls trying to purchase out of the money options, and bears, unable to buy puts, meeting this demand by selling calls. […]
Dear Karthik,
I have a query. Let’s say i sold SBI 150PE at Rs1, and at the expiry the value becomes 0.05 lets say. I have not closed the contract before expiry. Then what will happen?
1. The whole money (3000 lot*1 premium)= 3000 is into my pocket.
2. Or 0.95*3000 is my money
Any charges will be recover by zerodha in case of non closure of the contract before expiry.
please clarify.
Since the option expires worthless, you get to retain the entire premium.
since, i have not bought the positions back, zerodha will chage anything from me?
No, there are no penalty or additional charges.
Sir please share some other strategies like Box strategy where we can earn although little but riskless profit consistently.
Will add an updated chapter tomorrow.
Thank you sir ☺️
Happy learning, Raj!
Sir i have buyed many shares of a penny stock in nse @ 30 paise & now it trades at 1 rupee so it was showing me good profit. But today when i opened my account, i found out that zerodha changed my share from nse to bse itself which is trading only at 40 paise & it’s showing very less profit. What the hell is this happening ??
You can still choose to sell on NSE, Rishabh.
hello sir,
as stated above that NSE had opted only for european option and we have to wait for the expiry date to square off our position. So if i bought call option @ 21 on june 15 and on june 17 it is trading aove it and i am profitable in that position , sp can i sell it today or have to wait for expiry date .?
Yes, you can. There is no need to wait till expiry.
I am little confused regarding “Exit from Short Options”. I have sold TATAMOTORS JUN 120 CE at Rs. 0.65.
Let’s assume TataMotors closes below 100 on 25th June, i.e. 120CE is OTM.
1. What if I hold it till expiry and do not close(square off) my position? How much will be the net credit/profit in my account?
2. What is the margin requirement on Expiry day or the day before?
1) In this case, the option expires worthless, hence you get to retain the entire premium of 0.65
2) It will be higher, since its physically delivered. I’d suggest you check the margin calculator for this.
What do you mean by “physically delivered”?
I do not want the delivery, I am not getting this. Could you please explain this in detail?
What happens to sellers when the option goes OTM on expiry day? Why the “delivery” come into the picture?
Lalit, as and when you approach expiry, F&O gets into physical delivery mode. I’s suggest you read this once – https://zerodha.com/z-connect/tradezerodha/policy-on-settlement-of-compulsory-delivery-derivative-contracts
Hi
I interested to inform that, the chart of particular stocks, i seen difficulties to move any desired position(screen of web platform) on the chart screen window. smooth operation is not available, it very hard to move up or downward. i believe zerodha may consider for this enhancements on the web platform.
I’m not sure, the operations are quite smooth Subin. Maybe something to do with your system?
you may verify the same smooth operation of the any chart (moving up or down) on the below link.
https://www.investing.com/indices/us-30-futures-streaming-chart
Verify using click the chart(link chart given ) and drag up or down or right,left or corner, any place we can move the chart smoothly.
The chart is powered by TradingView, we have the same on Kite as well, Subin.
Sir
after I write a call in a particular stock and then that stock comes under ban what will happen.am I able to square off my short call.will there be any taker as that stock is under security ban.
Yes, once the stock is in ban, everyone can only square off, no one initiate a new position. So the person at the other end of the trade will have to do the same.
Sir last year there was an article about a stock which is over 100,000 in worth but trades @ 6 rupee per share. Right now the share is at 9.09 & just like last year it had many willing buyers but no sellers. The stock’s name is Elcidin. Why don’t exchanges do something against these open frauds even after knowing everything ??
Lack of liquidity is not a fraud, but yes, fraudsters can take advantage of this. We have taken some precautions, check this – https://zerodha.com/z-connect/tradezerodha/kite/mandatory-totp-for-illiquid-risky-contracts
Sir is there any virtual trading terminal where i can practice options ? other than sensibull because it is not free
No, unfortunately, we don’t have a virtual trading platform Shivam.
I must say, Karthik, you and your team have done a fantastic job, astonished that all this stuff is for free!
Not related to the topic, but I observed that you have replied to almost every single comment ( even when repetitive) from 2015!
What inspires you to reply every single person in the thread?
Thanks!
Thanks for the kind words, Swadish. The fact that a quick reply from us will put the guy asking the query at ease is very heartwarming, that keeps us going 🙂
Hi Karthik
I am amazed by this varsity modules. Its so clear, detailed yet simple. I am grateful to you all for this & also for the fact that its free, for such an amazing stuff. Brilliant.
I invest for long term but was going through “Options” modules in Varsity. I have one question (Pls absolve if some terms are incorrect, i am too new to options)
Lets say I have made a short call for Nifty 25th July 10550 CE on 19th June 2020. Premium is Rs. 22 at a NRML margin of Rs. 1,03,000. Lot size is 75.
The closing spot prices for Nifty are
19-Jun-20 10244
22-Jun-20 10311
23-Jun-20 10600
24-Jun-20 10305
25-Jun-20 10288
If you see above (on slightly made up prices), the price went higher than my strike price on 23rd. But since there are two more days for delivery, can I just sit (& praying) without doing anything and on 25th June, would have made profit, as it ended up lesser than 10550? (or) is there something like in this scenario I will make a loss? Please clarify.
I hope my question is clear.
Thanks
Sriram Ramanathan
Sriram, yes, if your prayers got answered and Nifty closed below 10550 (or even exactly at 10550), on 25th, then you get to retain the entire premium of 22. Else, you’d make a loss 🙂
Thanks Karthik
So, a sell call option need to be squared off (closed before expiry) only when the spot price goes above the strike price and the anticipation is that it will only go up further. Not in any other conditions. Am I right.
When we indeed do the square off – what exactly are we doing. Are we “buying” what we have already “sold”? So what happens to the ones that we are buying.
Squaring off a “buy” call option when the premium goes above, is clear to me. I am selling the options that I have bought earlier.
But I am unable to get my head around clearly on what happens in the reverse way (i.e) when I try to square off my “sell” call option. Am I buying something? 🙂
Thanks
Sriram Ramanathan
Under that condition, you will make a loss, so if you are unable to tolerate the loss, then its best if you exit the position and cut losses. Yes, when you square off, you buy, which means you are netting an open position.
The same thing happens but in a reverse way. Its just that you sell first and buy later. The easiest way to think about it to ignore the nuances and look at it at what price you buy and what price you sell.
Let say, Mr.X sell the Call option RS 10 and MR.Y bought the call option Rs10 after the call premium reached Rs12 Mr.Y exit thePosition then Mr.Z Bought the call Rs12 from Mr.Y the difference amount is the profit of Mr.Y the same will continue so on here how option seller getting unlimited losses. Kindly Clarify
The profit made by Y is the notional loss for Z. T’row from 12 it can goto 200 or any price. That is the loss for Z.
e.g
i have sell 24000ce premium @300 lot size :25
and square off after 15 days @ 100
meanse profit : 5000/- correct?
e.g in this scenario my fund use for this 1lakh
pls tell after square off total how much fund show in my ac?
Thats right. Please do check the exact prices here – https://zerodha.com/brokerage-calculator#tab-equities
Sir today, I shorted BANKNIFTY 2 jul 22000 PE at 150.70, and I did not close the position. Also BNF index closed at 21953.20.
1) Will I be charged any penalty for not covering my short position sir?
2) How much premium will I retain, is it 150.70 – (22000-21953.20) = 103.90 ?
1) No
2) Yes, plus applicable charges.
ok sir, thank you.
Good luck Mani.
Sir where can we see charts for option payout structures in zerodha???
You need to check Sensibull for this, Jinesh. https://sensibull.com/
Hi Karthik,
I have a question with respect to Call writing. Call writing is a great way to earn money in the US for people who have F&O stocks in their portfolio. I want to know if the following scenario is possible in Indian options market.
Let us say, I have 35 shares of Eicher motors in my portfolio which is the lot size of Eicher in options.
So, with these 35 shares in my portfolio bought at Rs.19500, i would like to sell it at a profit. Even Rs.20,000 is a good profit for me.
With this in mind, I would also like to earn monthly income using these shares by writing a call option. This is how it is done in US markets under the name covered calls.
– I Write a call option of july 20000 which is at a premium of 455 rupees. So, I earn a premium of 455*35 rupees.
– If the market price is below or at the money, i earn the profit of the premium and also can continue to keep my stocks in portfolio.
– If the market price crosses strike price, I earn the profit of the premium + the profit of 500 (20000-19500) * 35.
– Thereby, i profit both ways without any loss. Its a win-win situation.
– The only disappointment would be if the Eicher share price moves to 22000, I would have earned a bigger profit by selling directly
in the market.
Is the above scenario of covered call sells possible in India?
Yes, you can do this Prem.
But this scenario you’ve mentioned – If the market price crosses strike price, I earn the profit of the premium + the profit of 500 (20000-19500) * 35 —> this is wrong. It really depends on how much the spot has crossed the strike.
Hi Karthik,
So, for the same scenario, if the spot price crosses strike price, as I had written a 20000 call, I think i will earn a profit of 500 points only. Do you think there can be a loss in this scenario? What’s your take?
Yes, when you write, the max you earn is the premium you receive. Loss will happen when the spot moves higher than 22500.
hi Karthik
i want to know what will happen if I sell banknifty call @22400 and banknifty goes past 22550. if i did not exit the position till expiry what will happen to premium ? will it keep increasing till expiry or become zero?
Yes, the higher it goes, higher is the loss.
Hi Karthik,
I couldn’t understand one thing. You said Indian Stock exchange follows the European convention where one cannot sell off until expiry date. You also said if I buy a call option at 9 in the morning I can sell it off at 930. But this last statement denotes American option convention. Does it not? I am a bit confused here.
Buy-Sell the premium is one thing, exercising the option is another. I’ve highlighted the difference multiple time in the comments section, request you to go through the same 🙂
Sir
Does call option buyer has to pay margin?
And if it is,then why?
My thought process is the maximum call buyer can loose is the premium which already he had paid.Then what is the requirement of margin?
No, option buyers don’t have to pay margins.
How to find the exact margin required for hedged positions(for ex. bear call spread) of banknifty/nifty WEEKLY options expiry?? Zerodha options margin calculator is showing margins only for monthly expiry but not for weekly expiry options
Margins are similar for weekly as well, however, we are updating the margin calculator for weekly soon.
Sir,
I have a FD in SBI. How to pledge it as collateral for options margin. What will be the charges incurred for pledging FD. Will I get entire FD amount as margin or will there be any haircut.
One more doubt,
Can I pledge equity mutual funds as collateral to get options margin?
Thank you
We don’t accept FD/MF for collateral margin as of now.
Why Zerodha is not allowing to buy far OTM options in banknifty/nifty? Why are these restrictions imposed whereas some other brokers allowing to buy it?
Please check this – https://support.zerodha.com/category/trading-and-markets/kite-web-and-mobile/articles/why-did-my-bank-nifty-option-order-get-rejected
Sir,
I couldn’t find the option Greeks values for a given scrip in Zerodha kite. Where else can I access them (real time values of option Greeks for each scrip)?
Do check out sensibull.com for this.
Kindly clarify below queries
1. What happens when I buy a Nifty PUT option and I dont own the underlying asset, the option contract is on last hour to expiry and is ITM and I dont exit my position, as per PUT option, I have the right to sell at the strike price if I wish to exercise, but I don’t own the underlying asset. so what happens after option expires and how is it settled?
2. I write a naked CALL Option and I don’t square off and option expires with ITM and buyer exercises his option. Since nifty option is cash settled, I understand exchange will cash settle the buyer from my account and debit penalty from my trading account as per calculation. Kindly correct if my understanding is wrong.
3. Since option premium decays over time and eventually reaches zero on day of expiry, can we not just sell options(PUT/CALL) on last day hoping it will expire worthless and book the premium as profit. I strongly believe it is not that simple. Please provide additional information.
Awaiting feedback and comments from experts to clear my amateur doubts
Thank you
1) The difference is settled in cash
2) That’s correct
3) You can, but the margins required to the premium received may not make sense.
Thank you Karthik for the quick reply.
How do you exercise an option on Kite ? (or) Is it done automatically if option is in ITM and STT is lower than the Intrinsic value as explained below.
https://support.zerodha.com/category/trading-and-markets/trading-faqs/articles/options-on-expiry-day
Thank you once again Karthik
That’s right, Arun. You need not have to worry as long as you let your ITM option stay in the system.
Hii Sir
How to do Covered Call option in Zerodha?
I have searched over Google, but couldn’t find.
Covered call is basically to have the necessary underlying in your DEMAT and selling its respective CE. Nothing more to it.
Ok sir
Suppose I have 3000 shares of SBI. (one lot)
So can I sell SBI CE option even if I don’t have any funds/margin?
Nope, you need the margin, stocks wont offset the margin requirement.
CE stands for call European.
If I buy a call option NIFTY APR 12500 CE @10 rs. at the time 10 am
now it is trading at @12 rs. at 12 pm.
can I sell it and make profit of rs. 2 rs per share.?
as per definition of CE ,I am not able to sell it.
Yes, you can sell it and make the difference as profit.
Hello sir
Sir if I have sold PE of a stock, I will receive premium as you have said. Suppose on the expiry date, what if the option is exercised and I’m obliged to buy the shares if I dont have funds in my account but I’ve the sufficient margin?
For example, SBIN PE 150 AUG SELL
Required margin is around 108000
But if the option is exercised on aug 27,
I’ve to pay 150×3000=450000 which I dont have that much. (Let us say the spot is at 151 on the day of expiry)
The closer we get to the expiry, the margin block increases. In case you do not provide the required margins, then the position will be squared off. Do check this https://zerodha.com/varsity/chapter/quick-note-on-physical-settlement-2/
Sir suppose I choose to write an option and I want to square off my sell position so can it be done or not before expiry??
Also what will be my P&L if I square off before expiry?? Kindly give an example.
THANK YOU
Yes, you can sell it before expiry, no need to wait for expiry. The P&L will be the difference between the buy and sell price of the premium.
Hi,
I have a question involving a market example:
Date:13.07.2020
Expiry Date: 30.07.2020
Share Name: Bharti Airtel
Spot Price: Rs. 570
Strike Price: Rs. 600
I have sold a July Expiry 600 CE for a premium of Rs.8.00
That means that i have collected a preimum of Rs. 8 per share.
Now, from the day of booking the share, the premium value has sometimes gone above Rs. 8.00, and some dyas it has closed below Rs. 8.00.
My question is such – If on expiry day, after expiry, the underlying does not come to Rs. 600 (assuming it closes on expiry at Rs. 598.00), does that mean that:
a. Option cannot be exercised by the buyer?;
b. Despite the daily fluctuations (and daily corresponding Profits and Losses), when the contract expires and the underlying price is below my spot price, then I will recieve the full premium (which means that the premium value will become zero)?; and
c. If the underlying closes upon expiry at Rs. 605 (buyer has a loss of Rs. 3.00 still), can he exercise his option to buy the stock? What I mean is, can the option buyer exercise his right to take delivery of the stock? How does it work in the Indian Market/ NSE?
Thanks for any help that may be provided.
a. Yes, as the option is worthless
b. Yes, that right
c. Yes, he is in profit, but this may not make sense after factoring in the applicable changes, especially STT. Hence he may let go of this. However, he would if the value is said 610 or 615 or anything higher as he would still make substantial money post charges.
Hi,
If I sell 2 lots of ITC call options at a strike price of 212.35 for 1.80 premium, that means I am supposed to receive a premium of 11,520 right? As long as the spot price of ITC does not cross 212.35 I am making a profit. My losses will start only after the spot price crosses 214.15 as per my understanding. Please correct me if I am wrong.
Also, I am assuming I have to wait till expiry to get the premium? and if I square off my trade before that, I will make a profit only if the premium has increased and the difference between the LTP and the 1.80 will be my profit?
That’s right, your understanding is perfectly correct 🙂
I want to invest in a liquid mutual fund(say AXIS LIQUID FUND – DIRECT PLAN – GROWTH OPTION) in coin app. Can I pledge this liquid MF to get margin for option selling(not intraday). Is the margin alone is enough for option selling. For example, I invested 1 lakh in above liquid MF and pledged it. I may get 90k margin after 10% haircut. Say I need 90k margin for options selling also. Is margin(90k) I got by pledging MF is sufficient ? or Do I need to give 50% cash and 50% collateral margin(i.e 45k by cash and 45k by MF)?
50% has to come in the form of cash. Check this -https://support.zerodha.com/category/console/portfolio/articles/what-is-pledging
Dear Karthik
suppose i short call option nifty 11300, @ 70rs , 1 lot , i received immediate premium of total 5250,
& i pay approx 32000 in mis, (nifty is at 11100 ), can i exit immediately?, or i have to wait till expiry day, if i exit immediately will be there any penalty from exchange, or my money will be block until expiry day, if i stay & nifty is still bearish shall my premium will increases at the end of market close
why the option sell lot is too higher, rather than option buying
Thanks Sir
You can exit immediately or at the most by EOD since MIS is an intraday order. There is no penalty for this. The amount you make is equivalent to the difference between the buy and sell price of the premium.
i have query in stock option ce selling which is very bearsih view
for eg if sell today on 30 july 2020 a stock option of strike price 2500 ce spot price is @ 2300 premium is 67 lot size 400 for aug month expiry i get recvd of 67*400 that is 26800 premium now and my brekeven point is strike plus premium 2500 plus 67 that is 2567 after this only will make loss so then next on 31 july 2020 there some good news for stock and it came above strike price of 2571 the preium came to 173 so if i exit on that a only what will be loss and how much or till expiry if keep and price dont come below 2500 then also premium will decrease or not and what will be loss or profit
Your loss will be the difference between the premiums i.e. 173-67 multiplied by lot size. If the stock stays below 2500, then you get to keep the entire premium i.e. 67.
i have query in stock option ce selling which is very bearsih view
for eg if sell today on 30 july 2020 a stock option of strike price 2500 ce spot price is @ 2300 premium is 67 lot size 400 for aug month expiry i get recvd of 67*400 that is 26800 premium now and my brekeven point is strike plus premium 2500 plus 67 that is 2567 after this only will make loss so then next on 31 july 2020 there some good news for stock and it came above strike price of 2571 the preium came to 173 so if i exit on that a only what will be loss and how much or till expiry if keep and price dont come below 2500 then also premium will decrease or not and what will be loss or profit
contiuing to above query
if say next day it does not come above strike price say it trading 2485 but premium increase say 71 then also will make loss or not as its below my strick price
another scernerio if its trading 2560 which my breakeven point and preium is 115 whether i will make loss as or not
You will incur a loss only if you decide to sell it, otherwise it’s a notional loss. At 2560, you make no loss no profit.
sir i have buy divislab share in cash 120 qty @2470 sold it 2481 so i was in profit and my margin availabal was 297720 then i sold call of dvislab strike 2500 ce preium 67.95 my breaven point was 2567 but it went up till 2571 preium 173 so i exited with loss 173-67.75 lot size 400 so loss is 42100 so from my bal of 297720 -42100 remaing bal will 255620 but instead dedcuted 69200 and my bal is 228520 when i have incureed loss of 42100 then why dedcuted 69200 and bal is now 228520 only can u pl expalin with details
Ganesh, for this you will have to contact the support desk. They will be able to help you.
Sir,
I wanted to know
Q1.why is the number by which DIIs sell index options always stays zero at the end of the day.
Q2.Why are they not allowed to short the options even though they can use underlying shares as collateral to pocket premiums and generate alpha?
Q3.I was told that DIIs are not allowed to short the market??
Is it true?? In reality they are allowed to buy put options. Please mention some facts regarding this.
1) Not sure. Probably they dont sell options 🙂
2) Most MFs cant do that, but I think arb funds do this actively.
3) Not true
If I buy a call option of Nifty at 11,000 strike price, spot price is 11500 and premium paid is 500, then in what scenario will I get a profit?
Nifty has to move higher such that the premium increases beyond 500.
Sir, have the following queries:
Statement 1 >>> ABC long CE pays premium of INR100, while XYZ is short CE.
Question 1 >>> when will XYZ get the premium in his account?
Statement 2 >>> Premium decreases to INR70 days after and XYZ squares off.
Question 2 >>> So XYZ’s net payoff is 30? When will INR70 be debited from his account?
Thank you.
1) On T+1 day
2) Yes, provided the position is squared off
Hi Karthik
Please clarify on the following, considering I’m an option seller:
American options >>> If option buyer plans to square off then the option seller has to mandatorily exit?
European options >>> I’ve the choice to square off. Option buyer can’t force me liquidate?
Thanks.
1) Yes
2) No
I have taken following trade for call writing:
– Sell one lot Balkrishna Ind 1300 PE
– Buy one lot Balkrishna Ind 1200 PE
Do I need to settle this trade physically on expiry?
Or it will be settled based on premium (depending on price settlement of scrip)?
And I hope there is no penalty, if I leave this trade to expire?
All stocks are physically settled, Vineet.
Hi, I have a query, pl clarify.
Let’s say any share, for eg.PFC. The option lot of PFC is 6200. If I hold 6200 shares in my account of PFC, and I want to sell 100CE of August expiry of PFC. Since I have shares in my account, for selling one lot of PFC (which shares already have in my account) i require any capital to be deployed in my zerodha account.?
Selling CE means I’m ready to give or sell my shares if it reaches 100, since I have shares in my account, any other money I’m required to deploy as margin, pl clarify.
Thanks in advance.
Yes, you will need to pay the required margins to initiate the trade.
Yes, you still need to have the required margin in your account, Share holding does not set off the margin requirements.
Hi . Please let me know if my understanding is correct.
I bought a X company’s CE option with Strike price -100, Premium -5 and lot size 100.
I can trade in 2 ways :
1. Sell it on the next day when premium reaches Rs. 10 and make a profit of (100*5) – Charges.
2. Wait till expiry date. If the spot price on that day is say (100+5+X), I will make a profit of (100*X)- charges. Or a loss of either 500 or (105-spotprice)*100, whichever is less.
Thats right Sathish.
That’s right Sathish.
Thanks a Ton 🙂
Suppose if I have shares of X Ltd and want to write a call option, can I use the shares of X Ltd as margin.
I have a doubt,
Since Shorting of CALL requires margin amount to be deposited initially & the system will automatically square off his position when the losses approach span margin. So in this regard we can say that there is some kind of capping for Call sellers to mitigate his loss & avoid default. On the other hand as options are cash settled, the losses made by seller is equivalent to profit made by buyer. But here buyer’s profit is limited as seller’s loss is also limited due to margin squareoff. In that case, buyer won’t be benefiting from big profit though he is taking much of the risk.
This ambiguity is confusing me .
Please clarify it sir.
No Vaishak, why do you think margins are prohibitive to sellers? It is not, especially for institutional traders. You need to think about markets from both retail and institutional perspective.
I haven’t got your point. Can you please explain little more ?
What I mean is that once the position is squared off by the seller, a new seller will assume the same position. This is like a continuous affair, especially for a highly liquid contract.
i have a confusion here – at one point its metioned we can squareoff the options on the sameday and on the other hand option market is European in nature.
How does this work?
Thats because you can square off the option anytime you wish, but if you want to exercise, it has to happen on expiry only. Square off and expiry are two different things.
Karthik bro, as I gone through all 4 chapter , I can see Indian options is similar to amarican options exchange ( on the basis of we can exit whenever we want to exit the Trade )
But when it comes to European options trade we can’t exit till expiry date right …!!!
For example= I bought call option of August at 10am in long position ( delivery ) … So I should wait for end of August ….? ( As European options trade )
& Also tell in terms of intraday bro..!!
The square off part and exercise part are two different things, Kishore. You can exit the trade whenever you want but you cannot exercise the trade up until expiry.
Hi Karthik,
If i sell wipro 290CE and get premium.
And on the expiry the spot price remains below 290 lets say 285.so do i need to sqaure of my sell position on expiry in this case?
No, in this case the option expires worthless, hence you get to retain the entire premium.
Dear Karthik Sir,
Thanks for providing the insights of option trading. I have gone through all the comments and now I am bit confused. My question is.. Say for example I want to sell a call of SBI
Price- 5
Lot size is 3000
Spot price is 195
CMP is 187
Date is 3.08.2020
So now my breakeven point is when SBI market price is 187+5 equal to 192 or it is 195 + 5 equals to 200?
Secondly, suppose the CMP is now trading at 183, and the call option I have sell is having a price value of 3.0.
Now in order to square off my position , I can buy this call option at price of 3…so my profit will be 5-3 equals to 2 x lot size. Is I am right?
Thirdly
Also if I didn’t square of my position on the date of expiry, will it be automatically square off with the price of that day or I will loose all the margin?
Looking forward for your reply.
Thanking you in anticipation.
1) When you sell, you receive premium. When you start making losses, you first lose the premium and then start to lose capital. Hence the break-even is 187+5 = 192.
2) Thats right, your profit will be 2 * lot size
3) Yes, it will get settled depending on the settlement price upon expiry.
Thank you Sir
What does increase in call writing a week before expiry signifies?
In a way it implies that the the participants don’t expect the market to rally.
Can I sell options without sufficient margin in my trading account. Will it be squared off automatically when amount (whatever may be) gets exhausted?
You wont be able to initiate the trade without the margins in the first place.
There is a mention of PUT option in this section which is a greek word here.
Sorry, can you add more context to this?
Planning to trade in INDIA NSE Options by SELLING NSE Options. My query is as an NSE Options SELLER Index/Stock can I keep stop loss. Or I have to wait compulsorily till expiry? Can I exit from SELL Position before expiry by BUYING the same strike price?
YOu can keep a stoploss, not required to hold to expiry.
Hi Kartik,
want to understand the effect of square off of postion for a call option writer in below scenarios.
Assuming at CMP 800 i sell CE 850 of 100 lot size for a premium of Rs. 5 . Total pemium credited for me will be Rs. 500.
1. Can as a seller I square-off before expriry based on movement of premium?
2.What would be the incremental effect if I squre-off on in below scenarios I aleardy would have reeived Rs. 500 as option writing premium as mentioned above:
a. CMP 820 CE 850 premium 6. Will 100 be deducted?
B. CMP 780 CE 850 premium 4. Will additinal 100 be credited?
1) Yes, you can
a) Yes, 100 would be the loss
b) Yes, if you square of at 4, then you make 100.
I can buy and sell options anytime I wish , no need to wait till expiry, right.– this is essentially called trading the premium.
So, my question is –when did I receive the profit from this trading, on the same day or on the expiry day.?
Yes, that trading the premium. Profits are credited on T+1 basis.
can I daytrade options , and square off the option position on intraday basis only, and pocket the profit by the same day , no need to wait for expiry day to get profits.
Yes, you can day trade options.
Sir i m very confused what difference in square off the option or excercise the option if i have a buy call strike price1000 lot 25 and spot price 1200 premium 50 if after 2 days spot price 1300 i square off before expiry what will be my profit and same scenerio happens on expiry date what will profit and if i do not close position on expiry day and contract expire then what will be the condition then tell me cleary sir every point
Amit, to square off before expiry means that you just trade the premium. To exercise means that you hold the option to expiry and get delivery of stocks.
Hi karthik,
First of all thank you for providing such a great study material.
I just want to know may be it seems little awkward that after spot price increases the strike price for exiting my trade do i need to pay the whole amount or just work with premium amount.
Nakul, you will have to work with the premium amount.
Could you please explain how much margin is required to sell the call options
Please share how much amount of margin or balance I should have in account to place below order
Strike price 11500 and the premium is 10 rs
So it comes to
75*10=750
How much balance I should have in demat account account of zerodha
Do check this – https://zerodha.com/margin-calculator/SPAN/
Could you correlate Sell call (CE) option to Ajay and Venu land example, it is understood for Buy CE option, but how it goes when sell call option?
Sell Call is exactly what Venu has done, he has sold the right to buy the land if Ajay requires.
Sir , today i bought BankNifty 23700 PE at a premium of 52 when spot price is at 23820 , after 1 hour premium increased to 86 and i sold it . Now , my profit shows Rs.840 ,
1) Even though spot price didnt fall below 23700 , i made a profit .Is it really called profit booking ?
2) If premium is only our concern for booking profits , then by ignoring the strike price and spot price we may enter any trade where premium is lower and give it a shot for booking profits just like i did above. I just went blindfolded with that trade .All i did is to check how much maximum loss would be there for me ( i.e : 52 * 25 = 1300 ) . So i went for the trade. Can we follow such type of techniques?
Thank you .
1) Yes, thats right
2) True, but how will you know which strike to buy and which strike to sell? YOu need to note that there are several factors acting on the premium of an option.
Yes sir i agree with you but as a beginner , being so new to the market my concern will be about profits and losses .So , if i just search out for lowest premium price in the options chart , say Rs.2 for a very distant strike price i may just give a try since my maximum loss would be ( 25 * 2 = 50 ) only . Profit is unlimited. I know this sounds foolish sir , but when im new to markets i get these ideas .
By doing this, you will develop a gambling instinct and not a trader’s instinct. As a newbie, you need to ensure your foundation is strong and set on the right base.
I totally agree with you sir , thank you for responding to my numb queries.
Pleasure. Good luck, Yash!
Hi Karthik,
While writing a Call Option, we have to keep margin into our account. But I should get the premium amount as I am a option writer. So when do I receive my Premium amount?? Please resolve this doubt.
And for writing a Call option, I have to straight away short the position of the desired strike price, right??
Thank you very much!
You will get the credit of the premium on T+2 basis. Yes, thats right.
If I sell call options, let’s say at strike price of 105, with premium of 6 RS. The spot price at 100.
Scenario 1. Before expiry the spot moves to 120, what will be my loss. 6-15= 9 ?
Scenario 2. If I wait till expiry and spot moves to 130 on expiry date. What will be loss
1) Depends on the premium at the point of selling
2) 130-105 = 25
Hi Karthik,
Suppose I had executed a vertical spread/ bull call spread with only the required funds in my account. Later I had closed my buy option and kept holding to sell option. Then my demat account balance will show a huge negative value since I do not have the margin to hold on to a sell option. What would happen if I carry the option for the next day or let it expiry? Very curious.
The position will be squared off if the necessary funds are not available.
Greetings Karthik
Lets say currently NIFTY spot is 11500
If I have a long call at Strike price 11600 and short call at 11400, will it guaranty my profit all the time if NIFTY remain in this range ?
since I will average my P&L
While there are no guarantees in markets, the expected behaviour of a short strangle is this 🙂
Please correct me if I am wrong
for point 2 – total loss will be
6-(130-105) = 19
Can you share more context please?
If i buy a call option and leave it till expiration date so what will happen to the option .
Depends on the moneyness of the option upon expiry. If its ITM, you will have to take delivery of the stock. If its OTM, then it will just expire worthlessly.
Hi Karthik, I just added fund to the Zerodha account for trading options. In the Kite for selling BANKNIFTY does the ‘Qty’ field represent the LOT size or NUMBER of units.
Also please clarify the following doubts,
1) If ‘Qty’ is ONLY number of units, do I have to enter values in multiples of 25 as BANKNIFTY lot size is 25.
2) Is it possible to loose more than the amount in the account.
3) Is the margin amount less for hedged positions.
4) And finally let me know the age limit recommended for your book, Rupee Tales. (My two children are 10yrs and 7yrs old, is the book suitable for them).
Thanks in advance for your advice.
1) Yes, bu default it will show the number of units per lot
2) Possible, especially in case of rapid price movements
3) That’s right
4) 7 plus, but unfortunately, the books are all sold out.
Hi,
Is it a good strategy to sell deep OTM calls and buying futures in case the underlying stock moves up?
Can this be a fairly consistent strategy to make profits?
Thanks.
If its deep OTM, less time to expiry, then I’d rather not hedge it. Depends on your risk appetite
Thank you very much for replying.
Today I tried to SELL 25 quantities of BANKNIFTY CE and Kite shows the Margin requirement as Rs85k for just 1 lot.
If I hedge by buying a very deep OTM BANKNIFTY CE, the margins might reduce to around Rs35k, right. (I tried to get the margin requirement from Zerodha margin calculator).
So I wanted to FIRST Buy then take the Sell position to have the reduced margin allocation (I have only 50k in the Zerodha account).
Due to the below restrictions mentioned in the Zerodha F&O margin calculator webpage for buyers, I can’t first place the Buy trade for a very deep OTM (say 24200), right?
“Bank Nifty contracts allowed for trading
Current Week- 21300 TO 21800 CE & PE”
Please let me know if I have the only option of allocating minimum of Rs1lac to Sell 1 lot of BANKNIFTY (even if I hedge later on).
(I wanted to sell only one lot for a few more months until I am consistent in my trade).
Thanks in advance for your advice.
Uma, yes, there is a restriction on which strikes to trade in Bank Nifty given the constraint in OI conditions. Do check this, one of the ways to overcome the OI restriction – https://support.zerodha.com/category/trading-and-markets/kite-web-and-mobile/articles/trade-all-strikes
Thanks a million Karthik.
I will raise a ticket and reach out to the Zerodha team for further help.
I prefer to migrate to Orbis only if I can change the account back to Zerodha after a few months of learning in the real trade. Because, I wanted to pledge holdings as collateral while trading.
I am only new to Options but started trading Forex in 2009 in FXCM (I worked in the US and used my BOA account to fund it). After returning to Chennai, for several years I couldn’t fund it with any Indian bank accounts. But till today I can trade in the micro account which I opened 10 years before as I didn’t blow up the account. I have overcome emotions and greed with this trading experience.
In Forex I take position only if risk/reward is 1:2 or higher. But with my 2 months experience in Options Writing (paper trading), even with hedging the risk is very much higher than the reward with my strategy. So l certainly prefer to trade more lots only after making sure that I consistently make profits in Options.
Thanks again for all the clear explanation of the concepts in Zerodha Varsity.
10 years is a long time 🙂
Happy trading, Uma! I’d suggest you stick around, try other options and strikes and see how that goes and then figure if you wish to migrate or not.
Hi Karthik,
It is much informative article. A lot of thanks. My one question is this:
In case, I have sold call option and got premium against the Call writing. Now, waiting for expiry day for getting the benefit of all amount of Premium.
Further, till the time of expiry, not exited my position. then, what will be ?
1. whether it will be square off automatically ?
2. whether any loss component is hidden in this transaction, in case, I have not exited my position till the time of expiry on expiry date.
1) Position will be square off, if you hold to expiry
2) Not really, all our charges are listed here – https://learnapp.co/home
Thanks for the advice Karthik.
Yesterday I raised a ticket about the reliability of Orbis #20200930592844 and no response from Zerodha support team till now.
A few years back, our hedge manager asked us to move our holdings from our another Zerodha account to a different broker as his brokerage is much higher with that broker than Zerodha. We also did so, and he is pledging it and doing Options Trading for us. After seeing his good performance we increased the capital and last year alone he earned 12L for us (with 50% profit sharing we paid 6L to him but we pay the taxes for 12L).
After the Karvy scandal this year, we are much worried to have an account with any new broker. Our hedge manager is not ready to trade for us in Zerodha.
That’s why I started learning Options, but reluctant to migrate Orbis for I am not sure about its reliability. We earlier had good experience with Zerodha. But I can take full control of our options trading from the hedge manager only after learning for a few more months.
With ONLY Forex trading experience, I have got the mindset that volatility is the great advantage. But now in Options I am reading that volatility would make the sellers a begger.
1) Under high volatility, a seller would loose only if their prediction goes wrong, isn’t it?
2) As I have got used to high volatility for years, I ignored the VIX in options. Am I doing a big mistake here?
(My favourite is EURAUD which moves crazily several times and perfectly behaves with Bollinger band and I have earned 20% with this pair many times). So my mindset is volatility is always great.
3) I read that stock options are not good for beginners, but why?. (I gained good amount in paper options trading in Reliance).
I need time to clear my doubts not with only paper trading, but with a single lot real time trading.
Thanks in advance for your advice.
Please do consider my advice – get away from such arrangements. I’ve seen one too many of such ‘arrangements’, which eventually have a bad ending, particularly in cases where these guys operate without any regulatory cover. It is best if you are in full control of things and trade/invest based on your own thesis.
1) That’s right. Plus if the volatility increases, then the premium increases, which is not good for the seller
2) Yes, please do keep vix in perspective
3) Stock options are more volatility compared to index options
Good luck!
Nyc article ..
I have one question , suppose i am selling nifty ‘s weekly expiry call option on monday on intraday basis ..
Then when can i square of my position ??
You can square off the position whenever you’d want. You can square off the same minute if you choose, no need to wait for expiry!
Please let me know if we get leverage in Zerodha for selling options.
Yup, you can use MIS.
Yes Sir, thanks for replying. Only now I learnt to see the leverage in Kite as below
Sell NIFTY 15th OCT 12000 CE Rs82
Intraday MIS margin = Rs35,515.84
Overnight NRML margin = Rs1,34,804.55
But please let me know if we can get leverage for Selling of Options and holding it for several days. I wanted to know the margin benefits for naked sell positions and holding it overnight. Though risky I wanted to know it for my calculation purposes. Thank you sir.
Overnight leverage is not possible for option selling. You will need full margins to carry forward the position.
Thank you very much for explaining Sir. You are doing a wonderful job by helping the newbies like me.
Happy reading!
I would like to know about covered call options.
Say I have 1000 shares of company X at 100 on my demat already. I want to write a call with strike price of say 110 and the lot size for the company X happens to be 1000. If by expiry, the price hits 120 I tend to lose obviously. However, would it be possible for me to tender the 1000 shares of X sitting on my dmat at 110 ? If so, how can I do that and what would be the procedure. Could you please help.
Vikram, in that case, you will have to give delivery of the shares, which is already in your DEMAT. The quantity matters, not the price. The price for the buyer is at 110.
Suppose I short sell nifty 11000 CE at @ 50.
Next days it goes to 10
So what I do the time
You can choose to exit the position @10 and pocket the difference of 40.
Like the actor said..”Mere pass maa hai”…
An option holder/buyer say..”Mere pass option hai…”😂
🙂
Kyun nahi! 🙂
If we exercise our option to buy at the expiry,does that mean we get the stock in our holdings for delivery ?
how much margin is required for short any stoke in cash market in intraday ?
Do check this – https://zerodha.com/margin-calculator/SPAN/
In which scenario we have to take delivery while selling call/put. If we don’t take delivery what will happen?
Do check this chapter – https://zerodha.com/varsity/chapter/quick-note-on-physical-settlement-2/
Hello
Do we require stock in our demat account for doing call option writing or without stocks can we sell a call option of a particular stock?
No, that’s not required.
Sir I’m a newbie in options. I’ve read when shorting/selling stock in options call/put, I’ve to buy it before or on expiry. Does this rule implies in Nifty/Banknifty also??
Yes, this is applicable to all options. Basically, you have time to hold on to the option contract up until the expiry of the option.
Hello karthik,
Thanks for sharing the knowledge
I have one query
If I sell a call option and I received a premium of Rs 200 and if the trade goes beyond my view and the position coloum are also showing (-) figure say -100 , and the same figure are also deducted from my margin after square off of the trade, but as per the chapter above, if I have received 200 as premium then I am going to be in loss after losing the premium amount so why my position coloum is in minus if I have not loosed my premium which I have received and if there is any settlement process plz explain
I would be very greatful to you
Thank you 😊
Jay, think about it, if you have sold something at 200 and bought it back at 250, then your loss is 50 right? Hence this money will be deducted from your account.
Thanks for your revert karthik, it means a lot
But plz don’t mind my doubt is still not clear
Let me explain it with thr trade I made in bank nifty
Spot prize – 25430
Strike prize – 25300 @ 400 premium
Bought the deal with MIS
IT = 25430 – 25300
= 130
difference = 400 – 130
= 270
So my break event would be 25300 + 270 = 25570
Am I right or wrong plz explain, it would be very helpful
And the premium which I am calculating is right or wrong ?
And if wrong how much premium will I receive to calculate my break event
Thank you 😊
I’m assuming this is a call option. Breakeven for this is Strike + premium paid i.e. 25300+400 = 29300.
The above trade was made by selling call option
Figured as much 🙂
thank you so much karthik….
Good luck!
Wonderful article…karthik
I new small trader.This information is very helpful
But still we need help in buying and selling option.
If you have any WhatsApp no. to assist kindly Send me on my mail id.I shall b very thankful for this.
Sachin, do post all your queries here itself, I’ll be happy to help 🙂
I saw call options with strike price less than the market price of the share, I see people buying them.
What’s the strategy behind buying those kind of call options.
There are plenty of strikes, both above and below the current market price available. People trade these for various reasons.
Dear Karthik,
I have a question : Why the price of premium is zero before expiry for some strike prices in equity options. For example ICICIGI DEC 1500 CE or PE is zero today. How to handle such situation when one trust that price will reach that level.
Please explain.
It is not about trust, it is about the liquidity. If there is no liquidity, then there are no transactions taking place.
Dear author,
The losses and profits are not increasing or decreasing EXPONENTIALLY. They are changing LINEARLY w.r.t to strike price. I don’t know why you messed up this very simple observation from the graphs.
Agree. Thanks for pointing, have made the corrections.
Hi Karthik,
Since you started the module with option exercising I saw many comments where people are confused with option exercising and exiting the position.
However logically why would someone want to exercise the option call when we can trade premium directly? I still don’t understand the benefit of exercising although we don’t get stocks on expiry and only differential cash settlement would happen.
Trading premium is more better than waiting till expiry and exercising the option I feel, your thoughts?
Hi Karthik, can you please explain if call option selling has limited profit and unlimited risk why is it still preferred over buying put option ?
This is dependent on the premium. If the premium is high, then it is conducive for selling and if its low/inexpensive, then it makes sense to buy it.
Hi Karthik,
If we sell a options on 100 primium/13000 strike price of Nifty and same day after few minutes if we exist from positions when market is on 12950 then my 100 rupees primium will be return to exchange or primimum will be my profits please clear.
You will get the difference in premium as profits, provided you’ve bought for a lesser premium.
Pls explain if i bought cash 100 maruti at 7000 the same day i sell 7050 call at 150 at the end i want to give delivery my ac have all margin after expiry i want 15000 rs profit its possible pls
For example, if I have bought Bajaj Auto 2050 call option at Rs.6.35 in the morning and by noon the same is trading at Rs.9/- I can choose to sell and book profits
Sir you have told we can not exit call buy option even if we are in profit next day.. Then how can one exit same day.
Yes, you can. No need to hold to expiry.
Dear Sir,
Say i have written Bank Nifty Call Option
Spot Price: 29600
Strike Price: 30200
Premium: 185
Expiry: 3rd Dec
What will happen on expiry if Bank Nifty Spot Price closes at 28000.
In that case, the option will expire worthlessly and you will get to retain the premium amount.
Sir
Let’s assume
Current Price of Gail 110
I bought CE option of Gail at 10:am
DEC 115 @ 3 premium lot(6100)
In afternoon
Premium goes up by 100% now premium is 6.
Now what is my profit?
6100*3 – 8300
Or now profit till my 115 hit
The difference in premium * lot size i.e. (6-3)*6100
=3*6100
=18300/-
Pls suggest me a strategy. I hold shares in my demat a/c equal to the lot size of 4-5 shares. I wish to earn monthly basis & wish to hold the shares also. Thanks.
One of the things you can do is covered calls, Anil.
Hi
My doubt is in zerodha
I’m in an option of call sell do we need margin till the day of expiry if I’m already holding sufficient stocks in positions..
Pls reply
Yes, you need margins to hold your short call option.
The explanation is easy with outstanding content. Just one suggestion for 4.1 – Two sides of the same coin
In second Para text “Well, the reason why I’m taking about this legendary movie now”. I think the text ‘talking’ is mistyped as ‘taking’ in content. Please review.
Thanks
Noted. Thanks for pointing 🙂
Hi Karthick,
Thanks lot for such a extensive material.
In the last four chapters what I have understood is it,If I buy the Call Option and I can sell option on expiry i.e. at the end of the month. Looking at some of the above questions or examples, what I have understood is that I can sell the Call Option any time if the premium changes. Is this understanding correct?
Regards,
Shashidhar
Thats correct.
Hello Karthik,
First of all thanks to you for this informative article. I had one question, please clarify it
Suppose I am selling Nifty Dec 13500 CE with 100 Rs premium at 1,22,000 Rs Margine. but I do not want to wait till the expiry. So If I will square off the contract before expiry, will I get the following profit on the same day (Contact square off day)
Paid Margine – 1,22,000 Rs
Premium Recived = 100 * 75 = 7500 Rs
Total Amount Including Profit (1,22,000 + 7500) = 1,29,500 Rs
So will I get a total Rs 1,29,500 Rs on the same square off day?
Please carify
Settlements happen on T+1 basis, so the next day you get this.
why is call option premium increasing when spot price trades below strike price and vice versa
It could be a result of higher volatility.
suppose i buy a call option of bajaj today at a strike price say Rs. X and premium P1. I exercise it on expiry when the price is Y and Y > X and premium is P2, P2 > P1 what is my profit on exercise .
Y-X +P2-P1 or only Y-X.
if I square off the call a day before expiry then is my profit P2-P1 .
what do i need to do on expiry ? actively press some button to exercise or leave it as it is ? Exchange will do the rest.
Suppose you pay a premium of 10 and sell it a premium of 12, your profit is 12-10 = 2.
Dear Karthik, I have this query.
Suppose, I have 3200 shares of ITC at Rs 205/- (Delivery basis holding in Cash Market) and I sold one lot (3200 qty) 220 CE at Rs 2 premium (this month expiry). On expiry day say the spot price is Rs 230/-
So profit from my cash market delivery trade is (230-205) x 3200 = 25 x3200 = Rs 80000/-
Premium Collected = 2 x 3200 = Rs 6400/-
Loss from Option Selling = (230-220)x 3200 = Rs 32000/-
Net P&L = 80000 + 6400 – 32000 = Rs 54400/-
Is my calculation correct ? Also, how will physical settlement happen? As I am already holding the delivered shares in my Demat, will it be taken to meet obligation of 220 CE ?
Thats right, your shares will be taken in for obligations. Your stocks will be sold at strike i.e. 220 in the physical delivery market.
Thanks for your reply. Really Appreciate the same.
Happy learning!
Hi Karthik,
I have this one more query.
Suppose I sell options in Zerodha, for physical settlement can I use holding in Demat (which is with a different broker) ?
If yes, how ? What is the procedure ?
Regards,
No, that won’t work.
Thanks for the tutorial. How about taking advantage of combination of Long Call & Short Call together.
NOW ITC 210 CE – 12.05 & ITC 212.5 CE – 12.2
I go Long call on 210 CE and Short Call on 212.5.
The possible gains – Min 0.15 & Max 2.65 on premium.
There is no downside here. Am I missing some thing.
Pls give your feedback & let us know any issues, I’m not aware.
This is called a bull call spread, check this – https://zerodha.com/varsity/chapter/bull-call-spread/
A simple straightforward question, let us say I need 60,000 Rs margin to sell a call option of strike price 1600 Rs, stock is Bata. Is my potential max loss limited to this 60,000 Rs or could go beyond. If yes, then how is this settled by Zerodha?
It can go beyond 60K if there is a drastic move in the stock price. When you write options, margins are blocked, so as and when the position starts to move against you, your SPAN+EXP value increases and hence the broker and the eco system is covered
Hi Karthik, In case of physical settlement, (say sold 1 lot 220 CE ITC at Rs 2 premium, expiry at Rs 230), what are the charges that will be debited to a customer even if he holds the shares (3200 qty – 1 lot) in Demat ? Hope there is no penalty etc. as shares are already in Demat. Grateful if you could clarify.
There are no other charges apart from DP and statutory charges. No penalty as such. Do check this for the charge list – https://zerodha.com/charges
Hi Karthik,
Thank you so much for clearing all the queries promptly. Really appreciate the same.
One more query
If I had entered into 2 legs.
Say Nifty 14000 CE Sell & Nifty 14200 CE buy. Here say margin is around Rs 50000/- being a hedged trade.
On expiry day, by afternoon, say if premium is more than that was in the morning. Can I exit my Buy 14200 CE position alone ? Will there be any margin issue/penalty and whether the Sell 14000 CE position also will get squared off ?
If you exit the buy, then the margin for the short call will shoot up and you will have to ensure adequate margins are parked. The POsition will be squared off if you don’t have the necessary margins in your account.
Hi Karthik,
So far, I have been only doing option buying but I would like to get some clarity on Option Selling, could you please clarify it. I am not clear on Option writing/selling, so could you please help me in understanding it.
For example, I am of the view that the next week markets will go down, so I have sold 1 lot of Nifty 13700 CE Dec (exp: 31 st Dec 2020) @ 143.20.
Below is my understanding, please correct me if I am wrong:
1. In case 1, if the markets go down on expiry date, I assume I will keep the amount of premium received (75*143.20); In this case, do I need to buy 1 lot of 13700 CE DEC to offset my Sell option?
2.In case 2, if the markets go up above the strike price of 13700 then do I need to buy the 13700 CE Call to offset my writing/sell of the Call Option and also to reduce my losses?
3. Can I square off/close my Option Writing call of Nifty at any time during the week and not wait till Dec 31 2020 for the expiry to finish? And in this case, closing my position would be to simply buy the same 13700 CE call at the prevailing rate?
Also, could you please help in understanding how to hedge such position as above. For example to hedge, can I buy a call Option at different strike price to ensure a sudden volatile move on the upside is not going to cause huge loss for me.
It would be really helpful if you can explain the whole scenario with a Nifty Lot example. Basically, I want to ensure there is no huge loss for me when doing option writing and want to get out with a possible short loss if markets don’t move in my anticipated direction.
Thanks very much for your help.
1) If the market goes below 13700, there is no need to buy back as your option is worthless anyway.
2) If you buy 13700 CE, then you will square off the position
3) YEs, you can. Yes, you simply buyback.
I’d suggest you look at the hedged position like the spreads, these are lot more easy and offers less stress for the trader 🙂
hi,
Please explain to me
if i writing one cal option my broker collecting money (premium amount +margin amount) from me .same selling call option suppose iam square off 1 week before expiry day. can i get the amount (Profit or loss of premium + margin amount) or not
Yes, the margins will be released when you square off the trade. No need to wait to expiry.
Hi sir
Do i receive premium immediately if i sell put option
Yes.
Hi sir,
Do i receive premium immediately if write(short) put option.
Hi sir,
Does options trading is subjected to market to market profits and losses like futures?
No, M2M is for futures only.
Good Morning KR
Tata Motors Dec 175 CE sold short at 3.20. However now its at 11.15 showing a loss of 45300/-. How much I will lose if I exit right now?
That will be 45.3K.
Thank you sir
Good luck!
Hi sir,
Assume I have shorted nifty jan 13000pe at 250 premium.
Doubt-1:Do I receive premium 18750(250×75) immediately after execution of sell order?
Doubt-2:Assume premium goes down to 200. Does 3750(50×75) be deducted?
1) Yes
2) Nope, there is no M2M in options. But the margin requirement goes up.
HLO SIR( Karthik Rangappa) i came across your content yesterday and its just amazing its a new year gift year for me i cant tell my excitement i will take out hard copy of all your pdf .sir efforts you made are so great no need to attend all expensive classes one can go through all your modules and thats to free of cost . i pray to GOD that all your dreams come true and ALL MIGHTY bless you and your family with infinity happiness and good health . sir can you recommend me after your modules any books which will be great help for me in learning market mor deeper .seriously sir great effort of yours GOD BLESS
Thanks for the very kind words, Ayush! Means a lot to me.
I’ve recommended books at the end of every module. PLease do check these books for additional reading. Thanks!
How option sellers loss money.
The market goes against you, you would lose money 🙂
Hi sir,
If only margin requirement only increases then how option seller loss money?
You have written for 100, option shoots up to 150, then you’ll lose 50 right?
Hi sir,
I heard premium of options will be high during high volatile times. Is it true?
In this case though market falls drastically does premium of call option will be high or low?
That’s right. Higher the volatility, the higher the premium. Whenever volatility increases, volatility increases as well.
Thank you so much sir
Good luck!
Hi sir,
What is algo trading?
Automated trading i.e. to buy and sell based on pre-set rules and without the need to press the buy-sell button on the system.
Hi sir,
Assume
If A buys 1 future contract of bank nifty and
B sells 1 future contract of bank nifty (1 lot of bank nifty is 25).
Doubt:Here open interest is 1 or 25?
Thank you sir.
That would be 1.
Hi sir,
How to calculate intraday volatility?
Thank you sir.
That would be tough. YOu will have to take EOD vol.
Hi sir,
Please tell the process of calculation of intraday volatility.
Thank you sir.
Harsha, calculating EOD vol is fairly straightforward, but intraday is very quant intense. I’m afraid I won’t be able to explain that.
Hi sir,
What is the difference between end of the day volatility and intraday volatility?
Thank you sir.
Usually, intraday is forecasted, expected for the day. EOD is realised vol.
Hi sir,
Is it possible to calculate hourly volatility?
If it is possible which topic in mathematics/statistics helps us in finding hourly volatility?
If possible to you please explain process sir!
Thank you sir.
Harsha, any intraday volatility caculation involves a complex computation. Please look for ‘Garch/Arch process’ for this.
Hi karthik,
Thank you so much for your explaining us in a very simpler way.
As i have tried an dlearnt a lot from yyour module and even from the comments and practiced however, I have some doubts i want you to assist me with.
SCENARIO:-
I shorted a call at 10:10 AM
lot size= 1000
spot price=285
strike price= 290
premium =5 RS
At 10:30 AM
spot price=287
strike price= 290
premium =7 RS
conclusion:- Profit for sure , But ques 1:- Do we get profit by having a difference in premiums not in changing spot or strike price? If yes then explain , If No then elaborate ( Obliged to u )
ques 2:- As i got the P&L formula but as the spot price is moving towards strike price and premium is increasing , will we get profit or loss and How ( mean formula pls )
Regards
1) Premium increases or decreases due to the change in the spot price. Your actual Profit or loss depends on the amount of movement in the premium. So, as you see they are all connected 🙂
2) This depends on not just the directional move, but also on time to expiry, and volatility. But in general yes, you are likely to make a profit if the spot moves over and above closer to strike in case of a call option.
Thanks a lot sir for clarifying my doubt
Good luck, Harsha.
Hi sir,
Assume i sold a nifty option
It expires at the money
In this case do I receive entire premium?
Thank you sir.
Yes, you do.
Hi Karthik,
How do we benefit from the actual difference in the (spot price – strike price ) ( spot-price > strike-price ), if we just trade on premiums?
Say,
Premium incurred on ‘Buy’: 30/-
spot price : 250/-
strike price : 100/-
If I try to sell when premium is 50/-. The profit I would expect is (50-30) + ( 250-100 ). Do I have to wait until the end of expiry to pocket this profit ?
Thanks.
No need to wait until expiry, you can sell @ 50 and pocket the difference of 20.
Hi sir,
What is the meaning of trin and tick?
Thank you sir.
Not sure myself, hearing that for the first time myself. Can you please share some context?
Hello Mr Karthik. You stated above that there are three scenarios wrt options – 1) spot price increases 2) spot price decreases 3) spot price doesn’t budge; among these scenarios, you said that only the first scenario is profitable for the CE buyer while the other two favored the seller and thus statistically the seller has better odds. However in stating that, aren’t we assigning equal weights to all the outcomes, and if we’re doing so, doesn’t that pose a problem since logically it appears that the spot has a higher probability of moving up and down rather than staying stationary(of course it could vary for different underlyings). By doing so aren’t we inflating the seller’s odds of success?
Hmm, I’m not sure Sharran. There are months where the stock would be stuck in a range (of course, not in the current market), but we have seen this in the past. For example, RIL dint move for 3 years between 2009-11. So the general expectation is that there is an equal probability. Of course, this is empirical, and no data backing it.
Hi sir,
According to investopedia,
•A tick is a measure of the minimum upward or downward movement in the price of a security.
•TRIN
The arms index,also called the short-term trading index(TRIN) is a technical analysis indicator that compares the number of advancing and declining stock (AD ratio) to advancing and declining volume (AD volume).It is used to gauge overall market sentiment.
I could not understand this,will you please explain this still with more details?
Thank you sir.
Ah ok. I thought ‘Tick and Trin’is a market term 🙂
Of course, tick is a standard term. Indicates the minimum price movement. For example if the tick size of a stock is 25P, then the minimum amount the stock price can vary in 25P or in its multiple.
Was not sure about Trin 🙂
Suppose i sold a nifty 15000 call option(75) @ 50…jan expiry
I collected a premium of 50*75
Now as nifty moves up from current level 14500 lot premium changed to 120…
Suppose at this point can u explain what will be the profit for the option seller and call option buyer.??
Arvind, the P&L is the difference between the premiums i.e. 120-50 = 70, multiplies by the number of lots.
@karthik sir can you please answer this?
Posted.
Hi sir,
Whether announcing buyback a positive news for the company?
Thank you sir.
No straightforward answer depends on the broader context, Harsha.
How is squaring off your position on any day within the expiry period different from exercising option on the date of expiry?
When you square off, you don’t intend to take physical delivery. If you hold to expiry then that’s the agenda.
Assume I sell nifty 50 call option at a particular strike price at the begining of the day and close it at the market end on intraday basis and the nifty 50 spot price closed below the strike price at which I sold the call option , is my option selling completes on same day or do I need to wait until expiry day spot price at which it closes.
It is complete on the same day, you will have no obligation for the expiry.
What if i enter into a contract at 300 strike price and i am option seller. And the price went down to 290. And i have premiums with me. Can i square off before expiry date and pocket all the premiums i collected ? or Do i have to wait for expiry?
Correct me if i am wrong.
Yes, you can.
Hi,
If I already have shares in my demat account which equals to a lot. Do, I still need to maintain margin in case of selling a call option of the same stock?
Thanks,
Yes, you’d need to maintain margins.
I sold nifty 13000 pe at 100rs and at expiry I didn’t buy any pe options to settle 13000 pe contract then what happens in this case.
Nifty? If the option expires worthless, then you get to keep the entire premium.
“However, there is one thing that you should remember here – whatever happens to the option seller in terms of the P&L, the exact opposite happens to option buyer and vice versa. For example if the option writer is making Rs.70/- in profits, this automatically means the option buyer is losing Rs.70/-. “. If I understand it correctly the call option seller doesn’t actually lose money. He loses the opportunity to make money if he had a call option with him. Is this right?
Sorry, I didn’t understand that query fully. Can you elaborate a bit, please?
Can i sell call with full lot of shares in my account without any margin? (covered call)
Nope, you will still need margins equal to SPAN + Exposure.
I meant to say that the call option seller is not paying the money the call option buyer will gain. For example, if call option buyer makes a profit of 70 when the stock price rises. So the call option seller lost the opportunity to gain 70 if he had call option with him at that time. But he doesn’t pay 70 to call option buyer. The call option buyer will gain that money by utilizing call option on the stock market. He gains that money from the stock market. 🤔
So the call option seller lost the opportunity to gain 70 if he had call option with him ——-> That is because he chose to be on the opposite side of the trade. So that argument won’t hold true.
He gains money from the stock market. 🤔 —–> He gains it via the stock market, but someone has to cough up that money right? Money can’t just appear in the market. The seller is the one who has to pay this.
How much do I have to pay , if I sell a option. ? Anyone pls.
YOu can check the margins here – https://zerodha.com/margin-calculator/SPAN/
Hi, Supposing I sell call option of Nifty at strike 15200 n collect premium of Rs 1000/-.
On Expiry Nifty closed at 15205/- but premium has gone down to Rs 200/- .
My concern is – In case I Donot square off before expiry manually , will the exchange credit this profit of Rs 800(1000-200) or I won’t get anything ,as it is 5 points above my strike…
Yes, this will be settled by the exchange upon expiry.
Confusing !!
If I had bought a Call option expiring 30 MAR 2021, can I sell that option on 23 FEB 2021 ?
Yes, you can.
Hi Kartik,
Just got a feeling from question from many other people and it is a confusion for me too. Can you please help to clarify the below!
When we say that India now follows European Options only.
So to put this into context:
If i buy for e.g. Call Option of ITC FEB CE at strike price of 180 and @39 Premium today.
After 2 days, this premium rose to lets say 45.. So, I as an option buyer can book my profits i.e. 45-39 = 6 right? (q1)
Another scenairo lets say i keep the feb option till expiry and i want to exercise my rights (here is the confusion, what do we exactly mean when we say to exercse the right – q2?)
Does it mean that if i own one lot than the option seller or counter party is required to provide me share @180*Lot price, whatever the premium may be on expiry data..
Also, while exercising the option on expiry, how is the P&L calculated?
Q1) Yes, you can
Q2) You can take physical delivery of the option based on whether you are long or short option. Do check the last chapter on this.
Q3) For P&L also, do check the last chapter on physical settlement.
What is the difference between Squaring off the option and Selling the Option
If you have an open position, then to close that position, you square off. So if your open position is long, square off is short. If your open position is short, square off is to buy (not long). ‘Selling the option’ usually refers to initiating a new short position in the market, to square off the short option position, you buy back.
Dear Karthik, This is one of the great articles I have come across for Option selling. It clears most of my doubts regarding Option selling. There are plenty of videos out there on youtube, but the way you have simplified the concept here is really remarkable.
Hey Sunil, thanks so much for the kind words! I’m glad you liked the content 🙂
Hi Kartik, Hope you are in good spirit.
thanks for describing amazingly. I just want to know that squaring off the position means that now I am not involved in the same trade that I have participated in. In other words, if I have squared off my position, there is no need to think about what will happen in the future or say on the expiry date weather I am option writer or buyer. I am right? if not please clarify me if you can. I appreciate your response. Thanks,
Thats right, to square off means that you are out of the position completely.
If I have 900 shares of INDUSINDBK @ 1000 and In sell 1100 CE Mar then do I get any margin benefit ?
Not really.
Yes i have a doubt.
Suppose I am option writer
Nifty 15000 is spot price, strike prike 14500PE and current premium is 50 rs. Lot size 75
After an hour nifty spot price becomes 14800 strike price 14500 PE and current premium 70 rs
If I exit my loss will be (70-50)*75=1500
But suppose further after an hour spot price goes to 14400 strike price 14500 and current premium 100 rs.
Than in this case what will be my loss
Whether loss depends on current
premium or spot price. And when this loss occur.
Once you exit, it does not matter what really happens to the spot or the premium, since you don’t have any open position in the market.
Sir if I don’t exit my position than in that case what will happen in above case.
The option will be settled accordingly by the broker.
Please reply sir
I guess, I did.
Hi Karthik
I understand if you want to do covered call for say HDFC, you need to have HDFC stock.
So I buy 300 stock of HDFC in cash, and sell call options (lot size 300).
What happens if you want to do covered call for NIFTY? I want to sell call NIFTY options, but what will the underlying be on the other side? Will it be nifty bees, nifty etfs? Do you buy 75 of NIFTY BEES, ETFs etc. ( as lot size is 75, and I will be selling call lot of 75)
Or can you take any index fund say by UTI, SBI etc.?
I am not talking about pledging, hair cut and all that.
Either works, but I’d go for Nifty ETFs for this purpose.
How many NIFTY ETFs should I buy for selling one call lot?
Also what will the margins be for that call lot (sell side). I am guessing it wont be much because of the covered long position.
1 lot = 75 Nifty units, so ETFs should be 75. Margins will be full, no margin benefit here.
Why do you prefer NIFTY ETFs over Index funds?
If I buy Nifty BEES it will be present in DEMAT account.
What happens if I buy index fund from outside like UTI? How does Zerodha acknowledge it?
Well, there is no particular reason. It is a personal preference. You can but Nifty Index from UTI on Coin and still do a covered call.
Sir, I have gone through your content its really very good and would like to develop my skills from professional standpoint in option. Could you suggest any of your books for more indepth knowledge in option trading.
If options is what you are looking for, then do check out books by Sheldon Natenberg.
Thank you so much for quick response.
Happy learning, Vinayak.
So if I am buying NIFTY Bees, the long side will come to 75*155(marketprice of one ETF)*100==11,62,500?
Ah, you will have to work around and ensure the values match.
Thanks for the replies.
Good luck and happy trading!
Sir, Can i square off my option selling position on any day or only on expiry day??
Suppose i short weekly option of Nifty on Monday, Can i square off it any time or only on expiry day i,e, Thursday??
Yes, you can square off anytime you wish, no need to wait till expiry.
Hi Karthik..can we sell next month far OTM call or put options in stocks or nifty/Banknifty index..is zerodha allows for the same?
Yes, Vijay, this should be possible.
In case of out of money call written, is the margin same as in the money. And also close to the expiry does margin increase of out of money options as well.
For eg,
if I write at 600 strike option, spot price is 500 on the first day of the month – there is some margin which i have to keep
now on last 2 days, when margins go up, spot price is still 500……does the margin requirement go up, as this is deep out of the money option
Yup, the margin is a function of volatility and it can change.
Hi sir,
Can a retail trader do algo trading,is it approved?
Is it possible to develop a own trading software,is it approved?
Thank you sir.
Full algo including execution is not allowed, Harsha.
Hi sir,
To what extent may a retail trader use algo trading?
Thank you sir.
As long as you click a button to execute a trade, it is ok.
Hello Sir,
Just to give you a background of my situation.
I had shorted bank nifty PE for April 8 Expiry. I had calculated the SD and shorted a strike after 1 SD around 31000PE. Pocketed 7-8 points or so. Has shorted it on 01 April 2021.
You had mentioned that when there are like 3-4 days to expiry it is better to short naked options that are further than 1 SD away.
Monday 05/04/21. Bank Nifty gaps down 500 points and ends up being down nearly 1500 points by 10 am.
My written PE was losing a large amount of money. Nevertheless this is a calculated risk.
Now my questions are
1) What could I do if markets gap up/down like this?
2) what kind of stop loss can one put while writing options?
3) Was there a mistake in my trade, if there is could you please explain what I could have done differently?
Please do assist me in this matter?
1) Gaps are common. Hence the need to stick to a stop loss and adhere to it. No other way out.
2) You can keep a premium based SL. For example, you collected 50 as premium, worst case you will square it off if the premium shoots to 75, something like this.
3) I don’t think so. You stuck to the plan, which is a good thing.
Dear Sir,
Thanks for your reply.
How does one choose an arbitary figure like 75 points, like a 25% loss?
Secondly, is there a way for me to keep a continuous trigger stop loss? As my trigger stop loss order always expires at the end of the day.
If the market gaps down like the way it did, I was not able to keep a trigger stop loss order as my previous day one expired.
Is there a way around this?
These figures need not be arbitrary, you can calibrate these points by back testing.
You can try a GTT order.
Sir I’m just a beginner and trying to learn options ..so I’ve a very basic question..that in the above article it is said that the seller has a fix profit i.e tha premium he received..but in actual situation the premium price keeps on changing ..then how the seller has fix profit?
Premium changes, but that impacts the buyer (hence the variable P&L for the buyer), for seller profit is fixed, only the losses are variable.
Hello Sir,
One cannot place a GTT order with a trigger price right??
Yup, check this – https://tradingqna.com/t/what-happens-to-gtt-order-which-is-triggered-but-not-executed-t-executed/89985
Hello sir,
Suppose I write(sell) a call option and I am currently holding underlying stock( of which I sell a call option of) and do nothing till expiry. So in this case whatever the market price is(and also whatever the value of call option also) shall I receive full premium of writing the call and if the option is in the money will Zerodha automatically sell my share upon expiry at contract rate at which I collect premium. (because I don’t know the buyer and also don’t know whether buyer has exercise his right to buy option or not).
Plz guide me in this scenario. 😊
Yes, if you have the shares, have written CE which are ITM, then by expiry, the broker will take these shares for delivery.
If Nifty is at 14500 and if I am Bullish, then it is said to Sell Out of Money Put Option. For Put, what are OTM values? Do we sell 14400(below) or 14600(above) PE when Bullish?
Yeah, anything below 14500 will be OTM puts.
Hello Karthik,
Can you help me understand how does Call Selling Work in intraday?
For eg. In the morning at around 9.30 I sell a JSW CE of strike 650 13.30 (lot size 2700)
And at the end of the day at around 3.15 pm the price of JSW spot remains below 650.
So how will my profit will be calculated on intraday basis, will I be retaining the entire premium (13.30*2700) that I have received by selling the call ?
Also how to work out the brokerage charges and net gain ?
It works just like an intrday EQ trade. The P&L depends on the price at which you buy and sell the option premium.
In one of your comments above, you mentioned you preferred NIFTY ETFs over index funds for covered calls.
Don’t you think NIFTY ETFs have lower liquidity than index funds?
Say you buy 20 lakhs worth of Nifty bees at 15000, and you want to sell them later on at 16000. I know NIFTY BEES is 150,not 15000 but for simplicities sake, I ignored it.
I am guessing there is a possibility there may not be enough interested buyers to buy all the shares at 16000, so you might end up selling 10 lakhs worth and leaving remaining 10 lakhs in your account.
This kind of messes up the covered call part, because when the price rises by 1000. most likely your sell option is invalid, so you have to make money selling your NIFTY BEES. If you sell only 10 lakhs worth you might end up losing even though the market rose.
Liquidity is an issue, I agree. But I do believe that it has improved now. The only advantage is with ETF is that the transaction is immediate unlike transacting in MFs.
At what range do you think liquidity of ETFs becomes an issue?
I am guessing if you buy NIFTY Bees worth 50,000 Rs(around 333 units, assuming NIFTY BEES price is 150 Rs), that should be easily disposable.
But anything above 4,00,000( 8000 units) becomes difficult to sell. What do you think? How much time does it take to dispose of MFs?
Thats about right, 50K is easily tradable, anything above say 3-5L or maybe 10, gets a bit of an issue.
Do you think this range (50k-3 L) applies for index funds as well?
Or are index funds liquid no matter what.
Keep it as a thumb rule, may vary ETF to ETF.
I am interested in writing puts ITM, as the premiums are higher and I am bullish. (NIFTY)
I am concerned about liquidity in case the position goes against me. I want to be able to get out at my stop loss.
How do you measure liquidity of an option at a particular strike price?
Is there a thumb rule like if open interest is x, then that strike price is liquid. Are there other ways of finding out liquidity?
Thum rule = stick to index options and perhaps the top 5 stock options, you cant go too wrong with it 🙂
You are right about sticking to index options.
But even in index options some ITM options have low liquidity for short put. I am talking about say 200 300 points from strike price.
Maybe my way of counting liquidity is wrong, thats why I asked.
Can you please give pointers on what to look for in the option chain,to determine whether a particular strike price is liquid?
Jagdeesh, impact cost is the right way to measure the liquidity of the option. However, during trading hours, you can quickly look at the bid-ask spread and check the number of trades that are happening in the strike. Higher the number of trades = higher is the liquidity.
Suppose I Sold a Call option on 25th Aug
Lot Size: 100
Premium: 5
Spot price: 280
Strike price: 285
So basically Rs500 will get credited to my account right?
now if tomorrow I see
Spot remains at: 280
but due to Theta: Premium moves down to 2
and now I think Stock price might break out 285 strike price
can I square off the position and eventually Rs300 or 500rs will be my P&L?
Yes, you can sq off. The P&L will be credited/debited accordingly.
Hi Karthik, suppose I bought bank nifty call at 10am
strick price 32500
with premium 500
after 10:30
Premium gone up to 550
and then I sold it at 550
so 50rs is my profit right.
and Is there the same procedure as above for buying call for delivery and book profit or I have to wait till the expiry date.
You can sell the option anytime you want, no need to wait till expiry.
I understand the thumb rule of the range (50k-3 lakh) applies for ETFs.(when it comes to liquidity)
I think the asker asked regarding index funds, and not ETFs.
Is the liquidity range same for index funds and ETFs?
Ah, my bad. For Index funds liquidity is not an issue.
‘Unlimited’ risk in option selling is theoretical, right?
Your stop gets triggered. If you don’t use stops, then at margin call your position gets squared off. Either of the two scenarios occur way before unlimited losses.
Yes, that’s theoretical.
Hi Karthik I want to ask ka very important question regarding option selling I sold a call option of Reliance strike price CE e2100 27th main 21 and what rupees 40 as premium dirt spot price of Reliance is 2033 on 30 April 21 although the price of stock is below 2100 but the premium has increased Tu rupees 45 showing me a loss of rupees 1250 in spite of of the price being below 2100 I am unable to exit my position why it is so and what should I do
Sanjeev, with the increase in volatility, the premium too increased. Remember, the premium is a function of many variables, including volatility.
Hey sir i need to knwo that if on a new contract starting day i will sell calland put both options and wait for the expiry day, i benifit from premium decay and make it 100% safe method?
Not really. It is just that the contract sizes are reducing. Wont make any difference to your P&L.
Is there any “good” open interest value to indicate liquidity for NIFTY options? Like OI values of (0-2 is low liquidity) (2-5 is good liquidity).
(values are in lakhs)
Ah, nothing that I know about.
I have come across advice from books suggesting it is safer to sell OTM put options over ITM Put options.
The way I see it, if price goes down both OTM and ITM premiums go up, i.e. in loss. Maybe squaring off might be an issue for ITM options due to lower liquidity, but apart from that I can’t see the difference.
If price goes up both OTM and ITM expire anyway, and I get to collect the premium.
Therefore I think selling ITM Put options is better than OTM Put options as you get higher premium.
What do you think?
Yeah, if you are selling, OTM is always a better option to sell.
If the price goes up, OTM and ATM will be worthless, not ITM.
“If the price goes up, OTM and ATM will be worthless, not ITM.”
Can you please explain this statement with an example?
Rakesh, that means to say that the intrinsic value of OTM and ATM will be zero and only the ITM will be profitable.
Hi sir,
How to apply Elliott wave theory for small time frames like 1 hour, 5 minutes,1 minute?
How to use Elliott wave theory to know present trend and trend reversal?
Thank you sir.
Harsha, I’m not familiar with Elliott wave, I’d not be able to help you with it 🙂
You say it is better to sell OTM options, and in another reply say you say only ITM will be profitable. If only ITM is profitable then how is it better to sell OTM options?
I find this confusing, can you please explain this?
ITM if you are buying, OTM if you are selling.
I had the same doubt, thanks for clarifying.
Sure, good luck!
Hi Karthik,
I have one confusion if we can buy a Put when market is going down then why short a call and take unlimited risk.
What benefits are there for shorting call over buying put ?
The decision to buy a PUT or sell a call depends on the premium at the point you make a decision. Suppose the volatility is very high, and you expect it to cool down, then selling a call is better than buying a put. Because with the increase in volatility, the premium too increases.
I plan to write NIFTY options on a weekly basis.
Say I write one option and it expires worthless on Thursday. I want to write another option for the next week. But my margin will be tied for Thursday, and I guess it will be open on Friday. But on Friday I will experience premium decay.
Is there any way I can open a new trade on Thursday for the next week (apart from squaring off)?
Between Thursday closing and Friday opening, there won’t be much theta loss, especially considering the fact that this is early in the expiry series.
Can you please recommend stop losses for premiums in option selling?
YOu can place the SL based on the movement in the underlying.
Suppose I sell an OTM call for NIFTY Weekly expiry, say around 200-600 points from strike price.
Now the market goes against me. As a general observation, do you think it will be difficult to square off this position? (as there will be more sellers than buyers, plus premium decay is much higher in weekly options)
Similarly if the option was an ITM sell call, again 200-600 points from strike price. Do you think it would be difficult to square off?
I guess Index options that too 200-300 points away from ATM are fairly liquid. You wont have issues transacting in these.
When placing stop loss for options, how do you base it on the movement of the underlying?
For example for a stock or future, you can use moving average, ATR, etc.. You can calculate these values with respect and set up a stop loss.
For options, you have to enter a value for premium stop loss on the screen. What value do you enter? AFAIK there are no indicators,support resistance etc. for premiums.
I understand there is a relationship between the underlying and the premium, but can you tell me how it works etc?
Roopa, one of the best ways to place a stop loss is base it on the underlying itself. For instance, if (after buying the option), the underlying declines by 5%, then you square off the option at whatever premium prevails.
The other way is to keep a fixed percentage point on the premium i.e. if the premium declines by say 50%, you square off the position.
When placing a stop loss based on the underlying (for options), it means we have to constantly monitor the price of the underlying.
If the price goes down by five % then we have to manually go and square off. Unless you are glued to the screen for 8 hours this is not feasible. Plus there will be some delay in us processing the under lying price movement, then going to options screen and squaring off.
Is there any automatic way off doing this? Say price declines by 5% and automatically the option position gets squared off without our intervention.
You can check this Krishna – https://zerodha.com/z-connect/tradezerodha/kite/introducing-gtt-good-till-triggered-orders
Hi Karthik
You have helped me so much. I want to open a Zerodha account.
If you can give your referral link, I will mention it.
The intention is to help, regardless of you open an account or not with us Jay 🙂
You can visit Zerodha page and click on open an account or maybe you can just use the Varsity’s ref link – https://zerodha.com/?ref=varsity
Good luck!
Hi Karthik,
Can a government employee also do option trading ?
Thanks
I’m don’t think so, please check this – https://support.zerodha.com/category/trading-and-markets/trading-faqs/articles/can-government-servants-trade-in-stock-markets
Hi sir,
I shorted a call at 10:10 AM
lot size= 1000
spot price=285
strike price= 290
premium =5 RS
At 10:30 AM
spot price=287
strike price= 290
premium =3 RS
I squared off my position.In spite of trade moving against my direction.
I made a profit of 2000 Rs
Some one stated this but you answered it is
This scenario is not possible
At 10:30 AM
spot price=287
strike price= 290
premium =3 RS
because when spot price moves towards strike price, the premium will increase beyond 5 RS. Hence you will suffer a loss.
My question is how it is loss sir in this case break even point is 290+5=295 up to 295 no loss no profit is in it sir. If is market will come 287 the writer will be in profit how he will be in loss sir
Yeah, sometimes these situation arises due to a fall in volatility.
Hi Kartik,
Can I long the option which I shorted earlier in the same day?
Yup, possible.
I sold option and want to wait till expiry. Please help me on below:
1. Will i get premium automatically on expiry if prices are in my favor or i will have to buy the option to exit on day of expiry to book premium profit
2. if buying is not required in step 1 to book premium based profit. How to calculate charges on Zerodha Calculator as there is only Sell Option and no buying
1) Yes, you will if you let the option expiry
2) YOu can bought 0 as the buying price.
As mentioned on your site, less than 1% beat FD returns.
I think even among the 1%, most cannot go above 15-20% per year. Maybe they can for a year or two, but I doubt they get more than 20% consistently for say 5 or 10 years.
I think in good market conditions even an index fund will give 15-20% per year.
My question is do traders really get more than 15-20% per year if they use futures, options etc.?
Why go through the hassle of trading when an index fund will give similar returns for much less risk, much less effort?
Hmm, not sure where you saw that less than 1% beat FD returns. Yes, Index funds is a great option. Ppl set up trades to generate a return over and above the index returns.
I think Rakesh is referring to this https://zerodha.com/z-connect/traders-zone/trading-with-other-peoples-money, about the less than 1% beating FD part.
Even top hedge fund managers and investors like Buffett make returns somewhere similar to the index, give or take 2-3 percentage.
Are you saying those (less than 1%) who make money make 30-40% year trading via options and futures? Even Buffett struggles to do that. Do you have any examples of traders making 30-40% per year for say 10 years?
Very few stand out in that league, Rohit.
Hi Kartik,
Let’s suppose on Monday i sold a call option, do I need to buy the call on same day to square off the position or I can buy till expiry which is Thursday.
You can sell it the same day!
Dear Karthik,
Your work is amazing. I gained the knowledge of stock trading / investing mainly from Zerodha Varsity only. In fact, I printed it and kept in a book form. My sincere thanks to you for this great job.
I wish to clarify one thing though I searched in Zerodha Varsity and Tradinqna. I didn’t get the exact answer. Please clarify.
Is the contract at At the Money (ATM) becomes (zero) worthless on expiry? Or it has any intrinsic value on expiry if it is at ATM.
Since I have seen in some case it becomes zero and in some has some value. I cannot get it … I mean at ATM.
I know if it is in OTM becomes worthless and ITM has value.
My doubt is, if the contract is on ATM on expiry, what is its value … means whether it becomes zero.
Whether I need to exercise it or let it expire, suppose if it has any value at ATM on expiry.
Thanks, Padma. Glad you liked the content 🙂
All options including ATM, OTM strikes are considered worthless. Only ITM strike will have value based on its closing price.
Hi, let’s assume i had sold the nifty option and spot price is still OTM and I’m in profit with the premium received. What happen if i don’t exit/square off the position ?
You will make the difference between the strike and the spot.
I have sold BANKNIFTY JUN 36000 CE @490 premium. Current premium is 724, thus it is showing huge loss.
Please confirm if following statement correct:
“Let the premium increase to 4000. If BANKNIFTY June expiry happens below OR @ 36000, I will be profitable & will get the entire premium. Even if premium increases 4500, my breakeven point will be 36000+490=36490”
Another statement :
“In order to compensate loss in CE, I should buy PE the moment banknifty crosses 36000”
Thanks in advance
Technically correct, what matters is the price at which bank nifty will expire. YOu will make money if the spot is 36000 or below.
Thank you Karthik sir for your Prompt response.
Good luck!
In one of your earlier comments you said stick to NIFTY and top 5 stock options as a thumb rule for liquidity.
How do you define the top 5 stock options? Is it based on market cap or something else?
If a certain stock’s options are illiquid can we assume the stock’s future is also illiquid?
Top 5 in terms of market capitalization. Yes, that’s a very fair assumption.
I think impact cost of (0-0.05) means highly liquid. Anything above 0.05 is not liquid and not worth trading, either in future or options.
What do you think?
Perhaps 🙂
I think 0.05 is a bit high for impact cost, don’t you think? I think anything beyond 0.02 is illiquid.
Do you think if a stocks options are illiquid, then its futures are also illiquid?
Yes, but thats how the liquidity is in the markets. Futures are usually more liquid compared to options, if the futures itself is not liquid, then it usually implies that the options aren’t liquid.
Dear sir/Madam,
I sold a call option of bank nifty 33900 (3rd june 2021) on 18 May sale price 800, but still I kept in position(current 1400), if market goes up and I kept till expiry will be come down from 1400 to 800 or due to expiry.
Please suggest
Since you sold the CE you will retain the premium only if Bank Nifty expires 33900 or below.
Hi I purchased 1 option of 25 NIFTY Bank at 391.1 (Normal) and purchased 75 BANKNIFTY at 66.2 (MIS). I sold both at 105. However, my profit shows less.
I should be receiving 25*105 = 2625 Premium and 75*(105-66.2 = 38.8) = 2910 Premium. But I received only 2625 Premium.
Will I be getting the rest at a future date?
Sandipan, I’d suggest you call support for this. There could be other positions as well which may have an impact on the P&L.
Hi Sir,
Bank Nifty Eg: Spot price on 3rd Apr 2020 is 17,249.30 & Strike Price selected 18,300 (OTM)
Weekly Expiry on the day of 9th Apr 2020 closed @ 19,913.60
Option Writing CE and collected premium as 2,000.
19,913.60 – 18,300 = 1,614 x 25 (lot size) = 40,340 – 2,000 Premium received = 38.340 Need to pay buyer?
Can I exit from trade as Stop loss once it hit Strike Price? (on any day without waiting for expiry)
If yes what is the total loss as stop loss? Hope not related with Settlement day since already sold contract.
Thanks in Advance.
Yes, you can exit the trade before expiry. Loss (or profit) depends on the price at which you buy back the premium.
Hello sir. Can we sell a buy call before expiry if it found profitable . If yes what is the difference between american and european options.
Also can we bought sell call before expiry date.
Reply please sir.
Yes, you can. The difference is in the way the expiry is treated. In American, settlement is anytime, but in EU its only on the day of expiry. In India, everything is European.
hi sir do you think there is any situation where using future would be beneficial to options because they offer
right and not obligation .
thank you
It depends on the context of the market, no straightforward answer 🙂
Hello Sir, First of all I would like to thank you for such wonderful articles on different topics on trading. Its really very helpful.
I have a question regarding Call Option.
If a Long Call is taken, the risk is fixed but the profit is unlimited and vice versa in case of Short Call. So being a trader, isn’t is always better to go for Long Call as the risk is minimized if i am a bit bullish. Because in case i am bearish, i would still avoid Short Call as the risk is indefinite and the profit is limited(or on what basis should I do Short Call).
Let me know where i am going wrong or if i am missing something.
Thanks in advance
Regards
Not really Sangeet. The decision to buy or sell option really depends on a lot of other factors, right from Volatility, time to expiry, and of course the movement of the spot price.
Sir, correct me if i am wrong.
Say if i am extreme bearish(due to some factors) on a stock, in that case only i would go for Short Call else will go for a Long call.
Because the RRR in the former is way too low i feel and seems much better in the latter.
Sir, please explain a bit more on this as i feel i am missing something.
Yes, the decision to buy a PUT or short a call has multiple factors to consider. This is one of them.
hi Karthik,
first of all, thanks for great effort and very nice explanation.
I have one question related to premium in comparison with ajay-venu example.
in the ajay-venu example, current value of the land is 5L (at the time when agreement was made is 5L, “The land is valued at Rs.500,000/-“) and after 6months agreement also it is to sell at 5L right but not more than 5L, with premium of 1L.
now coming to options, the option seller knows that the stock is trading at 2026.9 (current value) and why does seller want to have a higher strike price (increase in the value of stock to 2050 at a premium of 6.35 in instead at 2026.9 like above example)? or the example is just for an illustrative purpose?
Madhu, that depends on what you expect out of the markets right? If you expect the market to move higher, then you’d as well deal with a higher strike.
Hi sir,
How to place both target and stop loss order in mis in zerodha kite?
Thank you sir.
Please do call the support desk, they will help you with it.
I am thinking of a covered call strategy.
Say I buy NIFTY index fund worth 8 lakh ( when NIFTY is at 15000) and sell a call option at say 15900 strike price, expiring at the end of the month.
Now if the market crashes this month say to 9000, I will get the premium for 15900 this month.
But for next month I will be stuck with the NIFTY index fund at a loss of (15000-9000), and if I try to sell a premium at 15900 it might be outside circuit limits, or premiums may be too low. I don’t plan to sell the index fund part as maybe after 4-5 years prices may pass 15000 again.
My concern is during corrections my capital will be tied with a) Nifty index funds showing a loss and b) the option also returning minimal premium. Is there any way to handle this?
You will have to sell call options closer to the market 🙂
Selling call options closer to the market wont help in this case.(Rishabh’s comment).
In a classic cover call, you make money a) when the cash component goes up or b) you collect the premiums in case price of the underlying stays flat.
Imagine your cash component is 15000. Assume price reaches 9000 after a crash.If you sell call options closer to the market price say 9200. You make money when the price does not breach 9200 by collecting the call premium.
What happens if the price breaches 9200, you lose money on the call option. At the same time you don’t make money on the cash side. Because your initial purchase was at 15000, now the price is 9200, hence you are in a loss (15000-9200).
You have to sell call at a strike price of 15000 or more to guarantee income either from the call premiums or from cash component appreciation.
If you sell closer to 9000, you only get money from the call side if price does not go up.
If you sell a call at option at around the purchase price of 15000 when market price is 9000. Then either you will get very low premiums or your order won’t go through because it outside the circuit limits. Plus cash component appreciation from 9000 to 15000 is not easy.
I think this is what Rishabh had in mind.
How do you think we should address this?
Laxman, but why do you have to wait for the market to crash to initiate a covered call? Why not sell the CE when the market is at 15K itself? The idea of a covered call is to ensure you have a steady stream of passive income. So ideally you should look at selling something like 15700 or 15800 CE when the market is at 15000. Of course you can select the right strike to sell based on your own analysis, things like standard deviation will help here.
If I sell a call option at premium for 50 Rs, and now the value is 100 Rs. It shows a loss of 50 Rs.
I think there is no loss and it is only breakeven. Because I first received 50 Rs when I sold the option, so when the price goes to 100 Rs, I owe 50 Rs and it cancels out with the initial 50 Rs I received.
Is this the correct way to think?
Dont think like that, Prashanth. When you write, you sell first at 50 and when you decide to close the position you buy at 100. So –
Buy @ 100
Sell @ 50
Loss = 50.
Regarding the covered call query.
I dont think it is about waiting for a crash to write a covered call. It is about a crash happening after you have bought. I buy with the thought process the price will go up, but we don’t have control over the future price. So a crash can happen immediately after you have bought.
To give a real world example, in March 2020, NIFTY declined to around 8000. In Jan if you had gone long NIFTY was around 12000, and you sold a call for say 12200. You might have received premiums in February, but what about March? 12200 would be either out of circuit or very low premiums because the spot price now is 8000.
Fortunately the market recovered within 2 months and we have had a bull market since then. What if NIFTY prices remained at 8000 for several months or declined? This way you are stuck with a loss making cash component and out of circuit/very low premiums. Earning income is not possible. Covered calls don’t work well during corrective phases.
Agreed, no one can time the crash. Assuming the market cracks just after you initiated the CC, then the gains in the short call partially offset your loss spot. But yes, the loss will be far higher than the gain leaving you with a dent. But that’s how CC works.
Yes, you can work on hedging CC, but when you add another leg to this, then you are no longer dealing with a CC, but rather a different strategy with its own risk and reward profile. My experience says that such hedged strategies tend to reduce your profitability further.
Over the long term, the next 10-15 years. If one were to start investing a lump sum today?
What do you think would be better a buy and hold strategy, or a covered call strategy for the same stock? I think buy and hold is better because one can avoid taxes, and other hassles implementing the trades. Would like to hear your take.
Buy and hold, Roopa.
It is not clear what happens to Option seller who has not squared his position on expiry day when spot price is above strike price by a big margin and is in deep loss .If one is having equivalent amount of shares in demat will it help ?
Depends on which option – Call or Put.
If you’ve sold CE, then the option is ITM (and therefore stock options will be physically settled), for PE, it will be OTM.
Why do you say buy and hold is a better option than covered call for the long term?
Cause chances are that in one of the series, your call option will go bust taking away all the cash you’d have gained over the months.
I am thinking of selling far OTM NIFTY puts (around 11000) in December 2021 because of the high premiums.
My concern is liquidity in case things go wrong. If NIFTY comes down to 11000 by August, will I be able to square off the December put.
Will there be liquidity concerns?
Yeah, you will have liquidity issues with this.
If the call option goes bust, it means that the stock price has gone up.
So if we sell the stock, it will offset the loss in call and you still end up in profit overall, right?
It Goes bust as in premium goes down, then it means the stock price has gone down. Yes, provided you have the stock with you.
I read the article on moving average cross and I agree it works well when you take every crossover.
I plan to trade in USDINR. It is not possible to take every crossover. The Indian markets end at 5, whereas the US market goes on till late night. Thus you miss out on a lot of crossovers that take place in the US market. You may end up in a situation where miss the successful crossovers and end up with the unsuccessful ones.
Is there any way around this?
Unfortunately no, there is no way around this.
Can u please explain via example how in Option Setting the loss is potentially unlimited.
For example, if you sell a Call, the stock price can increase indefinitely and you’ll lose a lot of capital.
I agree that covered call can go bust in a crash like scenario where the loss in the cash side outweighs the premium received. If you sell the cash side you lose.
Assuming in both cases you won’t sell the cash side no matter what. In this case covered call going bust is not an issue as we are thinking long term and eventually the cash side goes up.
In this instance how do you think buy and hold compares to covered call?
Alright, what about a situation wherein you sell the call and the stock starts a rally of 20-30% a month, your CE since it is a leveraged position tends to lose quite a bit. I’m not saying CC is a bad bet, if you are deploying CC, you just need to be aware of these outcomes and be prepared for them.
If it rallies 20-30% upward, the gains from the stock price should be more than the loss from the call. So I can sell the stock and be profitable.
Then maybe repurchase after the expiry of the call. Then sell a call again. Repeat process.
So up moves are not a problem for covered call.
If I handle covered calls like this, how does it compared to buy and hold?
In a down market, I don’t plan to sell the stock. So covered call or buy and hold it makes no difference.
I’ve not tested this, so I cant comment. But you can try and back test this to know how the strategy would have performed to get a perspective.
Hi Karthik,
What money strategy do you use? What returns do you get from it?
I don’t trade anymore since no one at Zerodha is permitted to trade.
My hunch is that they will be similar. Do you know any backtesting sources for options?
Hmm, nope. As in there is streak.tech, but you cant back test it there. When backtesting, do consider the cost of transactions as well.
So what do you do with your money? Do you put it in mutual funds, fds etc?
Sorry if this questions bothers you.
I am new to money management, and I am curious to see how the pros handle it.
Mutual funds + SGB + Stocks (investments) + stocks (short term trade, for few weeks to months).
Back testing in India is a pain and a huge business opportunity . I hope you guys look into it.
Thanks for your time
Yup, to some extent streak. tech is bridging this gap.
If you had to pick two commodities for trading based on technical analysis which would they be ( first and second)?
Also please give the reasons.
Crude and Gold. Because both are very liquid.
Hi Karthik
Can you please recommend strategies that can generate more than 20% returns annually?
Karthik sir pls reply and any good soul who can reply also reply
Sir I bought 16000 CE at 2.80 and sold it at 3.00
So my profit is 15 rs. But the nifty hasn’t reached strike price.So will I lose my capital
Can I buy and sell options befor strike price but with profit
Yes, you can buy and sell the premium before expiry.
how much minimum money should be required to become option writer ?
Depends on the contract.
Finvasia has zero charges.
Will Zerodha have zero charges in the future? (at least for the basics, maybe you can charge for streak and other extras)
How can a business sustain itself if it charges 0?
I think they will charge extra for their advanced technology driven products.
But for the basics they waive of all charges.
So if you don’t need the bells and whistles, you pay nothing.
Hi Karthik,
If i sell cal option 15950 @ 30 rupees premium, when it was trading at 15800.
Now, market starts to bull nifty starts to trade above 15800 and premium of 15950 starts to increase to 40 rupees.
Now if i want to square off what is my P&L.
You will have a 10 Rupee loss.
Hi Kartik,
1. On expiry of a call option, is the obligation to buy the stock/lot needs to be executed then sell for the higher prices to receive the reward or the difference amount is credited automatically from the seller of the option?
2. What happens during the mid way of a sell option? If I decide to sell of the profitable option, does exchange need to find a buyer for this to happen. I am guessing it become difficult to square-off as the expiry date nears and find buyers?
1) Yes, as long as you have the necessary margins in the account
2) YOu can sq off anytime you wish, but yes, there has to be liquidity in the script for the transaction to go through.
HI Karthik,
can you help me to understand, i have purchase the call option and on the day of expiry i am getting losses in the premium paid, now i have to option either i can square off the position or the call value is become ZERO on expiry day. instead of getting zero i want to buy the Lot (total shares) and i am bullish that next month or next quarter the price of the share will increase.
how i can buy the LOT size of the shares
real time example
Last month i buy the 4 lots of Dr Reddy of strike of 5400 (DRREDDY21MAY5400CE) for a premium of Rs 79875 on day of expiry the price is become zero.
Here is my question
how i can convert the lot size into shares?
Thanks in advance
regards
Syed
No Syed, you can not since the option is dead and has no real value.
Hi
Can you introduce a trial period for say 1 or two weeks? I can try out Zerodha and see if I like it.
Unfortunately, thats not possible, Michael.
Is there possibility that there may not be sellers available to sell call options for call buyers to buy call option?
Yeah, liquidity can be an issue in a few options.
What happens if I buy NIFTY futures today at 15000 , and tomorrow market gaps down at 12000?
The margins won’t be enough to cover the loss.
In case you don’t have enough margins, then the position will be closed and you will have to take a hit of 300*75.
See the total margin is 1,09,784 (from the Zerodha website) for NIFTY 50 lots.
(July)
This should cover a 2195 drop. (1,09,784/50).
But if NIFTY gaps down 15000 to 12000, there will be a 3000 point drop. Since it opens at 12000 stop loss wont work. So one has to exit at 12000. Exiting at 12000 means a 3000 point drop, but our margins only cover 2195 points drop. What happens to the extra 1000 points (3000- 2195)? How do you collect money for it?
Nifty won’t gap down so much, Prakash. There is something called F&O execution range. Check this – https://support.zerodha.com/category/trading-and-markets/margin-leverage-and-product-and-order-types/articles/what-is-f-o-execution-range-and-why-do-some-open-orders-outside-f-o-execution-range-get-cancelled
When it comes to liquidity, are Bank Nifty and FIN NIFTY close to the liquidity of NIFTY?
In terms of liquidity how would you rank indices, commodities and currencies? (in order of decreasing liquidity). How to find out the liquidity of a particular instrument?
I think Nifty, BankNifty are super liquid. I guess FInnifty too is liquid.
Hi Sir,As you rightly mention below imp points:
– When you are bullish on a stock you can either buy the stock in spot, buy its futures, or buy a call option
But my question here is Let’s say i am bullish then on which basis should i choose to trade either buy stocks in spot or buy futures or buy call? Which one will be best ? Is there any criteria to select ?
That Sandip depends on how well you understand these instruments and your risk appetite for the same.
How do you measure liquidity of a futures contract? When you say Nifty is super liquid,what data tells you NIFTY is super liquid?
One way to measure liquidity is to evaluate the impact cost. Have discussed this in section 9.2 – https://zerodha.com/varsity/chapter/nifty-futures/
What is the difference between execution range and circuit limits,i.e. operating range?
Ah, that article I shared must have the explanation for all, can you please check? Thanks.
The execution range seems to do a good job of protecting traders from adverse price actions against them.
What is the point of the circuit breakers? Isn’t execution range on its own enough?
Circuit is for non derivative stocks, derivative stocks dont have that.
You are right about impact cost. It is a good measure of liquidity.
Where do we get the data for impact cost?
I checked the NSE website for impact costs for indices and currency.
I also checked MCX for impact costs for commodities. I didn’t find impact cost in either.
I think NSE publishes this in the stock price page. Don’t know if they have changed it now.
Hi
Can you please tell me the returns your best traders make on Zerodha (CAGR)?
We don’t really track that, Tulika.
You are right. The impact cost for stocks used to be mentioned on the stock price page, but I can’t find it now. For indices, currencies and commodities there is no stock price page, so how do you find the impact cost for these?
Is there any other way to find out the impact cost?
Is there any other data apart from impact cost to identify liquidity? Where can we see this data?
Hmm, not that I know about. But Laxman, once you start observing the markets for a while, you will kind of get to know which ones are liquid and which one’s arent. It’s something you will develop over time as a market participant. No need to calculate the impact cost, it will become intuitive to you 🙂
Intuition can be very subjective. You and I can have different opinions on whether an instrument is liquid or not, even if we both have the same level of experience in the markets.
I can’t believe something there is no objective way to measure something as basic as liquidity. If it is objective data, if both of us look at the same data we both come to the same conclusion.
The objective way is by measuring the imapct cost, Laxman.
The objective way is the impact cost. But there is no way to get it. So practically there is no objective way to measure liquidity as of now.
You may not get it ready, but given the order book, one can easily calculate it right?
Sir if buy PE 120, spot-122, premium is 2.5 , same day i sold before hitting Strike price 120 and now premium increased from 2.5 to RS 4….i will make loss or profit , if i sell in high premium and buy at low premium …please clear my confusion..thanku
Yes, Manish. You can do intrday trade on the option premium.
The order book contains about five entries, is that enough to give an accurate measure of impact cost?
Yes, thats good enough.
Hello!
Let’s if I’m selling Reliance call 2lots at 2300 strike price and buying 2100 and 2400 strike price. Do I need to maintain the full required margin for the last 4days for the expiry?i.e 25%, 50%,75% and 100%?
Thank you!!
Harsha, I’d suggest you use the margin calculator for this.
Hello!
Let us say if I’m selling Reliance call 2lots at 2300 strike price and buying 1 lot at 2100 and 2400 strike price. Do I need to maintain the full required margin for the last 4days for the expiry?i.e 25%, 50%,75% and 100%?
Thank you!!
Hi Karthik,
I am new to options selling. i needed to clarify how things are calculated if i am having a overnight short position. for example, i have sold 33700 pe and received a premium of 21000. now next day i am closing the position with a profit of 5000. what will happen to the premium received when i close the position? is 15000 deducted from available cash immediately when i close the position ?
Shantanu, think of your P&L as the difference between the buy and sell price of your option premium.
Karthik,
The crude oil mini futures no longer exist. You need to update that part in the varsity section (chapter 3 I think).
What are the low capital requirement futures (less than 70000) available? I can think of only GOLDM and the currencies, may be the MCX indices as well.
Will do Jay.
I can only think of currency futures at this point.
Some time back crude oil went negative.
Suppose I was long. After it went negative, way more than all the capital I had. The RMS could not square off because it was overnight. At the same time I owe you extra money, i.e. initial capital+ excess amount.
How is this extra money collected?
Also is there anything like circuit limit, execution range for commodities and currencies?
This will be an issue and the broker will have to collect it from you.
How will Zerodha collect it? Is there a time period where I have to pay it back?
Is there circuit breakers, execution range for currencies and commodities?
Most of the times, the margins will cover the losses. But under an extraordinary circumstance like that, we will invoice you for it, if the client does not pay up, then its a legal course.
Let’s say I do a short call and the stock price moves above my strike price before/on expire day. If I have that particular stock in my Demat account, will the stock get debited automatically from Demat to settle the options or what will happen? Also what will be the margin requirements incase If I hold the particular stock in my Demat account.(equivalent/more then the lot size of the stock)
That’s right. If you have stocks in your demat, then the same will be debited for physical settlement. Also, during the holding period, margins will be applicable. Please do read this chapter on physical delivery – https://zerodha.com/varsity/chapter/quick-note-on-physical-settlement-2/
Have such extraordinary events occured at Zerodha?
Is there something like circuit limits or execution range for commodities?
I suppose so, I’d not have this information.
Which do you think supports technical analysis better for positional trading? NIFTY or GOLD M?
Both are liquid, and you can try applying TA on both.
Why do currencies and commodities have margin requirements about 4%? But NIFTY has margin requirements of 15% and some stocks have upto 50%?
These are less volatile compared to EQs. Margins for these also go higher when the volatility shoots up.
I agree both are liquid. But can you say that one is way better than the other in liquidity?
Can you please do a write up on futures missing in Zerodha varsity? For example Bank Nifty, Fin Nifty and MCX indices.
Check this https://zerodha.com/varsity/module/futures-trading/
Hi,
I want to do edge trading in option selling I.e. I will sell both PE &CE which will have same cost and I will wait till expiry. Please advice whether it is dvicable or not.
Yes, these are straddles and strangles fairly straightforward strategies.
If a individual sells a option (writing), is it possible to exit the position before expiry? If so, will the deposited amount returned back?
Yes, you can Dinesh.
I read the futures link provided. It does not mention anything about Bank Nifty or the MCX Indices.
What I am suggesting is in parts of Zerodha varsity, you have described crude oil, gold, nifty futures etc.
You can add bank nifty and the mcx indices over there.
Understood. Will try and do that. Thanks.
Thank you Karthik for such a lucid explanation! I have a query, do the premiums of different strike prices exactly follow the ups and downs of the underlying asset? i.e. if at 9:30am nifty takes a sharp 2% rise, will the CE premiums also take the 2% rise at 9:30? If they don’t then how to calculate the change wrt the underlying asset?
Aditya, yes, this does happen especially when a move as large as 2% happens. However, you need to be aware that at any given point there are multiple factors that influence the options premium. While some factors drive the premium up other factors drive it down.
Hello Karthik,
Lets say i short a CE option for stock and it turns out of the money. And there are no buyers for the option before expiry. The profit will be credited automatically to my account ? or what will exactly happen ?
In the USDINR page you mention NIFTY and USDINR are inversely related. But if you look from 2014, both the NIFTY and USDINR are going in the same direction, i.e. up. Why is that?
USD INR going up means Rupee going down.
In 4.2 (Call opt. seller and his thought process) while discussing the above table of p&l, in point 3.2 it says “the opt. buyer would be profitable over and above the premium amount he has received”. I am getting confused here. The opt. buyer only has paid the premium right? please help!
Think about it. YOu have paid 10 Rupees for a stock. YOu will be profitable only over and above 10 right? Thats the same for options premium as well.
Why is the commodity and currency markets almost 24/7 and stock are limited to around 8 hours per day?
Currency is global, impact is far higher. Equities are more local to the country in consideration.
In the NIFTY futures varsity article , there is wrongly typed buy and sell price for MRF in the impact cost part. Sell of 38266 should be buy and vice versa. Look at the order book snapshot and then the text too see what I mean. It is also mentioned that MRF has an impact cost of 0.3, hence it is illiquid.
I did a similar calculation for GOLDM futures, impact cost would come to 1.24% which is higher than MRF, hence illiquid. I did the same for GOLD and the impact cost comes to 0.014%, which is low. But capital requirements are high. In gold part of varsity, it is mentioned both GOLD and GOLDM are liquid, but based on calculating impact cost, I think only GOLD is liquid
In the gold section it
Thanks Jay. Let me check this.
If I buy 15 lakh worth of nifty futures (about 15 contracts), will it be easy to sell it off intraday because NIFTY has high liquidity?
It is not possible for NIFTYBEES , as nifty bees are not liquid beyond 2 lakhs. Wondering about the situation for NIFTY futures.
Yes, you can easily buy and sell 15L worth of Nifty futures intraday. Niftybees is not that liquid I guess.
In March 2020, there was a ban short selling for NIFTY. Suppose I had shorted NIFTY before the ban took place, what happens to my position?
There was no such ban 🙂
How liquid is GOLD M? It’s impact cost is high, so I guess it is illiquid.
Is it easy to buy 7 lakh worth of GOLDM and sell it intraday?
I think its fairly liquid for that quantity.
I think GOLD M is highly illiquid due to high impact costs as per my calculations.
Can you please calculate the impact cost for GOLDM and tell me your opinion?
You can generally look at the spread and make an assessment. No need to calculate the impact cost as such.
I know that gold is inversely proportional to NIFTY, when one rises the other falls.
Similarly USDINR is also inversely proportional to NIFTY.
My question is does gold lead nifty or vice versa? Do increases in gold price mean a future possibility of NIFTY drop? Or does increase in NIFTY price mean a future possibility of gold price drop?
I have the same question for USDINR vs NIFTY?
Usually its the other way round i.e. Nifty leading Gold or more generically Equities leading Gold.
Is there any way to know at what trading ranges a certain instrument will be liquid?
For example NIFTY BEES loses liquidity beyond 3 lakhs, whereas NIFTY futures have liquidity upto 10 lakhs and beyond.
One can calculate this, and as far as I know, no one has put up a list for this.
I dont agree with the statement that GOLDM is liquid as mentioned in the Varsity. I have done the impact cost calculations for the same, so I would like to know how it is concluded that GOLD M is liquid.
I agree GOLD is liquid though.
Arun, I’ve not traded Gold M in a while. Let me check its liquidity on Monday and get back. But if you’ve done the math and found it not so liquid, then I’d not suspect that since you’ve done the math.
How about USDINR and NIFTY? Who leads whom?
I’m not sure if there is a lead – lag behavior with these two instruments.
How to calculate the ranges at which a certain instrument will be liquid?
The thumb rule is that maximum liquidity for any instrument is around its ATM strike. So if you’ve set up a bull call spread with 760CE and 780CE, when market is at 740CE, initially strikes between 740 and 760 will be liquid. Once the market starts to move, say 785, then strikes around 780-790 becomes liquid. This is a generic observation though, really depends on the scrip you are trading.
I didn’t explain what I meant by ranges in my earlier comment. I was not referring to ATM strike price range.
For NIFTY Bees, the range is 2-3 lakh INR. Beyond that it loses liquidity.
For NIFTY futures, the range can be more than 5 lakhs.
So how do we identify ranges for a particular instrument?
I need to think about this, but I suspect its impact cost itself.
Have you had time to think about this? (about the ranges)?
I know you can find out liquidity of a futures contract by impact cost.
Is there any way to find out liquidity of options at a particular strike price?
The easiest way is to look at the trading activity in the order book (20 depth helps). If you see a lot of transactions and a narrow bid as spread, then its liquid 🙂
By 20 depth, do you mean 20 prices away from strike price?
No, I mean this – https://zerodha.com/varsity/chapter/supplementary-note-the-20-market-depth/
If I have 250 shares of RIL in cash, will I still need margin to sell 1 lot of call options? (1 lot=250 shares)
Yes, you do.
If I have an entrie lot of a stock, would the margin required to sell calls be lesser?
Yes, it will be required.
Hi Karthik,
If I sell an option on expiry day after 1.30 PM, is it obvious that I will end up in profit due to premium decay?
Thanks,
Rajesh
Depends on which option you’ve sold, a higher probability if you sold an OTM option.
Hi Karthik, if we can buy/sell options anytime after getting into an options contract, then why it is written that we can only exercise options contract at the time of expiry. Or it might be the case that I am misunderstanding the meaning of “exercising the contract”. Can you clarify it, please?
Thanks
Buy-sell is different from exercising an option. Exercising is basically sticking to the purpose of the option i.e to either take delivery or give delivery of the option.
I am interested in trading small cap stocks. But small cap stocks are more prone to manipulation, fraud etc. Hence technical analysis wont work.
Is there any way to weed out the faulty small cap stocks?
Stick to the ones which are highly liquid, that will help to some extent.
Most of the small caps I have seen have impact cost of 0.05 and 0.1. Do you this is liquid enough?
Especially if I am transacting in higher amounts like 5 lakhs and above?
0.05 seems liquid enough, Reshma.
I agree 0.05 is liquid enough at least for small INR amounts like 5,000 INR.
Is there any way to know a stock will be liquid when we trade in higher amounts?(before making the trade)
I don’t want to be in a situation where I buy a small cap company having high liquidity (say impact cost of 0.05) for relatively big amounts say 5 lakh and above. But because I am trading 5 lakh worth there are not enough buyers, when I want to sell it.
There are large cap stocks having impact cost of 0.05, but I think those can be sold at the 5 lakh range.
Reshma, you can look at the following details –
1) Bid – Ask spread
2) Quantity bought and sold
2) Value traded
So lets assume you intend to buy 1Cr worth of shares, and you notice that the value traded is 25L, then its not liquid enough for 1 Cr, but very liquid for 5K transaction. You get the above information in the market depth window of Kite.
Is there anyway to trade in currencies and commodities without leverage, i.e.full cash?
Nope, these are leveraged products.
In the Futures varsity section it is mentioned that MRF has an impact cost of 0.3. https://zerodha.com/varsity/chapter/nifty-futures/
But on the NSE website, the impact cost is 0.03. https://www.nseindia.com/get-quotes/equity?symbol=MRF
There is a ten times difference.
How is this possible?
Must have changed over time 🙂
In Zerodha futures varsity write up , MRF has impact cost of 0.3
On the NSE website MRF impact cost is 0.03. That is a ten times difference.
How is this possible?
Regarding the MRF impact cost, is it possible for a NIFTY 50 stock to improve it it’s liquidity by 10 times? Isn’t one of the main points about NIFTY 50 that they are stable and don’t change their characteristics much? One or two times improvement in liquidity is understandable, but ten times?
Also the traded volume today for MRF is much lower than what is mentioned in the NIFTY Futures Varsity module.
Shouldn’t lower trading volumes decrease liquidity?
Nifty 50 is market-cap-weighted. The requirement is mainly wrt price, trading pattern. Liquidity can improve over time.
Do you think a swing trading strategy can beat a buy and hold over a long term? Long term is like 15 years or more?
Very hard to say, depends on market cycles 🙂 I like both kinds on activity.
Can you advice me on what indicators or other trading techniques to trade choppy markets?
Simple things like range double top, bottom etc helps Rpppa.
Which of these do you think has a greater impact on liquidity a) impact cost or b) traded volume.
Ideally low impact cost stocks should have high traded volume. But I have noticed certain high impact cost stocks having higher traded volume and vice versa.
They are all related. Traded volume increases, then the impact cost would reduce and liquidity improves.
But there are many stocks with both high trading volumes and high impact cost. Why is that?
Function of demand and supply 🙂
Hi bro tatachem was trading 760
For example I sold 740 Ce and 790 pe for this month expiry as I see there is not more buyer in 790 PE volume is 4K only lot size 1000
If I hold both options until expiry 740 CE can easily exit coz got buyers volume 48k
I am thinking what will happen to 790 PE if there is no buyer ON EXPIRY DAY
Sure, but why did you decide to sell ITM options?
Can you explain demand and supply more clearly please?
I’d suggest you look at this chapter on support and resistance, have tried to explain the same.
I understand supply and demand with respect to support and resistance for technical analysis.
Some stocks have both high impact cost and high traded value. How is this related to supply and demand?
When the supply and demand increase it tends to bring down the bid and ask spread and therefore the impact cost, driving the liquidity higher.
I agree when traded value increases, impact cost decreases and liquidity increases.
There are stocks that have BOTH high traded value and high impact cost.
If one increases the other should decrease right?
Sorry, I missed adding traded value + traded volume 🙂
Is there any way to identify penny stocks that are manipulated?
Its tough, but its generally a good idea to avoid penny stocks 🙂
We exercise American options ,right?Then what is the reference of European options in Indian stock markets?
American options (not available in India) can be exercised at any point.
We exercise American options ,right?Then what is the reference of European options in Indian stock markets?I need to know the mechanism behind the settlement cycle of both these options.
Hello Karthik,
Could you please help me to clear the notion “seller potentially has unlimited risk in options.”?
As per my understanding, a option seller have unlimited risk if the trade is not in his/her favor on expiry date. However, options seller can avoid loss if he/she square-off the trade before the expiry date citing the trend is not in favor.
Is my understanding valid?
Regards
Subir Dutta
The trade can go out of his/her favour even during the expiry, right?
Is there any way to find out the volatility? By looking at a certain number and say this is volatile, that is not.
Yes, you can quickly calculate the historical vol and reference it to the current volatility.
But computing historical volatility with current volatility tells you whether the instrument is volatile with respect to itself.
How do I compare volatility with other instruments?
For example, I want to compare volatility of WIPRO with respect to YES BANK, how do I do that? The historical volatility/current volatility can tell whether WIPRO is volatile today compared to last year, but can it say whether WIPRO is more volatile than YES BANK?
For this, you just have to compare the volatility of both companies. The larger the volatility in terms of %, the higher is the volatility. For example, if YES bank is 18% and Wipro is 15%, then YES Bank is more volatile.
When you are referring to YES bank having 18% are you referring to annualized volatility?
Thats right, annualized volatility.
If (assume) I sell a call option at the strike price 100 (spot price also 100) and I got a premium of 5, and, if I immediately exit the position, will I be profitable?
Nope, because you bought and sold at the same price right?
Dear Karthik,
For all ‘long call’ contracts of particular strike price executed, ‘short call’ will also be executed? I am able to see only entire CE details on NSE.
Yes, both call and put are actively traded.
Is EURUSD coming soon?
Not anytime soon I guess.
Which trading session, the Indian or the USA ones have a greater impact on the USDINR prices?
Both, Ajay.
Since a option position can be exercised anytime before expiry in India.
I believe the option type is American and not European.
Can you pls correct me, if I am wrong
Thats right and we don’t have American option in India. All options in India is European.
Hello, please explain the cash settlement cycle of a options trade.
1. what happens to a sell call or sell put (index option trade) if i dont square off on expiry day.
i need to understand the settlement cycle for a sell side trade (incase i do not square off on expiry day, what happens)
If you sell a stock option and it expires worthless, then you get to retain the premium. If the option is ITM, then the option will be physically settled. CE sell results in giving stock, PE sell results in taking stock. If you are taking stock, then the stock comes to you on T+2 days.
Hello, thanks for your reply. But I want to know the process for Nifty and Bank Nifty.
I dont want the stock option process. Only Nifty and Bank Nifty process i need to know.
Indices are cash-settled, Renu. Not physically settled.
Hi Mr. Kathik, yes i want to know the cash settlement process for indices only. because am new to this options part.
how does it work for a sell call or sell put (shorting trade) , what happens if i dont square off on expiry day.
if i dont square off the sell trade on expiry day ..how is cash settlement done. what happens to premium that i am suppose to receive. thank you for replying as ususal.
Renu, the cash settlement happnes basis the intrensic value of the option. I’ve explained this through the module.
Hi Kartik,
Suppose I sell a option on stock and get the premium…
After the few days the stock price goes down so the option premium has gone up so now i decide to square off the position.
Will my total profit be original premium + the trading profit between premium difference?
Your P&L is the difference between the buy and sell price of the option premium.
Hi Karthik,
Suppose a person B buys a call option from person A and then sells it to person C at a profit after some time. Then C waits till the expiry and decides to exercise his right (let’s assume that the spot price now is above C’s break-even point) then who is obliged to pay the difference of the amount to C?
Assuming no other players in the market, the obligation is on A. B is out of the market.
As a seller,
If my option becomes otm, it goes to 0. That’s clear
If my option remains itm. But if I m still profitable on day of expiry
N couldn’t close position
( Eg. My sell price is 6 rs n option is at 2 rs on expiry day
And if I don’t close the position)
What happens
How does that trade get settled
The trade gets physically settled (assuming it’s a stock option), else physically settled. Check this – https://zerodha.com/varsity/chapter/quick-note-on-physical-settlement-2/
Can a delivery based sell trade get paired with an intraday buy trade?
I’m assuming you are asking if a CNC sell position will be offset if you buy the same qty in MIS. If yes, no, MIS buy will be squared off, and you will be left with CNC sell for the day.
I am not talking about me doing both buying and selling.
Suppose I buy equity delivery , can I sell it to some one else who has placed an intraday sell order?
Yes, from your perspective, you just sell.
Hi Kartik!
Pls. let me know if I SOLD the call option of Adani port 740 CE at spot price 728 @ premium 2.15 and Squared off at spot price [email protected]. I paid the margin 260000. Pls. let us know the profit and reversal of margin. I much amount will I get on square off. Is it 260000+(2.15-.30)*1250=262312.5 and the net profit will be (2.15-.30)*1250=2312.5. Pls. guide.
Subhash, I’d suggest you call the support desk for this. Generally speaking the profit or loss you’d make is the difference between the buy and sell price of premium multiplied by the lot size.
Can you write an article on pyramiding as part of money management?
Pyramiding? Can you share more context?
Pyramiding means instead of going all in one trade you go part by part.
You have 100 Rs. You can either buy 100 Rs worth of shares in one go.
Or you can set targets like initially you put 50 Rs. If the stock goes up 10% you put another 50 Rs.
There are many variations to the above.
Ah, got it. I’ve discussed that across various chapters in the Risk management module.
Excellent explanation and examples. That’s why zero dhaa is NO1
Happy learning!
Hey karthik,
Since the option seller/writer has unlimited risk, what happens if his margin gets exhausted. is the seller/writer loss capped by his margin?
Yeah, either the writer has to bring in more cash for margins (if he/she intends to hold the position), or square off the trade.
If I sell option and buyer buy it. Then my question is at the day of expiry if buyer want to sell its buy option then who will buy it? Or is this seller responsibility to buy back its option because buyer want to sell it?
If the option is held to expiry, then the exchange will settle the same.
Sir if option seller has shorted (expiry day)
At 10:00 am
Spot -600
Strike -600
PREMIUM RECEIVED – 8.00
AT 14:00
SPOT – 500
STRIKE -600
P&L – ONLY (8* LOT )
why would not the premium increase in case of option seller
Premium is a function of many factors – volatility, price change, and time to expiry.
What to do if the markets enter a bearish or range bound condition?
I trade only in cash, and I don’t want to do intraday.
Then you either have to exit or hold the position, Laxman. Depends on your risk perspective.
Why is short selling in cash only limited to intraday?
Why not for overnight trades?
That’s because of the settlement cycles in India. For overnight, you always have futures and options.
With futures and options position sizing is not possible.
You have to stick to the leverage provided, no adjustments. You cannot increase or decrease the leverage.
I have sold ITM call without having share in my demat account. For september 2021 expiry is on 30th September 2021. What is the last date when i can buy share for physical settlement of share.
If i buy full lot on 30th September before the day end it will be ok? or i need to buy atleast 1 or 2 days before the expiry date?
Is the SLB program (for lending shares) fully functional in Zerodha?
We can facilitate, I’d suggest you call the support desk for this.
Thanks for a detailed explanation. one doubt, if the option seller square off his position before making loss how option buyer get profit I mean in the point of liquidity.
Remember, you can buy and sell option premium even before the expiry. So the P&L will be just like the way you buy and sell options.
which one is correct statement? can u pl clarify?
1. If I have bought Bajaj Auto 2050 call option at Rs.6.35 in the morning and by noon the same is trading at Rs.9/- I can choose to sell and book profits?
2.the option buyer will have to mandatory wait till the expiry date to exercise his right?
in varsity, the above statements are given. pl clear wheather option buyer can sell immediately to book profits (or) have to wait for expiry date?
1) Yes, you can
2) No, not needed. YOu can sell before expiry.
sir,
please rectify the mistake in the above text.
4.2 – Call option seller and his thought process > option chain > You can extend the same argument to the option buyer. Since the option buyer pays a premium, he first needs to recover the premium he has paid, hence he would be profitable over and above the premium amount he has (((((received,))))))) hence the P&L calculation would be ‘ Intrinsic Value – Premium’.
its not “received” it should be “paid”.
Thank you,
Noted, thanks for pointing this out.
Can you please provide a demo version of Zerodha trading platform? So that I can try it before making my decision to buy.
Also how do you calculate ATR for bonus shares on your platform?
For example SRF made bonus shares today (Oct 13). So yesterday the price was about 12500 and ATR till then was about 350.
Today after the bonus shares, the price is about 2500, but ATR is around 1000. This divergence in ATR messes up calculations.
I am aware that one ends up with 5 shares in this case. I am interested in knowing what happens to the ATR.
You can check this Rajesh – https://kite.trade/docs/kite/.
Once the bonus shares are announced and the price drops, the chart is adjusted to a change in price. You plot ATR on the changed chart, that’s it.
Plotting ATR on the changed chart is a bit confusing. The below values are from Trading view, I think Zerodha will have similar values.
Before the stock split, the ATR was 350, stock price is 12500 (approx nos.) So that means ATR is about 3% of the stock price (350/12500).
After stock split ATR is 1000, stock price is 2500. ATR is now about 50% (1000/2500).
So if we plot the ATR now, the stock appears more volatile. Before there was only a 3% variation in price, now there is a 50% variation. The stock is actually not more volatile in reality.
Suppose I used a trailing stop of 350 when the price was 12500, what do I now? If I use ATR of 1000 for a stock price of 2500, it means that the gap I am willing to tolerate is much larger than before. Before I could tolerate about 3%, now I have to tolerate about 50%
That is my problem.
Ah, this is strange. Ideally, the ATR proportion should be similar to before the split. Let me check this, but have you noticed this across other stocks also? Or is this a one off case?
This is the first time I have bothered to check it out, maybe it has happened before also I don’t know.
I expect this to happen to other stocks also.
I think maybe after 14 days, the ATR proportion will reflect the after stock split price.
Because then it will measure the volatility of the after stock split price. Now ATR measures before stock split price.
I guess you are right, I need to check this too.
Please consider the following from your definitions:
“European Options – If the option type is European then it means that the option buyer will have to mandatory wait till the expiry date to exercise his right.”
Does it mean I can not exit my call option before the expiry date?
I have read 100s of answer on more than 50 platforms that one can exit from the call option before expiry date.
Suppose, I buy ABC call option at strike price Rs. 50 (premium Rs. 2) which expires on October 28, 2021. Let the spot price on October 22, 2021 is Rs. 80. Can I sell my call options at this spot price? If no, then no interpretation is needed. If yes, suppose I sold as mentioned and on Oct 28 (day of expiry) price goes back down to 45, what will happen?
You can exit, but you cannot exercise the option. To exit an option is different from exercising an option.
Here is a list of commodities on MCX.
Aluminium
Copper
Crude oil
Gold
Lead
Natural Gas
Nickel
Silver
Zinc
Can you rate them in increasing order of volatility please?
Ah, its been a while since I traded commodities, not sure if I can rate these. But if I were to guess, it would be Natural Gas topping the list.
I meant in increasing order of volatility. So natural gas at the top of the list would mean it has the lowest volatility, is that what you meant?
How do you measure the volatility of commodities? If you can tell me I will calculate on my own and do the ratings.
Ah no, I’d put NG at the top, meaning highest volatility. But like I said, this is just a guess and I could be wrong. You measure volatility the same way i.e take the daily returns and run a standard deviation function on it.
Sir I have gone through the study material and it is very helpful.
Please check this scenario: –
Strike price – 510
Spot price – 500
Premium – 10
Strike price – 490
Spot price – 500
Premium – 5
My thinking is price may go up and the same time I am concerned about the loss.
So if I
1. buy this call option at strike price of 510 and premium rs. 10 .
and at the same time
2. Sell the call option at strike price 490 at premium rs.5
to minimise loss.
Is this decision is ok?
Swapan, check this – https://zerodha.com/varsity/chapter/bull-call-spread/
Hi mate , can I buy a future and sell a call option of same month . In case if at expiry my call is in the money can I use future position to offset it ? If yes then how does it work? Thanks
Yes, the option will be offset because sell CE results in taking delivery and buy Fut results in taking delivery.
Sri Karthik
Great presentation for an old 77 man.Today and sometime ago I contacted people in Zerodha on point now u have explained.Poor guys were fumbling.
Query :I had wriitten a call option at STRIKE PRICE of 1880 oct 21
of LT pocketing a premium of 5.7 rs.when spot was 1798.
When I saw the premium increasing to 7 today when spot was 1803 I got scared .only one day left and I was sure the scrip cannt expire anywhere near 1880.I was wondering whether I should exit.Finally one lady clarified that as long as the spot is less than 1880 I need not worry.
My doubt is why the premiums are behaving this way.
Will the premium become nearabout zero tomorrow, expiry day for 1880ce for LT.
Sir, I’m glad you liked the content in Varsity. The option will expire worthlessly if LT stays at or below 1880. At any given time, there are multiple factors acting upon the premium. Some factors tend to increase the premium, some tend to decrease the premium. For example, if the stock price increase, the call option premium tends to increase but at the same time, if the time to expiry reduces, the premium tends to decrease.
So the premium price you see on screen factors in all these variables, hence the premiums increase or decrease.
Sri Karthik
I have the same doubt of Smt shruti mazumdar .
What happens if on expiry the spot is very much below strike price chosen but expiry premium is more than the premium received earlier on selling.
Kindly clarify whether this is possible and we will make loss or profit?
It does not matter, upon expiry what really matters is the settlement price of the stock and the strike price.
I would call you Dr.Karthik Rangappa for you richly deserve a P.hdfor having done such deep research and made a huge thesis .Only thing you dont have a mentor to whom you can submit this to a Phd.😂😂
Haha, thanks for the kind words, but I don’t think I deserve that kind of honour 🙂
If a stock has an impact cost of 0.07-0.10 does it mean it is not liquid and highly volatile?
0.07 is quite liquid I guess.
What about .1 ?
Which do you think will be most profitable among swing trading, positional and buy and hold? (in terms of returns w.r.t. cash placed)
Assuming same market conditions for all three. The only thing that changes are perhaps the duration and stop losses (swing will have the smallest…others will have bigger ones)
It really depends on how you manage risk, Prakash. Personally, I prefer swing positions.
Why do you prefer swing positions?
Gives me more time to act.
Swing trading actually gives the least time to act compared to positional (holding over months) or buy and hold (holding over years)
So shouldn’t you preferring positional or buy and hold?
It depends on how you look at it, compared to intraday, swing trade does right?
By the way, I also prefer positional for the same reasons.
Kartik. Well done. I am just surprised to see the great quality of the content u guys are providing. It’s so easy to understand. Much better than paid courses , I can see this with confidence. Thanks…..
Happy learning, Rahul!
When you used to trade your own money what used to be your CAGR over a period of 5 years?
I think about 13-14%. This is across a bulk of strategies.
What was your trading capital?
Just enough to sustain 🙂
Is the 60 day challenge open now?
Yes, check this – https://zerodha.com/60-day-challenge/
Dont you think it would be a better idea to put money in index funds/mutual funds if you are returning about 13%.
You get similar results without putting any efforts.
Yup, it is peaceful. But as investors, we always seak higher returns 🙂
I’m unable to sell call option even after having sufficient shares in demote account tatasteel I holding 425 shares but I’m unable to sell call option its asking for margin
PLEASE HELP ME
Rakesh, you need to have margins in your account to trade/sell options. Just shares in demat wont help. You can pledge shares though, check this – https://support.zerodha.com/category/console/portfolio/articles/how-do-i-pledge-my-shares-to-get-collateral-margin
In the 60 day challenge, what happens if the position is profitable but I have not closed it. Do I get the certificate?
You need to close the trade, Roopa.
I am talking about if position is profitable after 60 days, but I have not closed it.
Like I mentioned, you need to close the position.
Hi Karthik,
I have a question..
As a Call option Writer I enjoyed the premium and squarred off comfortably at a certain point of time before expiry (as mentioned by you that a writer can do that) then what my margin amount has to do with above business?
Pl. Clarify..
Yogesh, margins are blocked at the time of writing the option and released when the position is closed. Thats about it.
Sir, considering bank nifty options,
Can i sell deep ITM call option to eat all the premium till the expiry ?
As I know that This Option will move towards zero loosing the extrinsic value !
Can I sell the option worth 1500₹ and wait till it becomes near about 100 to 200 ₹ to earn the premium ?
Yes, you can. But please be aware of the risks involved in selling options.
Thank you sir for answering this Doubt about Selling deep ITM option,
But I want to ask you that ” Does Broker allow me to sell Far Deep ITM ? ”
If bank nifty running on 37000 and assuming downtrend in next 7 to 10 days, Can I sell 38000 CE of next week expiry ( 1000 Points Away from Current BN) worth 1500 – 2000₹ ?
Will Broker allow me to sell ? Any restriction in future to buy back ?
Please solve my all doubts !
It should not be, but due to OI restrictions, this can be an issue. Please check the range within which this is allowed.
sir currently i buy nifty nifty bank and stock options and sell whever i want means i am settling my shares as per my interest at any time then this turns out to be american option na, how can this be europen option in nature can you explain clearly in detail sir
In the American option, you can get settlement anytime you wish, but in European options, settlement is only on the expiry date.
Hi Kartik,
I am enjoying taking such knowledge, you explained all the complex things very nicely and simply. I have one confusion, as you said option buyer only excercise their rights on expiry day, then how can one sell call option before expiry? for example right now on 28th nov 2021 powergrid stock is trading at Rs.202 in spot market , lets assume I am bullish on this stock and i am assuming that this stock can go upto Rs.210 in next 5 days, so can I buy 210CE on Monday that is 29th nov 2021 and sell it on 6th Dec 2021 when underlying price goes to say Rs.215 or should I have to wait till expiry which is on 30th dec 2021. Please give clarity on this.
I’m glad you like the content here, Nandkumar. Yes, you can sell the option anytime after you buy, no need to wait till expiry for this.
Hello, what will happen if don’t close in the money short call position in banknifty at the time of expiry? can I wait till the last minute of expiry? or I need to close 10 mins before closing. Will there be any penalty or extra margin, if I wait till 15:29 hrs on the day of expiry and close it in last minute.
YOu can keep the position open till expiry. Post expiry, the position will be cash-settled. If you close this before expiry, even at 3:29, you will make the difference between buy and sell price of the premium. Have explained in this chapter – https://zerodha.com/varsity/chapter/options-m2m-and-pl/
Hi Team,
Suppose I buy Nifty December 23 rd 17600 on December 13th, anticipating, the Nifty is bullish and expected to go beyond 17600.
Let say the purchase price of the lot is Rs 80/ unit so for 50 lot size I pay ₹ 4000.
If market is bullish the premium increases, however if market turns bearish and I want to exit the position
and I find there are no buyers to square off my position, what is the maximum amount of loss I stand to suffer.
Let’s assume I bought the call intra day.
I have set a stop loss at 60, it got triggered but the contract did not get executed as there are no buyers.
The worst case is that you will lose the premium paid entirely i.e. 4000. If you manage to find a buyer (which you will in the case of Nifty), it can be than 4000.
I want to start my own portfolio and sell subscriptions on small case.
Are there any eligibility criteria for this?
Jay, you will have to check with smallcase for this.
Hi Kartika.
In advance ,I would like to thank you and zerodha members for helping newbies as well as experienced.
I will be very happy if you can clear my doubt given below .
Scenario-1 ( long Position)
Vedl 360 Pe
Lot size-3100
Buy 3100*19
Square off done – 3100*30
Before Expiry .
Scenario-2 ( Long Position)
HINDUNILVR 2340 Pe
Lot size -300
Buy 300*41
Now trading at 110 .( 300*110)
But unfortunately 😕 not able to square off on or before expiry.
* What is the profit I made in Scenario-1 ? Is there anything about to worry for exercise of expiry ?
* what is the profit I made and what about excerise due to open position in expiry on Scenario-2.
Thank you once again .
Hey Aswini, I’m glad you liked the chapters. As far as your queries are concerned, I’d suggest you take a look at this chapter – https://zerodha.com/varsity/chapter/options-m2m-and-pl/ guess, this will cover all your doubts.
Sir there is an update regarding options from nse but i am not able to understand what does it mean, please help sir
https://www.livemint.com/market/stock-market-news/nifty-bank-weekly-contracts-to-be-reduced-from-next-month-says-nse/amp-11640240374598.html
I guess weekly contract, Manas. These contracts have weekly expiry.
excellent. education moneys(fees) can be converted to investment fund. wonderful service.
Happy learning!
Sir i have seen sometimes nifty or bank nifty are suppose 30-40 points are up or down, but their futures are 100 points up or down, why is it so & i hope it doesn’t messes up if we want to make a futures trade
That’s because of the demand-supply situation, Hemant. Futures either increase or decrease based on market dynamics. Nope, it won’t mess up anything.
Sir,
When can the seller make entry and exit in option trade?. What is the impact of changing in premium on seller’s profit ?
Both the seller and buyer can decide to exit the trade anytime. Not necessary to hold the trade to expiry. Not sure what you mean by premium on seller’s profit. Can you please share more context? Thanks.
Sir i have bought 35,500 Ce of 13 Jan , but not able to square off as kite is saying working in this strike is blocked due to illiquidity. Are u kidding me ? If it was so why did it let me take it in the first place ? What the hell i do now, even the call center nos. for zerodha never picks up call, please reply
Hemant, you must be placing a market order. Please try placing a limit order.
If i’m willing to buy a call option… I m paying the premium amount.. Will the premium amount go to NSE or the seller from whom I bought??
Simply… Whenever there is a call buy option, will there be a call sell option?
The premium amount moves from the option buyer to the option seller via the intermediation of the broker and exchanges.
Hello,
1). My query is, can I buy and sell an option (call or put ) at any time. Can I sell call option before ” Expiry Day”?
2). If there is a loss occur due to the market, my strike price also is lost with premium. (or only premium is lost not strike price.)
3). If I am having 3 lots of calls, can I sell 1 lot today “before Expiry Day” and the other two lots on “Expiry Day”.
1) Yes
2) Premium will change, strike remains the same
3) Yes, you can.
its like this –
At 10:00 AM –
Strike price = 300
Spot price = 300
Premium you pay = Rs.5 (just assuming some value here)
Qty 50 (assume)
I pay Rs 50*5= Rs 250 premium
At 10:30 AM –
Strike Price = 300
Spot Price = 320
Premium = 25
how much money credit when i sell ?
Did Rs 250 which i pay as a permium will also credit ?
YOu will get credit to the extent of sale value, here it is 25*50.
I have a colpal PE short for 1400. This is in the money. Can I sell a future against this to avoid delivery?
Yup, you can.
Thank you for make me understanding with easily examples
Happy learning, Venkatesh.
Thanks for clarification. Also, how will brokerage and STT be charged. Presume that the final expiry price is 1390, while the strike price was 1400. Will it be on entire amount (say 1390 *lot size on both legs: put and future)? Or since there is no physical settlement, it will be only on the difference of Rs 10.
If there is no physical delivery, the normal brokerage is applicable Deepak. As mentioned here – https://zerodha.com/brokerage-calculator#tab-equities
Hi,
Can an Option Seller exit at any time of his choice? If yes, then the Option Buyer will always be losing premium as the Option Seller will exit before the Option Buyer can make a profit. Can you please clarify if I am right?
Thanks,
Amitabh
Yes, an option writer or seller can exit anytime, no need to wait till expiry. The profit or loss that you make is the difference between the buy and sell premium.
If I have holdings of 1 lot of a share. Will I be allowed to sell call option of that share without any additional margin?
No, margins are still required.
I want to sell OTM call and put,can I hold for long time or I would required to buy at the end of trading day.
You can hold for long, Kapil.
European Options – If the option type is European then it means that the option buyer will have to mandatory wait till the expiry date to exercise his right. The settlement is based on the value of spot market on expiry day. For example if he has bought a Bajaj Auto 2050 Call option, then for the buyer to be profitable Bajaj Auto has to go higher than the breakeven point on the day of the expiry.
Typo here:
Even not it the option is worthless to the buyer and he will lose all the premium money that he paid to the Option seller.
If the option is not worthless, then it has an intrinsic value that is beneficial to the buyer right?
Hi kartik
U said , india follows European model that says we can execrcise
Right only on expiry
But in comments section u have said ,we can execrcise rights anytime
Please clarify
Not exercise, but you can sell the option anytime after you buy. There is a difference between exercising and selling the options.
What is difference can u please tell
Difference between?
Why are the lot sizes for the option of every underlying different? Who determines the lot size and on what basis?
This is decided by the exchange, Sahin. But the contract value is pretty much similar across different contracts.
Hi Kartik
what is the difference between exercising and selling the options?
When you purchase an option, say a call option, you get a right to buy the underlying at a predetermined rate (strike), you can exercise this right only upon expiry. But you can also buy and sell the option (actively trading) anytime.
Hi Kartik,
i just had doubt, i have recently started option buying and while trading equity, if we are doing intraday so we have to cover thte short selling trades same day, so in option if we are doing option selling suppose we sold 17000 pe option that is far otm can we hold same trade for next day ot till expiry?
suppose nifty is trading at 16000 and i sold nifty 15900 put option so this trate can i carry for next day or till expiry or i have to cover my position same day?
As long as you have margins, you can carry forward the position Sunil. No need to close the position the same day.
If I have 1075 HINDALCO stocks, which is equal to its lot size. Will I be allowed to sell Call Option without margin requirement? Since I already hold the stocks, there will not be any risk of defaulting right?
Nope, you’ll still need margins Gerin.
Sir if I m selling a call option of 2000 strike price at premium of 80 rupees and spot price is 2020 if I will square off my position at 2060 at premium of 90 what will be my loss
YOu will make a loss of Rs.10, which is the difference between buy and sell price of the premium.
I have square off the position for a call of NIFTY. TODAY IS THURSDAY 17TH MARCH. Since i am in profit so when can I expect the amount to be credited into my zerodha wallet.
Call- at 23.90
Strike price- 17300 nifty
Exit – 50
Profit – 1305
Profit from options will be settled on T+1 basis.
sir if we have a negative view on a stock, can we buy the PE option of that instead of selling CE option because selling CE option will require high margin amount. Is this a good way?
Yes, you can do that. But sometimes, selling an option can be beneficial given the higher volatility and therefore higher option premium.
if a option seller sells he gets a premium, right. So he can exercise his position after the trade for getting the premium . What if he exit the trade right after he receives the premium amount?
YOu cant exercise the option till expiry date. But you can square off the position anytime you wish. There is a difference between square off and exercise, check this – https://zerodha.com/varsity/chapter/options-m2m-and-pl/
So if one is buying and selling before the expiry they benefit from the change in premium so if they hold till expiry will they benefit from change in price as well as premium?
Change in price = change in premium.
I own say 7000 PFC shares. I write a covered call at 120. I get my premium. Now, at expiry, the price of underlying is 122. So the call gets assigned and I am now supposed to deliver 6200 shares of PFC. In real life, how is this done now ? How do I deliver the shares and how do I get back my money? Is it automatically done?
Tapas, so the broker debits the shares from your demat and does the settlement for you. You just need to ensure the shares are present in your demat.
If I sell options either call or put and wait till expiry and the transaction is not yet squared off then what are the consequences?
Then the contract will be settled by the broker.
In the Above articles, they have said we follow european options and european options can be exercised only on the expiry day but in the same article 7.3 they said buyer can exit at any point of time after capturing momentum in premium….
can someone explain whats the diff?
Praveen, these are two different things you are referring to. Check this – https://zerodha.com/varsity/chapter/options-m2m-and-pl/
Hi
I am just learning about call options in your tutorial. I am a trader in progress…
I understood your tutorial clearly… BUt on reading the comments, i am little surprised to know that the premium can change for the strike price after few days of buying a call option…
Pls explain this premium change scenario with an example, for me to understand both from the call option buyer and call option seller…
Thanks Much
Nitsar, please do check this – https://zerodha.com/varsity/chapter/options-m2m-and-pl/
Adding clarity to my previous question, posted few mins back…
Pls explain with example what ll happen on the expiry day,if the premium changes after buying and selling the call option and they exercise the call option buying or selling
Please do check the response for the previous thread, I’ve posted a link. Do check that once.
Hi sir,
Thank you for easy explanation, i have 2 doubts.
Stick options till expiry is cash settled or physical settlement.
If I hold a index option at call buy at a premium 100 and during expiry what I will get if before expiry premium is 90
Stock is physically settled, index is not.
Karthik right now nifty futures are trading at a premium of almost 100 points. So suppose i buy futures right now & sell a call option for hedging, would i incur extra loss if the futures premium starts to wave off as it nears the expiry, or do option premiums are also relatively high when there is so much premium in futures ??
Hmm, so if the futures is at a premium, why are buying futures? Anyway, the setup with futures + options will lock in a spread, but you have to hold to expiry.
I bought them since i was a little bullish on nifty, but i am a little concerned after i noticed that it is almost at 100 points premium from the spot & i have used 13th April weekly options as hedging, so i hope all this 100 points premium doesn’t wave off in a single day
You never know what can happen in the market 🙂
Karthik sorry to bother you again, but please one more important question. I made up a strategy which is showing 700 rupees profit in sensibull if nifty expires around 18000. So do the option strategy builder shows completey accurate profit/loss ?? because if it do, then i don’t need to be tensed about the premium waving off.
Manas, the payoff will be accurate assuming you hold to expiry. Not so accurate if you square off before expiry. But also keep the costs in mind when dealing with the payoff.
In the chapter of buying and selling options (call and put) you have written down break even as breakdown point. It is just a typo and nothing big as the point has been driven home in finesse.
Not a typo, its breakdown point when the prices starts to trend down.
if you have bought Call Option which is presently a deep OTM strike, can you sell a call at the same strike and lot size and tap your loss rather than squarring off your position…
thanks
Nope, that will sq off the position.
Hello Karthik,
one doubt regarding option selling.
example
if i sell HDFC APR 2200 CE for premium 40 (lot size 300) on 26th April and on 27th April if i buy(close yesterdays sell option ) hdfc apr 2200 ce when the premium is at 22, what will be my profit ?
will it be 18*300 = 5400 ?
thanks ,
deepak
40-22 is your profit.
Hi,
Can u say the exact difference between futures and options?
Please do read the two modules 🙂
Hi
What happens to a future if it is not cancelled on expiry day?
Are ALL futures cash settled? I mean if I buy for 100 and the close price is 110 without me closing, I get approximately 10 back in my account.
Is there any alternative to setting stop loss everyday. Similar to GTT, you set a stop loss market order once for a trade and that is it. The current system of logging daily to place stop loss is annoying.
If you dont close before expiry, then the futures is physically settled (stock futures) and cash-settled if its index futures. More on that here – https://zerodha.com/varsity/module/futures-trading/
YOu can use GTT for futures, check this – https://support.zerodha.com/category/trading-and-markets/kite-features/gtt/articles/gtt-fno
What about commodities and currencies? Are they physical or cash settled?
GTT works when you want to place a buy order for something you have not already bought. Supppose I have sold a contract, and want to set a buy order as stop loss for the same contract at a higher, will GTT help me?
I could set another separate buy order for GTT at a higher price but that is not the same as setting stop loss for the same contract.
I think you want to place both target and SL together. Why don’t you try OCO, where one order cancels the other?
Yes, I want to place target and SL together. OCO works only for intraday and not delivery, so how to set up something similar to OCO for delivery.
Hi
I just went through your brokerage calculator for currencies. Say I buy something for 80 and sell for 90.
The brokerage should be 20 because there is one transaction.
But in the calculator it shows 40. Is brokerage being charged once when you buy (20) and when you sell (40)?
Its 20 for each leg, so 20 + 20 = 40.
I buy jubilant food call option of strike price 520 at 12.90 premium..now share goes down and premium comes to 9 …can i sell call at 9 and book loss on premium ?
If i sell at 9 how much loss is possibile??
Yes, you can. The difference in premium i.e. 12.9 – 9 will be your loss.
Ultimate clarity through this Q/A segment !
Happy learning, Tarun 🙂
Hi Karthik, on this page you have given an option selling example with Stock options. It would have been more perfect if have given one more example with index option selling as well.
the index option selling profit/loss calculation is confusing very much.
thanks for your time and efforts.
In fact, it is easier with an index as everything is cash settled. Btw, which part is confusing, let me know, maybe I can help.
Dear Karthik sir,
Suppose I sold an option whose strike = 8500CE Premium = Rs.20. I square it off before expiry.
Today Spot = 8450 & Premium = Rs.30 What would be my P/L? Thanks.
Good evening Mr.Karthick
I buy today the bank nifty call option strike 34500 when the spot was 34327 premium was 345. If I square of the position tomorrow for premium 245 then my loss will be 100 or entire premium which I paid?
Yes, thats correct.
Dear Karthik sir,
Suppose I sold an option whose strike = 8500CE Premium = Rs.20. I square it off before expiry.
Today Spot = 8450 & Premium = Rs.30 What would be my P/L? Please help.
YOu will lose 10.
Hi Senthil, as the premium has become 245, your profit would be 100 rs.
Hi Karthik, my doubt is when we sell an option, we get the net premium. If the option is expiring worthless is there anything that we need to buy back that option maybe say at 0.5 or 0.25 etc to get the profit or we can just the options to expire and get the M2M profit ?
You can just let it expire worthless, Sai.
Hello sir!
Sir on Sensibull or any other platform, they show us our probability of profit(PoP) when we set our trade using different legs. I am not sure how actually this PoP is interpreted.
Let’s say, I executed 100 trades each having 88% probability of profit. Does that mean with such kind of PoP, out of 100 trades executed, 88 trades will be profitable and rest 12 will be loosing?
Please clarify!
I guess this is based on each trade and not on the entire set. Maybe you should write to Sensibull team to figure this 🙂
If your stock has low liquidity in the cash sector, does it mean it is also low liquid in the fno sector?
Highly likely, Jay.
But in futures contract isn’t there a buyer for every seller and vice versa? That is decided when both sides enter the contract. So I don’t understand how low liquidity can be a factor for futures.
For cash I can understand, as there is no seller guaranteed when you buy the shares.
So imagine you bought a futures contract and the price has increased after you bought, you now want to book profits, but there are no one who will buy this from you. That means you are stuck right? This is liquidity risk.
How do you judge the liquidity of a futures contract?
I get the liquidity risk part.
But then what is the point of saying in future there is always a buyer for every seller?
To check the liquidity of a contract, you simply check the difference between the bid and ask, this is called the bid-ask spread. The higher the spread, the lower is the liquidity. The tighter the spread, the higher the liquidity.
So if you don’t find a buyer or a seller for your contract that you already own, that means there is at least 1 counter party to you who is refusing to sell or buy. In such cases you can always hold to expiry and upon expiry, the exchanges will settle the contract for you.
How to measure whether a spread is high or low? I know how to find the spread, (subtract bid-ask)..but after finding the spread..what do I compare it with?
Nifty is the most liquid futures contract. You can compare the stock spread with Nifty’s.
Understanding option was a humongous task. You really sir, has done an excellent work in simplifying for us.
Wanted to confirm if I understood correctly.
buyers: only premium is considered when squaring off before expiry, but squaring off by exchange following expiry means now along with premium IV will also be considered during settlement.
settlement for seller : Before expiry difference in premium and post expiry get to keep the only the premium and no IV will be considered as per your P&L statement example. Am I correct sir?
Thanks Ajay. Glad you liked the content here.
Before expiry – If you sq off before expiry, the difference in premium is considered for P&L
At expiry – The intrinsic value of options is considered
You can also check this – https://zerodha.com/varsity/chapter/options-m2m-and-pl/
Hi, Karthik
Suppose if I am selling option in Nifty 50 only as a intraday trader. I want to know whether I am allowed to exit my position any time whenever I want during the day or there is any particular rule
Thanks
You can exit anytime you wish; no need to wait for a particular time.
Hello
I might be wrong, still I would like to express my view……… I think in 4.2 para……. The highlighted word “disadvantage “……… should be advantage……… Because option buyer has advantage in only one situation out of three when price increases
Perhaps, will look at it again 🙂
I dont Understand what is squaring off. it would be Helpful if u explain with example
Assume you buy a stock at 107 and sell the stock at 110 for a profit of Rs.3. Here when you sell at 110, you are essentially squaring off your long position at 107.
Hi Karthik,
If i take a option position for expiry for one of this week and one for next week.
Will the one expiring in the next week also squared off by Zerodha when this week option expires on Thursday.
For example i take a position for 11th Aug and 18th Aug Will 18thAug will be squared off on 11th Aug if i don’t sell it on 11th Aug ?
No, square-off will happen only for the one which is expiring.
Hello Karthik,
I have got a question. Can you please explain or tell me in which condition a buyer of a Call Option will get his premium back ?? Or is there no condition as such that exist ??
Whenever the buyer squares off the position (either call or put), the buyer receives the premium which is prevailing in the market at that point.
How does the settlement of covered call selling? It means I have a stock and I am selling the call of that stock. If that stock goes above the exercise price, does Zerodha deducts the premium and settle loss/profit OR Zerodha takes the underlying shares from demat and credit the value of exercise price? Thanks
If you have written a call option, that means that if the strike turns ITM at expiry, then you are obligated to give delivery of shares. So shares will be debited from your demat account and delivered to the buyer.
Can we hold option sell position till expiry ? (example – if we sell next month option.)
Yes, you can hold to expiry.
Hello sir!
Let say I short stock call option just before expiry and market remained in favor of me till expiry. I want to know are there any cases where I will suffer a loss except the directional movement of stock?
No, not really. Your loss depends on the option’s intrinsic value, which upon expiry is dependent on the directional movement of the stock.
Thank you! Also I would like to share that I learnt to backtest trading strategies using Python. Our option selling strategy (based on standard deviation) now can be tested in few minutes for last 10-15 years data!
Amazing. Do share the results 🙂
Basically I have used simple logic to generate this data. I simply fetched data from NSE and calculated mean and std dev for last 252 days of daily returns as per strategy. Then I projected these figures (mean and std dev) for specified days like 4,3,2,1 (to create positions on Friday, Monday, Tuesday, Wednesday respectively) since I generally trade weekly options. I have not considered weekends as trading days so used 4 days projection for creating short position on Friday and 6 days basically as market will be shut anyways for 2 days.
By leveraging window functions of pandas library, I (I mean my laptop 😁) ran these operations for each day till end. and at end all generated results are exported to csv file.
Now I can simply compare closing price on expiry date with std dev levels 4 days prior to that expiry and count how many times these levels were broken, by how much points they were broken if so and so on as per need.
This comparing and counting work can also be automated but I am not yet till that level. Working on it!
Here is sample file for bank nifty levels to sell options on Friday (4 days prior to expiry) :https://drive.google.com/file/d/1_79-RAhSYJxG0SYcciVkILvYFydaRByw/view?usp=sharing
Also I have build some technical indicators and their BackTesting. Here is GitHub link for this: https://github.com/Dhananjay-B/QuantPack
Got it. But I hope you convert SD value by multiplying with Sqrt of time. I hope you get favorable results 🙂
I posted here results but not sure if it is visible or not as I am not able to see but when I repost it it says, duplicate comment detected.
Yeah, when you post a comment with the link, it comes for moderation and won’t be available immediately.
Yes I have done the same. I might have messed up with posting here but I have done as you taught for selling
Good luck, and I hope this works in your favor.
How do we dispose a short call option ?
By disposing of, do you mean to exit? If yes, it is just like the way you went shorted it. Go ahead, press the buy button and close the position. Or from the positions tab, click on exit.
Hello Team, there seems to be multiple typos is European vs AMerican Call Option topic. Please review it
Will review this again, thanks.
I calculated daily returns using traditional formula
returns = (latest close – previous close) / previous close
and other way is to do it by logarithmic
returns = log(latest close / previous close)
My question is how this two ways differs?
I saw around 60-100 points difference in final calculations. What are advantages/disadvantages of one over other from option selling perspective. Which one I should use?
I have explained this in queries (Volatility application chapter), can you please check that once?
Sure! Thank you!
I checked that comment. Here’s what I understood
– log returns are easier to calculate than actual traditional method so it makes sense to use log returns as they are not much different from actual returns calculated using traditional formula
– If I am developing a system then I can go for simple returns (calculated using traditional formula)
So I am using Pandas library of Python to backtest how many times underlying has broken particular SD level. So I can use simple returns over log returns.
Please correct me if I am missing something here
Its the other way round right?
When I sell a call option, I buy it’s immediate next strike for hedging. So my max loss will be not more than 25*100 (assuming I am trading on bank nifty). Even in this case When I go for 1 SD levels and play around, lets say market breaches 1 sd level for 10 times out of 50 (total expiries in year, weekly) then I will be in loss at end of year.
I hardly get 13-15 points after Hedging and I am risking at 100 points for this. So for 40 times I will earn 15*25*40= 15000 rs and in only 10 loosing trades, I will loose 10*2500 = 25000 rs.
How can I tackle with this? And I suppose market can actually break 1 sd level for 10 times in market
This is a bull call spread essentially. I’d suggest you check the chapter on that for more insights 🙂
This is going to be long comment. Please clarify my issue
Used historical data is from 2012 to August 2022 and I have assumed all weekly expiries here. Data is calculated using Pandas library. Below is the table of how many times 1 SD away call side was broken and how many times 1 SD away put side was broken in that particular year and last column has total number of expiries in that year for Bank Nifty options.
Year Call side Put side Expiries
2012 5 3 50
2013 8 13 52
2014 1 6 52
2015 2 13 53
2016 9 10 52
2017 7 5 52
2018 10 8 52
2019 7 11 52
2020 9 6 53
2021 3 2 52
2022 5 5 34
Now we have bank nifty strikes with difference of 100 points (25000, 25100, 25200 and so on). Let’s say I am option seller so I will calculate 1 SD and will sell strike (call side) above 1 SD. To hedge my position, I will buy it’s immediate next strike. Why immediate next? because this is what I can do to limit my loss at 2500 Rs (Bank Nifty lot size of 25 so 100 point difference in strikes will result in not more than 2500 Rs loss in case market goes against me). Buying any other strike for hedging will give me loss in multiple of 2500 (5000 for 2 strikes away, 7500 for 3 strikes away and so on).
So here I selling let say 36000 CE and buying it’s immediate next 36100 CE. This is my hedged position. Now as I am buying immediate next strike, I will not be able to even gain 10 points. Even then let’s assume I can gain 10 points and lot of 25 will result in 250 Rs profit per lot for me when market stays below my sold strike. and this position will result in max loss of 2500 Rs if gone wrong. Now below is table of how much profit and loss I could have made if I follow same set of execution from 2012 till date for 1 lot of bank nifty.
Year Profit Loss Net
2012 11250 12500 -1250
2013 11000 20000 -9000
2014 12750 2500 10250
2015 12750 5000 7750
2016 10750 22500 -11750
2017 11250 17500 -6250
2018 10500 25000 -14500
2019 11250 17500 -6250
2020 11000 22500 -11500
2021 12250 7500 4750
2022 7250 12500 -5250
Here I am assuming, I will be adding fresh capital required to trade 1 lot if my current capital in account is less than required to trade 1 lot. If I sum the the Net column I get -43000 which clearly a loss (I have not even yet considered brokerages and other charges). These are results for 1 lot and with higher capital loss will amplify only!
Now here are some points I have noted:
– Clearly we can see that winning rate of this strategy in incredibly higher (we are loosing hardly 10 out of 50 expiries)
– But, loosing trades (which are very less in count) are resulting in heavy losses which in turn take out all profits and sometimes more than that
Possible ways I may be doing it wrong:
– I am hedging it in completely wrong way
– I may be using wrong strategy (selling 1 SD away call and buying immediate next one) for this kind of system (system with higher winning rate but I am loosing at end. Means I am not using system in proper way.)
– Am I choosing wrong combinations of strikes?
and at end, how do I tackle with this?
This is a known behavior of these strategies. In most cases it results in a profit, but when it goes out of wack, the losses can be high…high enough to wipe out the gains made over several expires. One reason why this happens is because of the sharp movement in prices around expiry…and one of the ways to tackle this is by buying slightly OTM options a hedge. Slightly OTM is cheaper as well and increases the overall profitability. Do give this a try.
I am selling 1 SD away call option and if I buy slightly OTM call then I will have to pay more than I get. Essentially I am getting in *net pay* position than *net get*
You are selling a lower strike than the higher price, so you should technically receive more than what you pay.
Yes but backtesting results say that I will be winning most of the time small and loosing large for few times. But lossses in loosing trades will be always higher than I gain in profitable trades.
This is generic feature of option selling but how do I manage losses in case market move against me so that at end of year(s) I will be in net positive position?
In my previous comment I have posted backtesting results and respective calculations.
One way (as mentioned in my previous comment) is to buy OTM options. These losses usually occur because of a rapid move, so a hedge may help you cut these losses.
How much money need to sell a out of the money call option
You can check the margins on Kite itself.
Can Option writer make stop loss? How?
Yes, they can. Its the same way as you’d place a SL for a short futures position.
Good evening Karthik,
Last time i made a strategy on sensibull consisting of nifty futures & options, it was showing 700 rupees profit at any direction. I executed the trade & ended up with 2100 rupees loss. Why do sensibull showed such inaccurate data ? I want to test other similar strategies but it would be of no use on sensibull, as it is showing completely wrong payoffs
Hemant, its mostly some error in the inputs. I’d suggest you check with Sensibull for this.
Hi
Is it possible to set stop loss limit orders for option selling?
Yes, you can.
Hi
I am doing some paper trading selling options for weekly expiry. I sold a call option at 1000 Rs LTP. On expiry day the LTP was 650. So the profit/loss for this is 1000-650=350 Rs correct?
Similarly I sold a put option for 1000 Rs, but on expiry day the LTP is showing blank. So what happens to this option?
Yes, provided you squared off at 650. Most likely there are no trades and the option is illiquid.
I wont be squaring off. 650 LTP was the last price on Thursday for that option. Friday new series began.
I guess I can get 650 because it is automatically squared off.
What happens to the illiquid put option? How is that settled? What will be my profit /loss as I sold it initially for 1000 Rs.
Illiquid options are all settled by the exchange upon expiry. The P&L will be calculated per the option’s intrinsic value upon expiry.
Hi
If an option seller sells an ITM option and it becomes illiquid on expiry day, what happens to the seller?
Can we sell options on weekly NIFTY in zerodha?
The illiquid option, upon expiry will be settled by the exchange. Yes, you can.
Hi
I just saw your statement “Illiquid options are all settled by the exchange upon expiry. The P&L will be calculated per the option’s intrinsic value upon expiry.”
Can you please explain this with an example?
So lets say you buy a 100 CE. After you buy the option turns illiquid and you are unable to square off. Now, upon expiry assume the spot is at 110. The 100 strike will be settled keeping the intrinsic price as 110.
So if I sold the 100 CE as in the previous example, and the spot price is 110.
Intrinsic Value of a Call option = Spot Price – Strike Price
=110-100 = 10 Rs, for a lot size of 50 loss comes to 10*50=500 Rs?
Yes, thats right.
Hi
Is there any data source to get high low close price of options at any strike price we want?
YOu can check Sensibull for this.
Hi
I want to use sensibull whats app alerts.
I am outside india, so I can’t use my Indian whatsapp number to receive the alerts.
Is there any way out? Maybe email alerts?
I’m not sure if they have anything related to this. But I’d suggest you check with them once.
Hi kartik sir
Will I have to pay margin or premium while buying a call option
Please reply
You will have to the premium i.e. lot size * premium.
Hi sir one more query
Different between excercise the right and trading the premium
Have discussed this here in the video series, do check that – https://www.youtube.com/watch?v=-mO0YOTcCiQ&list=PLX2SHiKfualFiusiT9G5uE9jU3vetvW2x
Replies are excellent.
My query
Suppose I sell 50 nifty put option today, say at prrmium 10, then without waiting for the expiry date, I square up on the same day at premium of 20.
How much I pay for initial transaction.
How much I get when I square up
Regards.
50 is 2 lots.
Strike price is immaterial.
The P&L is the difference between the buy price and the sell price of the premium.
Can u please guide me in detail how to put stoploss while selling call against the shares in my demat account when am doing covered call ? I mean ,it’s in percentage while putting stoploss. 1)How to calculate stoploss in percentage? 2) should we be removing -ve sign while putting stoploss while selling calls? Please guide in detail. Regards -VIKRAM MARDHEKAR
Here is an example – assume you have 1000 shares of Infy and you intend to sell Infy call option. The price of the option is say 20.
In a pure-covered call, you don’t really put a SL. The idea is if the call goes against you, you deliver shares. But if you do intend to put an SL, say 10%, then you wait for a decline in your call option by 10%. So at Rs.18, you exit the position. Rs.2 = 10% of 20.
Thanks a lot sir for prompt response.but should I be putting -ve sign while putting stoploss or it should be + sign . As I generally put – ve sign in stoploss while buying option . While selling should it be +ve ?
No, think about it as a percentage. YOu bought at 100, you have a 5% SL tolerance…so you get out at 95. Dont think about it from +ve and -ve numbers perspective.
So, in both option buying and option selling ,stop loss should be with -ve sign. Am I correct in getting it sir?
Here are two examples.
1) I enter a long trade at 100, with a stop loss of 5 points. So my SL is 95 here.
2) I enter a short trade at 100, with a stop loss of 6 points. So my SL is 106.
The point is that the SL is a number which you subtract from your entry price when you are long and deduct from your entry price when you are short.
How does open interest (OI) decrease before expiry?
That’s because the market participants are interested in closing down their existing positions and not really interested in starting new ones.
Please clarify what happens if I buy a call option and do not sell it on expiry day? Do I have to bear any penalties and what are the charges?
No penalties, but upon expiry, the option will be physically settled.
Hi Karthik,
Thank you for the amazing sessions!!
I have a silly doubt. For example – If an I have sold a call option and underlaying values for that call option is
Spot price – Rs. 816
Strike price – Rs.820
Premium – 17.85
lot size -500
In this scenario, will my profit be
P&L = Premium – Max [0, (Spot Price – Strike Price)]
=17.85 – Max[0,(816-820)]
=17.85
=500(lot size)*17.85 = Rs. 8925
So, will i get profit of Rs. 8925 or say at the time of square off , premium is say 13. so, 8925 -(500*13) = 8925-6500= Rs.2425?
So , for option seller will profit be always difference between margins?
Thanks again for your help!
Thats right. You get to keep the entire premium of 17.85, if the option expires OTM. Always take the difference between the premiums to figure the P&L.
Hi Karthik,
Thanks a lot for explaining the concept. I still have one more doubt. So, in case I am seeing the price being OTM near end of the month, should I need to square off at the last Thursday or keep it as it is still the last Thursday of month to get the keep all the entire premium of 17.85.
If its, OTM and the option has no value, you can let it be. Consider squaring off if its ITM.
Got it. Thanks a lot for your help! 🙂
Sure, happy learning 🙂
In case of equity you have only 2 possible trqnsactions
Buy Equity
Sell Equity
But in option you have
Buy call option
Sell call option
Buy put option
Sell put option
Can you compare each of the above with example
I’ve explained that in this module and this video series – https://www.youtube.com/watch?v=-mO0YOTcCiQ&list=PLX2SHiKfualFiusiT9G5uE9jU3vetvW2x
hey karthik
what is more profitable -trading premium before expiry or trading option(exercising right) at expiry
can you clarify with a real stock data example
It purely depends on the market condition. But if you’ve sold options, you can retain the entire premium only upon expiry, provided the option is OTM. But this does not necessarily mean you have to wait till expiry. Its a call you have to take based on how the market is moving.
1 Point I didn’t understand that: How the settlement will be done in case of IV …if the spot price > strike price. Because anyway seller has to pay the difference between Sport Price and Strike price then how IV play role here (Because IV for that particular strike price is High R8)
Example: Current price of XYZ share is 2050/- & I opt buy option of Strike price of 2070/- at price of 6 Rs. for Qty. 125.
Total Paid Premium = 125 * 6 = 750
now my breakeven point is 2070+6= which is 2076.
Now I’m considering that stock closing at 2080 then according to last chapter I’m in profit of (Spot Price – Strike Price)
(2080 – 2070 = 10) where I’m in profit of 10*125 = 1250 Rs. in which if I deduct paid premium 1250-750 = 500 is Net Profit.
But at the same time IV of 2070 is 10 – 6(paid premium) = 4.
Now how the settlement will work here will I get 500 which is net profit or my IV 4 * 125 = 500.
OR Both are same?
Ashish, please do check this – https://zerodha.com/varsity/chapter/options-m2m-and-pl/
Hello sir, just wanna thanks for this amazing super easy to understand content
Just asking out of curiosity, do you still trade in option..?😊
Hi Saurabh, thanks for the kind words. We are restricted to trade, it is a company policy. So no, I don’t trade options now 🙂
Hi Karthik,
If suppose i have sold long term options like say 1month to expiry. A black swan event occurs and by chance i am out of town basically not responding to short margin calls.
When and How does zerodha square off my options? Like what is the procedure followed. And if i have less margin am i liable to pay anything extra other than blocked funds if zerodha was unable to square off(very low probability) at right time before all my blocked funds are utilised?
The company will try to reach you/communicate with you to inform you about the short margin and that you need to fund your account to topup the short margin. In case there is no response, the company will square off the position on your behalf.
call sell otm @6.10 strike 380.
At the expiry day strike price 350.
On expiry day What will happen if I don’t exit my position ? And what will happen if there have no buyers for exit my sell position?
Upon expiry, the option will be physically settled by the broker.
sell strike price 380 call @6.1 (quantity: 1100)
Spot price 365 at expiry .
What happened if I don’t exit my position or there have no buyers and what will be my p&l ?
The option will be physically settled upon expiry, Shankar.
But the strike price I chose was otm at expiry . Why physical settlement? kindly tell me
Sorry, if the option is OTM upon expiry, then it will be worthless and hence no settlement required.
But the strike price I chose was otm at expiry . Why physical settlement? kindly tell me.
What will be my p&l?
There is no physical settlement for options that expire OTM. It is only for options that have an intrinsic value upon expiry.
Hi
I Bought a stock at 2000 of 1 lot of shares i.e 300 and write a call option for current month at 2200 CE @ 50 Rs and end of the month the spot is at 2300 i am ready to give delivery @2200 but now my question is wat is my profit
i.e 50+200(2000-2200) =250
am i right or wrong please inform me
thanks in advance please.
So you will deliver at 2200, while the market price is 2300. So you lose 100 here.
Please make a video/explanation on when an option buyer will execute the options contract. When an option seller has to obay the contract? Does the option seller has to obey though he has squared off..?? Any possibility of short delivery in option selling when sold an option in normal/delivery mode.
Please make explain the intricasies of this executing an option contract.
Naresh, can you check this – https://www.youtube.com/watch?v=-mO0YOTcCiQ&list=PLX2SHiKfualFiusiT9G5uE9jU3vetvW2x
When and how an option buyer will execute the option contract.?
Please check the video series that I shared in the previous comment.
Hi,
I do have little confusion regarding call option which is described as below.
Suppose I bought a stock call option at premium of 5INR in carry forward mode from some seller in the market. Then to book profit from the option trading, I have sold that call option contract at premium of 10INR to another buyer. Now, this buyer of that call option does not sell it further and kept it till the expiry date. At that expiry date, if he wants to exercise that call option, then who is liable to make delivery of underlying stock to that last holder of the call option ? Is it me in this case or the original/first writer/seller of the call option contract ?
Its not you since you have sold the option and are out of the market. The contract is between the latest buyer and seller.
Thank you very much for your reply.
As you said “The contract is between the latest buyer and seller.”
Does not it mean, in this case, that I would be the latest seller of contract ?
Since I am a new comer to the world of options, your elaborated answer will enhance my understanding in this regard. Which will be very grateful of you. Thanks once again.
But your sell offsets the initial buy, right? Every two trades done in the opposite direction and same quantity offsets your position. For example, buy 100 shares of Infy, sell 100 shares of Infy means you are out of the market. Likewise, buy 10 lots of Infy call options and sell 10 lots of Infy call options (both belonging to same strike), means you are out of the market and your positions are squared off.
Can we sell a option with 17 days to expiry (eg. current date 18-02-2023 I want to sell 09-03-2023)??
Yes, you can do that Sourab.
Hi Karthik,
Please can you correct me if i am wrong.
I go for a call option and suppose the strike price is – 150, Premium – 10 as on 10th April
Expiry date – 20th May
scenario 1
date – 19th April, Spot Price – 150 and premium is 30
We can book profit on premium (20 x total number of shares) but we can execute the option on the expiry date. (without paying double brokerage)
scenario 2
date – 24th April
Spot price – 170, Premium – 30
We can book profit = {(170-50) + (30-10)} x total number of shares – how about the brokerage in this situation?
Scenario 3
Date – 20th May
Spot Price – 200
Profit – 200-150= 50
50-10 (premium) x total no of shares
Thanks in advance!
1) No, such a thing is not possible
2) Rs.20 per executed trade
3) NOt sure what the question is for scenario 3 🙂
Hi,
I am a call writer (suppose). I actually want to be because I have some free cash of 20/25L. Just tell me these few things dear.
a) I Sell Company X 500CE strike at a premium of 5 for 1000 shares on 15th March for expiry of 30th March. The CMP of Co X is 450.
b) Then my immediate income is 5000 rupees as the max premium. Right ? First question – When does this 5000 get credited to my account ?
c) Second question – During the period till expiry, does any change in the premium price from 5 (to either higher or lower) change anything in my income of 5000?
d) On the expiry, the market price of Co X remains below 500 and therefore obviously I earn all my premium. Correct ? Tell me within the 15 days till expiry if any change in the premium price would in any way change my income of premium even if the CMP of X stays below 500?
Yes, that’s right. You get 5000, which is credited immediately to your account. You will lose if the premiums increase beyond five and go higher. You will get to retain the entire premium as long as the spot remains below the strike price.
Hi sir..
I entered into short strangle on Monday and find the spot price is within range on Tuesday .I find the total premium paid by me as unsettled credit in my funds position .Suppose I squared off on Tuesday after noon …how much credit can I get..
Ex: I paid premium of Rs.3203 on Monday and squared off on Tuesday when my profit is 1460.In this case how much profit can I receive after square off. Pl clarify
Regards
Since this is EQ, you will receive the entire premium/profit on the same day, Shiba. Of course, you can withdraw it only on T+1 basis.
karthik sir , Thank you sir! . I love your module, your course available for purchase in advance level.
Thanks for the kind words, Amit. No, we don’t have any paid course.
Hi Karthik,
I want to know about the time decay benefits, like if I sell the options at a price like 15 on expiry morning.
Now as per my knowledge as time pass and expiry is about to close, and premium reduces.
and I am selling the position around 3 PM, am I into profit as a result of time decay or lose?
Thanks
Your profit or loss depends on the change in premium, Onkar. For you to be profitable, the premium has to reduce from 15. The lower the premium goes, the higher your P&L.
Hi,
In the US market when you have 100 share i.e one lot of a share. if I go for covered call they will be take if the stock exceed the price.
Similar manner if I have a sample infy 400 stock if I want to do a covered call, just go and do a call sell. Please explain what happens at the end of the expiry, if the price crosses the covered call price. Whether the broker will take the existing stock automatically or do I need to pledge before trading.
if so how to do that.
Thanks
K.Udayakumar
So if you sell a call, and the call goes in the money, then you are liable to give delivery of shares. If you have the required shares in DEMAT, then your shares will be debited from the demat account (physical delivery) i.e. assuming you don’t have any other positions to offset the short ITM call position.
Sir,
As understood that all options are now European in nature and the buyer could only exercise his right on the expiry day at the closing. Now I have a query here below:
(i) At one place you mentioned that “For example, if I have bought Bajaj Auto 2050 call option at Rs.6.35 in the morning and by noon the same is trading at Rs.9/- I can choose to sell and book profits”
Does that mean one can square off before expiry too in European market. Please help to understand here.
(ii) Unlike NSE restriction, are American options there in BSE trade?
1) Yes thats right.
2) All options are European in nature.
Sir,
For my above query as below:
(i) At one place you mentioned that “For example, if I have bought Bajaj Auto 2050 call option at Rs.6.35 in the morning and by noon the same is trading at Rs.9/- I can choose to sell and book profits”
Does that mean one can square off before expiry too in European market. Please help to understand here.
However, at several instances in your discussion, it was understood that positions in call options can only be squared off at the expiry day.
Please help to understand this subtle difference. I am totally confused.
Check this, Anirban – https://zerodha.com/varsity/chapter/options-m2m-and-pl/
Sir,
I asked you the above query, however, could you please check if the below is correctly mentioned or am I missing something here:
(i) From a buy call option perspective, if I square off the option before expiry date, then P&L will be based on premium only. And when someone square off his buy position on the expiry date, his P&L will be based on Max [0, (Spot Price – Strike Price)] – Premium Paid.
However, to enjoy the P&L “Max [0, (Spot Price – Strike Price)] – Premium Paid”, does the exchange need to square off the position or I can myself close the position on the expiration day anytime and enjoy P&L “Max [0, (Spot Price – Strike Price)] – Premium Paid”.
If you hold the position o expiry, then the position will be deemed closed and settlement will happen. Do check the link i shared earlier.
Sir,
Like in futures, we understood that it is better to get out of deal before the expiry to avoid physical settlement. In options, the exercise can be done only at the expiry date.
(i)I would like to know whether this exercise has to be done from the trader end or the exchange will do on its own?
(ii)If the exchange does, will it also cost for physical settlement?
(iii)If the trader can also exercise on the day of expiry, can it be any timing on the day on or before 3:20 pm?
1) Exchange and broker takes care of this. You don’t have to do anything.
2) Yes
3) No, only post-market closes.
Sir,
Like in futures we get the full benefit even in cash settlement if not prolonged to expiry. However, in options does it only mean physical settlement upon exercising and no privileges of cash settlement?
Yes, but if held to expiry, all stock options are cash settled.
Margin required for Selling options = Margin for Future – premium amount.
BUT WHEN WE PLACE AN ORDER IN ZERODHA, THE SYSTEM ASKS MARGIN FOR FUTURE + PREMIUM AMOUNT.
Though it get reduced after activation of the order. I request ZERODHA to make necessary changes in the system to state the correct required margin at the time of placing orders. @ Karthik Rangappa
Ashok, you will see the margins and charges on the order window page when placing an order.
Can option selling is possible without margins by holding stock in required lots
No, thats not possible 🙂
I sold a let’s say 100CE call option at 2 rs. but at the day of expiry the stock price is 90, but i’m not able to buy the option because no one is there to sell 100CE option. So, it will remain an open position for me. what will happen in this case?
i’m talking about stock option, not index options.
Since its an OTM option, it will expire worthless.
so selling a call option which will expire worthless, so i need not buy that option, right? i mean there will be no penalty for this? and i will not be in any contract??
so can i sell an option lets say at 0.05 and expect returns generated from this? i mean that option is like 10000 shares a lot, so i will generate a profit with no cost incurred?? is this understanding right?
So the option itself expires worthless, so there is no need to buy a worthless option 🙂
There is a calculation error when calculating P&L for a spot price of 2072.
The calculation 6.35-22 should give -15.65 and not -15.56.
Thanks for sharing, checking this.
Hi kartik,
I followed a strategy shown on tv,in which I bought 1 CE of LT at strike price 2400 at 20.60 and sold 2 CE of LT strike price 2440 at 7.70. now this was bought on Friday.
If I hold this till expiry then in this case how the profits will be calculated,kindly advise as what should be done in such a case.
Thank u
NikhilB
Nikhil, you can actually put feed the values in Sensibull and get the exact values.
kartik sir, there are only European options available in Indian market still, I buy and sell at any time before expiry happens, just like American. European and American smees the same to me, so can you please clarify how they are different.
The difference is in settlement of options 🙂
Hi Karthik,
Can you please explain how profits will differ in case of squaring off vs exercising in futures . As in options they differ by premium
Sumit, I’d suggest you check this – https://zerodha.com/varsity/chapter/options-m2m-and-pl/
I sold Call options. On the date of expiry, the scrip was lower than the Strike price, so the premium value during closing was 0.10.
Do I still need to square off? Or Squaring off is not required, as the Call option cannot be exercised eitherways.
No need, since the option is worthless at the time of expiry, no need to square off the position.
Hi Kartik
My query is regarding Nfty50 weekly option.
On the expiry date Nifty 50 ATM-19650, OTM-19700, OTM – 19750. OTM – 19750 premium was Rs.11.40 at 12.10 AM. Nifty 50 trend was clearly downward. If I sale OTM – 19750 for Rs.11.40 and exit at Rs.2.00 with stoploss at 16.50, then is this deal will be safe and profitable.
No one can answer that for you, Kishor. No guarantee in the market 🙂
Hi,
If I have the underlying and write options, do I need to pay margin ?
Yes, margins are compulsory.
if my view is bearish and i want to short then what will be the process? can I first buy a CE that sell CE? or first sell CE that buy CE for hedge.
You can sell a call or buy a put option, Satish.
Hi ..
Thanks for information ..
Question is if index moves above our strike price and premium and starts making loss … Can we close option SELLING…?
Yes, you can Arun.
Hi Karthik ,
I am planning to short sell Tata motors at 670 CE and 570 PE ( Short strangle ) and get a premium of about 8000
If At the date of expiry tata motors is trading at 630
My question is should I square off both the 670 CE and 570 PE before expiry inorder to avoid physical delivery or since these two options are OTM will they expire worthless?
Is short selling stock option risky than index option ?
Can you also the explain the rule for physical delivery of stock option while option selling 🙂
physical delivery of stock option is only for ITM and ATM or does it also include OTM stock options ?
if both options are worthless upon expiry, then you can let it be. No need to square off. Yes, single options is way more risky than index. Physical delivery is only for ITM options and not OTM or ATM. The last chapter in this module explains that.
Hi Karthik,
I have very dumb question and need your help to understand the Theta decay in overnight position.
Assume I sell Call option and Put option just before the close of the market.
in Bank Nifty
Both sold 1 Lot
Call sold at 300 Rs
Put sold at 300 Rs
Next day morning before 9:15 AM :
Call price would show 300 and Put price would show 305(After NSE average adjustment) and Booked P&L would be showing as -5 Rs.
Now My question is being Option seller is this amount credited to Demat account overnight or I have to start my trade with -5rs P&L ?
Unlike in futures trading, there is no M2M here. YOu will realise the loss only upon square off of the position.
Hi kartik from this I have understood that option buyer can exercise it’s position only on the day of expiry . But a option seller can exercise it’s position before expiry , intraday . whether it’s correct or not please correct me if I were wrong.
Both the buyer and seller can initiate and close positions anytime they want, but can exercise their respective rights only on the day of expiry.
Hello Sir, Please Reply.
My Question Is , what Happens When Sell A call Option Of current week Expiry And at the same time, buy Call Option of Same STRIKE PRICE of Next Month Expiry.
There Will Be difference in the time decay.
But Will I Be Able To Capture this difference when Market Moves Beyond my Range?
No, that is becuase the premiums are not just a function of time, but also volatility. Even if you capture the time premium, you wont be able to get the volatility premium.
Hi Karthik,
If I sell a Call Option let say at the rate of 284 (1 lot) on October 30, 2023 and square off my position on October 31, 2023 at the rate of 400 (1 lot) what will be my actual loss (will it only be the price difference or anything else).
Thats right, your P&L will be the difference between the buy and sell premium.
Why margin is required, if an option seller holds share in demat account?
There is no guarantee that you will continue to hold shares as long as have the option position open right?
Hi karthik, whats the difference between settlement of option (say call) and selling a call option
Have explained in detail in the options module itself 🙂
Hi, was looking to understand who issues options in India?
All the blogs and articles that I have come across talk about option trading meaning there’s already an option contract in the market. But who is the option issuer? Who issues the contract for the very first time
The exchanges spawn options as and when old contracts expire and new ge issued.
Isn’t it an complicated and advanced form of gambling
Not really, trades can be setup by design, and anything by design is not gambling. Which is what we are trying to explore in Varsity, happy reading 🙂
Hello sir,
I really appreciate your effort of offering quality content on F&O. Sir I have one confusion and I would be grateful if you solve it.
I have heard many people on youtube and read in many online articles on derivative trading that when we sell our bought call option or buy back our sold position, may be because of reasons such as stop loss hit or exiting the position, price of the underlying goes up or goes down accordingly. Don’t you think these statements are wrong since F&O are derivative instruments and derive their value from underlying security. If this is true then don’t you think we should say that we sell our bought call when price of the underlying moves up (hit target) or down (hit stop loss) rather than saying that selling or buying options incline or decline the price of underlying.
Do you think selling or buying options in themselves push the underlying value of security or index up or down. Or up and down movement of underlying make us exit or enter option positions.
correct me if I am wrong.
Thanks in advance.
This happens once in a way when there is excess short or long positions built up. Think about this – markets are rallying, traders have built up long positions. One fine day markets starts showing weakness, and everyone starts to sell to book profits. When too many traders sell at once, the price tends to fall. This is called long unwinding/profit booking or in case of shorts, its called short covering.
Hello, I want to ask whether we can use stocks in demat as margin. I got 3875 stocks of PFC. I want to sell otm calls and generate revenue. Do I still need the margin?
And does margin requirements change when stock reaches or goes above the strike I have choosen. Can I block my shares instead of cash?
Yes, you’d still need margins for this Vishesh.
Sir,
When engaging in valid serious option trading, Is it essential to hedge our positions all the time 100% due to the uncertainties in the market. Given that anything can happen at any time, is hedging mandatory for those looking to make a living through option trading? Additionally, in options simulators like the one in Sensibull, does the maximum loss displayed represent the absolute limit, meaning any unforeseen events will not result in a loss exceeding that amount?
Having a hedged position/spread is always good. It is capital protection, but also comes with limited profit potential. Yes, max loss represents all known risks.
Hi sir, Who actually write/sell the call option. Can a retail trader write a call/put option?
can any one square off the call option sell position anytime before expiry or the option writer have to wait till the expiry because it had taken the premium of the call??Plz,answer.
Yes, you can square off the position anytime you wish, no need to wait till expiry.
Hi,
Can I buy back a sold call option the very next day?
Suppose I have SBI 750 CE and I have sold the same. Now the share price is at 740, however the next day the price has increased to 747.
I do not want to wait for it to come in the money and want to buyback this option at the earliest with the little profit that I have made.
Can this be done?
Thanks!
Yes, you can do that and there is no need to wait till expiry.
When I can square off my position before expiry why are you calling it European
You can square off your position anytime you wish, but settlement against physical delivery is only on the day of expiry. Do check this – https://www.youtube.com/watch?v=Llp4xW2GI4s&list=PLX2SHiKfualFiusiT9G5uE9jU3vetvW2x&index=12
Hi, if I wish to go short on Nifty at current levels which is the best way to go about it
Future or buy puts, or sell calls.
Good evening 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) , he also has a youtube channel ]
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?
Thanks & Regards,
Santosh
I guess I answered this for you already 🙂
If Nifty spot price is 25000 and I sell one lot Nifty 24800 put option with Margin money of 75000 , and the next day there is a gap down of 2500 points and Nifty opens at 22500, and I have no spare margin money in my trading account, what will be my loss? Will my position be automatically squared off by NSE and will my loss be limited to ₹62500, even if Nifty further falls to 20000?
Thats right, but NSE wont square off, but the broker will.
I bought a weekly call spread. How can I unwind before expiry ?
You simply square off the positions and ensure all positions are closed. Thats it 🙂
Hi Karthik. Thank you for the amazing course. Learned a lot.
Today (26Sep24), I sold a Nifty call 26200 (expiring today) early in the day and observed that towards the close of day like at about 10:59 when Nifty spot was around 26185, the 26200 call was still at 16. Since the call was expiring in about 1 minute, I thought the 26200 call should be much less than 16 based on how Call Options have behaved in the past near to expiry.
Check this Jim, this should help – https://www.youtube.com/watch?v=eJiouVUWEb0&list=PLX2SHiKfualEyD05J9JsklEq1JFGbG6qJ&index=15
Who is the owner of the land or the flat?from whom he purchased it?
Not sure. But that is besides the point right?