Module 5 Options Theory for Professional Trading

Chapter 4

Selling/Writing a Call Option

M5-Ch4-title

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 taking 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 –

  1. The price of the land moves above Rs.500,000 (good for Ajay – option buyer)
  2. The price stays flat at Rs.500,000 (good for Venu – option seller)
  3. 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 –

Image 1_Bajaj Auto stock price

  • 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 –

Image 2_Bajaj Auto

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 –

  1. The positive sign in the ‘premium received’ column indicates a cash inflow (credit) to the option writer
  2. The intrinsic value of an option (upon expiry) remains the same irrespective of call option buyer or seller
  3. The net P&L calculation for an option writer changes slightly, the logic goes like this
    1. 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’
    2. 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) –

  1. 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/-.
    1. 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)
  2. The option writer experiences an exponential loss as and when Bajaj Auto starts to move above the strike price of 2050
    1. 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.
  3. 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 –

  1. 2023
  2. 2072
  3. 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 –

Image 3_Short call pay off

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 –

  1. The profit is restricted to Rs.6.35/- as long as the spot price is trading at any price below the strike of 2050
  2. From 2050 to 2056.35 (breakdown price) we can see the profits getting minimized
  3. At 2056.35 we can see that there is neither a profit nor a loss
  4. 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 exponentially 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 exponentially 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.

Image 4_Futures Margin

And here is the margin requirement for selling 2050 call option.

Image 5_ Options Margin

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

  1. You sell a call option when you are bearish on a stock
  2. The call option buyer and the seller have a symmetrically opposite P&L behavior
  3. When you sell a call option you receive a premium
  4. Selling a call option requires you to deposit a margin
  5. 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
  6. P&L = Premium – Max [0, (Spot Price – Strike Price)]
  7. Breakdown point = Strike Price + Premium Recieved
  8. In India all options are European in nature

1,084 comments

  1. Sathish J says:

    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)?

    • Karthik Rangappa says:

      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).

      • Harish says:

        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!

      • Naveen Rai says:

        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.

        • Karthik Rangappa says:

          Yes you can.

          • Ashish Ranjan says:

            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.

          • Karthik Rangappa says:

            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.

          • Frank says:

            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

          • Karthik Rangappa says:

            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.

          • Suvojit Maity says:

            What about Margin then?

          • Karthik Rangappa says:

            Margins will be reversed when you square off the position.

          • STM says:

            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….

          • Karthik Rangappa says:

            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.

      • Ripon says:

        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.

        • Karthik Rangappa says:

          You can sell anytime you wish, no need to wait for expiry.

          • Manjeet says:

            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.

      • pritam says:

        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

    • Sunil kumar says:

      Hi,
      Can short a call/ put be only for intraday or it can carry forward till expiry.. Pls clear.
      Thanks

  2. Vidhyalakshmi says:

    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?

    • Karthik Rangappa says:

      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.

      • Vidhyalakshmi says:

        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).

        • Karthik Rangappa says:

          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 🙂

          • Vidhyalakshmi says:

            Oh, thank you so much! Now it’s all clear and I can’t wait for what’s coming next 🙂

          • Karthik Rangappa says:

            The chapter on buying a put option will be put up sometime soon this week! Thanks for your patience.

      • aakashrkothhari says:

        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

  3. Ashwin Datre says:

    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?

    • Gnaneeswar says:

      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.

  4. khyati verdhan says:

    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???

    • Karthik Rangappa says:

      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.

      • Jeel says:

        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!

  5. Yogesh Rajput says:

    Hi, Can we square off the option writing on Intraday basis or it can only be squared off on option expiry day.

    • Karthik Rangappa says:

      You can square it off anytime you wish, no need to wait till expiry.

      • Yogesh says:

        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?

        • Karthik Rangappa says:

          Bang on! You are absolutely correct.

          • AnilKumar says:

            So what happens to the premium?

          • Karthik Rangappa says:

            When you square off you will get the difference in the premium as your profit or loss.

          • Sai Sreedhar says:

            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!

          • Karthik Rangappa says:

            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.

          • Waqaar says:

            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 ?

          • Karthik Rangappa says:

            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.

          • Waqaar says:

            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 ?

          • Karthik Rangappa says:

            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.

          • Waqaar says:

            Thank you Sir for clarifying my doubts.

          • Karthik Rangappa says:

            Good luck!

          • Waqaar says:

            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

          • Karthik Rangappa says:

            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.

          • Vivek says:

            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?

          • Karthik Rangappa says:

            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.

  6. medicine30 says:

    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.

    • Karthik Rangappa says:

      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.

  7. N S V IYENGAR says:

    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.

    • Karthik Rangappa says:

      Yes for now 🙂 But when you discover option Greeks your opinion may change and you may want to be an Options seller!

  8. RK0987 says:

    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.

    • Karthik Rangappa says:

      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.

  9. k l agarwal says:

    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.

    • Karthik Rangappa says:

      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.

      • k l agarwal says:

        thanks Karthik, for reply, these both points are very important to understand, pls blog on these point as the earliest.

  10. R P HANS says:

    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.

    • Karthik Rangappa says:

      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!

  11. iyengarnsv says:

    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?

  12. khyati verdhan says:

    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??

  13. raviraj445 says:

    waiting for next chapter to come…
    but waiting..waiting 🙁

    • Karthik Rangappa says:

      Sorry for the delay and thanks for your patience, the next chapter will be uploaded on Monday or Tuesday.

  14. amit kumar says:

    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

    • Karthik Rangappa says:

      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.

  15. SUBHANKAR says:

    How can i choose call option strike price?

    • Karthik Rangappa says:

      Strike selection is not really a straight forward method…we will discuss at length regarding this topic soon.

  16. iyengarnsv says:

    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.

    • Karthik Rangappa says:

      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/-.

  17. madhu nair says:

    Karthik, while trading options is it preferable to read the charts of strike price selected or the underlying stock??

  18. iyengarnsv says:

    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.

    • Karthik Rangappa says:

      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.

      • Rahul says:

        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.

  19. Anilth says:

    Hi Karthik,
    I wanted to know the exact steps on trading terminal for option writing.
    regards
    anil

    • Karthik Rangappa says:

      Highlight the strike in your trading terminal and press F2 to sell it, thats it 🙂

      • Roshan Zade says:

        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)

        • Karthik Rangappa says:

          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.

  20. Anil says:

    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.

    • Karthik Rangappa says:

      Yes, selecting the strike price is the crux of this module. We will discuss that in great detail very soon.

  21. RK0987 says:

    karthik, waiting your blog on above subject eagerly.

  22. iyengarnsv says:

    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?

    • Karthik Rangappa says:

      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.

  23. iyengarnsv says:

    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

    • Karthik Rangappa says:

      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.

  24. Satya says:

    Hi Karthik,

    What is the difference between squaring off or selling my existing long call and exercising it?

    Thank you.

    • Karthik Rangappa says:

      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/

      • satya says:

        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?

        • Karthik Rangappa says:

          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.

  25. iyengarnsv says:

    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

    • Karthik Rangappa says:

      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.

  26. iyengarnsv says:

    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.

    • Karthik Rangappa says:

      Profit for call option buying = [Premium paid while buying – Premium at the time of selling] * lot size.

      • eshwar says:

        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.

        • Karthik Rangappa says:

          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.

      • Vikram Singh says:

        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.

        • Karthik Rangappa says:

          The premium depends on the strike. So in that sense it is important to know which strike you are dealing with.

  27. Anirudhra says:

    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?

    • Karthik Rangappa says:

      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/

      • Sidharth says:

        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)?

  28. khyati verdhan says:

    hi kartik,
    is trailing stoploss is available with options like futures ?

  29. prasad says:

    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…

    • Karthik Rangappa says:

      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 🙂

      • anirudhra says:

        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

        • Karthik Rangappa says:

          Yes you can, but remember the more number of of options you write, the higher the risk you carry.

          • Nitin says:

            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

          • Karthik Rangappa says:

            Are you long or short, Nitin?

      • RAJAT says:

        Sir, what is nifty lot size , i think 75 but you mention 25. plz explain

  30. iyengarnsv says:

    Is Call writing with Deep ITM safe? Can you please explain by figures.

    • Karthik Rangappa says:

      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.

      • ravk says:

        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

        • Karthik Rangappa says:

          As the expiry is through, the exchange would have taken care of this. You will get your profit credited to you account.

  31. RK0987 says:

    we are waiting eagerly your talk on new chapter on writting option.

  32. Epistun RajaE says:

    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

  33. srikanth says:

    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?

    • Karthik Rangappa says:

      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’.

  34. vasanth says:

    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)?

    • Karthik Rangappa says:

      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.

  35. Nav says:

    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?

    • Karthik Rangappa says:

      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.

  36. Aditya Narang says:

    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?

  37. kieron says:

    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)

    • Karthik Rangappa says:

      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.

  38. aditya garg says:

    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?

    • Karthik Rangappa says:

      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.

      • aditya garg says:

        sir what is the difference between sell and settlement?

        • Karthik Rangappa says:

          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.

  39. Sudhakar says:

    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.

    • Karthik Rangappa says:

      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.

  40. Sudhakar says:

    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.

    • R P HANS says:

      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.

      • Karthik Rangappa says:

        Nope in fact 8900 CE is trading around Rs.3 today…and ard 4 y’day…do you see the theta effect 🙂

    • Karthik Rangappa says:

      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.

    • Wannbetrader says:

      one very imp factor is margin required sir… for 100 lots you will need more than 12 lacs capital 🙂

  41. Karthik Rangappa says:

    Hello there!

  42. Vivek Jain says:

    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

  43. Abhishek says:

    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

  44. Mukul says:

    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?

    • Karthik Rangappa says:

      @7501 – you lose 29/-
      @7499 – you lose 30/-

      • Mukul says:

        Hi Karthik,
        I sell 7500 [email protected] 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?”

        • Karthik Rangappa says:

          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

          • Shashank T Pujar says:

            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

          • Karthik Rangappa says:

            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.

          • Kiran says:

            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 ?

          • Karthik Rangappa says:

            Yup.

          • Ravi says:

            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

          • Karthik Rangappa says:

            This is the formula for Option Buyer – P&L = Premium – Max [0, (Spot Price – Strike Price)] , Ravi.

          • Nancy says:

            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?

          • Karthik Rangappa says:

            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

          • Nancy says:

            Thanks for the clarification. For a moment I thought I need to unlearn everything.

          • Karthik Rangappa says:

            Good luck and happy learning 🙂

      • Prateek says:

        This is wrong…’lose’ should be ‘get’. pls clarify

  45. Sudhakar says:

    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

  46. Anand Singh says:

    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.

    • Karthik Rangappa says:

      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.

  47. sidd says:

    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…

    • Karthik Rangappa says:

      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.

  48. ShreyaDR says:

    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?

    • Karthik Rangappa says:

      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.

  49. aehsan4004 says:

    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 ?

    • Karthik Rangappa says:

      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.

  50. Thomas says:

    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?

    • Karthik Rangappa says:

      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.

      • Thomas says:

        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)?

  51. subodh says:

    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:

      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.

  52. k l Agarwal says:

    You will keep initial premium

  53. m v nagaraja says:

    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

  54. Venkatesh G says:

    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

    • Karthik Rangappa says:

      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/-

  55. SARAVANA PERUMAL D says:

    Hi Karthik,

    Please make the change in highlight red. Correct on is highlighted by green. Thank for your great effort.

  56. Govind Kumar says:

    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

  57. Abhilash says:

    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 🙂

    • Karthik Rangappa says:

      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.

  58. Abhilash says:

    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. :).

    • Karthik Rangappa says:

      Yes, got it 🙂

      Option selling will be profitable only when the premium goes down !

      • Abhilash says:

        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.

        • Karthik Rangappa says:

          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.

  59. paliwalenator says:

    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

    • Karthik Rangappa says:

      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.

      • paliwalenator says:

        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

        • Karthik Rangappa says:

          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.

  60. Praveen says:

    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

  61. chandana says:

    Why is such a huge margin required for writing an option

  62. Harsh says:

    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???

    • Karthik Rangappa says:

      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.

      • HARSH says:

        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.

        • Karthik Rangappa says:

          When you sell only margins are blocked and will be released when you square off the position. So you wont be spending any money.

  63. SUBHANKAR says:

    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 ?

  64. Sachin says:

    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 .

    • Karthik Rangappa says:

      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.

  65. Happy says:

    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.

  66. vishal says:

    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

    • vishal says:

      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?

    • Karthik Rangappa says:

      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!

  67. Harsh says:

    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??

  68. Yogesh says:

    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

  69. Pankaj jain says:

    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

  70. Tejas says:

    confused . Can understand Call Option Buyer / Seller. But then, what is meant by Option Writer ??

  71. Romeo says:

    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.

  72. Romeo says:

    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.

  73. Rudra says:

    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

    • Karthik Rangappa says:

      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.

  74. Suvendu Ghosh says:

    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?

    • Karthik Rangappa says:

      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.

  75. Yugesh says:

    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!

    • Karthik Rangappa says:

      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.

  76. Yugesh says:

    Thanks a lot Karthik, much appreciated!

  77. sumit kumar says:

    I have a question regarding option writing.This is my first time writing an option. Today i tried to write hindalco call [email protected] 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

    • Karthik Rangappa says:

      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.

      • Sumit kumar says:

        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.

        • Karthik Rangappa says:

          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.

  78. Abhilash D M says:

    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

  79. Ram Prabhu says:

    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 ?

  80. rajashekarreddy kaditham says:

    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?

    • Karthik Rangappa says:

      You can choose to square off the trade anytime you wish. The differential amount will be credited to your account by EOD.

  81. rajasekharreddy kaditham says:

    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?

  82. GS Prakash says:

    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.

    • Karthik Rangappa says:

      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.

      • Vamsi Burugula says:

        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?

        • Karthik Rangappa says:

          No, when you write options, you need to pay up the margins applicable.

          • Vamsi Burugula says:

            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?

          • Karthik Rangappa says:

            Vamsi, I’m confused with your query. All derivative contracts have a standard lot size.

  83. Yogendra says:

    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?

    • Karthik Rangappa says:

      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.

  84. Nikhil says:

    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

  85. Ameer Khan RA6835 says:

    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.

    • Karthik Rangappa says:

      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.

  86. Prakash says:

    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

    • Karthik Rangappa says:

      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.

      • Prakash says:

        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?

        • Karthik Rangappa says:

          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.

  87. Prakash says:

    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?

    • Karthik Rangappa says:

      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.

  88. Krishna.K says:

    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.

    • Karthik Rangappa says:

      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.

  89. Krishna.K says:

    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

    • Karthik Rangappa says:

      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.

  90. Arup says:

    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!

  91. Suyash Baderiya says:

    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?

  92. pravin says:

    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 ….

    • Karthik Rangappa says:

      In that case the the exchange itself will settle this for you, you need not worry about finding the counterparty.

  93. Mukesh says:

    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

  94. Rakesh Varma says:

    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.

    • Karthik Rangappa says:

      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.

  95. Prefull says:

    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.

    • Karthik Rangappa says:

      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.

      • Prefulla says:

        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.

  96. BHUPENDRA says:

    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.

  97. Prashant Pawar says:

    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

  98. Keshav says:

    How much percentage of returns expectation is safe in a month by selling options,.?

  99. Ananth says:

    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)

  100. Hetal Bhatt says:

    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.

    • Karthik Rangappa says:

      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.

  101. B Vamsi Krishna says:

    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.

    • Karthik Rangappa says:

      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.

  102. Raman Ahuja says:

    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

    • Karthik Rangappa says:

      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.

  103. Ravi says:

    Sir i shorted nifty nifty call 8800C[email protected] 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

    • Karthik Rangappa says:

      In this case you would be profitable and Rs.20*75 will be credited to your account (assuming you let the position expire).

      • AK014 says:

        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?

  104. Vishal Javakhedkar says:

    Kartik, do you know why margin for selling banknifty weekly option same as monthly?

  105. MD ASIF FARID says:

    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..

    • Karthik Rangappa says:

      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.

      • MD ASIF FARID says:

        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..

        • Karthik Rangappa says:

          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.

  106. Hitesh says:

    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 ?

    • Karthik Rangappa says:

      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.

  107. Vasist says:

    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?

    • Karthik Rangappa says:

      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!

      • vasist says:

        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

        • Karthik Rangappa says:

          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.

  108. Vishal Oturkar says:

    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

    • Karthik Rangappa says:

      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.

  109. Vishal Oturkar says:

    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 ?

  110. Vishal Oturkar says:

    After reading above all Comments ( Queries ) and there answers , i got my answers , ignore my above questions, thank you so much 🙂

  111. Ravi says:

    Hi, Dies a situation arise when you write/ sell an option and nobody buys it.

    • Karthik Rangappa says:

      Yes, this can happen especially in underlyings where the liquidity is low.

      • Ravi says:

        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?

        • Karthik Rangappa says:

          Contracts are available, however, a trade will take place only if there is an agreement on price between both the parties.

  112. Rohit Agarwal says:

    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

  113. p.shunmugaperumal says:

    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

    • Karthik Rangappa says:

      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.

  114. Yateesh agrawal says:

    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???

  115. Sunitha says:

    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.

    • Karthik Rangappa says:

      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.

  116. durga2000 says:

    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

  117. Mehul says:

    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

  118. abhradip says:

    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.

    • Karthik Rangappa says:

      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.

      • abhradip says:

        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 ?

        • Karthik Rangappa says:

          The underlying would be the RBI ref rate aka the spot price.

          • abhradip says:

            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.

          • Karthik Rangappa says:

            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.

  119. abhradip says:

    Yes i did check and it is still the same i can send screenshot if want me to

  120. Joyal says:

    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.

    • Karthik Rangappa says:

      No, there is no M2M for option sell position. Margins will be increased and you will be required to park more funds.

  121. Joyal says:

    So what about the notional loss of Rs 1400 for that particular day

  122. RAJAT says:

    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.

  123. Ankit says:

    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)

  124. Nitin Desale says:

    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

  125. 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

    • Karthik Rangappa says:

      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.

  126. DIGVIJAY singh says:

    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

  127. Deepak Yadav says:

    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 ??

    • Karthik Rangappa says:

      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.

  128. hetal says:

    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??

    • Karthik Rangappa says:

      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.

  129. Kishore Bulchandani says:

    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.

  130. RAJAT says:

    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.

  131. anil bhasein says:

    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

  132. Anil Bhasein says:

    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

    • Karthik Rangappa says:

      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.

      • anil bhasein says:

        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

        • Karthik Rangappa says:

          Dewar is one of my all time favorite 🙂

          Yes, you can short both these options and pocket the premiums, provided market stays at 9300.

  133. B Vamsi Krishna says:

    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?

  134. muthu mariappan says:

    Sir, What is the difference between call option sell and put option buy? Because both the view is expecting down trend in market.

    • Karthik Rangappa says:

      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.

  135. Amit Deshpande says:

    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 ?

  136. Tarun says:

    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?

    • Karthik Rangappa says:

      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.

  137. Subhasis says:

    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?

    • Karthik Rangappa says:

      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.

  138. Subhasis says:

    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

    • Karthik Rangappa says:

      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.

  139. karthik says:

    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.

  140. rp2806 says:

    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 ?

  141. Subhasis says:

    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

  142. Subhasis says:

    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

    • Karthik Rangappa says:

      No two charts, especially intraday are the same. No, ICICI servers could not have wrongly triggered the SL. Brokers cannot do this.

  143. Praveen Rawat says:

    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

    • Karthik Rangappa says:

      Thanks Praveen 🙂

      Spot price matters as the spot price would influence the premium of the option. Premiums is what matters when you trade options.

  144. Subhasis says:

    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

    .

  145. Abhilash says:

    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 ..

    • Karthik Rangappa says:

      Of course you can write options on intraday basis.

      • Abhilash says:

        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 ??

        • Karthik Rangappa says:

          You need the entire amount for delivery. If you intend to do intraday, you can use MIS for additional leverage.

  146. Mohit says:

    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)

    • Karthik Rangappa says:

      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.

      • Mohit says:

        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???

  147. krupakar says:

    what if i buy a sell call option before the expiry date.do i get the full premium??

    • Karthik Rangappa says:

      Yes, but you can retain the entire premium only if you hold the position till expiry and the option expired worthless.

  148. ayush says:

    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?

    • ayush says:

      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?

    • Karthik Rangappa says:

      Yes, you will suffer a loss of 0.5 multiplied by lot size.

  149. sat says:

    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

  150. vishal says:

    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?

  151. Keshav says:

    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?

  152. Saurabh says:

    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.

  153. Waqaar says:

    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…

  154. Waqaar says:

    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 ?

    • Karthik Rangappa says:

      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.

      • Waqaar says:

        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 ?

        • Karthik Rangappa says:

          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.

  155. Waqaar says:

    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 ?

    • Karthik Rangappa says:

      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.

  156. Waqaar says:

    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.

  157. sandeep says:

    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 ?

    • Karthik Rangappa says:

      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.

  158. RITU says:

    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….

    • Karthik Rangappa says:

      Sorry, my Hindi reading skills are quite bad.

    • SB says:

      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.

  159. SB says:

    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?

    • Karthik Rangappa says:

      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 🙂

      • SB says:

        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?

  160. Bhushan Nikhar says:

    Very well written.. but you should not use IV for Intrinsic value, this builds confusion with general usage of IV for Implied volatility.

  161. Pratheesh Karthikeyan says:

    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

    • Karthik Rangappa says:

      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.

  162. Shabeer says:

    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

    • Karthik Rangappa says:

      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.

      • Shabeer says:

        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 !!.

        • Karthik Rangappa says:

          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.

          • Shabeer says:

            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

          • Karthik Rangappa says:

            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 🙂

  163. Waqaar says:

    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

  164. Joyal says:

    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.

    • Karthik Rangappa says:

      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.

      • ALM says:

        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??

        • Karthik Rangappa says:

          When you write option, the maximum profit is restricted to the extent of the profit received, while the loss can be quite steep.

          • ALM says:

            That’s fine but in the above example my profit calculation is right or wrong?

          • Karthik Rangappa says:

            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]

  165. Joyal says:

    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

    • Karthik Rangappa says:

      1) Number of points * lot size
      2) The same calculation above holds true at 2:00 PM as well.

      • Waqaar says:

        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.

  166. Joyal says:

    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

  167. Shivam says:

    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 🙁

  168. sahil swaroop says:

    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.

    • Karthik Rangappa says:

      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.

      • sahil swaroop says:

        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

  169. Karthik says:

    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.

    • Karthik Rangappa says:

      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.

  170. hamsa says:

    I would like to sell an option automatically when the underlying reaches my target value, is it possible?

    • Karthik Rangappa says:

      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

      • hamsa says:

        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?

  171. Kranti says:

    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

    • Karthik Rangappa says:

      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.

  172. Radha says:

    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?

  173. anil says:

    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.

    • Karthik Rangappa says:

      Yes, you can. However, if Nifty goes beyond 10,500, then you will make a loss on the 10500CE.

      • ALM says:

        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??

  174. amit says:

    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?

  175. ajay says:

    Hi Karthik,
    How can we buy BankNifty Weekly Expiry options, as in Kite Latest 16NOV10600CE is not showing..

  176. Prince Raj says:

    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.

    • Karthik Rangappa says:

      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.

      • Prince Raj says:

        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)?

  177. Vinothini says:

    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?

  178. Prasad says:

    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.

  179. Prasi says:

    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.

    • Karthik Rangappa says:

      Yes, the number of lots has to be specified. Yes, option sellers receive only the premium, no exchange of premium on a daily basis.

  180. Karthik says:

    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?

  181. MADAN says:

    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.

  182. Vibhuti Thakkar says:

    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?

    • Karthik Rangappa says:

      You can buy and sell options anytime before the expiry, but exercising the option happens only at the end of the month.

  183. Pradeep says:

    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.

  184. Harsha says:

    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?

    • Harsha says:

      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?

    • Karthik Rangappa says:

      11000 CE would expire worthless, hence you get to retain the entire premium of Rs.3.

  185. Kartik says:

    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!

  186. chinmay says:

    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..

    • Karthik Rangappa says:

      This is is short term effect, have discussed this extensively across the TA module. Request you to kindly check this. Thanks.

      • chinmay says:

        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.

  187. PRAKUL JOSHI says:

    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

    • Karthik Rangappa says:

      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.

      • PRAKUL JOSHI says:

        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

  188. Harsha says:

    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 – [email protected] => 7500 – 100 – 7300 = Rs 100
    or
    b) Premium Recvd – [email protected] Strike => 100 – 300 = Rs 200

  189. Prakul says:

    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??? 🙂

  190. Priya says:

    How exercise of option can be done? Is there any option in Kite / Pi?
    Thanks Karthikji!!!!

    • Karthik Rangappa says:

      If you leave an ITM option in the system without squaring off, then its considered that you are willing to exercise the option.

  191. Patki says:

    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?

    • Karthik Rangappa says:

      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.

  192. Chingre says:

    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

    • Karthik Rangappa says:

      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 🙂

  193. Priya says:

    Karthik thanks for prompt response!

    In above case of Dish TV, can u explain profit calculation for case (2)

    • Karthik Rangappa says:

      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.

  194. Amar Labour says:

    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?

  195. Sakshi Thakare says:

    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

  196. Aniket says:

    1] Why option expires worthless?
    2] What is open interest?
    3] What is span ?
    4] What is exposure ?

  197. Kunal says:

    How to select strike price?

  198. Roy says:

    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?

  199. Yuvika Gupta says:

    Suppose, I write At premium 0.05 and remained open till 3:30 on expiry….what will be my P/L?

  200. Kailash Hitesh Mudaliar says:

    Dear SIr, after 3:30pm on expiry, how much time required for exercising & obligation from exchange settlement?

  201. Shivani Chabuswar says:

    In case of stock options, why some stock options ban for how much period?
    Plz explain….
    Thanks in advance 🙂

    • Karthik Rangappa says:

      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.

  202. Kiran K says:

    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.

    • Karthik Rangappa says:

      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.

      • Kiran K says:

        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/-

        • Karthik Rangappa says:

          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.

          • Kiran K says:

            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?

          • Karthik Rangappa says:

            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.

  203. Rakhi says:

    There are buy & sell position always remains open on expiry at 15:30.
    Who will responsible for closing automatically?
    Broker?

  204. Kiran K says:

    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?

    • Karthik Rangappa says:

      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.

  205. Pragyandipta Madhuala says:

    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?

    • Karthik Rangappa says:

      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.

  206. Swara Nair says:

    Beautiful explained Sir

  207. Manjusha Deole says:

    Dear Sir,
    Which is more important for premium in 100% scale.
    Intrinsic value or time value?