Module 5 Options Theory for Professional Trading

Chapter 7

Summarizing Call & Put Options


7.1 – Remember these graphs

Over the last few chapters we have looked at two basic option type’s i.e. the ‘Call Option’ and the ‘Put Option’. Further we looked at four different variants originating from these 2 options –

  1. Buying a Call Option
  2. Selling a Call Option
  3. Buying a Put Option
  4. Selling a Put Option

With these 4 variants, a trader can create numerous different combinations and venture into some really efficient strategies generally referred to as ‘Option Strategies’. Think of it this way – if you give a good artist a color palette and canvas he can create some really interesting paintings, similarly a good trader can use these four option variants to create some really good trades. Imagination and intellect is the only requirement for creating these option trades. Hence before we get deeper into options, it is important to have a strong foundation on these four variants of options. For this reason, we will quickly summarize what we have learnt so far in this module.

Please find below the pay off diagrams for the four different option variants –


Arranging the Payoff diagrams in the above fashion helps us understand a few things better. Let me list them for you –

  1. Let us start from the left side – if you notice we have stacked the pay off diagram of Call Option (buy) and Call option (sell) one below the other. If you look at the payoff diagram carefully, they both look like a mirror image. The mirror image of the payoff emphasis the fact that the risk-reward characteristics of an option buyer and seller are opposite. The maximum loss of the call option buyer is the maximum profit of the call option seller. Likewise the call option buyer has unlimited profit potential, mirroring this the call option seller has maximum loss potential
  2. We have placed the payoff of Call Option (buy) and Put Option (sell) next to each other. This is to emphasize that both these option variants make money only when the market is expected to go higher. In other words, do not buy a call option or do not sell a put option when you sense there is a chance for the markets to go down. You will not make money doing so, or in other words you will certainly lose money in such circumstances. Of course there is an angle of volatility here which we have not discussed yet; we will discuss the same going forward. The reason why I’m talking about volatility is because volatility has an impact on option premiums
  3. Finally on the right, the pay off diagram of Put Option (sell) and the Put Option (buy) are stacked one below the other. Clearly the pay off diagrams looks like the mirror image of one another. The mirror image of the payoff emphasizes the fact that the maximum loss of the put option buyer is the maximum profit of the put option seller. Likewise the put option buyer has unlimited profit potential, mirroring this the put option seller has maximum loss potential

Further, here is a table where the option positions are summarized.

Your Market View Option Type Position also called Other Alternatives Premium
Bullish Call Option (Buy) Long Call Buy Futures or Buy Spot Pay
Flat or Bullish Put Option (Sell) Short Put Buy Futures or Buy Spot Receive
Flat or Bearish Call Option (Sell) Short Call Sell Futures Receive
Bearish Put Option (Buy) Long Put Sell Futures Pay

It is important for you to remember that when you buy an option, it is also called a ‘Long’ position. Going by that, buying a call option and buying a put option is called Long Call and Long Put position respectively.

Likewise whenever you sell an option it is called a ‘Short’ position. Going by that, selling a call option and selling a put option is also called Short Call and Short Put position respectively.

Now here is another important thing to note, you can buy an option under 2 circumstances –

  1. You buy with an intention of creating a fresh option position
  2. You buy with an intention to close an existing short position

The position is called ‘Long Option’ only if you are creating a fresh buy position. If you are buying with and intention of closing an existing short position then it is merely called a ‘square off’ position.

Similarly you can sell an option under 2 circumstances –

  1. You sell with an intention of creating a fresh short position
  2. You sell with an intention to close an existing long position

The position is called ‘Short Option’ only if you are creating a fresh sell (writing an option) position. If you are selling with and intention of closing an existing long position then it is merely called a ‘square off’ position.


7.2 – Option Buyer in a nutshell

By now I’m certain you would have a basic understanding of the call and put option both from the buyer’s and seller’s perspective. However I think it is best to reiterate a few key points before we make further progress in this module.

Buying an option (call or put) makes sense only when we expect the market to move strongly in a certain direction. If fact, for the option buyer to be profitable the market should move away from the selected strike price. Selecting the right strike price to trade is a major task; we will learn this at a later stage. For now, here are a few key points that you should remember –

  1. P&L (Long call) upon expiry is calculated as P&L = Max [0, (Spot Price – Strike Price)] – Premium Paid
  2. P&L (Long Put) upon expiry is calculated as P&L = [Max (0, Strike Price – Spot Price)] – Premium Paid
  3. The above formula is applicable only when the trader intends to hold the long option till expiry
  4. The intrinsic value calculation we have looked at in the previous chapters is only applicable on the expiry day. We CANNOT use the same formula during the series
  5. The P&L calculation changes when the trader intends to square off the position well before the expiry
  6. The buyer of an option has limited risk, to the extent of premium paid. However he enjoys an unlimited profit potential


7.2 – Option seller in a nutshell

The option sellers (call or put) are also called the option writers. The buyers and sellers have exact opposite P&L experience. Selling an option makes sense when you expect the market to remain flat or below the strike price (in case of calls) or above strike price (in case of put option).

I want you to appreciate the fact that all else equal, markets are slightly favorable to option sellers. This is because, for the option sellers to be profitable the market has to be either flat or move in a certain direction (based on the type of option). However for the option buyer to be profitable, the market has to move in a certain direction. Clearly there are two favorable market conditions for the option seller versus one favorable condition for the option buyer. But of course this in itself should not be a reason to sell options.

Here are few key points you need to remember when it comes to selling options –

  1. P&L for a short call option upon expiry is calculated as P&L = Premium Received – Max [0, (Spot Price – Strike Price)]
  2. P&L for a short put option upon expiry is calculated as P&L = Premium Received – Max (0, Strike Price – Spot Price)
  3. Of course the P&L formula is applicable only if the trader intends to hold the position till expiry
  4. When you write options, margins are blocked in your trading account
  5. The seller of the option has unlimited risk but very limited profit potential (to the extent of the premium received)

Perhaps this is the reason why Nassim Nicholas Taleb in his book “Fooled by Randomness” says “Option writers eat like a chicken but shit like an elephant”. This means to say that the option writers earn small and steady returns by selling options, but when a disaster happens, they tend to lose a fortune.

Well, with this I hope you have developed a strong foundation on how a Call and Put option behaves. Just to give you a heads up, the focus going forward in this module will be on moneyness of an option, premiums, option pricing, option Greeks, and strike selection.  Once we understand these topics we will revisit the call and put option all over again. When we do so, I’m certain you will see the calls and puts in a new light and perhaps develop a vision to trade options professionally.

7.3 – A quick note on Premiums

Have a look at the snapshot below –

Image 2_BHEL

This is the snapshot of how the premium has behaved on an intraday basis (30th April 2015) for BHEL. The strike under consideration is 230 and the option type is a European Call Option (CE). This information is highlighted in the red box. Below the red box, I have highlighted the price information of the premium. If you notice, the premium of the 230 CE opened at Rs.2.25, shot up to make a high of Rs.8/- and closed the day at Rs.4.05/-.

Think about it, the premium has gyrated over 350% intraday! i.e. from Rs.2.25/- to Rs.8/-, and it roughly closed up 180%  for the day i.e. from Rs.2.25/- to Rs.4.05/-. Moves like this should not surprise you. These are fairly common to expect in the options world.

Assume in this massive swing you managed to capture just 2 points while trading this particular option intraday. This translates to a sweet Rs.2000/- in profits considering the lot size is 1000 (highlighted in green arrow). In fact this is exactly what happens in the real world. Traders just trade premiums. Hardly any traders hold option contracts until expiry. Most of the traders are interested in initiating a trade now and squaring it off in a short while (intraday or maybe for a few days) and capturing the movements in the premium. They do not really wait for the options to expire.

In fact you might be interested to know that a return of 100% or so while trading options is not really a thing of surprise. But please don’t just get carried away with what I just said; to enjoy such returns consistently you need develop a deep insight into options.

Have a look at this snapshot –

Image 3_Idea option chain

This is the option contract of IDEA Cellular Limited, strike price is 190, expiry is on 30th April 2015 and the option type is a European Call Option . These details are marked in the blue box. Below this we can notice the OHLC data, which quite obviously is very interesting.

The 190CE premium opened the day at Rs.8.25/- and made a low of Rs.0.30/-. I will skip the % calculation simply because it is a ridiculous figure for intraday. However assume you were a seller of the 190 call option intraday and you managed to capture just 2 points again, considering the lot size is 2000, the 2 point capture on the premium translates to Rs.4000/- in profits intraday, good enough for that nice dinner at Marriot with your better half J.

The point that I’m trying to make is that, traders (most of them) trade options only to capture the variations in premium. They don’t really bother to hold till expiry. However by no means I am suggesting that you need not hold until expiry, in fact I do hold options till expiry in certain cases. Generally speaking option sellers tend to hold contracts till expiry rather than option buyers. This is because if you have written an option for Rs.8/- you will enjoy the full premium received i.e. Rs.8/- only on expiry.

So having said that the traders prefer to trade just the premiums, you may have a few fundamental questions cropping up in your mind. Why do premiums vary? What is the basis for the change in premium? How can I predict the change in premiums? Who decides what should be the premium price of a particular option?

Well, these questions and therefore the answers to these form the crux of option trading. If you can master these aspects of an option, let me assure you that you would set yourself on a  professional path to trade options.

To give you a heads up – the answers to all these questions lies in understanding the 4 forces that simultaneously exerts its influence on options premiums, as a result of which the premiums vary. Think of this as a ship sailing in the sea. The speed at which the ship sails (assume its equivalent to the option premium) depends on various forces such as wind speed, sea water density, sea pressure, and the power of the ship. Some forces tend to increase the speed of the ship, while some tend to decrease the speed of the ship. The ship battles these forces and finally arrives at an optimal sailing speed.

Likewise the premium of the option depends on certain forces called as the ‘Option Greeks’. Crudely put, some Option Greeks tends to increase the premium, while some try to reduce the premium. A formula called the ‘Black & Scholes Option Pricing Formula’ employs these forces and translates the forces into a number, which is the premium of the option.

Try and imagine this – the Option Greeks influence the option premium however the Option Greeks itself are controlled by the markets. As the markets change on a minute by minute basis, therefore the Option Greeks change and therefore the option premiums!

Going forward in this module, we will understand each of these forces and its characteristics. We will understand how the force gets influenced by the markets and how the Option Greeks further influences the premium.

So the end objective here would be to be –

  1. To get a sense of how the Option Greeks influence premiums
  2. To figure out how the premiums are priced considering Option Greeks and their influence
  3. Finally keeping the Greeks and pricing in perspective, we need to smartly select strike prices to trade

One of the key things we need to know before we attempt to learn the option Greeks is to learn about the ‘Moneyness of an Option’. We will do the same in the next chapter.

A quick note here – the topics going forward will get a little complex, although we will try our best to simplify it. While we do that, we would request you to please be thorough with all the concepts we have learnt so far.

Key takeaways from this chapter

  1. Buy a call option or sell a put option only when you expect the market to go up
  2. Buy a put option or sell a call option only when you expect the market to go down
  3. The buyer of an option has an unlimited profit potential and limited risk (to the extent of premium paid)
  4. The seller of an option has an unlimited risk potential and limited reward (to the extent of premium received)
  5. Majority of option traders prefer to trade options only to capture the variation in premiums
  6. Option premiums tend to gyrate drastically – as an options trader you can expect this to happen quite frequently
  7. Premiums vary as a function of 4 forces called the Option Greeks
  8. Black & Sholes option pricing formula employs four forces as inputs to give out a price for the premium
  9. Markets control the Option Greeks and the Greek’s variation itself


  1. SUBHANKAR says:

    Good material to boost up for option trading.

  2. Ajay Pande says:

    Thanks a lot for sharing learning material, it is really helpful for beginners like me to understand the concept and strategy of share market.. eagerly waiting for rest of the modules to learn more. 🙂

    • Karthik Rangappa says:

      Thanks Ajay. We are trying out best to complete the modules as fast as we can. Please stay tuned.

      • swapnil says:

        if india follows European options and not the americans one then how come one can trade options on intraday basis? doesn’t he/she has to wait till expiry?

        • Karthik Rangappa says:

          European option means the settlement is on expiry day. However, you can just speculate on option premiums…and by virtue of which, you can hold the position for few mins or days.

  3. NC ARUNKUMAR says:

    Looking forward to know more about Option Strategy.

  4. khyati verdhan says:

    Hi kartik,
    In this chapter you have mentioned that 100% return in option world is not a thing of suprise. Also we have potential of unlimited profit in long call or long put and even we can trail stoploss of premiums.Then why people people waste so much time in spot market for generating a return of 20% or even less.

  5. jagadeesh says:

    Thank you so much for your articles sir. Don’t know how to thank you for your effort. 😀 Options was Greek and Latin for me once and now, Im slowly getting the concept with this. Thanks again. 🙂

  6. NARSIMHA says:

    sir,in trading stock options&calculting theoratical value which IV

  7. R P HANS says:

    We are trading premium of an option is great but how to put SL and target on option’s premium? Cause sitting in front of computer is not possible. Even if we r there we may miss the trade id doing some thing else at the time we are suppose to trade or squareoff the tyrade.

    Till now it has been very clear and crisp. Thanks for that and hope that further chapters will also come the same way.

    • Karthik Rangappa says:

      We will be discussing SL based on Volatility very soon. Request you to kindly stay tuned till then. We certainly hope to keep the future chapters as easy and lucid as the previous ones have been.

  8. NARSIMHA says:

    sir,when trading optionsstock which IV shouldwe take is it IV OF STOCK AS STATED IN NSE WEBSITE OR INDIA VIX

  9. khyati verdhan says:

    Hi kartik,
    In this chapter you have mentioned that 100% return in option world is not a thing of suprise. Also we have potential of unlimited profit in long call or long put and even we can trail stoploss of premiums.Then why people people waste so much time in spot market for generating a return of 20% or even less?????

    • Karthik Rangappa says:

      Well, its easier said than done 🙂

      To achieve a success rate of say 100% on options you need couple of things going in your favor –

      1) You need to be extremely well versed in options theory
      2) You need a strategy to trade
      3) You need to be excellent in your assessment of market direction, volatility, time decay, option pricing etc
      4) You need to have liquidity (for example sometimes you may be forced to book a series of losses – forced because you are following a strategy and there is no point going against your strategy)
      5) You need a bit of luck!

  10. Raj says:

    helpful material

  11. ANANT says:

    Really nice initiative sir. Can you please tell what do you mean by point movements while you talk of individual stock options (like IDEA and BHEL) in your example because what I know is that INDEX is measures in points and stocks in rupee value. Please tell me where I’m wrong?

    • Karthik Rangappa says:

      Both are somewhat same, for example if I’m referring to 1 point change in Nifty I’m essentially talking about 1 unit change in Nifty index. Whereas 1 point change in BHEL refers to Rs.1 change in the stock.

  12. Saurabh Garg says:

    Hello Sir, if I buy a lot of 1000, call option of strike price 260 at a premium of Rs 2 with a spot price of 250. Now if the price moves to 270 and premium is now at 3 so would be my profit??
    1. Would it be 270-260-2(premium paid)= 8 per share
    2. Difference of premium amounts 3-2= 1 per share

    • Karthik Rangappa says:

      Firstly, if the spot moves from 250 to 270, the premium of the 260 Call option will certainly be more than Rs.3, I would suggest you read the chapter on Delta…for sake of this example, assume the premium is now Rs.12. Your profits would be –

      Rs.12 (latest premium) – Rs.2 (premium paid) = Rs.10

      10 * 1000 = Rs.10,000/- would be you total profits (from this deduct brokerage and other charges).

      • Saurabh Garg says:

        Hello Sir,
        I am still confused with the way the profit is calculated. Might be, I am not able to get what u explained and I am really sorry for asking it again. In some of your replies, you mentioned that the profit is calculated as per the difference of spot price and strike price and in some replies u mentioned that it is as per the difference of premium.
        Let me give you a live scenario, yesterday ” TVSMOTOR 30Jul2015 CE 260″ was trading at rs 7 (premium) and today it is at rs 12.30 (premium) when value of the underlying moved to 270.7.
        In case of 1 lot of 1000 shares the profit would be

        1. As per the value of underlying

        (270)-(260)=10*1000= Rs 10,000 (Profit)

        2. As per the value of Premium

        (12.3)-(7)=5.3*1000= Rs 5300. (Profit)

        So which of the above options are correct??? (Is there a difference if I am closing my position before expiry or excersize it at expiry?)

        • Karthik Rangappa says:

          Saurabh – I’m sorry if I have confused you. For all practical purposes I would suggest you use the 2nd way of calculating profits…i.e the difference in premium method. In fact somewhere in this module, I have explained different ways of calculating P&L…and it all leads to the same answer…I’m unable to figure out which chapter I’ve done that 🙂

          • Saurabh Garg says:

            This is the example that you have given earlier
            I as the buyer of Bajaj Auto’s 2050 call option would make under the various possible spot value changes of Bajaj Auto (in spot market) on expiry. Do remember the premium paid for this option is Rs 6.35/–. Irrespective of how the spot value changes, the fact that I have paid Rs.6.35/- remains unchanged. This is the cost that I have incurred in order to buy the 2050 Call Option. Let us keep this in perspective and work out the P&L table –

            Please note – the negative sign before the premium paid represents a cash out flow from my trading account.

            Serial No. Possible values of spot Premium Paid Intrinsic Value (IV) P&L (IV + Premium)
            01 1990 (-) 6.35 1990 – 2050 = 0 = 0 + (– 6.35) = – 6.35
            02 2000 (-) 6.35 2000 – 2050 = 0 = 0 + (– 6.35) = – 6.35
            03 2010 (-) 6.35 2010 – 2050 = 0 = 0 + (– 6.35) = – 6.35
            04 2020 (-) 6.35 2020 – 2050 = 0 = 0 + (– 6.35) = – 6.35
            05 2030 (-) 6.35 2030 – 2050 = 0 = 0 + (– 6.35) = – 6.35
            06 2040 (-) 6.35 2040 – 2050 = 0 = 0 + (– 6.35) = – 6.35
            07 2050 (-) 6.35 2050 – 2050 = 0 = 0 + (– 6.35) = – 6.35
            08 2060 (-) 6.35 2060 – 2050 = 10 = 10 +(-6.35) = + 3.65
            09 2070 (-) 6.35 2070 – 2050 = 20 = 20 +(-6.35) = + 13.65
            10 2080 (-) 6.35 2080 – 2050 = 30 = 30 +(-6.35) = + 23.65
            11 2090 (-) 6.35 2090 – 2050 = 40 = 40 +(-6.35) = + 33.65
            12 2100 (-) 6.35 2100 – 2050 = 50 = 50 +(-6.35) = + 43.65

            (Now in this example, you are clearly calculating P&L as per the difference in strike and spot price but not the difference in premium price. This lead to my confusion. Please clairify)

          • Karthik Rangappa says:

            Got your point, see if you are holding the option till expiry you will end up getting the amount equivalent to the intrensic value of the option. For example if you bought 2050 call option and upon expiry the spot is at 2150, then you will makes exactly 2150-2050 = 100 minus the premium you have paid. However if you do not intent to hold till expiry then you will end up making the difference in premium…so for example if you bought 2050 CE @ 7, and few days later the same option is trading at 15, then you will make 15-7 = 8.

            Do remember premium = Intrinsic value + time value . I have explained more on this in the recent chapter on Theta…but I would suggest you read up sequentially and not really jump directly to Theta.

  13. Saurabh Garg says:

    The above example given by you was in chapter 3 (Buying a call option)

    • sumeet nagar says:

      Saurabh..The calculation provided by karthik in chapter 3 is for expiry(calculation on expirt date)..The profit for ur above example for ” TVSMOTOR 30Jul2015 CE 260″ would be (12.3)-(7)=5.3*1000= Rs 5300 (this is before expiry).. On the expiry date, if u exercise the option when the spot price is 270, then the profit would be (270)-(260)=10*1000= Rs 10,000 (Profit)..
      Hope this clears your doubt.. Or karthik can explain in a more lucid way 🙂

    • Karthik Rangappa says:

      Got it, hope I’ve cleared your doubt.

  14. Saurabh Garg says:

    Perfecto….thank u Karthik and Sumeet….it is clear now….:)

  15. aditya garg says:

    sir as premium =intrinsic value +time value of a option.but in the given example of bhel the option value is 7.8 of 230 call option.but as underlying value is 240.5 so it means time value of the option is this possible?

  16. bbhalaji says:

    Hi Karthik, Thanks a lot for these wonderful modules. A ocean to learn !! made simpler … Please clarify me on this phrase “Usually traders don’t hold the option contract till expiry, rather they trade the change in premium”. I have a situation here. I have Rs.5000/- in my trading account. I go long on call option of the underlying stock A. 50 CE @ premium Re.1/-. I enter a contract for buying a lot of 5000 shares at the time of expiry. After three days I find that the premium for the same call has moved to Rs.3/-. I feel that I should make a profit out of it. So here is my doubt. To make profit should I sell the same contract for a higher premium say Rs.3/-, thereby making a profit of Rs.2/-. If I am doing so, should I do that by writing a put option? In the event of writing should I have the required margin in my trading account ? Please bare with me if the question is so dumb… thanks a lot.

    • Karthik Rangappa says:

      Thanks for the kind words 🙂

      If you bought a call option @ 1 and the premium for the same is now trading at 3, then you can square off your position and make a profit of 2. Its just like buying a share at 10 and selling the same at 13. When you sell, someone in the market will buy it from you and you are completely out of the trade.

      • bbhalaji says:

        Thanks for the immediate reply. This means that the person who buys the contract from me @ premium Rs.3/- will deal with the other counterpart in the contract. In that case am I writing an Call option ? should I have a margin for this ? Thanks.

        • Karthik Rangappa says:

          Yes you are right, it becomes the counterparties obligation. Btw, you are not writing a call option when you sell an existing ‘long call option’. You are just squaring off the position.

          There is a difference between writing options and squaring off…you need to be aware of this.

      • mahesh says:

        Thanks for the great explanation.
        Please clarify me on this.
        1. What is square off in options?
        2. Ex: Hypothetical example Let’s say person B1 bought a call option of HDFC bank Call which expires on 28th Sept 2017 premium paid 40rs on 4th sept 2017 (B1 has limited risk max 40rs loss). Let’s say person S1 is the seller of that call option (S1 has unlimited risk).
        if B1 wants to sell the call option before expiry date (may be on 6th sept) , what will happen will he becomes S2 (will have unlimited risk)

        • Karthik Rangappa says:

          1) Square off in markets, in general, refers to you closing and existing open position
          2) He can sell it. When he sells, the person buying from it becomes the holder of the contract.

  17. raj says:

    “Just Dial and Divi’s Lab are two good options for going short on Thursday as massive bearish bets have been built up in these counters.Traders can consider going long on Reliance Communication and Mcleod Russel India for intraday purpose as these stocks have attracted bullish bets.”……karthik, i am pasting this from an article in pulse. where are these data points captured? i guess it gives a trader an indication to a general sentiment on a stock. your views. thanks.

  18. Ajit says:

    hi Karthik
    its been very informatic book,i havea same question as Raj.i have gone to site you have recomened,can you recomend some more

  19. Ajit says:

    thank you Karthik

  20. Prasanna says:

    Its fabulous material. I have read so many books but was still apprehensive to try Options. Now I will certainly try Options. Simple, thorough, to the point and more importantly most practical guide

  21. Pavan Kumar says:

    Hi Karthik,
    Thanks to Zerodha and specially you , the content, flow of information and the examples given by you to make varsity as simple but effective practical guide.
    I am sill learning the dynamics of Option, Just started trading a week ago.
    I would like to know the following things.
    1.What happens on Options expiry if i don’t square off in the following cases:
    (i)If I call nifty 7900 nifty spot is 8000 , premium i bought is 100 now premium is 120. What will be my P&L?
    (ii)If I call nifty 7900 nifty spot is 7800, premium i bought is 100 now premium is 120. What will be my P&L?
    (iii)If I call nifty 7900 nifty spot is 8000 , premium i bought is 100 now premium is 80. What will be my P&L?
    (iv)If I call nifty 7900 nifty spot is 7800, premium i bought is 100 now premium is 80. What will be my P&L?

    • Karthik Rangappa says:

      I’m glad you like Varsity Pavan, my answers in line –

      1 & 2) You stand to make 20 in profits (120 – 100)

      3 & 4) You make a loss on 20 (100 – 80)

    • ved kumar says:

      .Q)What happens on Options expiry if i don’t square off in the following cases:
      (i)If I call nifty 7900 nifty spot is 8000 , premium i bought is 100 now premium is 120. What will be my P&L?
      A) Karthik can the premium be 120 for this call ? taking it as 120 even then too on expiry it should be No Profit no Loss ( excluding brok& stt) as it will be 8000-7900=100 rs only. karthik correct me if i am wrong.

      ii)If I call nifty 7900 nifty spot is 7800, premium i bought is 100 now premium is 120. What will be my P&L
      A) it is out of money so on expiry loss of 100 rs .

  22. manus says:

    I have questions. Please answer.
    1- If my view is bullish on an index or stock, I should buy a call option for intraday? Which one to select current month, next month or far month? In the money or at the money or out of money?
    2- How to select and which one to select because there are many available. Please.

  23. Ankit says:

    Hi Karthik,
    I am beginner in call and put options, trying to learn this.
    My one friend explained one strategy in which one can earn money surely if nifty aggressively move upward or downward.
    I am explaining this, please let me know what loopholes are in it

    Buy call option 8000 ©50 (example)
    Buy put option 8050 ©100 (example)

    Now add both premium 100+50=150

    Now we get range (8000-150=7850)
    If on expiry nifty does not fall in this range we surely get profit.

    • Karthik Rangappa says:

      Firstly there is no such thing as ‘surely’ in markets 🙂

      This is a simple strategy called Strangle. Will be talking about it in the next module.

  24. Ankit says:

    After adding both premium (100+50) we get 150
    Now subtract both strike price (8050-8000) we get 50
    Now subtract this from lower strike price and add this to upper strike price
    Now we get range (7950-8100)

  25. Ankit says:

    I got it,
    I have checked it will not work

  26. Rohit Sharma says:

    Hi Karthik,
    I have never ever bought or sold options, because I did not know anything about it. But after reading your article I have developed basic understanding about it.
    Thanks to you and your team
    I want to share one strategy regarding options

    If.we buy one call option of nifty, strike price [email protected] and sell one call option @1075 (all are real value)
    In this case surely we can make money, does not matter on expiry nifty closes on what value.
    But this strategy works only when
    Difference in strike price <difference in LTP

    Please comment on this strategy

    • Karthik Rangappa says:

      Rohit in the upcoming module I will lay down a structure where you will be able to analyse such strategies yourself. So please do wait just for a little longer 🙂


    Hi Karthik,

    Firstly, I convey my heartily thank for this type of wonderful effort. Here, I made the simplify excel document, what i learn from here. This may be use someone. Hence, I uphold the part of excel Sheet screen short image here.

    I use some colour for make sense for the logical view.
    Green – Bull Market
    Red – Bear Market
    Blue – Buy
    Orange – Sell
    Dark Colour – High
    Light Colour – Low


    Here is another one

  29. Rohit Sharma says:

    I am waiting for that
    But please take a look

    Buying one lot call option [email protected]
    Selling call option [email protected]
    It means net amount I am getting 1075-770=305
    If nifty closes to any value on expiry, let
    My profit would be
    Net profit 305+50=355(355*75)
    If nifty is between 7000-7050
    or below 7000, I can make profit

    As you stated that nothing is sure in stock market, please let me know what are loopholes in it

    • Karthik Rangappa says:

      Rohit, this is a classic bull call spread. I understand your curiosity to get clarity, but I would request you to wait just for few days and I will upload a chapter on this. Thanks for your patience.

  30. Rohit Sharma says:

    Hi Karthik, I am eagerly waiting for that module.
    ,expecting that coming module would be at par with excellence to the previous modules.

    Thank you

  31. Pranjal says:

    Hi , karthik thanks for the wonderful explanation , I just have one doubt , I have posted the screen shot below ,
    You said that ” The 190CE premium opened the day at Rs.8.25/- and made a low of Rs.0.30/-. I will skip the % calculation simply because it is a ridiculous figure for intraday. However assume you were a seller of the 190 call option intraday and you managed to capture just 2 points again, considering the lot size is 2000, the 2 point capture on the premium translates to Rs.4000/- in profits intraday, good enough for that nice dinner at Marriot with your better half J.”

    My doubt here is that how can a seller sell a contract before expiry as he has no right only the buyer ,, or it was due to he was in indraday and short on call option ??
    Please clarify sir , thanks !! and good work for module,

  32. vishal says:

    if i sell a deep itm put option will i get the full premium if i square it off the same day

  33. Arunravi says:

    Dear Karthik
    In your article you have mentioned that options in India are European in nature and not American.
    i.e. one can exercise only on the strike date.
    i think exercising and squaring off are the same.
    in exercising you get the shares and in squaring off you get the difference in cash.
    so if you are able to square off within the next minute or few minutes then is it not American in nature.
    entry and exit possible at any time during the tenure of contract is American or European. please clarify.

    also please clarify point 4 and 7 below if my understanding is right have sold me a call i am the buyer of that call option and you are the seller of that call option
    2.price is moving in my direction and against you limit your losses (a)either i should exit with a limited profit or (b)you should square off on your side
    4.if you are squaring off does it mean somebody else is entering into your position because for my profit to be theoretically unlimited some other party has take your seat.
    5.opposite scenario if price is moving against me and in your favour either you have to square off or i should do.
    6.suppose you are not limiting your profit and your allowing the price movement to run its course in your direction and you want to pocket the full premium,then i will be forced to exit my long call to cut loss of entire premium. this case when i am squaring off am i squaring off with my call option seller i.e. yourself or will i be selling my call to some body else meaning that somebody else will be taking my seat.
    that’s how liquidity helps .

    • Karthik Rangappa says:

      Exercising and squaring off are two different aspects. You can square off anytime you wish, but exercising is only on the expiry day, and it does make a huge difference on when you can exercise your contracts.

      Also, which part do you want me to elaborate on?

  34. abashlal says:

    Hi Karthik,

    Can you please let me know few great tools (free or cheaper ones) available in the market to do:
    1. Scanning of opportunities(scripts of Nifty or other blue chip derivatives) through Volatility Cone. Eg the tool can reveal opportunities of shorting scripts if VI is high as compared to 2 SD Vol etc. on real time basis
    2. Do technical analysis using trend lines, R&S, Fibonacci Retracements
    3. Scanning of opportunities based on OI build up across Blue chip scripts on real time basis
    4. Scraping NSE websites on daily basis to pull our OI data, Historical Volatility data, VI data for analysis.

    I know all these tools can be developed by me, but any ready made tool will be helpful. I am really struggling to get such tools from the market.


    • Karthik Rangappa says:

      1) Check Options Oracle for Option analysis. Great tool, but not sure if its still actively supported. Give it a try
      2) & 3) Use Zeordha’s Kite and Pi for charting and TA requirements. In fact PI has this ‘Expert Advisor’ feature which will help you scan the markets based on your requirements
      4) They give out this information on a daily basis. I guess you will have to write a scrip to scrap this info from NSE site.

  35. abashlal says:

    Extremely thankful to you for sharing. However, having downloaded Opts Oracle, I am struggling to select the database. Not working for me having tried all troubleshooting.
    Pi and Kite are good, but unlike amibroker etc one cant search with OI in Tradescript. A big limitation. Any others you can recommend?

    • Karthik Rangappa says:

      Have you tried Metastock? Data vendors like Viratech give out OI information…when you have this data in metastock, you can use the metastock’s tradescript equivalent to filter scrips.

  36. abashlal says:

    Let me try this.

    One more question. The option premium which Black scholes calculator suggests is generally day’s morning price or closing price? eg. if I put days to expire as 10 , the price suggested is day’s start or closing price?

    • Karthik Rangappa says:

      The price is not pegged to any particular time frame. It generally indicates the option price for the given set of variables, at that particular moment.

      • abashlal says:

        From bhavcopy options data only, what does it mean when derivative analysts say that ” There’s a build up happening for a possible price increase”? Do they see OI change data for ITM OTM call and puts and conclude that? When does the build up condition meet?

        • Karthik Rangappa says:

          “Build up happening” means open interest is increasing, “for a possible price increase” is just his speculation about a possibility of an increase in price. You can refer to any option strike and pass such comments 🙂

  37. Nishant Kandoi says:

    Are American type options traded in Zerodha?

  38. rakesh kumar says:

    Excellent materials. good going zerodha !

  39. Rakesh says:

    Thank you and ZERODHA for the great content Karthik.
    I have a doubt doubt in the above idea cellular example, the sentence is this ” if you have written an option for Rs.8/- you will enjoy the full premium received i.e. Rs.8/- only on expiry”.
    my doubt is why the option writer have to wait till expiry for 8 Rs. if the option trades at 16Rs before expiry . Can the option writer square off his position and take the profit of 8 Rs? . Please correct me if im wrong.

    • Karthik Rangappa says:

      When you write an option, the maximum profit you make is to the extent of the premium you receive. So if 8 becomes 16, then you are looking at a loss of 8 and not a profit of 8.

  40. Rakesh says:

    Sorry karthik , that was a wrong doubt i posted above . i got the answer . he is in a short position so if the premium increases in market he will face loss if he squares off. so he have to wait till expiry to get full premium.

  41. Rajiv says:

    Hi Sir, excellent explanation. Thankyou. My query below:
    1. In practical trading world, is all trades on Options done on premiums? which means my P&L is (sell premium price) minus (buy premium price). or as you mentioned can we exercise our right and get the P&L as you had mentioned? IF latter is possible how do we do it in real trading world. should we just leave it and not to square off our positions on the expiry day? Thanks.

    • Karthik Rangappa says:

      Yes, its all a play on premiums, while some prefer to close it before expiry others prefer to hold to expiry. This depends on your strategy. If you decide to let it expire, then you just let it be as it is…and the exchange will work on the settlement for you.

  42. varungr087 says:

    if the premium for CALL option of a particular stock increases by 1% then will the premium for PUT option for the same stock reduces by same% ? I know its not that straight forward, what is the trend you have observed in your experience.

    • Karthik Rangappa says:

      No, options are non linear instruments and have multiple forces (option Greeks) acting upon them. So increase in calls does not mean Puts also have to increase.

  43. Haribabu says:

    I have seen today on 28th Oct 2016, both call and put options premiums are going up. this is happening in both Nifty and Bank Nifty.

    can you explain why this behaviour ?

  44. Amit Jain says:

    Under 7.1
    “You buy with an intention of creating a fresh option position”
    it should say
    “You buy with an intention of creating a fresh long position”
    am I right?

  45. AK014 says:

    In 7.3 first example of BHEL quote, if closing is 4.05, then what is 7.80, green uptick 3.90 followed by 100%?

  46. somi reddy says:

    hi…! i have a small doubt. in the previous chapters i read that we have to wait till expiry of call option but in here i read that we can Square off before the expiry. which is not possible in European trade CE as u said.. please clarify. thanks

    • Karthik Rangappa says:

      There is a difference between exercising and square off. You can square off anytime you wish….but if you want exercise, you will have to wait till expiry.

  47. Vishram Naik says:

    How to trade the Nifty on intraday basis.
    How to square the Nifty call option on Intraday Basis
    I f one is trading the Nifty on a intraday basis how is the postion squared off ?Do yoiu have to keep a track of the premium as well as the Nifty Index?As Nifty does not have a window to buy or sell how does the Call or Put Option screen look like?
    A example if on a intraday basis the Nifty moves up by 10 points how does this get captured less brokerage and transaction charges when trading the Nifty Call Option ,for example in the first step on intraday basis the Nifty Call Option is brought then in the next step on the same trading day this position is squared off ,pl explain on intraday basis

    • Karthik Rangappa says:

      You can trade it based on your view. If you feel bullish, buy the call option …if you fee bearish, buy the put option. You can square it off intraday, no need to hold till expiry. Yes, you need to track the premiums to identify the profitability. Check the brokerage calculator to figure out the profitability –

  48. Arun says:

    Hi Karthik
    How come large OI in a call at a particular strike price indicates resistance while it should mean that traders are expecting that price to cross thats why they are buying that call strike….?

  49. Ravi says:

    In option selling, if I choose to wait till expiry, I guess, I shall be saving brokerage and other charges of second leg. So, which one is better, to square off beforehand or wait till expiry, if there is no risk of incurring loss? Kindly explain.

  50. Dear sir I thank you and your team members for educating the public in stock trading. IT seems that for the same scrip at the same strike on the same day CE seller and PE seller are paying different margin amount.Why? Is it due to difference in premium received or in other words due to moneyness of the option? Kindly clarify..

    • Karthik Rangappa says:

      You are basically referring to the margins for ATM options. They are very similar with very little difference I guess.

  51. Arpit Gupta says:

    if premium is 6 rs. and lot is of 1000 than does we need to pay premium = 1000*6 else only 6

  52. virochansp says:

    Hey Karthik,
    small query to clear my confusion btn square off and exercising an option ,
    as I understand I can square off anytime as per my profitability or loss but suppose have shorted the strangle and then though I am into profit but I can see that ( due to OTM call n put write ) , liquidity got reduced resulting I hesitate to square off and I allow it to exercise on the day of expiry then in that case will I get get entire profit ( full premium of call n put ) or still there will be spread impact on my profit ?

    Also is there any extra charge I have to pay if I allow it to get squared off automatically @ 3.30 on the day of expiry then to squaring off the option manually.

    • Karthik Rangappa says:

      If you have shorted, then you need to hold till expiry to get the full premium. When you hold the written option to expiry, its not referred to as exercising the option. Only buyers of an option can exercise an option, as they have the right. You can square off the written option anytime before the expiry, but you will not get the full premium. There are no additional charges that you pay if you hold the sold option to expiry.

  53. virochansp says:

    Thanks for reply …… one more small doubt …. you said “You can square off the written option anytime before the expiry, but you will not get the full premium” agree to you …. on continuation to this my point is what if I dont square of ? will exchange do it on the day of expiry @ 3.30 ? If yes @ what premium they will square off ? as OTM options will have large spread ( difference between bid and ask price ) If I need to square off then this spread will reduce my profit and if exchange do it then what price it will take ?

  54. mahesh says:

    Thanks for the great explanation.
    Please clarify me on this.
    1. What is square off in options?
    2. Ex: Hypothetical example Let’s say person B1 bought a call option of HDFC bank Call which expires on 28th Sept 2017 premium paid 40rs on 4th sept 2017 (B1 has limited risk max 40rs loss). Let’s say person S1 is the seller of that call option (S1 has unlimited risk).
    if B1 wants to sell the call option before expiry date (may be on 6th sept) , what will happen will he becomes S2 (will have unlimited risk)

    • Arijit Banerjee says:

      1) Square Off means booking profit / loss on premium during series (before expiry date).
      2) As mentioned, before expiry date means he just square off his position. Now what happens here B1 just transfers his position to another person, say B2 who is interested to take position from B1. Once B2 will take position, B1 will no longer the participant of the game. B2 can hold it till expiry or can transfer his position to B3 before expiry. Before expiry the profit / loss will be calculated on premium difference.

      • Karthik Rangappa says:

        1) Sq Off means you are closing an open position. If you are long, then Sq off means you are selling your long position. Likewise, if you are short, sq off means you are closing by means of buying back. Expiry has nothing to do with this.
        2) Yes, B2 has taken on the risk from B1. P&L before expiry is the essentially the difference between premiums. Upon expiry, P&L is the difference between spot and strike.

  55. Rahul Sharma says:

    Hello sir,
    I want to know in which indexes weekly options contract are traded and in which nse is going to start?

  56. Bhavesh Ratapara says:

    What will be The charges lavied for Option call order execution at a time i.e. 5 lot of Reliance 850CE (5 Lot of 1000 ) at 25 and same lot sale at 35₹
    My doubts is for charges is per lot or per order??

  57. Sashidhar. L says:

    Sir where can we find historical call and put data for contracts that has already expired, say for the past one year?

  58. Rahul says:

    If suppose I have bought one lot(75) of Nifty CE 10400 @ premium of 80 and now its premium at 170. Now If I square off my position
    I will get 12750 including 6750 profit. Please confirm.

    Also while squaring off what if I do not get any buyer for the same position. Please confirm.

  59. HAMISH HARIDAS says:

    Great module and in par with the standards maintained by Zerodha 🙂
    Question: It has been mentioned time and again the Option contracts have to be held until expiry (following European Call format). At the same time, it’s mentioned that traders don’t usually keep contracts until expiry but instead simply try to take advantage in the fluctuations of the premiums. Aren’t those 2 statements contradictory? I’m sure I am missing a piece of the puzzle here.

    Thanks, Team!

    • Karthik Rangappa says:

      Hamish, technically you can hold the contract until expiry. But at the same time, you can choose to sell it before expiry, anytime after you initiate the position. So its completely your choice, which obviously depends on your P&L.

      Do note – If you sell options, then you will receive the full premium only if you hold it to expiry (this is assuming the option you have written turns out to be a worthless option meaning the premium goes to 0).

      • HAMISH HARIDAS says:

        Thanks, Karthik! A follow up question: if it’s the case that we can choose to sell it before expiry, then doesn’t that make it American format and not European format?

        • Karthik Rangappa says:

          No the fact that the settlement for intrinsic value happens only on expiry day, makes it European. If you can settle it anytime during the series, then it becomes American.

  60. muthu mariappan says:

    Thank you for your wonderful effort for putting the options concept.

  61. Devrat says:

    Thanks karthik sir and zerodha team for all the efforts ur taking…
    I m little confused about option selling,
    for eg; if I sell option and it turns to be worthless than i should wait till expiry for premium right…. please elaborate if I am wrong with your sweet examples

    • Karthik Rangappa says:

      Devrat, as a seller of the option, you should look for situations where the option will turn worthless. When the option turns worthless, you get to keep the entire premium. The option turns worthless only close to expiry and not before that. This is because the option will always have some amount of time value associated with it.

  62. Devrat says:

    Thanks sir

  63. Rajesh says:

    Once we buy we become seller the moment we sell… Seller is obligated to hold until expiry.Here in the second case(Sell) whether we have to pay margin for it? First, we have to pay the premium(buy) and secondly, we have to pay margin for same trade!!. Isn’t true? Little confusing kindly clarify me.

  64. CreaTorr says:

    Hi Karthik,

    Why is there difference in close price and last price in a snapshot of quote? Isn’t both are suppposed to be same? The last price at which the instrument traded should be equal to close price?

  65. Raj says:

    Hi Karthik,

    Thank you for the effort! 🙂 I have few questions:

    1. How to decide whether to buy call option or sell a put option (as both are for bullish), similarly sell a call option or buy a put option(as both are for bearish). I know the point of unlimited profit and limited profit, but why would anybody want to sell a put option as it has limited reward i.e. premium?

    2. Suppose we are selling put option, the premium went from Rs. 3 to Rs. 5, is it a Rs. 2 profit or loss (confused as we are selling). Please explain with example.

    Thanks in advance!!

    • Karthik Rangappa says:

      1) This really depends on the volatility. If the volatility of the stock has increased, then so would the premiums. In such situations, selling the option would be a better deal than buying the option. Hence the decision to sell the call or Put
      2) Since you’ve sold you want the premium to go down (irrespective of call or Put). Hence You’d make a loss here.

      • Raj says:

        Thanks Karthik for reply, but i am still not clear with point number 1. I am not able to make out the difference between buying the call option or selling the put. Could you please share an example?

        • Karthik Rangappa says:

          Raj, increase in volatility increases the premium of options, therefore making the premiums quite expensive. In case, you feel the option is expensive to buy, then you can take the opposite position by selling it and pocketing the premium.

  66. rk sahani says:

    What happens if there is a loss in the options premium at the end of the trading day? Will the loss amount be deducted from my Trading A/c ? And should I hold the options contract in normal, as I expect the market to go down and earn profits till the contract expires ?

    • Karthik Rangappa says:

      No, not really. There is no mark to market (like in Futures) in options. Have explained this in detail, request you to read through the chapters. Thanks.

Post a comment