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 –
- Buying a Call Option
- Selling a Call Option
- Buying a Put Option
- 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 colour palette and canvas he can create some fascinating paintings, similarly a good trader can use these four option variants to create some outstanding 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 –
- 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.
- 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 that volatility has an impact on option premiums.
- 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 would help if you remembered 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 –
- You buy to create a fresh option position.
- You buy intending 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 –
- You sell intending to create a fresh short position.
- You sell intending 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 –
- P&L (Long call) upon expiry is calculated as P&L = Max [0, (Spot Price – Strike Price)] – Premium Paid
- P&L (Long Put) upon expiry is calculated as P&L = [Max (0, Strike Price – Spot Price)] – Premium Paid
- The above formula is applicable only when the trader intends to hold the long option till expiry
- 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
- The P&L calculation changes when the trader intends to square off the position well before the expiry
- The buyer of an option has limited risk, to the extent of the 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 the 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 favourable 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 a few key points you need to remember when it comes to selling options –
- P&L for a short call option upon expiry is calculated as P&L = Premium Received – Max [0, (Spot Price – Strike Price)]
- P&L for a short put option upon expiry is calculated as P&L = Premium Received – Max (0, Strike Price – Spot Price)
- Of course the P&L formula is applicable only if the trader intends to hold the position till expiry
- When you write options, margins are blocked in your trading account
- The seller of the option has unlimited risk but minimal 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. 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 –
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 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 to develop a deep insight into options.
Have a look at this snapshot –
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!
In the future, in this module, we will understand each of these forces and their characteristics. We will understand how the force gets influenced by the markets and how the Option Greeks further influence the premium.
So the end objective here would be to be –
- To get a sense of how the Option Greeks influence premiums
- To figure out how the premiums are priced considering Option Greeks and their influence
- 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 in the future 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
- Buy a call option or sell a put option only when you expect the market to go up
- Buy a put option or sell a call option only when you expect the market to go down
- The buyer of an option has unlimited profit potential and limited risk (to the extent of the premium paid)
- The seller of an option has an unlimited risk potential and limited reward (to the extent of the premium received)
- Majority of options traders prefer to trade options only to capture the variation in premiums
- Option premiums tend to gyrate drastically – as an options trader, and you can expect this to happen quite frequently.
- Premiums vary as a function of 4 forces called the Option Greeks
- Black & Sholes option pricing formula employs four forces as inputs to give out a price for the premium
- Markets control the Option Greeks and the Greek’s variation itself
Good material to boost up for option trading.
Thank you so much 🙂
if the spot price of yes bank is 185 in the market then what if a i buy call option of yes bank nov strike price 170. what will happens then and what is my profit and loss and same with buying puts. if i buy 190 put and spot price is already 185 then what will happen. please clarify.
You’d be paying a high premium since the option is ITM and there is ample time to expiry. The profitability really depends on your square off price.
Dear Sir !!
You hv been doing a great job.
I have one query… could you just advise me….. There are so many ifs and buts… but reading all this , i hv some query.. could you please clear my doubts….
say a stock is doing good…. i buy it… spot price is 1000 in first week of month…. then stock starts going down…. then after 5-6 % drop in spot price….. I sell CALL @ 1000 at 28 Rs when the spot price is 950 Rs…. then stocks keeps going down for 2-3 days.. with time….. this premium value will keep coming down…. SAY I AM TRYING TO DO HEDGING……
Now suddenly in 2nd week, the stock spot value jumps backs to sat 990 Rs….. my losses from futures stock are getting less… but 1000CE call sell will definitely go towards losses AM I CORRECT ?????????
SO IN THIS CASE, WHAT will do????? like…. if the stock spot value is coming up in 3rd week, then from futures one can earn money … but at the same time, he will start lossing money from CE sell option…..
what will be the scenario now………….. i mean what should one do in this……
WAIT FOR DECAY WITH TIME.. SO THAT LOSSES FROM THIS SELL CALL @ 1000 RS CAN COME DOWN…. or is there anything else…..
i am confused with this covered call strategy…..
if you dont sell the call imeedietely when you are buying the stock futures, then u r at loss…. but u are buying futures only when u r optimistic about the stock…..
could you please throw some light here….. HOW IS THIS COVERED CALL HELPING….. what should one do when things dont go as per your plan….. should one wait for time to pass…. or do something else….
thanks and many regards
V. Rana
For this reason, the covered call should be initiated with OTM options. In this example, you’d probably be better off writing 1050CE as opposed to 1000CE.
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. 🙂
Thanks Ajay. We are trying out best to complete the modules as fast as we can. Please stay tuned.
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?
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.
Sir, by this do you mean we will get our settlement amount (if in profit) on the expiry or day after?
The P&L is adjusted on the day you square off the position.
Looking forward to know more about Option Strategy.
That would be in the next module 🙂
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.
tO ACHIEVE 100 PER CENT YOU MUST BE CERTAIN OF FUTURE PRICE. TRAJECTORY. OF THE UNDERLYING TO EXPIRY DAY. AND THAT IS WHERE THE CATCH IS.
Khyati option trading looks easy but when you goes live its very complicated and hard.
also remembar only 1% option trader make money in market.
happy reading and happy trading
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. 🙂
sir,in trading stock options&calculting theoratical value which IV
Sorry, can you please elaborate a bit?
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.
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.
sir,when trading optionsstock which IV shouldwe take is it IV OF STOCK AS STATED IN NSE WEBSITE OR INDIA VIX
IV of stocks makes sense.
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?????
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!
helpful material
Glad to know that 🙂
Hi
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?
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.
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
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).
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)
or
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?)
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 🙂
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)
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.
The above example given by you was in chapter 3 (Buying a call option)
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 🙂
Oh, I dint notice this…thanks for pitching in Sumeet 🙂
Hi Karthik,
But you have written in the next chapter that
Underlying CNX Nifty
Spot Value 8070
Option strike 8050
Option Type Call Option (CE)
Days to expiry 15
Position Long
Given this, assume you bought the 8050CE and instead of waiting for 15 days to expiry you had the right to exercise the option today. Now my question to you is – How much money would you stand to make provided you exercised the contract today?
Do remember when you exercise a long option, the money you make is equivalent to the intrinsic value of an option minus the premium paid. Hence to answer the above question we need to calculate the intrinsic value of an option, for which we need to pull up the call option intrinsic value formula from Chapter 3.
Here is the formula –
Intrinsic Value of a Call option = Spot Price – Strike Price
So now why did you use spot price-strike price and not the difference in premiums, while we are gonna square off today rather than on the expiry date
And please excuse me if I got it wrong and help me,
Thanks.
This is assuming you exercise the option today. Remember exercising the option on expiry is different from selling the option to benefit from the difference in premium. When you exercise, you get the intrinsic value, else you get the difference in premium.
Karthik can you please elaborate more?
And sorry I didnt understand you.
Ram, if you buy an option today, you can sell it anytime you wish. Even 5 seconds later. The P&L will the be the difference between the buy and sell premium. However, you can also decide to hold the option till expiry (also called exercising the option), in this case when you get is the intensive value of the option.
Got it, hope I’ve cleared your doubt.
Great Sir.
I am new to this option market.
Will definitely. Learn your basics.
Happy Learning!
Perfecto….thank u Karthik and Sumeet….it is clear now….:)
Good luck!
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 negative.is this possible?
Happy you spotted this 🙂
The minimum value for this option should be 10.65 (240.65 – 230)….but then it was the expiry day. There is an additional effect of STT for ITM options….guess mkt is factoring in that.
sir what is STT?
STT stands for Security Transaction Tax, which is levied by the Government whenever a person does any transaction on the exchange. More about here – https://en.wikipedia.org/wiki/Securities_Transaction_Tax
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.
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.
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.
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.
Thanks a lot Karthik.
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)
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.
“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.
Here is the article – http://profit.ndtv.com/news/market/article-nifty-range-seen-at-7-600-8-000-just-dial-divis-lab-to-be-under-pressure-1216021
Now sure which data points you are talking about. Also do note, the views expressed in any article is representative of the author’s view and not the market’s view in general.
hey karthik, what i meant was, the data where one can gauge where the long or the shorts are being built. what strikes etc. i had read that article in pulse earlier hence, wanted to know where can we spot these build up. thanks.
Raj – most of the view stems from simple OHLC data and the analyst’s interpretation of the same. So if you have access to the same along with volumes and maybe open interest you are good to go. Someone like http://www.neotradeanalytics.com/ should be able to provide you with this info.
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
Check out Global data feeds as well.
thank you Karthik
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
Congrats.
Awesome, glad you liked it Prasanna, good luck!
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?
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)
.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 .
1) Upon expiry this option will be at 100…so you make no profit no loss
2) You will lose the premium.
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.
Manus – You need to read the entire module for this 🙂
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)
(8050+150=8200)
If on expiry nifty does not fall in this range we surely get profit.
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.
Correction,
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
8000-50=7950
8050+50=8100
Now we get range (7950-8100)
As replied earlier.
I got it,
I have checked it will not work
🙂
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 7000@770 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
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 🙂
7050@1075
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
Here is another one
Saravana – you have summarized it quite well. I hope people will benefit from the same. Good luck 🙂
Where is the sheet? And how the upload of any supporting document is done here?
Nisha, you can upload only images and post comments. You cannot upload documents.
I am waiting for that
But please take a look
Buying one lot call option 7000@770
Selling call option 7050@1075
It means net amount I am getting 1075-770=305
305*75
If nifty closes to any value on expiry, let
8000
My profit would be
8000-7000=1000
8000-7050=950
1000-950=50
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
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.
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
Be assured, we will give it our best shot 🙂
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,
Thats the beauty of derivatives – you can buy and sell a contract anytime you wish and not really wait for expiry!
if i sell a deep itm put option will i get the full premium if i square it off the same day
Margins will be blocked and the same will be released by end of day when you square off.
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
1.you 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
3.to 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.
7.in 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 .
rgds/arunravi.k
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?
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.
Cheers,
Abash
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.
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?
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.
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?
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.
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?
“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 🙂
Does OI for a call or a put lead to this kind of speculation?
Increase / decrease in OI certainly adds to the speculative activity.
Are American type options traded in Zerodha?
All stock and index options in India are European.
Excellent materials. good going zerodha !
Cheers!
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.
Thanks&Regards.
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.
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.
Absolutely!
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.
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.
Hi,
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.
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.
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 ?
Increase in volatility leads to increase in premiums.
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?
Yes, if its with respect to a call option 🙂
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%?
It means from the close of 4.05, BHEL has shot up by 3.9 to about 7.8, which is a 100% upmove.
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
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.
thanks…by the way I love ur explanation. i am a newbie but i am now feeling a bit confident after knowing things from varsity
Very happy to know that 🙂
Good luck.
I want to know suppose I bought jan expiry
pe @1 now it’s value is 2
And strike is 68 and spot market is @67 and cant I exit position and make profit. Is it possible. What would be if I exit position now.
Yes, you can. Profit will be 1 * lot size.
But u said we can’t exercise European option. In the mid of the month m I right. So can I do it? What is meaning of exercise.?
Yes, EU Options are structured differently. However, in India all options are American, which can be exercised only on the day of expiry.
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
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 – https://zerodha.com/brokerage-calculator
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….?
It is not necessary for a large OI to indicate resistance.
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.
It is advisable to square off ITM options for reasons stated here – http://zerodha.com/z-connect/queries/stock-and-fo-queries/stt-options-nse-bse-mcx-sx
If you have sold and option or holding on to an option which is OTM, then you can let just expire without worrying about Sq off on expiry.
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..
You are basically referring to the margins for ATM options. They are very similar with very little difference I guess.
if premium is 6 rs. and lot is of 1000 than does we need to pay premium = 1000*6 else only 6
Premium payable will be 6000/-.
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.
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.
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 ?
If you let the option expire worthless, then the exchanges will let settle them for you at 0.
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)
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.
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.
Hello sir,
I want to know in which indexes weekly options contract are traded and in which nse is going to start?
Banknifty.
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??
Thanks
Brokerage – 40
STT total – 18
Total txn charge – 31.8
GST – 12.92
SEBI charges – 0.09
Total tax and charges – 102.81
Points to breakeven – 0.1
https://zerodha.com/brokerage-calculator
Sir where can we find historical call and put data for contracts that has already expired, say for the past one year?
You will have to get it from Bhavcopy – https://www.nseindia.com/products/content/derivatives/equities/historical_fo.htm
Karthik,
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.
Yes, you will. You will get a buyer for Nifty. Nifty is quite liquid.
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!
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).
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?
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.
Dear sir
Thanks for being so nice in answering everything ….. you are doing a great job……….
If one SELLS CE… ONE RECEIVES PREMIUM…… ok.. say.. i sell call 500 Rs @ 20 Rs…. spot price was 460 Rs
Now on expiry… value is 500 Rs CE @ 32…. Spot price is 520
How much are my losses…… is it simply 32-20………. or Premium received – (difference between spot price and strike price )
what happens in above scenario ??????????
If the premium is 32 and you’ve sold it at 20, then the loss is 12. This is basically the difference in the premium.
Karthik,
Thank you for your wonderful effort for putting the options concept.
Thanks, Muthu. Happy learning!
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
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.
Thanks sir
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.
I’m a little confused with your query, can you kindly elaborate? Thanks.
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?
Check this – https://tradingqna.com/t/how-to-determine-closing-price-in-f-o/584
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!!
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.
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?
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.
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 ?
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.
The F&O margin calculator shows ‘0’ Total margin when i select ‘Call Buy’ or ‘Put Buy’.
Why so?
It should show the premium i require to deposit.
However it works fine for Call Sell and Put Sell.
There is no margin when you buy either calls or puts. When you buy options, you need to pay only the premium. You need a margin only when you sell options.
Karthik Sir, I had a doubt regarding Expiry. In case of stocks the expiry is monthly in case of both futures & options.
But in case of Indexes are the following statements true :
1. Nifty or Banknifty futures , they both have a monthly expiry just like stock futures.
2. Nifty Options also have monthly expiry.
3. Only Bank Nifty Options have weekly expiry.
1) Yes
2) Yes
3) Yes
Thankyou Sir. _/\_
Cheers!
If I bought a call option at certain premium and the premium shoots up substantially in an hour and I would now want to sell to pocket the premium difference. Is it certain that I will always find a buyer or in spite of me wanting to sell can not sell it because I do not have a buyer??
Not certain. This really depends on the liquidity of the contract. However, if you are trading something like Nifty, then you can find buyers and sellers.
***typographical error,
7.1 ,after pay off digram, point no. 3
“Put Option (sell) and the Put Option (buy)”
i think it is call option sell and the put option buy
Vishal, don’t find any errors here. Can you try reading it again?
i apologies for it, i got confused.
hi kartik sir,
i have query, what would be fair value of 10600 PE Jun21 when nifty spot is 10640 and how it is calculated plz explain
This is calculated based on the Black & Scholes Calculator. Have discussed the same here – https://zerodha.com/z-connect/queries/stock-and-fo-queries/option-greeks/how-to-use-the-option-calculator
Sir, can a seller of the call option also trade the contract? If yes, how he makes profit?
Yes, you can sell the contract and buy it back whenever you want. Seller makes a profit when the price of the contract starts to go lower than the price at which he sold the contract.
Thank u sir ?
Welcome!
Though I really feel I should have been able to answer it by myself now, it was so simple. I feel so silly ?
Thats alright, Hina 🙂
Dear Sir, Please help me out here
Assume its the expiry date and I’ve shorted ASHOKLEY18MAY145CE ; Premium paid Rs:6
At the end of the closing bell the spot price of Ashokleyland is 148 ; ASHOKLEY18MAY145CE ,Premium Rs 2.5
Since the spot price is greater than the strike price will I be under a loss or since the premium has reduced in value will I be under profit?
If you have shorted @ 6 and the premium is now at 2.5, then you make a profit of 3.5.
Thanks for clarifying, sir. 🙂
I thought premiums are also decided by demand and supply, similar to the share prices. So you mean, all option premiums on NSE/BSE are calculated using Black Scholes formula only and not demand/supply?
The theoretical prices are calculated by the B&S model. However, the day to day trading is an out of demand and supply….which further is decided by fair pricing. So its kind of a function all factors 🙂
Sir it is being said that derivatives market would be open until 11:55pm from Oct 1 but sir equity market would be closed as usual 3:30pm so if there is no movement in underlying how would anything in options would change ?
Interesting, if this happens, the price will reflect the current news and events around the underlying stock.
Sir, that means premiums would be able to change even on news flow, without any help of underlying ? ?
Lets wait for things to roll out, Manans 🙂
I’ve read up to chapter 6 & the option module is toughest one Karthik, I’m spending days on reading it. maybe bcoz its 1st time I m knowing about Option 🙂 your module gave very deep knowledge and understanding. THANK YOU ZERODHA TEAM.
Happy to note that, Chanu. Take your own time to read and understand options. Markets will always have opportunities. Good luck 🙂
In option contract of IDEA Cellular Limited, the seller has sold Call option? as the stock was bearish (going down)?
Yes, when you sell a call option, the expectation is that the stock will go down or at the most, stay in a range.
Wishing you a very happy Independence Day sir,
According to me in today’s world Financial freedom is of utmost importance & you are the biggest freedom fighter by sharing your wisdom of knowledge with all of us…
God bless you sir… ?
Happy Independence day, to you too Manas!
Thanks for the kind words, keep spreading your knowledge, that’s when India will be a much greater country 🙂
Are options marked to market ?
i mean if i buy TCS call option today (16th august)( strike price 2100) and square off on 20 th august, will there be any dr/ cr in my account on 16th august day end, 17th day end ( any cost involved)? apart from actual profit as the case may be on monday 20th when i actualy square it off ?
No, options are not marked to market. So no debit or credit in your account. However, if you write options, the daily margin blocked can vary based on the volatility of the stock.
Hi karthik,
I am little bit confused.
(1) If we can buy & sell CALL option, then why do we need PUT option?
(2) what is the difference between buy call & sell put option ?
(3) is premium included in margin ?
(4) Does both seller & buyer need to deposit Margin ?
1) Call option premium increases when the prices increase and the put option premium increases when the price decreases
2) Buy call = you are bullish on the stock or bullish on volatility. Sell Put = you are either bullish, expect the market to be flat, or you are bearish on volatility
3) No
4) Only option sellers need to place margin deposits.
Marvelous ….. Thanks Karthik sir and team for this…
Happy learning, Arun 🙂
Case:
As on 3/9/2018
Call option bought
Spot: 100
Strike: 120
Premium: 12
As on 4/9/2018 (not expiry date)
Spot :90
Premium changes from 12 to 10
So that means I lose more 2 rupees if I sell this option? Or on selling I have lost nothing but the 12 bucks premium?
Yes, if you square off the position, you’d lose 2 Rupees.
Ok. So on squaring off I’ll get 10 rupees back on the options. Right?
Yes, its always the difference between the price you pay for the premium and the price you receive when you sell the premium.
When I try to buy equity option under BO/CO type, I get a message “option buying is enabled for NIFTY and BANKNIFTY only.”
Does Zerodha does not provide equity options under BO/CO order??
How do we trade in such a scenario because MIS positions do not provide any leverage?
Daljeet, BO is permitted only for Nifty Options. This is not available for stock options.
Thanks for the prompt reply Karthik.
Welcome!
Leverage is not provided for option long positions as they carry the risk of losing the whole premium.
We only provide 1.4X leverage for Nifty options as it is relatively less volatile
Thanks for the prompt reply Faisal. Most of the brokers don’t provide much leverage for stock options trading.
Hi,
I have one query, understood that if i done square off, order gets executed on the day of expiry.
1. If I buy Call option (say 1 lot of 40 shares of Infy) paid a premium , and if i dont sell my option then at the expiry day, exchange will buy 40 shares of Infy at that day’s price and add to my account, later i can sell them in open market in smaller quantity, say i sell 10 and keep 30 shares in my account, am i missing anything here? please clarify
Thanks
Srini
Srini, the exchange settles Futures and options using 2 methods- Cash and Physical mode(This differs from individual stocks).
Currently, there are 46 stocks that are physically settled, the rest are cash settled.
In case of cash settlement, if your option expires in the money, you will receive the intrinsic value gained of the option contract.
In case of physical settlement, you will receive shares of the underlying equal to the lot size in your demat account. Read more here
You can choose to sell them all at once or partially, or choose to hold them as long as you want.
Thank you very much , practical suggestion will be very helpful..
i want to get some clarity on how this works, planning to buy below Put option and qty is 1750
Strike Price Bid Qty Bid Ask Ask Net
price price Qty Chang LTP IV Volm Change OI
in OI
310.00 12,250 4.65 4.70 3,500 0.45 4.65 46.39 2,345 68,250 1,953,000
1. How much i need to buy 1 Lot, amount to be paid
2. If i watch this values tomorrow, which one will indicate that this put option is increased or decreased, i dont know which column to look for to find if my call option is profitable or not
3. If increased , how much can i sell to make profit?
1) 1750 * 4.70 = Total premium payable
2) You need to watch the premium (bid-ask)
3) The difference between the buy premium rate and the sell premium rate is what you make.
Hey Karthik,
Great job with these articles.
Thanks, Binesh! Happy learning 🙂
Hi, Thanks a lot for the useful content. I have recently started using kite platform and need to clarify few things-
1. How do we put both target and stop loss in a single order? I mean I know about bracket orders, but is it not allowed while trading options? For eg. If i want to buy a CE lot at 100 and want to set the target as 120 and stoploss as 90. Do i have to first put a buy order @ 100 and once it is completed put another order for sell @ 90?? If that is the case then how can can I put target of 120 in the same order. Whenever I try to do it, I get order rejected notification. Kindly guide me.
2. If a scrip reads as BANKNIFTY 1ST NOV 25000 CE, it means the expiry is 1st of November right? Also, would you kindly send a link where i can understand the expiry cycle for options.
Thanks in advance. Your lessons are truly great in giving much needed insight and very lucid. Keep up the good work!
1. For buy options, you can only place one sell order, either target or stop-loss. You can’t place both due to the risk of both the orders executing and leading to a short position in your account. However, you can place both target and stop-loss for Futures and option short.
2. That’s correct, the expiry is 1st November. Monthly expiry will not carry a date(only the month) in it, Banknifty weekly expiry will have the date on which they are expiring. Explained here
sir is it profitable to buy both call and put at same strike price and hold it till the end like till two days before expiry.
By doing so you are getting rid of directional risk, but for you to be profitable, the stock has to move in any single direction.
If the nifty Price is 10600
Can I short CE 12000 ?
Will I get profit ?
You can short. You will be profitable if Nifty stays below 12000 upon expiry.
Hi Karthik
Thank for valuable information
Suppose I sell call or put option in NRML I get the premium amount credited to my account can i exit the trade the same day by collecting the premium, OK with minimum decrease in premium but in profit.
Request you to please clear my doubt.
Regards
Aasim
Yes, you certainly can, Aasim. No problem with this.
So If I would like to exercise the put option do I need to instruct the dealing desk or if I hold the option position untill expiry, is it assumed to exercise?
Since I have a long put option but not sure whether if I hold untill expiry it’s assumed to exercise?
Yes, you can continue to hold. No need to inform the dealing desk. But you will have to bring in stock (if applicable), check this – https://zerodha.com/z-connect/tradezerodha/policy-on-settlement-of-compulsory-delivery-derivative-contracts
Great content Karthik.
Few questions :
If i have a view that stock will go up, so which CE is better to buy ? ITM, ATM or OTM ?
and
If i have a view that stock will go down, so which PE is better to buy ? ITM, ATM or OTM ?
Also in case of buying call option, which option(ITM,ATM and OTM) will increase faster if the stock goes up and similarly for buying Put option ?
People make lot pf money on Option Expiry. so how to do that? Do you have any article on that?
Depends on the market sitation, but by and large, buying ATM makes sense. This true for both PE and CE.
Also in case of buying call option, which option(ITM,ATM and OTM) will increase faster if the stock goes up and similarly for buying Put option? —-> This really depends on the market? There is no straightforward answer to this. Thanks.
Karthik, First and foremost, Thanks a ton for all your effort and help in educating so many of us. Grateful for that.
I am new to options and have one doubt. If i am a ” Call” option seller, will the P&L be based on the CMP / Spot at the closing bell on the final date of the month or the highest price achieved during the month once i have sold the call. Say i sold an NBCC CE Jan 19 at Strike Price 58 ( CMP 56) and on 31 Jan , it is 55 , but during the month(but not on date of expiry) it has touched say 65. How will that affect me as a call seller . Can the buyer of the call excercise the option when CMP is highest or is it only on date of expiry. There are varying explanations online. hence the doubt
Thanks in advance
Harry, as far as your P&L is concerned, what really matters is the price at which you close i.e buy back the option at. So if you choose to square off the position at 65, then you will have to consider 65 to calculate your P&L. If it is 50, then that is the price…so on and so forth.
Thanks Karthik for the answer . If i am a ” Call” option seller, will the P&L be based on the CMP / Spot at the closing bell on the final date of the month or the highest price achieved during the month once i have sold the call. Say i sold an NBCC CE Jan 19 at Strike Price 58 ( CMP 56) and on 31 Jan , it is 55 , but during the month(but not on date of expiry) it has touched say 65. How will that affect me as a call seller . Can the buyer of the call excercise the option when CMP is highest or is it only on date of expiry.
What i wanted to know was that is I am a passive call seller i.e. i dont intend to buy it back. Assuming on the date of expiry it is 60 , but during the month it touched 65. I am not buying it becos i am assuming it will fall by the end of the month. In that case will i need to take action or automatically it will get settled at the spot price . Secondly, Will i need to pay up (65-58) or (60-58) is my doubt. on last traded day of the month i.e. 31 Jan 19. ? I hope i am framing it right
Harry, I guess I answered this query earlier. The P&L is dependent on the price at which you exit the trade and not really at the highest or the lowest price it has traded during a period.
Karthik sir,
this is very useful information for me.as i am new to options trading.
I have some doubts please clarify.
1.can i buy both call &put options at a time?
2.if i buy next month options(suppose feb2019) do i need to wait to 1st february to exit the position? or can i exit 1/2 days later(before jan2019expiry date)?
3.suppose i bought 1 call option,and 1 put option today.(both are same same worth)
the next day call options premium raised to 50%,and put options premium decresed to 30% .if i exited from all 2 positions my profit would be 20%,am i right?
thanks in advance..
1) Yes, you can. In fact, this is one of the better strategies and its called Straddles.
2) You can exit it anytime you’d want
3) Yes, although its better you place numbers to check the exact P&L.
Sir,
Thank you for excellent way you explain.
But, I am still not able to figure out why one should sell a put option or call option instead of just buy a call option when bullish and buy a put option when bearish.
Please clarify
JS
The answers to those question lie in your understanding of option greeks. Have explained the same later in the module.
No matter at what great length one would write, it won’t suffice the needed “much” , to thank you for ‘what & with such beautiful precision’ you have done in public space for the beginners’ help. It’s fantastic and mesmerising. Salute you sir!!! great work
Chandan, thanks for the kind words! Glad you liked it, keep going.
I used to purchase a call option of nifty 11050CE. AS nifty has been closed at 11058 on 7th march expiry and i haven’t released my position by myself then what will happen. will i get these 8 rupees? 11050 CE is showing 2.85, so what will i get?
Ankur, although you are in profit of Rs.8, the STTs will eat away your profits, hence, for this reason, the option will not be exercised.
Hello sir,
Now nifty is closed at 11521.05. Suppose my view is bullish, i think that nifty will touch 11600 tomorrow.
Which strike price should i select?
Since my view is bullish, should i select a strike price below current nifty value or above nifty value?
Vishwajith, I’m guessing you are talking about this month’s expiry. Since the time to expiry is very short, maybe you should stick to ATM or slightly ITM option.
If I buy an option OTM and it expires ITM, which amount do i get as my profit? The difference in premium appreciation only or also the difference in the strike price & underlying price?
You will get the difference between the strike and spot. This is also the final value of the premium.
Some poor soul lost 16k on idea call option on that day 🙁
This is my one month of groceries gone in 6-7 hours.
Stoploss is absolutely critical. Carrying trade to next day absolutely scary.
I do agree on the SL bit. Positions can be carried forward only if you are convinced about the trade.
The content is more leaning towards making people get started with options.
I think you should also give examples how people can lose a fortune similar to the examples you have given for favorable trades.
Most professional trades are doing some kind of hedging when they are dealing with F&O.
Naked derivatives are dangerous and people should know this. If your content hides this fact then it is not an ethical thing to do.
Also focus should be on the fact that money is not getting created here. It is only getting transferred from one pocket to another. If someone is making a fortune someone somewhere is losing it too.
Having said that it would be wrong on my part if I do not praise you for your style of writing and clarity of concept.
Well done Sir.. you are a good teacher.
Thanks!!
I have tried to expose both sides of the coin and not just on the reward part, Naveen. Derivatives are risky and readers should know that.
I have sold a deep OTM sbi may CE 380 @ 0.7 premium with a view to hold till expiry so that i will get the premium. Now suppose premium is going up, if i hold the option till expiry and prevailing option premium is more than the price i sold, what will be my position ( profit or loss). I dont hold any shares of SBI. current spot price is 315…. please tell me
Srinivas, you can continue to hold the position, but the margins go up. So you will have to add more margin amount to continue holding to expiry. By the way, there is no concept of mark 2 market in Options.
If i wrote a call option and a put option . and made strangle and collected premium and in call option , premium went up and down , in what scenario , i will be in profit , up premium or down premium and same in put contract option writing .
Since you’ve written both the options, you will be profitable only if the premium comes down for both the options. This happens when the stock is stuck in a range.
If an option seller sells an OTM option at 0.05 and if it ends at OTM. Did he get any premium
Yes, he gets to retain the premium.
Hi
I want to know one thing, who buys from whom
Call option buyer buys the ”option” from ”call option seller” or ”put option seller”
and
put option buyer buys the ” option” from ” put option seller or ” call option seller”.
Call option buyer buys the call option from the person selling (also called writing) the call option. Likewise, the put option buyer buys the put option from the person selling (also called writing) the put option.
End of the day (11/07/2019)
Nifty was at 1_1583
Nifty 11 jul 11650 pe.
The difference = (11650-11583)=67.
But Nifty 11 jul 11650 expired at 62. Why is the difference?
Did you check the last traded price or the settlement price?
Hi
I am new / beginner in option trading. Can you clarify following points for better clarity
1. Does square off / exit creates additional position for .e.g I SELL CALL of NIFTY at Rs 50 for strike price 11500 and I want to exit or square off position. In this situation where
(a) does it create additional position such as CALL BUY / PUT SELL ..etc
(b) What happens if there is no buyers and sellers at strike price I executed the OPTIONS and want to square off or exit ? Can I still do this ?
2. As per my knowledge NSE allows intraday Options trading. Am I correct ? Are there any special / additional charges for this ?
3. Assuming Intraday options are allowed, I am taking example suppose I executed CALL SELL NIFTY 1 lot (75 qty ) at premium of Rs 2 for strike price 11000 and at 3:15 at time of settlement premium price reduced to Rs 1. At EOD how much premium I should be receiving ?
4. Suppose I want to place an option BUY call order such as BUY CALL option at strike price of Rs 10, exit /square off at Rs 14 and stop loss at Rs 12. Can I do this in this in a single order ? Can you pl tell me how to do this in Zerodha ?
Thanks for your very informative articles
Parag
1a) No square off means you close your position completely and take a full exit.
1b) In case of no liquidity, your position will stay pending in the system
2) Yes, you can trade options on an intraday basis. No additional charges for this
3) You will make the difference in the premium i.e Rs.1/-
4) You can do this with the bracket order, but for now, this is available only for Nifty.
Hi,
Thanks for the informative blog. Got doubt.
In intraday option trading, what will be difference between call sell and put buy, apart from margin and losses? Assume I enter trade with strict stop loss. Say for example, nifty is at 11120, strike price of 11100 call premium is Rs. 76 and strike price of 11150 put premium is Rs. 72. Now, if my view is bullish whether its better to buy call or sell put? And if I m bearish is it better to sell call or buy put?
I understand in intraday only the change in premium is what benefits. So assuming call premium raises to Rs. 86 with raise in nifty, if i buy call at Rs. 76 I will be in profit of (86 – 76 =) Rs. 10. And if I would have written sell I will make a loss of Rs. 10? If the nifty falls, premium of call reduces, assume it drops to 70Rs. Clearly I will be in a loss of Rs. 6 in case I bought call. And I make profit of Rs. 6 if I short call. But on the other side, when nifty falls, put premium increases.
Not able to decide, between call buy vs put sell and call sell vs put buy.. can u please explain this part.
Nagesh, the decision to buy a put or sell a call depends on the volatility. If the volatility is high, then you can consider selling the option. If the volatility is low, you can consider buying the option.
Hi Sir
I am new in F&O trading
Also loss 6Lakh in equity cash
Now started in F&O Segment
I just want to know if I have a position in
Yesbank Nov80CE
with 2 lot of 2200 = 4400 and premium paid @5
If strick price reaches to 100 and premium reach to 10 than how calculate has been made before expiry
100-80-5=15×4400
Or
10-5=5×4400
Second same figures but on expiry what will the proffit.
Or I need to extra money arrange if strick price crossed form 80 before or on expiry date
STT charges are when less before expiry sqoff or automatically sqoff by exchange in ITM.
If I already sold my holding before expiry that will not make any effect on tha date of expiry or any other exercise be done at the date of expiry
Please
Thanks
The difference in buy-sell premium i.e. 10-5 = 5 multiplied by the lot size is your P&L. The margin now depends on your overall portfolio. Yes, STT charges are lesser.
Hey Kartik,
Suppose I’ve bought some option (call and put). Here’s how the profit/loss is calculated if I square of position BEFORE the expiry
CE Buy -> Premium at the time of buying – current premium
PE Buy -> Current premium – Premium at the time of buying
CE Sell -> Premium at the time of buying – current premium
PE Sell -> Current premium – Premium at the time of buying
Are these calculations right?
Yes, Rahul. Before expiry, it is essentially the difference between the buy and sell premium.
Is it mandatory to square off the sold call or put, if they are out of money at end of expiry.
like If I have sold call of reliance of strike price of 1600 and end of expiry price of reliance is Rs. 1500
so reliance strike price 1600 is out of money and I have sold call of 1600 strike price.
so need i have to square off with the price of Rs. 0.05 or it is expires worthless (no need to square off).
thanks in advance.
Nope, not mandatory. You can let it expire worthless.
Hi Sir, can I make profit based on difference in premium, by buying a OTM call option at a particular strike and squaring it off before expiry even though spot is below the strike price?
Yes, you can.
Thanks for this great effort sir,how does technical analysis work with market driven by emotions like corona virus…. isn’t that fundamental analysis and long term investment is better and use TA for entry and exit point(just want to know your answer sir)😊
In times like these, none of them works properly. These are unprecedented times with extreme panic. You need to wait, watch, and take your steps cautiously.
Hi Karthik you r doing a great job, pls clarify my doubt, for an example if i sell a PUT option (1000=1 lot) at a strike price of 8500 at a premium of Rs.10 suppose if market goes down suddenly for various reasons that premium goes to Rs 25. So total loss is 150%.
1) I’ve invested 10000 now I square off & lost 15000 in this scenario how zeroda will collect extra 5000 & brokerage from me??????
2) Is “collateral” mandatory for option sellers & what r they????
1) Yes, the money will be taken from the margin blocked.
2) At the time of selling, you need to ensure there is adequate margin (not collateral), else the trade won’t go through.
If I buy put option premium 500 strike price 8000 with expiry 4months from now then if I exit my position when Spot price is 7000 . Am I exitng in profit of 500 or just change in premium i.e only exchanging contract to some other buyer?
Change in premium is your P&L.
Hi Karthik sorry for troubling u as I am extending the questions, pls clarify my doubt, for an example if i SELL a PUT option (1 lot=1000) TODAY at a strike price of 8500 at a premium of “Rs.10”
Suppose TOMORROW if premium rises to “Rs 25” i.e, 150% when the market starts at 9.15AM.
1)Will zeroda block the margin before market starts i.e, during pre-open session?
2)Will zeroda block the margin before it exceeds the loss of 100%?
3)What if zeroda blocks the margin @25 i.e,150%, should I pay that extra 5 Rs Premium i.e,50% margin additional Rs 5000?
Hi Kartik,
Thanks a lot for the wonderful content..
Please help me with my doubt…
Suppose I am put option seller and sold a lot @ premium of 10 (1lot=1000) @ strike price of 10000
1st case:
A week later market fell drastically to 7000 ,So as a put seller can I square off the put and come out to minimise my loss as trends suggest market will slide further.
2nd case:
And, if the premium is at 25 and buyer of the put sells the put to another buyer @25 with a net gain of 15 per share, so in this case will it effect my margin held with zerodha?
Thanks for your response in advance..
1) Yes, he can do this
2) No, it wont unless you have a margin benefit for this.
Hi sr
Sr how can we do intraday in options as we are following European options …As you have told in this chapter we can only exercise at the expiration date of option in European options..TIA
You can still trade the premiums, Aman and close the position intraday.
Hi Sir , i got to learn that the buyer starts to recover his premium and gaining profit once he crosses the break-even point , and opposite for the seller. But practically when i was executing a trade , i started gaining profit (for call buy) as soon as the spot moved towards the strike. This seems different than theory.
Please explain !!!!!!!!
The explanation is based on the assumption that you hold the option to expiry. If you are trading, then the P&L just depends on what price you buy and what price you sell.
Hi there , I was looking to buy a call option having almost 34 days to expiry and a premium of Rs 1/-. What would happen if the underlying drops down and the premium comes down to zero. Will the premium still recover if the underlying moves towards the strike price ?
Also, can we buy an option having a premium of Rs 0/- ????
As long as there is time to expiry, the premium can never be 0. It will have a positive value at which you can transact, provided it has liquidity.
is Volatility favorable for option buyers or options sellers..?? I mean if stock is volatile, is it good to buy option or sell them during intraday..? please let me know that.
Its good for both, depends on how you use it.
I am asking this because I heard that since Nifty is less volatile, option sellers prefer trading more in Nifty, while Banknifty is more volatile so option buyers prefer trading in it..!! Is it right what I heard.?? please clear my confusion..
No that is not true 🙂
very nice sir.. I have 3 doubts..
1> if I sell Nifty 8500 PUT (7-May Exp) @ 6/-, so what will happen if Nifty expiry at 8550 & I dont SquareOff it at expiry. My profit will be auto credited in my Trading A/C ?
2> if I buy Banknifty 20000 PUT (7-May Exp) @103/-, so what will happen if BankNifty expiry at 19200 & my Premium reaches 1000/- at expiry. Is it possible that I wont get Buyers at Expiry at that much HIGHER premium? I dont SquareOff it. What will be consequences?
3> On 30-April expiry Banknifty @21534. So PE (upto 21500) & CE (above 21500) Premium should be 0.05 or 0.1 Then why
14200PE expired @1.5
18800PE expired @0.3
23800CE expired @0.3
29300CE expired @2.9
1) The option will expire worthlessly, hence you get to retain the premium
2) Bank Nifty is highly liquid, you will get an exit, not a worry
3) Please look at the settlement price
Sir,
I am new to option short sell
Today I did short sell (short sold/written off) INDIGO airlines stock call option CE1160 of 28 May 2020 expiry by mistake at Rs.14.80 …………… Though i have collected the premium 14.80 x 300= Rs.4440 by shorting the CALL option , later I have seen that open interest (oi) is only 2100 and V =0 (I think volume) ……………… As the lot size is 300 quantity , that means only 2100/300 = 7 lot has been traded at this strike price….
(1) In-case when there will be no volume at the short sell strike price CE1160 , and suppose next few days stock price move to 1100 , than without any volume at strike price ce1160 , how i can exit/ square off/buy the short position , to avoid any loss (Because if it moves beyond 1160+14.80 = 1174.80 price , than i will be having unlimited loss) ?
(2) Is there any possibility that premium become higher than 14.80 when stock price move upward at ce1100 (i think premium will not increase as it not touched or crossed my short sell rate f ce1160). Please advise because i heard that premium decay happens as time and days goes near to expiry?
(3) Suppose on the day of expiry it settles at price 1150 and my short call CE1160 become out of money (OTM) then what penalty or charges will be added?
(3) I heard that SEBI has changed Option rules on year 2020 , and zerodha do square off the position one day before / prior to expiry if the trader don’t settle it 1 or 2 days ahead of expiry . Why this has done? What will happen if wait till expiry and wait to call become OTM ?
Exchange reports only 1 side volume, hence it could be about 14 lots.
1) You cannot, this is called ‘liquidity risk’. YOu will have to place a limit order and hope that it gets filled at a price you want.
2) Yes, this can happen. Premium decay happens, but it happens at a lower rate now because there is still time to expiry
3) Nothing, since the option is worthless you will get to keep the premium. However, since there is physical delivery, you will have to bring equity. So its best to square off before expiry. More on physical delivery here – https://support.zerodha.com/category/trading-and-markets/margin-leverage-and-product-and-order-types/articles/policy-on-physical-settlement
4) Yes, this is related to physical delivery.
Today 14 May 2020 Indigo was trading at Rs.971 , when i done far out of the money (OTM) call CE1160 at 14.80
I’m not sure if I get your query fully, can you please share more context? Thanks.
Thank You Karthik Rangappa Sir for sharing the point wise query reply……and that too very fast within the same day …………. Can you able to give me link of some video learning lesson on SHORT SELL / write of any stock cash market , stock & indices in options market (not future market) , hedging…….because though we read articles , but video with live exapmles are easy to catch
Let me look for these Jatin. I’m sure there are many on youtube.
Sir, I am new to options and I have account in zerotha
I have doubt regarding buying and selling options.
Sir ,my question is can I do trade in (for say: Banknifty options or any stocks options) same as like stocks but I want to ask can I do trade in premiums.
Let’s say I want to trade in Banknifty 21st may 16000 PE and I buy trade with premium 11 rupees and after few minutes when it reaches 15 and I sell it and when it again comes down and I short sell when it goes down at rupee 14 premium and again after few minutes I buy it at 12 premium. Can I do like that trade and what will be my profit if I take quantity lot size of Banknifty is 20 and I take 2000 quantity means 100 lot.
And same question is for call side means let’s say if I take trade in Banknifty 21st may 22000 CE in intraday and I buy their premium at rupee 13 and after few minutes sell it goes to 22 and vice versa . Can I do trade like that in intraday and what will be my profit if I take quantity 2000 means 100 lots in bank nifty.
And can I take margin in zerotha for intraday in options in this strategy,. How much is that margin ?
I am new to options trading and I am confused to buy and selling call and put .I only want to do trade in intraday ,not hold until expiry because I was already doing trading in intraday in stocks and now I want to apply same strategy in options in this way in intraday, please help us?
Is this possible in options in intraday?
Yes, Vikrant. You can trade-in options premium, just like the way you would with the stocks. No problem with this. While placing the order, choose MIS product type for additional leverage.
No need to hold till expiry.
How much is the leverage I get in mis
You can check that here – https://zerodha.com/margin-calculator/SPAN/
Hi Karthik….
M in a deep mess and need your help…. I purchased 2 lots of Nifty May 8900 PE @CMP 196.5 and 6 lots of BANKNIFTY May 17000 PE @ CMP 480 on 20th May.. Both these options are OTM as of today and are trading at much lower rates… My P&L shows around -40,000…😢…
Please guide me on what can I do to get out of this put problem..
Sorry to hear this. Unfortunately, there is nothing much that can be done. You either have to take this hit or hope that the market moves in your favour and you get an exit.
Karthik,
Both expire on 28 May 2020.
Thanks for your kind words, Karthik!
I hope you recover your losses quickly. Good luck.
Hi Sir!
Say I sell a NIFTY [email protected] with NIFTY spot as 9031. This means till 8966 I am profitable below which my loss start. Say tomorrow is expiry and due to some reason option prices rise to 200 for same 9150 strike and market starts falling but still remained at 8970. Here will I make profit of 183.8 premium I receive or loss of (200 – 183.8) = 16.2 due to increase in premium now?
Thanks and Regards
Saurav
When you write a put, you will make a profit upon expiry as long as the spot is at or above the strike, in which case you get to retain the entire premium. You make a loss if the spot moves below the strike.
Thnak you sir. That I understand. What I wanted to understand is how sudden change in premium can affect my PL. Is it possible that premium values appreciate and my oerall PL turn negative? Since I am selling an ITM put and if it remains or ITM, won’t premium increase day by day?
Yes, premium changes every instance, so will your P&L.
First of all I would like to thank you for sharing such a beautifully explained article.
I have a little confusion in my mind. I beg your pardon if in case it sounds silly as I am newbie. 🙂
Query 1: Suppose, we buy an Option of any stock XYX of 20 shares/lot @110 price. So, premium will be 110×20=2200 INR.
Now, First Condition is, he sells it @130 during intraday. What will be the profit? 400 INR or 2600 INR?
Second Condition is, if he sells next day @130, will the profit be, 400 INR or loss of 1800 INR? As premium gets deducted from the profit.
Query 2: Suppose, we sell an Option of any stock XYX of 20 shares/lot @110 price. So, margin will be something in thousands.
Now, First Condition is, he buys it @90 during intraday. What will be the profit? 400 INR?
Second Condition is, if he buys next day @90, will the profit be the same? i.e., 400 INR?
Query 3: It actually linked to above two, i.e., during intraday option trading, we don’t have to pay premium or margin, right? we only have to pay premium or margin if we keep the trade for next day, right?
I would be really obliged if you clear this confusion, Thank you!
1) Yes, that is correct. The premium paid is premium * lot size. If you bought and 110 and sold at 130, your profit is 20*lot size. The same holds true irrespective of which day you sell.
2) Yes, margins will be applicable for selling an option. In this case, your profit will be 110-90 = 20, so 20*lot size. The same holds true irrespective of which day you buy.
3) You need to pay the premium or margin for intraday as well. However, if you are using MIS, the margin gets reduced.
Hello Mr. Karthik, Thanks for responding to my query.
If in case of monthly or weekly expiry, then will the premium or margin also be paid? if we get in the trade in the morning and square off the trade before day closing?
Yes, the premium for long and margin for short will be applicable.
Thanks again Mr. Karthik for giving prompt response to my query.
So, if we sum up all asked doubts in an example-
Buying Reliance Jun 1500 CE @34 for the shares of 505 per lot, it will cost the premium of 17170 INR and no matter whether I will sell it today or any other day, in case it rises above 34, that will be the complete profit despite paying 17170 INR as premium. Right?
Yes, for example, if it goes to 40, you will make 6 * lot size as profit.
Hello sir..
I have a doubt regarding premium.
Example, buy BANKNIFTY xxxxx CE at ₹45 and sell Same at ₹60. I am making +15.
now, will I get only 15 or premium+15 as return?
In short, will I get my premium back if i sell before expiry?
You will get 60, which means a 15/- profit over your investment.
Hi Karthik,
So i have being reading the chapters trying to understand options. Please check if my understanding is right and if you can help me solve the doubts
Say i am a option seller and say spot nifty is 9500 and I have sold 1 lot call for NIFTY CE 10500 Jun 25 @ Rupees 10
Question 1:
1. If I have sold the call today at 10 rupee premium, the premium fluctuates through the day so say by 3 pm the premium is at 8. How does one unwind this position ? I purchase the same call at 8 and the position closes and i make 2 rupees on the position and similarly for put If i have sold the put at 10 and intraday it falls to 8 I purchase the put and close the position with 2 rupee profit ?is this understanding correct ?
2. If I were to hold the above position for say 10 – 15 days or even till expiry, in the interim when the call/put premium fluctuates. Or even an increase in the premium on intra day basis, Does it have an impact on my margin ? Say if the premium were to jump to say 12
3. How does one write a new option, when i look at the nifty option chain I dont see an option like 10105, or 11025 or 11075 etc. How are such options written for trade ? can i as individual do it or is it made available by the exchange.
4. Why are time value and intrinsic values not specified as a value on say the nifty option chain ?
1) Yes, the option premium trades just like a stock
2) There will be, but at 12 it won’t be much and nothing to do from your end
3) You load that strike on the MarketWatch and click sell, thats it:)
ok, with regards
“3. How does one write a new option, when i look at the nifty option chain I dont see an option like 10105, or 11025 or 11075 etc. How are such options written for trade ? can i as individual do it or is it made available by the exchange.”
So for example when i search for say a reliance Jun 1308 pe, it doesnt show up that value. Even if i search for a 10105 CE it adds the 10100 option? so how do this.
Nifty strikes are available 50 point interval, so odd lots like 11025/75 etc are not available. The strikes depend on the underlying asset.
Understand, but then what about a stock like reliance, I see there is an option at 1307.60. How is that decided. My question at what point and who is the first initiator of a particular option.
So as an individual can i write an option like 1308 ? or does the exchange define an option and then buyers and sellers work basis that?
Like I said, the strike price intervals depend on the price of the underlying. For example, if a stock is priced at 75, there is no point having 50 Rupee strikes. The strikes will be around 2.50 here. For any stock, look at the option chain and you’ll know which strikes are available.
Understand, helpful… thanx a ton !
Goodluck!
Hi Karthik,
Thanks for the wonderful explanation. Per you explanation, traders can create different combination of call and put options to make profit.
Lets Say Nifty is at 10000 and I am bullish on the market, So
1) Buying the nifty in call options by paying the premium
Also thinking that market would go down and also would like to make profit if the market goes down
2) Buying the put option by paying the premium
In both the cases, My maximum lose is premium but if market goes in either of the direction I can make profits in any one of my trades right? Did I understand this correctly?
Thank you!
Yes, whenever you buy options, the max loss is restricted to the extent of the premium paid.
Kindly resolve one query
Query 1: Suppose, we sell a call Option of any stock XYX of 20 shares/lot @110 price. So, margin will be something in thousands.
Now, First Condition is, he buys it @90 during intraday. What will be the profit? 400 INR?
Second Condition is, if he buys next day @90, will the profit be the same? i.e., 400 INR?
Am I right?
1) You make a profit of 30 here, multiplied by lot size
2) Same as above.
If I already have 20 shares of XYZ stock in my portfolio @Rs.80/share then
Kindly resolve the query: Suppose, I sell a call Option on 3 JUN for monthly expiry of any stock XYZ of 20 shares/lot @100 price.
Current market price of stock is Rs.80/share.
First Condition is, on expiry if stock goes to Rs. 110 then I have to sell all my holding shares @Rs. 110 per share.
Second Condition is, on expiry if stock goes to Rs. 50 then I got premium amount as profit.
Am I right?
Kindly ignore previous post.
1) Yes, in this case, you will have to bring stock, which you already have in your DEMAT
2) Yes, in this case, you can retain the entire premium
Thanks for reply.
Are both situations beneficial?
Depends on the market circumstances.
Hi All,
If I have buy some call option for a particular month. If strike price is not achieved. So can I move this to another months. Paying some more premium. Once month end all money is gone when strike price is not hit.
That’s right, Vivek. If by expiry the stock does not move higher than the strike price, you will lose all money.
hello sir,
one basis concept is drilling me , as per the screenshot shared above of BHEL , Open low close high , all figures are stated but beside them a figure on the left side is there of 7.8 showing a increase of 100 % from 3.9 . I though it was current market price but market was close while taking screenshot of this stock so what does this price reflect ?
It was the LTP at market close.
sorry sir , but i am still confused .The example above stated of BHEL shows LTP at market close differ from that of CLOSE price .LTP at market close become closing price then why there is a difference in the figures in the example mentioned above
Rajat, that is the closing price. I took this screenshot a few minutes after the market closing. There is no difference of any sort.
sir one more doubt ,
i go through the NSE website and kite chart for the paticular share ( RELIANCE) today , dated 6 july
sir there were difference of 0.05 – 0.1 in certain figures when i compared the figures of open high low close from NSE website to that of KITE chart directly
Is it because of round figures or something else?
That’s possible, do check this – https://tradingqna.com/t/why-does-two-charts-of-the-same-timeframe-look-different-on-the-same-platform/4715
sir what happen when we buy a call option of a strike price which is below the spot price ?
That will be an ITM option, premium will be higher.
Thank you so much Sir.
u taught me a lot of things in very simple language.
Honestly i would not have lost so much money if i would have studied this.
definitely would recommend any beginner to go through all the topics.
Thank you .
Happy reading, Siddharth 🙂
very well explained, looking forward to learn more
Happy learning.
Hi
I am a newbie to option
I would like no know that in a Call option trade on expiry date if trade becomes ITM in intraday , but on closing share price will below the stike price. In such condition contract will expired or excuted.
Thank you
No, in that case, the option is still OTM. The point is that the option should be OTM upon expiry, during the day is ok.
Sir,
The options premiums that change every second when we trade in zerodha are all driven by supply/ demand market forces or automatically calculated backend based on Black Scholes formula by the exchange ?
Thanks in Advance
Supply-demand, guided by a fair price as derived from a B&S calculator.
Sir, I am a complete newbie into trading along with technical analysis should one watch news also. Please tell me from where one can get news is it sites like monecontrol.
Also sir what should be minimum amount to start trading?
There is no minimum amount to start. You can start with as low as 500 also. Yes, news helps in building a view. You can check out https://pulse.zerodha.com/ to get a clutter-free news aggregation experience.
Also Sir I want to start with rs 3000 (savings) as I am a student now so no active income. What would you suggest where should I start trading from equity or currency trading or something else. Asking this because I read on quora that with little amount one can start trading in currency. Please tell me which should be best for a begginer.
Thank you very much.
I’d suggest you get used to the act of buying and holding stock in the initial days. Once you get used to it, you can to explore trading.Straight away starting to trade can be a daunting affair.
Sir I understand that Option greeks are going to play a role in determining the appropriate Premium, but i am still a little curious to know one thing,
If RIL is trading @1997.7Rs and someone sells a 1800RIL PE @Premium of 5.9Rs then from that Put option seller’s perspective the premium should go higher as RIL’s share price goes over 2000Rs, but from a Put option buyer’s perspective the premium should go lower. So then how is a an adept Premium value fixed?
Thanks.
Arti, irrespective of call or Put, the option seller wants the premium to go lower to the price which she has sold and the buyer wants the price to go higher from the price she has bought at.
Ok sir got your point. My bad. But what you said matters only when we try to square off our position anytime before expiry, right? At the date of expiry the value at which premium trades is irrelevant. Only the Premium fixed as Payable/receivable(at the time of buying and selling respectively) is considered. Isn’t it?
Yes, at expiry, what matters is the intrinsic value of the option.
can i buy an option call with strike price lower than the spot price? If yes, the spot price is already higher than the spot price, then will i make a profit or when is the loss?
Yes, you can buy any strike you wish. When you buy, you have to pay for the premium. So there is a cost. You will make money only if the price of the premium increases.
Please clarify if I can write/sell a covered call option and collect premium on HDFC securities platform.
I have one lot of ITC shares in my dmat account with them.
I am willing to deliver the shares if the price goes beyond the srike price.
Other wise I will keep the premium
Yes, you can. However, you will not get any margin benefit for this.
THANK YOU FOR THE PROMPT REPLY.
But i did not understand about margin benefit.
Which part of the margin benefit, Narasimha?
Sir, Can I convert NRML positional trade into MIS after a week on expiry day? THANKS.
Meaning?
Sir ,I have a positional trade which I have taken one week ago in options .Can I convert that trade into MIS today? If yes then can that be done in both long and short positions? Thank you sir.
Karthik, could you please explain this?
‘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.’
I did not understand this. What are the scenarios in which a seller may sell/square it off? Is there a loss due to squaring off both ITM and OTM?
You sell for Rs.8, you will get to retain this amount only if you buy it back at 0. It will goto 0 on expiry, provided the option is worthless (OTM). Have explained this in the module.
Dear sir, I am beginner in options trading and doing studies of different different option strategies , I would like to know if I am using STRADDLE + BUTTERFLY strategy example sbi is having strike price of 200, then I am USING STRATEGY
BUY 210 CE
SELL 200 CE
SELL 200 PE
BUY 190 PE
In this case I can receive a good premium against sold 200 CE and PE , but I would like to know if I want to exit from strategy before expiry then in this case it will deduct my recieved premium amount ?
Yes, if you exit out of the positions, then the P&L will be based on the premium value at exit.
Hi karthik sir,
Can you please clarify something for me,
Lets say I’m Bearish on a share and in the beginning of the month I sold its call option with a premium of 10/- per share. Let’s say the lot size was 1000.
The next day premium reduces to 6/- per share. Now i want to book profit so,
1) I’ll have to buy the call option to exit the position and book profit on premium, right?
If I’m correct then,
2) when I buy the call option I’ll have to pay premium @6/- per share, right?
3)Then the difference between the premium I received and the premium I paid(i.e. 10000-6000=4000) will be my profit, is that right?
Thats absolutely correct, Rishabh.
Now suddenly in 2nd week, the stock spot value jumps backs to sat 990 Rs….. my losses from futures stock are getting less… but 1000CE call sell will definitely go towards losses AM I CORRECT ?????????
Excerpt From Vikas Rana’s question,
Pl answer what to do, Exit or else?
There nothing like ‘definite’ in the market, Shankar.
Hi Karthik,
If we use naked sell option ( for call or put)with stop loss , it is risk free. The loss is restricted to the stop loss. Am i correct?
Yeah, but it is not ‘ risk-free’, its ‘risk contained’ 🙂
Hello,
I have one question , I buy option call when infosys stock price was at 1030/- INR , with premium as 7/- INR (1 lot of 1200 stocks) for 1050 as strike price , so I pay premium as 1200*7= 8400/- INR, now on expiry day, market crashes and infosys share price becomes 975/- INR and OTM call option primum price becomes 0.5 (5 paisa), and there was no buyer for the same (unable to sell said call option ), so here I will loose 8400/- or more?
That’s right, you lose the premium money in case the option expires out of the money.
Thanks sir.
One more thing,
Suppose i buy one call option of XYZ trade having spot price as 2000/- and strike price as 2050/- , primum is 8/- and lot size is 500 ,so I invested 500*8=4000/- , on same day or on next day , spot price becomes 2035 and primum also moves to 12/- , now still it did not hit strike price , but still i am in profit i.e. 12-8*500=2000/-, so here , i will sell said option and gain profit , will not wait to hit for strike price , so any harm in this process ? Or we cannot sell option call like stocks ?
Yes, you can do this, no need to wait till expiry.
Hello Sir,
I am new to options. I have some basic query.
Suppose I bought call options in OCT of a stock say RELIANCE NOV CE 2500 , current price of stock (spot value) is 2200/- and premium is 8/- , lot size is 505 , so I invested 505*8= 4040/- , now on same day or next day only (in OCT only) RELIANCE stock price becomes 2300/- (it still did not hit strike price of 2500/-), and my premium prize becomes 20/- and total value of my lot becomes 505*20=10,100/- , so my profit is 10100-4040=6060/- , so what is use of strike price then? It anyways grows till it hits strike price?
Rajesh, strike price matters a lot. Especially when it comes to taking delivery on expiry days.
Hi Sir,
Thanks for your guidance , i made 45 K in less than 2 weeks via call options only (out of money call only). Still I am beginner , some basic fundas wants to clear.
Advantage of out of money call is , you don’t need to bother to exercise it till expiry day , max loss is your premium and no limit for max profit.However catch here is if it hits/crosses strike price then it got converted into ‘in the money’ call option. For e.g. I bought IDEA OCT CE 12 and on expiry day only if it hits 12.50/- and if i do not exercise my call till eod on expiry day , I need to buy entire lot i.e. 45,000 stocks in case of IDEA, is this correct? As ‘in the money’ options needs to exercise at any cost before expiry and even-though it was purchased/bought as out of money , it got converted into ‘in the money’ due to rice in stock price , then ‘In the money’ is huge risky than ‘out of money’ and what is point on going for ‘in the money’ call option?
Jaggi, yes, you will have to take delivery of ITM options. Taking delivery is not really a huge risk, you can still take delivery of stocks and sell it in markets for a higher rate right?
Yes sir,
But we need to have that much money to take delivery. For e.g. in case of IDEA , slot is of 45,000 stocks, and in case of ITM if we do not exercise call option on expiry day , we need to invest said money to take delivery (e.g. if stock price is 10/- INR, we need to have 4.5 Lacs to take this delivery), is this understanding correct?
Thats right. But you can always square off the position before expiry too.
Thanks sir for reply.
But, on expiray day its not guranteed that some buyer will available. Many times squaring call on expiry day becomes diffcult due to no buyer, so in such case , for OTM , loss is restricted to primium paid only but big risk on ITM , as in case of ‘no buyer’ in ITM, you need to take physical delivery of all stocks i.e. you should have that much money in pocket, so always better to square off positions before 1-2 days before expiry day irrespective of OTM/ITM calls and OTM have low risk compared to ITM , does this understandinh is correct ?
Jaggi, there is no concern of settlement from the exchange as the contracts will get settled even if there are no sellers available. However, you need to go through the physical settlement process. If you don’t want to take these chances, then yes, its better if you sell before expiry. Ensure you deal with liquid contracts so that you avoid getting stuck in illiquid contracts.
Hi,
I am Getting error in zerodha while buying fresh call option of ‘bank nifty’ today for 01st Oct expiry with strike price as 22500 and its present spot value is 21100. Error is;
“Fresh buy orders are not allowed for this strike due to OI restrictions.Buy for range 21000-21500 only”. What does it mean?
This means that the strike that you are trying to buy is not permitted due to restrictions.
The content is excellent, especially for layman understanding. Can we get access to these chapters in some form? Paid subscription or can we buy these modules for academic interest and learning? Thanks a lot for sharing on online platform.
YOu have free access to it here itself, right?
Hello sir, you have been doing a great job with these modules which are really helping us a lot. I only had one question in mind that are these modules on options sufficient for a person to learn about this if he is planning to become a full time trader or does he have to do an additional online course and if so which course would you recommend?
I’d believe so, this module along with the next has everything you need to know about options trading.
sir can we sell call or put option on expiry day and square off our position by buying them again at low price and till what time i have to buy them again on expiry day and what will happen if forget to square off my position
Yes, you can.
Hi sir..
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
Sir we put sell only make money when spot price is below strike price and you have mentioned the market should be bullish.. Please clarify this..
Thats right Chandu, to profit out of a short PUT position, you expect the market to go higher.
I got the answer for last question sir.. I was just little confused
Good 🙂
Sir,
I am very new to F&0 segment.
I have sold ITC JAN 190 PUT OPTION ie PE for Rs 1.15 premium.
Plz guide me what to do..
Whether to wait till expiry or shall I square off. If I square off, how much premium will I get?
If I hold till monthly expiry how much capital shall I need to buy ITC at Rs 190, Is that Rs 190*3200.
Plz help me.
Obliged,
Hi karthik,
Thank you for the module as I have learnt from your module better than anuone yet.
therefore I have doubts for you to assist me with:-
1:- Explain ITM and OTM elaborately as got confused that spot price is above strike price or vice versa. hope you will assist.
2:- Explain margins
To understand the concept of ITM and OTM, you need to understand the concept of time value and intrinsic value. I’ve explained that in the moneyness of the options chapter. Basically, ITM = In the money, these are options which have intrinsic value OTM options don’t have intrinsic value and has only time value.
Hi Kartik,
Will it not be prudent for the initial trader to buy Option Calls or puts rather than be a seller of either.
Atleast initially till one gets a feel of the trades before venturing into selling
Yes, at least in the initial stages.
If I sold Call Option, and on the day of expiry the spot price is below strike price then do I need to do anything to exit the trade or it will automatically get squared-off at premium of Rs 0?
You need not have to do anything, it will be automatically squared off to 0.
This is a very helpful module. Thank you.
My query is of a very beginner level.
For a call option buyer, he/she can make profits by trading on the Premium instead of waiting till expiry. But what about a call option seller? A seller receives premium from the buyer. So can you please explain what happens if a seller exits before expiry?
Its the same for both buyer and seller, Rohit. The seller too can exit whenever he/she desires.
Thank you, Karthik. But isn’t the seller Obligated to sell the shares to the buyer at expiry? If the spot price is moving up sharply well and above the strike price and if the Buyer hasn’t exited yet (Possibly because he prefers physical settlement and is hoping to get the shares from the seller at the agreed upon strike price since it looks like the spot will be way higher than the strike at expiry) and is holding on to the contract, can the seller still Exit before expiry? If that is the case, then can’t all Sellers just pocket the premium and exit the position immediately thereby guaranteeing confirmed profits?
Apologies if my question is based on a wrong assumption.
Rohit, that’s the advantage of a ‘tradable asset’. At any point, the buyer or the seller can simply choose to exit their position. When they exit, the same position is held by a new buyer or seller. Like this, the contract will continue to exist, until it expires on the expiry day.
Got it. Thank you, Karthik.
Good luck, Rohit!
Can we have more examples for this kind of topics?
There are quite a few after this chapter, Kavita.
when there is a buyer for each seller in derivative trading then why I could not find buyer for my call option on Expiry day..
The availability of the buyer and seller depends on that particular moment in the market 🙂
If I get gain from change in prices of premium how is it considered in return filling ?
Considered as business income, assuming you are a regular trader.
Thank You so much sir for your effort. I was able to atleast begin my first trade in options after this chapter, i think my basics of options were cleared to some extent and these articles also drive away the fear of the unknown.
Thanks once again 🙂
Happy to note that, Divya! Keep learning 🙂
Under fund tab my option premium is showing in negative , what is the meaning of that.
The total amount you have paid to purchase options. This value will be negative if you have received funds for shorting/writing options.
Check this Haarish – https://support.zerodha.com/category/trading-and-markets/margin-leverage-and-product-and-order-types/articles/kite-dashboard-and-fund-values-calculation
Karthik . Great and extremely understandable learning modules.
Can you suggest any site where demo trading can be practiced from live Data for Indai.
Maybe you should check Sensibull website.
Hi, I have a doubt. Suppose I have bought a PUT option at 10rs then I exit at 12rs. Exiting means that I have now become a seller and may face unlimited loss on the expiry?
No, exit means that you are out of the market and any further movement in the market has no consequences to you.
Hi Karthik,
I have some queries related to the premium received or pay by an option holder/writer.
1. You have mentioned that the option writer only gets the premium on the day of expiry, but if I want to square off my position, I can buy an option. Will I not receive the difference in the premium amount on the day of squaring off, or I have to wait till expiry?
2. Selling a future or an option both require margins. But for the futures, if I ignore MTM Losses and look only at the big picture, will it be good to go for shorting futures only as options have higher margins? Also, buying futures require margin but buying options- that will direct me to buy options only and overlook the alternatives. Please correct me if I am wrong in my predictions.
Anyway, I love Zerodha, and a great thumbs up to you and the varsity team for making my life in stock trading very easy.
1) Yes you will be settled on T+1 basis if you were to close out the position. Btw, if you are to hold to expiry, then you will get the full premium assuming the option is worthless.
2) The margins are similar, not different. Option buying has limited risk, hence there is no margin
Thanks, and happy learning!
Available hai sir abhi aap ke paas
on the last day of settlement i.e 15th April what would be the premium on call and put of strike rate of 14950 nifty when the current mkt rate is say 15000 and starts moving above the strike rate of 14950.
It depends on the exact spot price. CE will have an intrinsic value if the spot is higher than the strike and put will have an intrinsic value if the spot is lower than the strike. I’ve given the exact formula in the chapter.
Is positional and intraday/scalping option different or same?
Both are very different. Positional trading = you expect to capture a large move with positions held over few trading sessions. Intraday is exact opposite i.e. small profits, held for a short span.
In intraday, if one is an option buyer, can he trade in any strike price provided that he buy that premium at low and exit at high even though spot price does not reach that strike price.
Ex. Spot Price of BankNifty 31900 at 10:00 am,
Strike Price selected: 32300
Premium: 320 (during buy)
If the market is bullish and the Spot Price of BankNifty is 32200 at 12:00 am and Premium of 32300 reaches from 320 to 520 and we exit.
Will I be profitable?
Yes, you can exit at any given point, Saurabh. No need to hold to expiry.
Sir, in zerodha varsity there is no chapter for NSE option chain learnig. Please see that.
You can check this – https://zerodha.com/varsity/chapter/moneyness-of-an-option-contract/
The seller of the option has unlimited risk but minimal profit potential (to the extent of the premium received)
Assuming you put an appropriate stop loss, say stop loss=premium received.
Then unlimited risk no longer exists right?
Yes, thats always possible.
If I short 33200 put @400
And at expiry market closes at 33100
What will be my profit and loss.
The option will have an intrinsic value of 100, but since you’ve received 400, you will get to keep 300 as profits here.
Hi Karthik, Could you kindly help me understand this scenario. Assume Day 5 is expiry.
Day1: Person A and Person Z has entered in to the contract. A is buyer and Z is seller. Strike price for PVR is 1200, premium paid by buyer is 80. At this point, all that Seller(Z) gets is limited to 80(at the expiry), if his prediction turns out to be true.
Day2: Premium went upto 100. Buyer(A) exits his position @100 which was then bought by someone called C. Now a new buyer came into place called ‘C’. My 1st question is, As the A exits and C comes in place, does the contract now lies between C and Z ? If yes, then Is the premium that Seller(Z) gets is now changed to 100 ?
On the Same Day(Day2) or Day3: Can the seller now exit his position by taking away the increased premium ?
Yes, the new agreement is between C & Z. However, the premium you paid is to A, so A get to make a quick buck here i.e 100-80 = 20. C and Z can exit their positions anytime, no need to wait till expiry.
Dear Sir,
Thank You for providing such beneficial information to all pupil who wants to learn the stock market from scratch before entering the real game.
I’d like to inform you about the data which the site provides whereas the data which the app provides have a huge difference and also there’s no update regarding Module 12 in the app which shows ‘Coming Soon’ for the last 2 years. Can you provide an update on these queries?
Also, I’ve noticed some issues with Varsity App Qualification Test and Certification Test wherein some answers I selected were changed unanimously and due to which scores during those tests were affected. Please provide the updates regarding the issue ASAP.
Thank You for your humble efforts.
Module 12 – which is inner worth is available on the app Sanskar. Check the home page in the app. About the questions, can you please tell me what issues you’ve noticed.
How to decide a Strike Price.
Please Enlighten me
This entire module is for that, please do check 🙂
Hi Karthik, Kindly clarify these doubts of mine, I’m very confused with how premium’s works for ‘Seller’ and what happens when Seller Exits!!
Day1, 9:30AM : Assume a contract occurred between A(buyer) and Z(seller). ‘A’ bought the option at 80 premium.
Sam Day(Day1), 9:45AM: Premium increased to 100. Seller ‘Z’ exits the position, where ‘Y’ has comes in to place. Now the Contract is between ‘A’ (Buyer) and ‘Y’ (Seller).
Question1: In the above case, what’s the Premium that Seller(‘Y’) gets ? Is it 100 or the 80 ? Since originally the agreed contract was at premium 80 between ‘A’ and ‘Z’ !!
Question2: When the premium increased to 100. The first seller ‘Z’ got panicked and exited immediately. Now, will there be any Loss/Profit for ‘Z’?
The contract is a floating rate…keeps changing every minute. When A and Z struck a deal, the premium was 80. Now both of them can exit anytime they wish. When Z decided to close the position, Z has to buy back. That means, he will be buying at 100 (at a loss) and the new seller selling at 100 is Y.
I’d suggest you read this chapter to understand this better – https://zerodha.com/varsity/chapter/open-interest/ , I’ve used a similar example that you’ve quoted.
If I buy nifty CE date 03/06/21 @ Rs. 60/- . On due date it will become zero / Rs.0 05 ?
Or I buy PE , on due date it will become zero / Rs. 0.05 ?
It depends on the market movement, right?
Hi karthik brother. Really amazing. Kindly send me your whatsapp number 9037022131
I have a one confusion please clear it by given example suppose i am buying call option of 10 june 21 at the strike of 15750, of 1 lot, and at same time i am also buying another 1 lot of call at strike of 15550 and same time i am selling 2 lot at the srike of 15650 .
Means same time in a morning i am taking position with 3 trades
15750 CE BUY 1 LOT OF NIFTY
15650 CE SELL 2 LOT OF NIFTY
15559 CE BUY 1 LOT OF NIFTY
NOW position are opened but after few hours i want to take exit at spot of 15670
So i calculated i am making profit of 80 points its correct or not ?
As per my calculations :-
15670 – 15750 = -80 or loss in buying
15670 – 15650 = -20×2 lots = -40 for selling
In last 15550 – 15670 = 120 point
So 120-40 = 80
Is it correct ?
Please answer
Not really, it depends on what price you bought the option and the price at which you sold. Suppose you bought an option at 10 and sold the same at 13 on the same day, then the profit is Rs.3 in this case.
How to see number of contracts on nse official website..?
Please check the Open interest.
If on day of expiry, if my call option (long) is in the money, what happens if I don’t (or am not able to) square it off. Will it be settled in my favor?
2 scenarios:
1. Spot of ABC closes at 204 at the end of the day. I had bought a lot of 1000 of 200 call at RS. 10. If I don’t square off, I will receive 4000 whereas will pay 10000. Net out 6000.
2. I had bought a lot of Rs. 2. I will receive net income 2000.
Is my understanding correct?
It wont be squared off or settled till expiry. Alternatively, if you sell it, the difference between the buy and sell price of the premium will be settled.
1) What matters before expiry is the price at which you buy and sell the premium
2) Same as above
What if sold option becomes in the money on expiry?
Do I have to pay difference as loss or I can also pick delivery of shares at sold strike price?
All ITM stock options will be physically settled.
Sir, If I am trading in options and suppose market is trading on 15,513. I’ve put a call option on 15550 CE. And the market goes upto 15,538. Then I’d sell my lot! Now market goes down again at 15,520.. can I again buy the same trade i.e, 15550 CE on the same day??? To make extra profit?
Yes, you can intrday trade options.
Very useful information.
Thank you !
Happy reading!
Hello Sir,
In stock options I don’t know which order to use and how to put stoploss for that trade. I did put a stoploss in trade but price fell below it and still stoploss didn’t trigger. I seek for your help and guidance on this. Thanking you in anticipation 😊
Latesh, this is can happen when stock prices move quickly. I’d suggest you use a stoploss limit, and put the trigger price lower than the current price, so that your SL gets triggered as a market order but with protection.
I sold a Put Options of a stock, and at the moment it is showing ‘Out of Money’. My question is on the day of expiry in case it remains ‘Out of Money’, do I need to square-off, or maintain margin in my trading account? Or in this situation I have to do nothing, it will automatically settle, and I will receive the premium at which I sold the Put? Thank you.
No need, since the OTM option will expire worthless anyway.
Good Article for beginners to understand options trading .
Happy reading, Abhishek.
Thanks a lot sir for explaining in such a easy way.
Good luck, Deepak!
Is it possible
If yes then how??
Suppose PE of a Stock XYZ is sold at ₹ 10 @ strike price ₹ 100/-
After a week It is reduced to ₹2 and spot price increases to ₹ 180.
Then profit booking took place in market and spot price reduces to
₹ 120. But now the premium is increased to ₹20.
Expiry is short of one week.
Do the premium keep changing and adjusted like this .
This is possible, Ritu. Time to expiry plays an important role here.
Dear sir if have
ICall sell position and I hedge the position by call buy at different strike price, same lot size both position.
What will happened during settlement Whether I need take delivery of stock?
That depends, if both options are ITM, then no physical delivery. The position will be net off against each other. If both are OTM, then both expire worthlessly. Otherwise, whichever option is ITM, that will be settled physically.
Dear Sir,
Below are the details of option I am analysing .
My question is Target p&l show 915 does this mean this position is in profit of 915 if I exit this position now?
Premium paid is 9750.
QNIFTY 18151.85 +0.2%
B 1x 28 OCT 18300 Pe
Target price 10618
LTP: 10500
Entry Px: 9703
Target P&L: 915
Max Profit At Expiry
9.05L
Max Loss At Expiry
-9,703
Reward/Risk ratio
93
Breakeven at expiry Ⓒ
18105.95
Not sure where you are seeing the target P&L, but to identify the P&L, all you need to do is consider the difference between the purchase price of premium and sell price of premium and multiply by the lot size.
Hi sir
I have two queries
1)can we do intraday options on nifty and shares
2)let me know if yes I apply short straddle on share or nifty can
I square off immediately
As it is risk in my range bound (ie risk neutral)
1) Yes, you can.
2) Yes, you can.
Hi Karthik, your modules are very good and give a lot of clarity. I have a few question since I am very new to this aspect of trading.
Hypothetical example:
I write a call option with the below assumptions:
Nifty @18000 for a premium of Rs.100. Validity is till the last Thursday of the month.
Buyer pays premium of Rs.100 and buys.
Questions:
1. Premium goes down to Rs.50. As a buyer I make a loss if I want to sell the brought option, right?
2. Premium goes up to Rs.125. As a buyer I make a profit of Rs.25 if I want to sell the brought option, right?
3. If Nifty goes to 18200, and premium goes to 125, as a writer I am staring at a loss. Can I close/square off the call option mid term?
Thanks
1) Yes, thats right
2) Yes
3) Yes, you can. No need to wait till expiry.
thanks to zeridha varsity..spreading knowledge..
Happy learning!
Hi Karthik, I didn’t get ” 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 lets say you write an option at 8. After some time, you decide to square off at 5. The profit you make here is 3. Now, if you want to make the entire 8 as profit, you will have to buy back at 0 or say 0.1. You can do that (i.e. buy at 0 or 0.1), only on expiry.
Awesome, thank you so much for the knowledge you share. I can not thank you enough…cheers!
Happy learning!
Hi Karthik- one ws please.
If I’m bullish on a stock which is currently beaten down to go up in one month’s time.
Can i buy the dec call option sitting in November?
In the that case, will the time expiry make the premium worthless even if the stock prices reached strike point?
Yes, you can choose to buy either Dec or Jan call in Nov, but make sure they are liquid and tradable. Time value is something you need to take care off. Usually these options carry a huge amount of time value.
How long does it take for option scripts to react to changes in the underlying asset prices. When I see out of the call options of BANKNIFTY I see that the OTC options have there own price discovering mechanisms. Would anyone like to comment upon it.
It reacts instantly, Jay. When you look at options, don’t just look at the premium, look at the changes in bid and ask.
Sir,
Can you explain me what is shot covering.
Eg. Nifty close at 16900
At 17000 1 CR call writers are their.
Then if the next day open above 17200, then some analysts say huge short covering will happen and nifty will go high. But how i it happens?
Kiran, short covering is basically traders closing out their short position, which means they have to buy back their positions. Because traders are buying (to close their open position), markets tend to go up for a bit.
I have a doubt in the table of Options positions. What is the difference between the two views? “Bullish” and “Flat or Bullish”?
Flat to bullish is that you expect the price to either stay neutral or increase, but not fall 🙂
मुझे इस सम्बन्ध मे एक्सपर्ट का सुझाव और मार्गदर्शन चाहिए। कम जोखिम अधिक लाभ फुल प्रूफ के साथ लाइव ट्रेडिंग।
Mobile No-. 09125325672
In Hindi Language.
Hello again sir the chapters are on fire honestly never felt more motivated to continue 😁🙏
I’m 17 right now and want plenty of information and practice (dummy trading) before actually starting with real money when I get 18 and these modules contribute like 99.99% to it 🙂
Hey Chetan, I’m glad you liked the content here on Varsity. To practise, stick to USD INR, it’s not volatile, less risky, and you can learn all the nuances of placing an order easily with USDINR. Much better than paper trading I think 🙂
Before continuing ahead … Is data on premium and options Available in form of charts say candlestick..?
Yeah, you can look at the charts of options.
I appreciate your suggestion on forex .. so a doubt what do we trade and basically what’s the difference between USDINR and INRUSD
USD INR is what we trade. The easiest way to remember is – what does $1 cost in INR? This is USDINR. If you are looking at INR USD then you need to ask what does Rs.1 cost in USD? which as you can imagine is a tiny fractional number.
Maine Manappuram jan172.5CE buy kiya tha Premium Rs 4 par. Abhi uska premium Rs 0.05 hai jo lower circuit hai. Current market price of share is Rs 153. This is ITM or OTM? Agar weekly expiry ke din koi buyer nahi mila aur main contract square off nahi kar paya to kya hoga in present situation.
Kya mujhe physical delivery Leni paregi as per sebi new rule ya zerodha already square off kar dega. Kindly reply.
You should use the “Water image” instead of “Mirror image” in the pay off chart and previous chapter also when you are comparing charts side by side and up and down.
That’s new, I’ll check this Deedy.
In Option CE – if i exit less than my premium amount, whether capital will be Zero ?
Example:
Contract 17600CE
Bought Premium at Avg 277
If i sell at LTP 260 whether my captial will be zero or only will lose part of capital.
If you sell it at 260, then your loss is difference between the buy and sell value of the premium i.e. 277-260 = 17.
If a call option meets the strike price n in profit say, how to exercise. So also, put option
You cannot exercise the option, you can sell the option though.
Hi,
I need to understand if the following examples are right with regards to square-off
I bought Call option for XYZ stock, lot size = 100, strike price = 200 and spot price = 210.
to square-off the above trade I should “Sell Put” for XYZ stock, lot size = 100, strike price = 200
I bought Put option for XYZ stock, lot size = 100, strike price = 200 and spot price = 190.
to square-off the above trade I should “Sell Call” for XYZ stock, lot size = 100, strike price = 200
I couldn’t find any detailed explanation regarding the square-off process until now, if the square-off process has been detailed in this series, please redirect me to that part I need to understand it thoroughly.
Nathan, to square off you need to reverse the position you originally initiated. For example, if I buy 1 share of Reliance, to square off I need to sell 1 share of Reliance. Likewise, if I buy 1 lot of Call option, to square off I need to sell 1 lot of the same call option (cant be a different strike).
Hi Karthik,
Thank you for the wonderful study material. Just a quick one here.
If only European options are allowed in India how come one has the option to exercise while he is still bounded by the contract? Please throw some light on that
I’ve actually discussed that in this chapter – https://zerodha.com/varsity/chapter/options-m2m-and-pl/
Basically, they are two different things, I’ve discussed the difference between the two in the chapter.
Sir due to SEBI’s open interest regulation, SOME OTM OPTIONS cannot be BROUGHT
But such SAME OTM OPTONS can be SOLD
https://support.zerodha.com/category/trading-and-markets/kite-web-and-mobile/articles/why-did-my-bank-nifty-option-order-get-rejected
I think the persons who SOLD earlier would be buying (and)
and the NEW SELLERS can SELL to them – will it work like this sir?
To sell you need margins, and when you square off the position, you are not creating a new position, rather just closing an existing one.
https://support.zerodha.com/category/trading-and-markets/kite-web-and-mobile/articles/why-did-my-bank-nifty-option-order-get-rejected
Sir in this above link,
It has been told that sometimes DEEP OTM OPTIONS can’t be brought
But such SAME DEEP OTM OPTIONS can be sold.
How Sir???
Selling requires margins, Muthu, which is several times over the premium you’d pay as a buyer.
want open demat
sumit
8000556439
9950119876
Sir kindly suggest me how many times I can do call or put option in a day?
As many times as you want, but that said, excessive trading usually does more harm to you than it benefits you.
I am new to zerodha option trading. In a week how many times we are allowed to buy option & exit. For example I buy option 17000PE and exit. Later same week shall I buy same 17000 PE multiple times
How can I buy stocks myself on expiry for- a written put option (in the money) ? or I need to wait for settlement ?
You need to wait for settlement.
Good explanation to boost the confidence of a nascent options trader.
Happy with the concepts being explained in a layman’s terms
Happy learning 🙂
Dear Karthik,
Excellent effort on Explaining this complex subject!
I have a query.. Could pls clarify this?
Example: (Ref.08/12/22 Expiry).
On 02/12 friday close, Nifty Spot at 18696. (18700).
NIFTY 18900 PUT CLOSES AT 213. (ITM worth 204)
NIFTY 18500 CALL CLOSES AT 251. (ITM worth 196).
My QUery is: When We take these Two pairs, Same Distance (200 Pts) from the SPOT on both sides, PUT Options at almost zero premium (Just 10 pts)… But on Call Side it Trades at nearly 60 Pts Premium… (SOmetimes, its 75 pts premium on same situations)..
I request you to Explain, What such scenario Indicates? Why there is almost no premium on one side (Here PUT Side), eventhough its just 1% distance Strike from Nifty Spot, that too on first day of the fresh weekly expiry?
Pls clarify on this case, as this would help us a lot..
Eswaran, so the premium is a function of many factors. One of the explanations for this disparity is that the sellers maybe expect the market to break 18500 during the series, hence more activity/premium to this particular strike.
SIR I AM DOING NIFTY/BANK NIFTY OPTIONS SELLING … ON THURSDAY EXPIRY DAY I SELL A CALL/UPT OF RS 50 60 70 ANY MY FUND WILL BE USE AROUND 115000 RS … SIR IF BY MIKTAKE I FORGET OR BUY ON EXPIRY DAY HOW MY FUND WILL SETTLE.
The option contract will be cash settled, Ravi.
Hi Karthik, I have a very basic question, I don’t know how to think about it. Here it goes – if option prices are determined by a formula, then how does one trade in it? I mean when we see the market depth of a stock/index option for example, we see multiple prices being quoted by different traders, but if the price being quoted is purely the trader’s price, then how does the price get determined by the option pricing model. I mean how does the option price adjust itself based on the factors if people are quoting it. Is it that option pricing formula is merely quantifying what the traders are likely to do in a given situation?
Dave, so it is like this. We all know what the manufacturing and marketing cost of a Rolex is. But why does it still trade at a serious premium in the market? Because that’s how people perceive it. So options to are dictated by a theoretical price, but the market demand and supply situation rule over the theoretical price.
Hi dear sir, thank you for these valuable articles, I got very much good understanding, please make these more aspects or topics for option trading and candle chart etc.
Happy learning, Harpreet 🙂
As an option seller, do we get freedom to decide on (a) Strike Price (b) Premium Amount (c) No. of Shares in a lot.
Please clarify.
Thanks.
You get to choose the strike. But lot size is standardized..and the option premium is market driven.
Excellent course. Had a doubt though.
If I buy a call option of strike price 100 rs from an option writer (Mr. X) at say Rs 5. Now I sell this option contract itself for Rs 6 to Mr. Y (suppose). If Mr. Y exercises the option and CMP of underlying is 105. Now Mr. Y gets to buy the underlying at Rs 100 from the option writer(Mr. X) or myself (because I sold the contract to Y)?
In other words if a contract travels like X->Y->Z->A. And A is exercising, the liability or contract of A is with whom?
Since you have squared off the contract/position, you a no longer in the market. The trade is with the latest buyer and seller.
What if we
1.Buy option 100 CE when market price was 90 and market reached @a. 100 b. Reached @95 c. Reached @105
2.Buy 100 PE when market is at 110 and hold it until expiry with market at a. @100 b. Reached @95 c. reached @105 hold it till expiry.
Another query as said premium going to reduce each day then why should we hold option till expiry date. In which case should we hold it till expiry what the parameters to check this.
For 1 & 2, check this – https://zerodha.com/varsity/chapter/options-m2m-and-pl/
That depends on many factors, suggest you read the next set of chapter 🙂
Even in Selling call/put, the obligation is on seller and right is with buyer. Correct?
For example person A sells a Put option, it is still up to Buyer of put option whether or not to exersice the right to buy upon expiry. Right Sir?
Yes, sellers are always obligated to the buyers.
So much information…than watching videos on YouTube… content is top notch and most important thing is you are learning by your broker… ☺️
Happy learning, Gaurav 🙂
Respected Sir,
uptill this level, learning was smooth
now at this point chapter 7.3 of module 5 (OPTIONS)
There is a snapshot of BHEL
Underlying value 240.65
Strike Price 230 CE
Exp. Date NIL
Premium Price Close 7.80
Here I am stuck, to my understanding so far
Intrinsic Value should have been at least 10.65
Hence Closing Price of the Premium should have been at least 10.65
But here it is only 7.80
Kindly explain where I am going wrong or where to rectify the understanding.
I shall be grateful for your response.
Regards
Sagromoy, so the premium also depends on many other factors apart from direction. So you will also have to consider that 🙂
Thanks a lot for the fantastic inputs. This is truly unbeatable.
I have a question on the screenshots. Why is the close price not matching the price displayed in bold? the screenshot is take at 15;30 hrs which means the end of the day price
For BHEL , it shows close as Rs 4.05 and current price as Rs 7.05
For Idea , it shows close as Rs 0.55 and current price as Rs 0.30
I read an z-connect article on a possible small difference. But that happens late in the evening much after market close and the difference is normally small.
The close price is the average of the last 30 minutes trading, Kalyan. So the close price will always be different from the last traded price.
Hi
Thanks Karthik
Kalyan
Happy learning!
Sir, thank you for sharing your knowledge on Option trading.
Sir, you said Premiums = f (Option Greeks), Option Greeks = f (market conditions) & Market conditions change every minute.
Sir, will I be right in saying that market conditions are shown by “Change in Open Interest” in the open chain.
Open interest = f (trader’s sentiment). So its all interconnected to one another 🙂
Hi, so the option price is determined by the BS formula u say and market makers and market participants are the ones that trade contracts in the market. And they are the ones that quote the prices and the LTP becomes the price of the given contract. Where does the BS formula price comes here?
The prices traders quote is based on the fair value, as determined by B&S formula. For example, if a fair value of option is Rs.25, the trades would be in and around 25 and would not vary much.
I’m in college, know very little about trading and have an exam on various scenarios to buy/sell corn futures. In doing so, I need to understand and explain my approach as to why I may be buying calls/puts, setting my max price vs actual price etc. is there a tutor out there who I can speak with who’d be willing to work with me on understanding the concepts.
You can read through the contents here, I’ll be happy to answer if you have any specific questions.
Sir, somewhere in these capters you said it’s very rare for traders to exercise their option rather they trade on premium. What I understood is, if premium increases from what you have paid,( say I am an option call buyer) then you can sell it and pocket the difference. Right?
But my question is, why don’t traders wait till expiry, because if the trade is indeed going in your direction then the profit grows exponentially. If the premium is increasing, then it means the trade is going bullish. So why pocket the small difference in premium raher than waiting to exercise the option on expiry? Is it because the risk is very high and the probability is only 33%?
Thats right, most traders prefer to exit trades before expiry, and by that I mean you can exit the trade on the day of expiry also and not necessary to wait till the close of the market (and expiry). You can check this as well – https://zerodha.com/varsity/chapter/options-m2m-and-pl/
As you said for the seller he need to hold the option till expiry for the sake of premiums, but what is the buyer buys it before the expiry from the seller?
Your position will stay open for as long as you wisk to keep it, Prem.
As premium=intrinsic value + Time value
So on 05 September nifty options expired,Nifty closed 25234 on expiry but nifty CE 25200 05 September option closed at 0.As intrinsic value is left as option expired why premium where not 34(25234-25200)?
You cant look at the close price, you need to look at the settlement price. Check this – https://www.youtube.com/watch?v=eJiouVUWEb0
Sir as option buyers after capturing moment they sold premium in market.but as a option seller if written contract for one month.how it can be square off before expiry.so after getting few premium if there is chance market gaining momentum I have to become option buyers.
The same rules applies for both buyer and sellers in-terms of transactional abilities. So yes, the sellers can square off the positions, anytime they wish.