## 9.1 – Overview

Yesterday I watched the latest bollywood flick ‘Piku’. Quite nice I must say. After watching the movie I was casually pondering over what really made me like Piku – was it the overall storyline, or Amitabh Bachchan’s brilliant acting, or Deepika Padukone’s charming screen presence, or Shoojit Sircar’s brilliant direction? Well, I suppose it was a mix of all these factors that made the movie enjoyable.

This also made me realize, there is a remarkable similarity between a bollywood movie and an options trade. Similar to a bollywood movie, for an options trade to be successful in the market there are several forces which need to work in the option trader’s favor. These forces are collectively called ‘The Option Greeks’. These forces influence an option contract in real time, affecting the premium to either increase or decrease on a minute by minute basis. To make matters complicated, these forces not only influence the premiums directly but also influence each another.

To put this in perspective think about these two bollywood actors – Aamir Khan and Salman Khan. Movie buffs would recognize them as two independent acting forces (similar to option Greeks) of Bollywood. They can independently influence the outcome of the movie they act in (think of the movie as an options premium). However if you put both these guys in a single flick, chances are that they will try to pull one another down while at the same time push themselves up and at the same time try to make the movie a success. Do you see the juggling around here? This may not be a perfect analogy, but I hope it gives you a sense of what I’m trying to convey.

Options Premiums, options Greeks, and the natural demand supply situation of the markets influence each other. Though all these factors work as independent agents, yet they are all intervened with one another. The final outcome of this mixture can be assessed in the option’s premium. For an options trader, assessing the variation in premium is most important. He needs to develop a sense for how these factors play out before setting up an option trade.

So without much ado, let me introduce the Greeks to you –

**Delta**– Measures the rate of change of options premium based on the directional movement of the underlying**Gamma**– Rate of change of delta itself**Vega**– Rate of change of premium based on change in volatility**Theta**– Measures the impact on premium based on time left for expiry

We will discuss these Greeks over the next few chapters. The focus of this chapter is to understand the Delta.

## 9.2 – Delta of an Option

Notice the following two snapshots here – they belong to Nifty’s 8250 CE option. The first snapshot was taken at 09:18 AM when Nifty spot was at 8292.

Now notice the change in premium – at 09:18 AM **when Nifty was at 8292 **the call option was trading at 144, however at 10:00 AM **Nifty moved to 8315 **and the same call option was trading at 150.

In fact here is another snapshot at 10:55 AM – **Nifty declined to 8288** and so did the option premium (declined to 133).

From the above observations one thing stands out very clear – as and when the value of the spot changes, so does the option premium. More precisely as we already know – the call option premium increases with the increase in the spot value and vice versa.

Keeping this in perspective, imagine this – you have predicted that Nifty will reach 8355 by 3:00 PM today. From the snapshots above we know that the premium will certainly change – but by how much? What is the likely value of the 8250 CE premium if Nifty reaches 8355?

Well, this is exactly where the ‘Delta of an Option’ comes handy. The Delta measures how an options value changes with respect to the change in the underlying. In simpler terms, the Delta of an option helps us answer questions of this sort – “By how many points will the option premium change for every 1 point change in the underlying?”

Therefore the Option Greek’s ‘Delta’ captures the effect of the directional movement of the market on the Option’s premium.

The delta is a number which varies –

- Between 0 and 1 for a call option, some traders prefer to use the 0 to 100 scale. So the delta value of 0.55 on 0 to 1 scale is equivalent to 55 on the 0 to 100 scale.
- Between -1 and 0 (-100 to 0) for a put option. So the delta value of -0.4 on the -1 to 0 scale is equivalent to -40 on the -100 to 0 scale
- We will soon understand why the put option’s delta has a negative value associated with it

At this stage I want to give you an orientation of how this chapter will shape up, please do keep this at the back of your mind as I believe it will help you join the dots better –

- We will understand how we can use the Delta value for Call Options
- A quick note on how the Delta values are arrived at
- Understand how we can use the Delta value for Put Options
- Delta Characteristics – Delta vs. Spot, Delta Acceleration (continued in next chapter)
- Option positions in terms of Delta (continued in next chapter)

So let’s hit the road!

## 9.3 – Delta for a Call Option

We know the delta is a number that ranges between 0 and 1. Assume a call option has a delta of 0.3 or 30 – what does this mean?

Well, as we know the delta measures the rate of change of premium for every unit change in the underlying. So a delta of 0.3 indicates that for every 1 point change in the underlying, the premium is likely change by 0.3 units, or for every 100 point change in the underlying the premium is likely to change by 30 points.

The following example should help you understand this better –

Nifty @ 10:55 AM is at 8288

Option Strike = 8250 Call Option

Premium = 133

Delta of the option = + 0.55

Nifty @ 3:15 PM is expected to reach 8310

What is the likely option premium value at 3:15 PM?

Well, this is fairly easy to calculate. We know the Delta of the option is 0.55, which means for every 1 point change in the underlying the premium is expected to change by 0.55 points.

We are expecting the underlying to change by 22 points (8310 – 8288), hence the premium is supposed to increase by

= 22*0.55

**= 12.1 **

Therefore the new option premium is expected to trade around **145.1** (133+12.1)

Which is the sum of old premium + expected change in premium

Let us pick another case – what if one anticipates a drop in Nifty? What will happen to the premium? Let us figure that out –

Nifty @ 10:55 AM is at 8288

Option Strike = 8250 Call Option

Premium = 133

Delta of the option = 0.55

Nifty @ 3:15 PM is expected to reach 8200

What is the likely premium value at 3:15 PM?

We are expecting Nifty to decline by **– 88** points (8200 – 8288), hence the change in premium will be –

= – 88 * 0.55

= **– 48.4**

Therefore the premium is expected to trade around

= 133 – 48.4

= 84.6** **(new premium value)

As you can see from the above two examples, the delta helps us evaluate the premium value based on the directional move in the underlying. This is extremely useful information to have while trading options. For example assume you expect a massive 100 point up move on Nifty, and based on this expectation you decide to buy an option. There are two Call options and you need to decide which one to buy.

Call Option 1 has a delta of 0.05

Call Option 2 has a delta of 0.2

Now the question is, which option will you buy?

Let us do some math to answer this –

Change in underlying = 100 points

Call option 1 Delta = 0.05

Change in premium for call option 1 = 100 * 0.05

= 5

Call option 2 Delta = 0.2

Change in premium for call option 2 = 100 * 0.2

= 20

As you can see the same 100 point move in the underlying has different effects on different options. In this case clearly the trader would be better off buying Call Option 2. This should give you a hint – the delta helps you select the right option strike to trade. But of course there are more dimensions to this, which we will explore soon.

At this stage let me post a very important question – Why is the delta value for a call option bound by 0 and 1? Why can’t the call option’s delta go beyond 0 and 1?

To help understand this, let us look at 2 scenarios wherein I will purposely keep the delta value above 1 and below 0.

**Scenario 1: Delta greater than 1 for a call option**

Nifty @ 10:55 AM at 8268

Option Strike = 8250 Call Option

Premium = 133

Delta of the option = 1.5 (purposely keeping it above 1)

Nifty @ 3:15 PM is expected to reach 8310

What is the likely premium value at 3:15 PM?

Change in Nifty = 42 points

Therefore the change in premium (considering the delta is 1.5)

= 1.5*42

**= 63**

Do you notice that? The answer suggests that for a 42 point change in the underlying, the value of premium is increasing by 63 points! In other words, the option is gaining more value than the underlying itself. Remember the option is a derivative contract, it derives its value from its respective underlying, hence it can never move faster than the underlying.

If the delta is 1 (which is the maximum delta value) it signifies that the option is moving in line with the underlying which is acceptable, but a value higher than 1 does not make sense. For this reason the delta of an option is fixed to a maximum value of 1 or 100.

Let us extend the same logic to figure out why the delta of a call option is lower bound to 0.

**Scenario 2: Delta lesser than 0 for a call option**

Nifty @ 10:55 AM at 8288

Option Strike = 8300 Call Option

Premium = 9

Delta of the option = – 0.2 (have purposely changed the value to below 0, hence negative delta)

Nifty @ 3:15 PM is expected to reach 8200

What is the likely premium value at 3:15 PM?

Change in Nifty = 88 points (8288 -8200)

Therefore the change in premium (considering the delta is -0.2)

= -0.2*88

= **-17.6**

For a moment we will assume this is true, therefore new premium will be

= -17.6 + 9

= **– 8.6**

As you can see in this case, when the delta of a call option goes below 0, there is a possibility for the premium to go below 0, which is impossible. At this point do recollect the premium irrespective of a call or put can never be negative. Hence for this reason, the delta of a call option is lower bound to zero.

## 9.4 – Who decides the value of the Delta?

The value of the delta is one of the many outputs from the Black & Scholes option pricing formula. As I have mentioned earlier in this module, the B&S formula takes in a bunch of inputs and gives out a few key outputs. The output includes the option’s delta value and other Greeks. After discussing all the Greeks, we will also go through the B&S formula to strengthen our understanding on options. However for now, you need to be aware that the delta and other Greeks are market driven values and are computed by the B&S formula.

However here is a table which will help you identify the approximate delta value for a given option –

Option Type | Approx Delta value (CE) | Approx Delta value (PE) |
---|---|---|

Deep ITM | Between + 0.8 to + 1 | Between – 0.8 to – 1 |

Slightly ITM | Between + 0.6 to + 1 | Between – 0.6 to – 1 |

ATM | Between + 0.45 to + 0.55 | Between – 0.45 to – 0.55 |

Slightly OTM | Between + 0.45 to + 0.3 | Between – 0.45 to -0.3 |

Deep OTM | Between + 0.3 to + 0 | Between – 0.3 to – 0 |

Of course you can always find out the exact delta of an option by using a B&S option pricing calculator.

## 9.5 – Delta for a Put Option

Do recollect the Delta of a Put Option ranges from -1 to 0. The negative sign is just to illustrate the fact that when the underlying gains in value, the value of premium goes down. Keeping this in mind, consider the following details –

Parameters | Values |
---|---|

Underlying | Nifty |

Strike | 8300 |

Spot value | 8268 |

Premium | 128 |

Delta | -0.55 |

Expected Nifty Value (Case 1) | 8310 |

Expected Nifty Value (Case 2) | 8230 |

Note – 8268 is a slightly ITM option, hence the delta is around -0.55 (as indicated from the table above).

The objective is to evaluate the new premium value considering the delta value to be **-0.55**. Do pay attention to the calculations made below.

**Case 1:** Nifty is expected to move to 8310

Expected change = 8310 – 8268

= 42

Delta = – 0.55

= -0.55*42

**= -23.1**

Current Premium = 128

New Premium = 128 -23.1

**= 104.9**

Here I’m subtracting the value of delta since I know that the value of a Put option declines when the underlying value increases.

**Case 2:** Nifty is expected to move to 8230

Expected change = 8268 – 8230

= 38

Delta = – 0.55

= -0.55*38

**= -20.9**

Current Premium = 128

New Premium = 128 + 20.9

**= 148.9**

Here I’m adding the value of delta since I know that the value of a Put option gains when the underlying value decreases.

I hope with the above two Illustrations you are now clear on how to use the Put Option’s delta value to evaluate the new premium value. Also, I will take the liberty to skip explaining why the Put Option’s delta is bound between -1 and 0.

In fact I would encourage the readers to apply the same logic we used while understanding why the call option’s delta is bound between 0 and 1, to understand why Put option’s delta is bound between -1 and 0.

In the next chapter we will dig deeper into Delta and understand some of its characteristics.

### Key takeaways from this chapter

- Option Greeks are forces that influence the premium of an option
- Delta is an Option Greek that captures the effect of the direction of the market
- Call option delta varies between 0 and 1, some traders prefer to use 0 to 100.
- Put option delta varies between -1 and 0 (-100 to 0)
- The negative delta value for a Put Option indicates that the option premium and underlying value moves in the opposite direction
- ATM options have a delta of 0.5
- ITM option have a delta of close to 1
- OTM options have a delta of close to 0.

Hi kartik,

Very very thanks for new chapter. Contents are very good and clear but incomplete knowledge create confusion. So, I am waiting with Patience for your completing this module.

Thanks for you patience, we are working on the new chapter…will put up up as soon as we can.

hey Nikhil ,i have learnt alot from zerodha varsity. While going through this chapter and solving examples a doubt arose.it would be great if you could look into it.

In the example of call option where you talk about the role delta plays when one expects nifty to drop and the example where you take delta below 0. in these two case there is certain differences in computation of premium. i believe as per the computation in first example ,in later example it should have been

change in nifty= 8200-8288= -88

expected change in premium =

-88*(-0.2) = 17.6

hence new premium shall be 9+17.6=26.6

please look into it.and let me know if i have misunderstood the concept

Glad to note that, Jyotsana. By the way, the way to determine the change in Delta is by calculating the change in Nifty points multiplied by the Delta….so in this case –

88*0.2 = 17.6.

If you are long Call, add the delta to the premium, if you are short call, deduct the delta from the premium. Do not consider the algebraic sign at the time of calculating the change in delta. Easier this way 🙂

Ok,thanks I had a similar question ,which I have posted below.Of course we have to consider the premium both from a writer and buyer perspective..doubt cleared.

Ah, glad you figured 🙂

BS has been known to be erroneous for NIFTY (Asian Journal for Management) , how does one trust the Greeks then ? Is there a modification in BS Formula to consider the NIFTY.

Well, in that case, no model is perfect 🙂 I’m not sure if there is a variant which fits Nifty well. I need to check this.

Sir

Thank you very much for explaining the difficult subject in easy way. It’s really appreciable & thank you once again for taking so much pain to explain rather complicated things.

Keep it up. Awaiting eagerly for next chapters.

waiting for next chapter …..

hey first of all thanks for explaining the delta in such a simple way.

when will be the chapter on option strategies will come?

The module on Option stratergies will take some time…we will start work on that once the ongoing module on Options Theory is through.

If i sell first a stock at 25 and then buy at 20 before expiry , then my profit is 5 plus premium received. Am i right?

Let me rephrase this – If you sell an option (not stock) at a premium of 25 and buy the option back at 20, then the profit you make is Rs.5/- times the lot size”.

why not premium received?

Can you please elaborate your query, I’m unable to understand the context. Thanks.

You may have already realized answer to your question. If not, you received Rs25/- premium for selling the call option, which is already considered in the calculation, right ?

profit=(25-20)*lot size —- assuming you bought same number of contracts (lots), which you should be doing.

Hi Karthik

Your contents are very lucid that a layman in the Dalal Street can know more about the options trading.

This chapter particularly

//the option is gaining more value than the underlying itself. Remember the option is a derivative contract, it derives its value from its respective underlying, hence it can never move faster than the underlying. If the delta is 1 (which is the maximum delta value) it signifies that the option is moving in line with the underlying which is acceptable, but a value higher than 1 does not make sense. For this reason the delta of an option is fixed to a maximum value of 1 or 100.//

its a fantastic explanation about the delta value. Thanks for the contents. Need More classes like this.

Thanks for the kind words and encouragement 🙂

We are working towards putting up the chapters soon. Should be out soon.

sir,(personnel)with all my experience&sufferings i strongly beleive technicals,charts,indicators,etc wont work in options trading,it purely depends on greeks&mass psycycology&what u advised in t.analysis ie best suited for equities&fut moreover i didnt got any justification correct me if iam wrong&i wantededucational moves in TRADING

You are absolutely right – when it comes to option trading you should be using Option Greeks and other parameters to trade and not really Technical Analysis.

sir,thanks again(pnl) iam running a small business(mall) problem is iam unable to adjust money for trading,whatever comes by sales,borrowings will not be sufficieent for retail busin,iam unable to trade frely&give time to loss&repair in that pressure i end up loosing even i know many thiings which i learnt at somecost&3yrs now i dont want to waste my experience&knowledge&loose my passion which may turn to fortune in future if iam right so whats way,advise.

Take it easy is the advice 🙂 Here is what I would suggest –

1) Concentrate on your core business and try to improvise on the same

2) Do not trade the markets if you feel you are getting too stressed and therefore making losses

3) Slowly unlearn everything about the markets you know so far and then try to relearn in a structured way

4) Start with small amounts of investments (no trading)

5) Invest small amounts and watch it grow

6) Once you are comfortable with that, try investing significant amounts with an intention of creating wealth

7) And if you have gained enough confidence by then maybe you can dabble with small amounts of restricted trading

If you follow this, I have a feeling you will be in a much better position in the future.

sir,thanks,i dont think investing works in these econimic conditions as middleclass i cant about my core business my wife will always looks iam only a supporter with all this network i want something on my own,thatswhy iam passioate for this business for timebeing iam planning to trde 8 lots nifty options&1 fut stock as ur t.analysis teached sorry iam working smartly to overcome&win

Good luck Narsimha. I hope you have all the success in the market.

sir ,thanks will aiways follow,keep on learning&eventually turn to earning am i right

That’s the spirited attitude 🙂

sir,when can we expect TRADING STATEGIES ,LIKE BACKTESTING,WRITING OWN STATEGU&OTHER COMPLICATED SGIES,OFCOURSE THERE IS LOT INFORMATION IN NET ABOUT THESE BUT NOBODY WRITES LIKE U,WAITING

We will come up with a module called “Trading Strategies” which will include all this – meanwhile check this https://zerodha.com/expert-advisors/

Hi, just a question though it’s out of context but haven’t got this answer from anybody. When one sells a call option that means he has created a short position so can he close his position whenever he feels like or it will only close when the buyer of the call closes it. Have you in any of your chapters explained this. Not able to understand when analysts say that the price is above strike price nd now we can see shortcovering

You can close the short position anytime you want, not need to wait for either expiry or for the counterparty to close the position. This is true with long options as well.

sir,in morning trade first 2 min,why cant we trade (open=low)for long (open=high)for short,ithink it is marubuzo can we trade for v short time within 10min

Sure you can.

Sir, as you mentioned in this conversation:

“We will come up with a module called “Trading Strategies” which will include all this – meanwhile check this https://zerodha.com/expert-advisors/”

When that module will be published?

Sometime soon, Arijit. Hard to put a timeline to this.

Hi kartik,

I am an intra day trader. So, I never wait expiry to collect premium. So my question is — suppose nifty CE with strike price of 8200 and premium of 120 and delta or 5.5. If I were execute an long or short order and price moves some favour in my direction then my profit is equal on long or short position and risk should also be same on long and short orders depending upon the points I trail on stop loss on either side. The only difference is that I have to deposit margin money on short orders. Am I correct??? Please clarify.

When you say delta is 5.5 I hope you are talking about the 0 to 100 scale.

P&L on options is non linear. So when you buy a call option the profit you enjoy is very different from the profits you would enjoy when you are short. Likewise for risk.

Yes, when you short the margins are blocked from you trading account.

Where can we know the Greeks value for Nifty options?

Option Calculator helps – check this for now http://zerodha.com/z-connect/queries/stock-and-fo-queries/option-greeks/how-to-use-the-option-calculator

How does the value of Delta change with time decay?

Where we can get the delta values?

You can get the delta value from the Options calculator. Will discuss Delta against time shortly.

Hi Karthik,

One thing I am not able to understand since long is, how derivative follows underlying stock/index price and that too in very much sync? As per my understanding option price is decided by last trade price transaction(LTP) of that option. Then following somehting should not be practically possible. Lets say for example, If nifty is going down and suddenly some people try to buy options in extremely large quantity then that option price should increase but it does not happen. I have observed there is no relation of volume in price of options. if option price is calculated based on delta, theta, vega, time decay etc then who decides it? is someone punches that into system or exchange computers calculate based on these greeks formula and display as LTP? or is it just simple last trade price?

Thanks.

A derivative by definition is a contract that derives its value based on an underlying. Hence technically speaking derivatives cannot influence the spot. Option price is not decided by LTP, in fact LTP is decided by Option Pricing which in turn is depended on the Option Greeks. Volume is a function of pure demand and supply…so that is a different perspective all together.

Hi Karthick,

I had the same question. Just to clarify myself, I have two more questions.

1. So, can we say that volumes in the options does not influence option prices?.

2. It should be the exchange that enforces the prices and not the participants in the options market right?

Thank you for your time.

1) No, not really. There are more influencing factors than Volume.

2) No, options is tradable, hence the market decides the rate. The Exchange does not have a role to play in option pricing.

HI Karthik

Can you please elaborate on why no, since your answer is open ended.

1. Say if “Call” Option x currently trading at 100 and underlying assest trading at 1000.

we have 10 lots of sell order at 105, 10 at 110, 20 at 120. Total 40 sell orders at different prices. No buy orders as of now.

Later some point one buyer ordered 40 buy order at market price, same time underlying asset price droping to 980. But no new sellers of option.

In this case, after executing all 40 orders, LTP is 120 right….

Yes, 120 would be the last traded price.

Nifty @ 10:55 AM is at 8268

Option Strike = 8250 Call Option

Premium = 133

Delta of the option = 0.55

In above example how you take or calculate premium value 133 and delta option value 0.55

This was just an illustration – also do notice I have mentioned spot @ 8268 and strike @ 8250, hence this is an ITM option … therefore the Delta should be more than 0.5 – hence the assumption that the delta is 0.55.

And sir what about premium

How you take or calculate it

i.e 133

Option premium is market driven (although based on the B&S formula).

Where can one get delta value of nifty options on a real time basis ?

Check this post – http://zerodha.com/z-connect/queries/stock-and-fo-queries/option-greeks/how-to-use-the-option-calculator

Awesome…. Thank you so much for your untiring effort sir…

Pleasure is ours 🙂

When will you post the next part. We are waiting…

Part 2 is posted – working on Part 3 (chapter 11).

sir,for eod trades there is good website called TOP STOCK RESEACH IF U R FREE CHECK&ADVISE

Avoid all such things my friend 🙂

sir,how many moniters we need for intraday,bcoz we cant see many charts atatime& capitalise on fast movings

1 monitor is more than sufficient for trading!

Hi Karthik,

It’s a really nice write up.I have some queries.

Say NIFTY is trading at 8300 and there are still 10 days to expiry.Assume NIFTY 8400CE is trading at 30. Suddenly NIFTY spikes by 50 points and 8400CE suddenly becomes 50 +. Why the demand-supply equation doesn’t govern the option price ?Is it like sellers drop suddenly or buyers increase instantly ?Even if the option greeks control premium pricing,shouldn’t buy/sell numbers decide the price ? Sometimes the nifty spot price moves by 10 points (+ve), nearest CE moves by 2 rs sometimes and sometimes 5 rs. So what should be the definitive way to calculate ?

Thanks,

Debasish.

You answered it yourself – this about it bit by bit –

1) What is demand supply situation in the market?

Ans – It is the pressure to buy or sell a particular asset

2) What happens when the pressure builds?

Ans – Depending on the strength of the pressure (either there is more selling pressure of more buying pressure) the market moves in a certain direction.

3) What happens to options when the market moves?

Ans – The premium changes

4) By how much does the premium change?

Ans – That depends on the delta!

So as you see – Delta is captures the effect of directional movement, which by itself is a function of demand and supply of the market.

Thanks a lot for the reply Karthik. So, can we directly bet on the delta then via some instrument which is like “derivative of a derivative” ?

Yes of course, you can trade the Delta. We will be discussing much more about these topics soon.

Dear kartik,

I have understood call & put options,but i m confused regarding trading with put on the trading terminal.

Lets say i buy nifty put 8150 @ 100.After 3 days the nifty spot is at 8000 and premium @ 110…so how do i profit from above trade…if i sell put 8150..i would make a loss of 110-100=10*25=250…am i right sir?

Let me just rephrase what you’ve said –

Option Type – Nifty Put

Strike – 8150

Premium Paid – 100

Trade type – Long Put (buy put option)

3 days later…

Nifty Spot – 8000

Premium – 110

Profit = 110 -100 = Rs.10/=

Total Profit = 10 * 25 = Rs.250/-

So you make a profit on this trade and not a loss 🙂

Premium – 110

Sir, my question is related to the above example only. When we bought a put at 8150 and now the spot price is 8000 then isn’t the profit 8150-8000= 150

& 150-100(premium paid)= 50*25=1250

Because in previous examples, u calculated profit with the difference in the value of underlying asset instead of the value of premium.

Saurabh – yes, the profit will be at least to the extent of the intrinsic value..which in this case happens to be 8150 minus 8000 = 150. However I dint want to say this as I was worried about creating confusion. Hence used the same numbers Pankit quoted 🙂

Hi Karthik bro,

Now I am confused..shouldn’t SAURABH GARG calculation only be used when exercising the option and not when “trading” premium i.e. not waiting for expiry?

Thanks bro 🙂

Yes, the Option P&L before the expiry will be lot different when compared to the P&L on expiry. The calculation here is for expiry.

Dear Karthik Rangappa,

You deserve praise and thanks for taking all the troubles to

write it all quite clearly and making it all easily

understandable.

You do not have to publish the rest of this post: I just

thought I will bring 2 minor items (nit-picking, really!) to

your attention.

Section 9.2 : “Delta of an Option” : 2nd sentence:

“The first snapshot was taken at 09:18 AM when Nifty spot

was trading at 8278 (not captured in the snapshot). ”

1. The parenthetical remark “not captured in the snapshot” is

not quite correct:

In fact, Nifty is right there: see the line immediately below

“VWAP” on the “Fundamentals” tab:

Underlying Value : 8292.65

2. Nifty is an Index: it is not a traded asset.

So, the second part of the the sentence

“when Nifty spot was trading at 8278 ….”

can be stated more simply as :

“when Nifty was at 8278…”

(if one wants to be very pedantic and precise!)

If you agree on this change, you will have to make similar

changes at quite a few other places as well.

A good teacher sometimes deliberately makes mistakes in the class to

find out if the audience is alert or sleeping! Perhaps you too

inserted such mistakes to test if your audience is alert!

With best regards,

J. Viswanathan.

Wow! Thank you so much for pointing out these errors. I have made the necessary changes. The errors are not intentional and attributable to oversight. I would be very grateful if you can help in pointing out these errors. Please feel free to email these errors to me at karthik.r at zerodha dot com.

We are expecting the underlying to change by 42 points (8310 – 8288), hence the premium is supposed to increase by

= 22*0.55

Sir above 42 should be 22

Thanks for pointing that, have made the changes.

Delta of the option = 1.55 (purposely keeping it above 1)

Sir this should be 1.5 (Please see 1.5*42=63)

Will look into this. Thanks.

Change in Nifty = 68 points (8288 -8200)

Instead of 68 points it should be 88

Changes done. Thanks.

I know that if i am making loss as a buyer of an option i can simply allow my option to expire. and if i am making loss i will have to forgo the margin. But what if

A. As buyer of a call or put option i am making profit on the expiry but i don’t exercise the option. will i get the profit or not.

B. If i sold a call or put option and i am making profit on the expiry day but do not square off my position on the expiry.

Thanks and regards

When you buy an option you pay the full premium required and not really margins. You pay margins when you short option.

1) When you buy options and hold it till expiry then on the expiry day whatever profits you are entitled will be credited to your trading account.

2) When you short options and hold it till expiry then on the expiry day whatever profits you are entitled will be credited to your trading account. However STT on short option positions is quite high, so its advisable to close the trade yourself and not hold till expiry.

1 sir isn’t the stt same for buying and selling 0.05% on premium value and 0.125% on excersized contract value.

2.And if we are short on options we will be paying the stt at selling side only and why we need to worry about stt on buying side.

3.stt is high only on long positions itm options right.

1) Yes, the ‘value’ and how it is calculated varies based on the moneyness of the option, and hence such a big impact

2) Look at it in terms of moneyness

3) Yes

Many articles including wikipedia

(https://en.wikipedia.org/wiki/Black%E2%80%93Scholes_model) describe five Greeks,the last being RHO which is not described here. Why is it so ?

Rho is mainly with respect to Rate of change of underlying with changes in the interest rate. For all practical purpose the change in interest rate is minimal, and that makes Rho not a very active Greek…so I’m still contemplating to include this or not 🙂

is there is any option to calculate current delta of an option ?

Check this – http://zerodha.com/z-connect/queries/stock-and-fo-queries/option-greeks/how-to-use-the-option-calculator

right now pi providing these type calculation?

Not as of now Sarath.

is it come in soon right?

As mentioned in the above comments, while trading options it is advised to use Greeks and other parameters not really TA. My doubt is that after TA only we can predict the direction and position according to the view. Option Greek will increase the success probability but TA will be the base.. Correct me if am wrong.

Perfect. Use TA to get a directional view…use that along with greeks to calibrate your trade.

Can you highlight the other parameters to be considered apart from Greeks while trading options?

Knowing Greeks really well takes you a long way when it comes to options trading.

Please give me link on NSE for these greeks.regards

Not sure if NSE has a Greek calculator.

where to get values of Option Greeks before trading in options

We will soon have a greeks calculator.

Do you have a strategy for getting monthly income through Nifty options,keeping in mind the market tank on 24Aug2015, are there any option strategy that will protect ones capital

No strategy related to markets can guarantee capital.

You can try the strategy discussed in chapter 18.

Sir,

I have a doubt. For example, if i sell a lot at X premium price and waited till the expire day. I think the value of premium will approaches 0 (or say some lesser value) at the time if i bought a lot. Then i may get profit of X/lot. Is it possible??

Yes, but to make sure X goes to 0, the security has to be below the strike in case of Call options and above the strike in case of PUT options.

Hi Karthik bro,

In Buy side, If premium on particular day(lets say before 10 days or near to expire) is more than settlement i.e exercise amount then is it better to take the premium or is there any incentives if I let my ITM to expire and then exercise .

Thanks bro

There is no guarantee that the option will remain ITM upon expiry. If you are a short term trader, better to book profits when you see it on the table!

dear mr. karthik ,

after a very very very long-time , something / someone has sparked the learning charge in me.

i entered the learning modules out of necessity with a mindset of boredom , but now i am simply hooked and continuing for fun .

options clearly are “magical” and many things can be done using them .

i have developed a belief that options can be used for a secure no-risk,low-risk trading/investing .

IS IT POSSIBLE TO USE OPTIONS TO HEDGE OUR FUTURES TRADE ?

for example i am long on USD OCT 15 AT 66 .0000 . if price goes down i make a loss .

but what if i also go LONGPUT same script at 66.0000 ?

as per my thinking . the loss i make in futures ,is covered by profits in options and vice-versa .

i would like to know your comments .

case-2:-

long on USD OCT 15 FUT at 66.0000

and LONG PUT same script at 67.0000

what happens on expiry ,in between ?

I’m glad to know that Varsity has ignited your learning enthusiasm. Yes you are right about Options, lots of possibilities with these instruments.

Yes you can hedge your future positions with Options. Both the examples you quoted are classic long future + long put hedging strategy….and both of them are very similar. Buying 66 PE or 67 PE does not make much difference.

Thank you so much for the lessons and really so easy to learn .

I have one doubt .

9.3 Delta for call option.

spot price = 8288

strike price = 8250

premium = 133

delta = 0.55

expected to reach 8200

decline (8200-8288) = -88

-88*0.55 = -48.4

133 – 48.4 = 84.6

spot price = 8288

strike price = 8300

premium = 9

delta = -0.2

expected to reach 8200

decline (8288 – 8200) = 88

In first case decline is in negative value(8200 – 8288) and in second case decline is in positive value(8288 – 8200) , but both have same scenario . please explain why there is no negative delta value in call option with some other example. Thanks.

Thats because the delta is lower bound to 0…it cannot go lesser than 0. If it was lesser than 0, it means the option is moving faster than the underlying, which is counter intuitive.

Dear Karthik,

I have some doubt , call trading in different value where as put trading in same value , why there is variation in call premium , can you explain this and how to calculate the value ?

Raju – The B&S calculator gives the theoretical value. Could be different from market values.

Thanks for your reply.

nse option

Answered earlier.

hello mr kartik … i want to do option trading ,please guide me with how much (minimum) amount ,i can start with? 2) does option price (example yesterday dr ready 4300 put price was around 53+ and today was around 600+ …) does it move like stock price goes up n down? i mean want to know from a.b.c of live option trading..pls guide..thanks

Deepak this whole module is dedicated towards helping people understand options trading. Suggest you go through this chapter by chapter.

To trade options minimum amount would be something like 5000/- I suppose (nifty options).

hi karthik.

is there zany formula to calculate delta values?? or its consistent?

for EX

Nifty @ 10:55 AM is at 8288

Option Strike = 8250 Call Option

Premium = 133

Delta of the option = + 0.55

do this delta holds good in below case

Option Strike = 7900 Call Option

option spot = 7954

Premium = 36

whats delta value in above case and how do we derive it?

once again thanx for your patience for replying all quires

Delta of the option is dependent of the moneyness of the option – the thumb rule is

Option is ATM , Delta is ~ 0.5

Option is ITM , Delta is ~ between 0.5 to 1

Option is OTM , Delta is ~ between 0.1 to 0.5

Fantastic easy to understand and involving explanation. I have many times tried to study and understand Option Geeks from many sites but the explanation is so boring that I leave it mid way and close the site.

The difference between other site topics and your is that to understand the other sites the reader has to be an expert but by reading your site explanation the reader becomes an expert.

i love it.

Avinash – I’m so glad to know this.

Please do stay tunned for more content here 🙂

Hi Karthick,

Just not clear why we should buy option2 and not option 1? In option2 I will have to pay a higher premium and hence breakeven will be farther than in option 1 case?

Higher the delta, higher the probability of the option expiring in the money!

HI KARTHIK,

IV = SPOT -STRICK( FOR CALL OPTION) , SPOT MEANS SPOT PRICE OR FUTURE PRICE ?

Spot refers to spot values, not futures.

so in option underlying is spot right?

Yes.

Karthik bro.. plzz.. update commodity and currency module.. i want to learn how to trade in currency market..and also want to improve my knowledge on commodity market..i think many here many traders who are trading in commodity markets.. want to improve there skills..

Will do, two more chapters in this module and will move one to Commodities and Currency.

Hi, Karthik

understanding option with time principle is making me more tuff to solve the ENIGMA ,, i have an ready excel file with correct quote executed on the Trading Terminal , would lead to give a big junk of open interest to access .. i know there is a big potential behind the fortune gate …… i would strongly request you to give your few minutes of time on skype ,, i feel the place you and me stand here is we are just from skin of a teath .. i would like to share my knowledge with you on TIME ANALYSIS by W D Gann … ( square of 9 method) is generally understood as …

would be eagerly waiting for your reply ,,,,

Abhilash

Interesting, hopefully someday!

How to get the delta of an option ? Is it provided somewhere ?

You can use the calculator here – https://zerodha.com/tools/black-scholes

Hello Karthik Sir,

This module is absolutely perfect for anyone who wants to trade options. But one thing I’m confused about Delta risk is, how it (delta) will behave when price moves other way around.

For Example, in above screen shots

At 9:18 AM, NIFTY 8250 Call price was 144, when NIFTY spot was at 8292

At 10:00 AM, NIFTY 8250 Call price moves up to 149, when NIFTY spot was at 8315 (an increase of 4 points in call premium, I think at that moment delta would be around 0.15 to 0.20)

My confusion lies in the other side of the trade i.e. what if I have shorted the put option, how much Put Option premium has been reduced between 9:18 to 10:00 ? or what will happen to Delta of put option (will it increase or decrease) i.e.

If at 9:18 AM, Put 8250 delta would be around -0.45, when NIFTY spot was at 8292 (this put would be slightly OTM)

At 10:00 AM, Put 8250 delta would be what -0.4, -0.3, -0.2 ?, when NIFTY spot moves to 8315 (now PUT will moves slightly more OTM). My confusion lies in how much value Put option will loose ? In short I’m asking the rate of change in delta when prices moves other way around. I hope I’m not confusion you

I’m asking this question because when I look at the spread between Bid-Ask prices of options it gives me a sense that option are illiquid and it is better sell first and buy it later, and I don’t have to bother about STT when exchange auto-settle the ITM contracts.

Well, the Put option delta works the same way as the delta of a call, but in the reverse way. So if spot moves up, the call option delta increases and the put option delta decreases. Of course the delta for each strike varies based on the moneyness of the option. I’d suggest you read up further to know more on moneyness. By the way, 80%+ of all the F&O trading happens on options (Nifty especially), so there is ample liquidity in this particular market.

Ok NIFTY it is, I built my misconception on option by looking at RCOM current month option chain.

As to the question I asked, my confusion lies in the Writing Calls / Puts.

So going by the example you have mention in this chapter. How much is the change in delta when NIFTY spot moves down from 8315 to 8288. I’m simply asking how much change in delta a call option writer should expect when he/she short the call, since profit is directly related to fall in spot price.

Well, change in Delta is captured by Gamma, which is explained in the next chapter with an example 🙂

Hi Karthik,

The content is very crisp and clear with very good examples and thank you for this work.I have one question over the Delta example you gave in the chapter.For the underlying movement of 100 delta of 0.05 and 0.2 will have increased premiums of 5 and 20.So I as as a Option call buyer will need to pay less premium in case of choosing the 0.05 delta right,but you have mentioned the 0.2 delta is better.Am I missing something.Please clarify..

The selection of Option should not really be dependent on the delta. Hence, I would not choose an option with 0.2 over 0.05 just because i perceive 0.2 as a better delta.

Sir

Ur. Modules are too good. I think. The so called trainers should go through this module first before charging money Hats off to u sir

Thanks for the kind words, I’m glad you liked the content here 🙂

Karthik,

Great lessons. I’ve question though, I’m not clear on delta of CE cannot be negative. Does that mean, the option premium will never decrease, even if the underlying decreases?.

Yes, in fact this is exactly how a CE functions. When markets increase, the premium of CE decreases.

Hi Karthik,

Not able to understand why the CE option Premium will decrease, when the market increases. Shouldn’t it be other was round.

Regards,

Dheeraj

Yup. Thats’s what I would imagine. Call option delta is always positive because there is positive correlation between the price of the underlying and price of the option. In other words as the underlying goes up, the price of the option will go up too. Conversely, as the price of the underlying falls, the option price will fall too (again a case of positive correlation).

When it comes to put options, there is negative correlation between price of the underlying and option price. Hence the negative sign.

Absolutely, the call premium moves in line with the underlying and the put premium move the other way round.

where can i find real time option greek on zerodha kite,pi

Not as of now, Ankit.

Please correct the slightly ITM value from 0.6 to 1 to 0.6 to 0.8 in the delta table. At topic 9.4

Thanks, will fix that soon.

how we hedge with f&o with delta

Will be covering this topic soon 🙂

FUTURE AND OPTION CAN BE EXERCISED ONLY ON EXPIRY DATE ?? OR WE CAN EXERCISED THEM AT ANY TIME WITHIN EXPIRY.

Exercise is only on expiry day, however, you can square off the contract anytime you wish.

Hi karthik.

Amazing stuff written by youand big help in understanding options.

1 thing I was not sure about, In the table above where delta value is given for ATM, ITM and OTM.

In The value of ITM, should it be between 0.6 and 0.8 or 0.6 and 1 because for otm it is written the other way around.

Thanks

Thanks for the kind words, Sarthak.

Well, if the option is anywhere between ITM to deep ITM, then it can range anywhere between 0.6 to 1. The acceleration of delta slows down when the option traverses from deep ITM to further deep ITM. This is why you will notice a flattish curve towards the tail. The same is applicable to deep OTM to further deep OTM.

Hello sir

I want to know about changes in premium

For example yesterday’s banknifty close was 21640

Premium for call for strike price 21600 was 100

and for put it was 60

Now today banknifty has moved by

45 points either downward or upward now what

Would be changes in premium

I mean will be increment in premium equal to decrement

in another premium

You need to read up the chapter on Delta and Gamma to get a clear understanding of this. We have it covered in this and the subsequent chapters.

Sir I have read all modules 2-3times

Today whatever I have knowledge about stock market, just because of you

I am so grateful to you and to your team

If we talk about banknifty what I have observed that if tomorrow’s opening is less than 50-60 points in either direction then premium of today’s ATM changes in one way and if opens by more than 50-60 points then in different way

Why this happens

Thanks for the kind words, Rohit.

That is because the premiums are dependent on the spot prices.

sir .. today i buy nifty 9300 PE at 87.30 rs at the time of buying Put option spot was trading at 9305 ,,after 1 hr spot was trading at 9294 and put option is trading at 87.35 ….why this happen…. ideally it should be (9305-9244)*.50+87.30 =92.80 rs …am i right or wrong …or these option greeks are not work in case of intraday ….plz ans …

Remember, the volatility is also dropping here. Volatility has an impact on option premiums.

I am slowly taking into option trading even though I have burnt my fingers before. (Experience wasthe best teacher for me into business)

Now I am trying a strategy though with smaller lots. So far my results are mixed.

My post here is:

Nifty Jun 9800 CE on 11th May 2017 was 18.80 (Nifty spot value was around 9450at that time). Of course Nifty was on unexpected upswing for the previous day due to IMD monsoon data tricking in)

Nifty Jun 9800 CE on 15 May 2017 was 15.45 even though Nifty spot levels are around the same.

India Nifty VIX value was -0.11 and 0.44 respectively on 11th and 15th May respectively. (This means volatility has increased)

Then why the option price divergence between 11th and 15th May 2017? Unable to fathom. Is anything I am missing? Your help is appreciated.

Thanks.

Attributable to time decay to some extent, but the bigger reason could be the trader’s lack of confidence that Nifty will go beyond 9800.

Thanks for your reply.

Not only option greeks option buyers/sellers should also take overall expectation of the market it seems. Indicators are not absolute, I understand.

Is it so? In this case, gamma (time variance) could not have depleted so strongly as the contract is of far month. delta is good, vega is OK.

Yes, along with the greeks you also need to consider the overall market sentiment. This makes a difference.

Thanks.

May I know what factors vega depend?

Vega depends on Volatility. Please check this chapter – http://zerodha.com/varsity/chapter/vega/

With respect to your explanation of impact of Delta on premium. in the example where the Delta of first option is 0.05 and Delta of second option is 0.2. Didn’t understand the reason why would a trader be benefited by paying higher premium of 20. Please help explain.

Remember, the delta also showcases the probability of an option closing ITM. For example, if the delta is 0.7, it also means there is a 70% chance of the option closing ITM. So when a trader pays for a higher premium strike, he is looking for a brighter chances of closing ITM.

Hi Karthik,

I ‘ve a doubt about “Initial value of delta”.

I’m nowhere nearing to understand B&S model. What I’ve assumed is when spot price meets strike price the delta of that particular strike is 0.5 and say in call option the far most traded OTM stike price’s delta can be considered as zero. Similarly the far most traded ITM strike price’s delta can be considered as 1 and then on basis of relativity like percentile calculation all other strike price’s delta are calculated.

Is my assumption is correct? Pl shed some light over it.

Thanks in advance,

Koushik T

Your understanding of delta values seems to be correct. However, the deltas itself change due to market forces which is captured by the B&S model. You can keep it simple by assuming that the deltas of each strike is more or less an outcome of what the B&S model throws up.

Hi Karthik,

If I buy a call option, at first I thought that I will have to wait till the expiry of the contract to actually gain profits or book ‘losses=premium’

Now with the new information of dealing with the premiums itself to gain profits I have a confusion.

Lets say I am dealing with NIFTY options for Strike Price 9700 and Spot price 9500 with 30 days to expire. The premium was 160 when I bought the shares and the lot size was 75. After 2 days the premiums rose to 180 with the spot price at 9600 and I sell the contract. Will I gain (180-160)*75 \? or will I book losses of 160*75 as I did not want the contract and sold it before expiry?

You will make a profit of (180-160)*75 = 1500.

That means I am selling my contract to someone else for the current premium price, if I sell the the contract before expiry. But if I chose not to sell it and wait till the expiry then my profits/losses will be based on the theory which you said in the first few chapters of the options module.

Yes, if you wait for expiry, then you will get the settlement price on expiry.

Thank you. Love your work!!

Thanks for the kind words 🙂

Happy reading!

i) ITM- ATM => 1 To .50

ii) ATM=> .50

iii) ATM-OTM => .50 To 0

Am i right?

Will this be opposite for put option?

Yes, just the algebraic sign changes.

Yes, you are.

Hi kartik,

i have a account with zerodha in the name of my momm. You people are really doing good job of giving guidance and deep & explanation with simply way and good example. i really like zerodha varsity. God bless u people

Thank you so much for the kind words, Niraj. Happy learning!

Hi

Where can i find the delta value on kite or nse website

You can approximate the delta values yourself – check the delta table given the chapter. For the exact values, check this – https://zerodha.com/tools/black-scholes/

Why is CALL option premium directly proportional to spot price and PUT option premium inversely proportional to spot price?

Thats the way its structured 🙂

sir,

i have two question about maruti.

1.spot price-9647(down from 9705)

but CE of 9500 was increased by 8000 percent.

as the stock price came down than why call option of 9500 increased by these much amount.

2.if i bought call option of M&M with 770 at 11 rs and stock is trading at 757rs.

as i am bullish on stock and stock goes up and near to 765 the premium is also increase according to delta.but as per our calculation i made profit after 770+11 premium.but as stock goes up and as premium than if i sell my call option on higher premium than it would be profitable deal or not?

thank you.

1) This can be attributed to the increase in volatility

2) Remember, an option contract is also influenced by gamma, vega, and theta besides Delta. Hence you need to have a holistic view.

Hi Karthik,

Could you kindly suggest on the 2nd query:

If the option contract is sold before expiry (Call Option profitable trade), would the profit will be as follows:

(Spot – Strike) – Premium Paid * Lot Size

or

Difference in Premium * Lot Size

If sold before expiry, then you will always make the difference in premium. Hence, P&L = (Buy price of the premium – sale price of the premium ) * Lot Size.

We bow you for your efforts . Very beautifully explained . I am following this from chapter 1 . Thank you

Its all worth the efforts if people take the efforts to learn 🙂

Happy learning and stay profitable, Arun 🙂

Hi Karthik,

Great work as usual but would like to share one genuine concern – zerodha clients who want to sell fat OTM weekly BNF options are restricted due to some LTP percentage regulation. So today i wasnt able to short 26000 pe/29000 ce. Customer care says there is a certain percentage decided early morning which decides how far one can participate in these OTM options. I wonder how/why zerodha doesnt have clients who want to indulge in far OTM strikes.

i) There is significant activity in these strikes – which indicates other brokerages allow

ii) As per today’s % informed from zerodha customer care i.e. 4.1%, i could sell 26400 pe which is a slightly more riskier strike. Now ifi want to hedge it with buying a pe of lesser strike, say 26100, i cannot

iii) It is tedious and impractical calling everyday to support centre and asking for this % (im told this keeps changing daily). Could you please take some steps like putting it on your website (best), send a mail to clients who are interested to do so (better)?

Looking fwd to hearing from you.

Regards

Check this, Pratheesh – https://tradingqna.com/t/banknifty-bracket-and-cover-order-blocked/14152/2?u=bhuvanesh

Hi Karthik, I did go thru the thread but i didnt see any answers on the people’s query (which is similar to mine). Not sure if this was the intended link you wanted to share. Just to reiterate, my concern is that i am not able to short far OTM strikes with regular orders – not BO/CO/MIS.

Are you talking about far OTM of Bank Nifty weekly expiry? If yes, we do not allow that for reasons mentioned here – https://tradingqna.com/t/banknifty-bracket-and-cover-order-blocked/14152/2?u=bhuvanesh

If a client wants to know which is the farthest OTM BNF weekly option strike price that can be traded on that day, do you intend him/her to call the customer care to know that particular day’s percentage? Can the process be simplified please?

Still didnt get my answer 🙁

Pratheesh, as of now you have to call up the customer care and check the limits. We are trying to make this process simpler

Hi Karthik – Am new to options and trying to learn using zerodha. Must say it is awesome tutorial. I have a query . in the below example which you have given

“Call Option 1 has a delta of 0.05, Call Option 2 has a delta of 0.2

Now the question is, which option will you buy?

Let us do some math to answer this –

Change in underlying = 100 points, Call option 1 Delta = 0.05,Change in premium for call option 1 = 100 * 0.05, = 5

Call option 2 Delta = 0.2,Change in premium for call option 2 = 100 * 0.2,= 20

As you can see the same 100 point move in the underlying has different effects on different options. In this case clearly the trader would be better off buying Call Option 2. ”

I thought Option 1 is better as the trader will pay lower premium for the same strike price ? why is option 2 better ?

In fact, your decision to buy or sell an option should NOT be based on DELTA. It should rather be based on the opportunity the candlestick pattern (or any other analysis).

Hope i am not misunderstood when you suggest to refer the candlestick too.

I have a query here, If i am to trade on NIFTY options and am to follow the candlestick, which chart shall i refer? is it the nifty, nifty future for the running series or the chart of CE/PE for that particular strike price?

Say e.g. i plan to buy/sell 10600CE for which i will be obviously following the greeks and trend, and if i am to look at the candlestick pattern then which one shall i refer? shall i refer the chart of nifty50 or chart of nifty running month future chart or 10600CE chart?

Ajeet, it is always best to look at the chart of the underlying asset. So the chart of Nifty 50 is what matters. No point looking at the chart of options.

Noted. Thank you Karthik.

Welcome, Ajeet.

Hi,

Really appreciate clear and simple way of explaining these topics. I have a few questions.

1) Where can we get the quotes of delta, gamma, vega, IV etc on the Kite platform? I know that NSE has the option chain table but even there could not find out the Greeks values.

2) When we trade an options strategy and are required to take more than one trade in that strategy, do we have to place individual orders for each trade or is there a method by which we input our criteria and the platform executes it simultaneously for multiple trades?

3) Do you’ll a program where you can mentor us for options trading and how to execute the strategies. Is there a demo platform available where we can practise taking such trades?

Thanks and Regards.

1) Not available on Kite, meanwhile you could check this – https://zerodha.com/tools/black-scholes/

2) Yes, you will have to place each order separately

3) Unfortunately no, but I’m always available on this platform and can help you to my best possible extent.

Good luck.

Hi Karthik,

Thanks for such an awesome content.

Just out of curiosity,

Lets assume the premium for nifty CE spot @ 10250 is Rs 9 and delta for an option is 0.5 and if nifty falls by 50 points , then going by the definition of delta , the change in premium i.e. (50*0.5 )= 25 will make the premium negative.

Has the above scenario ever happened?

Sorry for sounding so naive, i just want to be clear with the content

Thanks in Advance!! Cheers 🙂

No, the premium cannot go -ve, if you see the Delta is capped between 0 and 1. Also, remember, Delta is just one contributor to the premium, apart from this, there is also Vega and Theta which is contributing to the premium.

The line below if from the chapter above:

Note – 8268 is a slightly ITM option, hence the delta is around -0.55 (as indicated from the table above).

Here the Strike price is 8300 . This is for a Put option

How can this be slightly ITM option, as per the explanation of the chapters which says that higher the strike price from an ATM for a PUT option it is ITM, this needs to be a slightly OTM otpion, kindly clarify my understanding or mis-understanding

Santosh, it works like this. For Call options – ITM – ATM – OTM. So all strike below ATM are ITM and all above are OTM. For Put options OTM – ATM – ITM. So all option strikes above ATM are ITM.

Where can we view the delta in the options chain and any reference site for the same

For now, you can look at this – https://zerodha.com/tools/black-scholes/

Hello sir,

Can i buy only just call premium and sell it?

Or i have to exercise it?

Yes, you can do that and not really wait for expiry.

Hi, really informative article. I bought infy 1180 pe (lot 600) at 18/- premium. The delta value is -1 and the expiry is this week Thursday. As the delta value is -1, I assumed that even a slight fall of say 2 to 3/- in the underlying share price can bring almost a similar movement. Currently the option is closed at 16. Can I hold it till the expiry or book Profit or Loss? Your advise for this practical test..

Srikanth, the decision to close the trade is completely dependent on your P&L aspirations, I cannot really comment on it 🙂

Please ignore my previous question, as a few values are wrong.

Hi, really informative article. I bought infy 1180 pe (lot 600) at 18/- premium. The delta value is -0.52 and the expiry is this week Thursday. Currently the option is closed at 16. Can I hold it till the expiry or book Profit or Loss? Your advise for this practical test..

Like I mentioned in your previous comment, this is dependent on your P&L aspirations. However, you need to remember that the effect of Theta on long options will start eating into the premium in the last week of expiry. So from this perspective, maybe you may want to close the position if you are happy with the P&L.

can I know how the brokerage is charged in the currency derivatives segment

Check this Pavan – https://zerodha.com/charges

In nse website and in zeordha website where i can find delta value.

Check this – https://zerodha.com/tools/black-scholes/

i want to see live delta value of a particular strike.

strikeprice ltp iv oi DELTA

10650

Live delta is not available yet, but please do watch out for announcements from our side.

Live delta is availaible in NEST software, which software zerodha use

We also have NEST. However, most of the clients use our own proprietary web-based trading terminal called Kite.

how do we get Delta 0.55

You can use the options calcualton for this. Like this one – https://zerodha.com/tools/black-scholes/

hi kartik

am new to options & trying to trade as per the Tec analysis of charts , but however , i cannot make any profits

how do the greeks impact the option premium , how to know when to enter trade & exit trade

reg

Sammir

I’d suggest you read up the concepts and start taking small directional bets. Get used this and then try figuring out the effect on greeks on your option premiums. This will help I guess.

[…] The Option Greeks (Delta) Part 1 […]

Hi Sir

The link which you are providing to get the Delta value i.e https://zerodha.com/tools/black-scholes/ asking the volatility % , Dividend and interest% . Can you please help , from where we can get these figures to put there ?

Check this, Ashish – https://zerodha.com/z-connect/queries/stock-and-fo-queries/option-greeks/how-to-use-the-option-calculator

Hi Sir

As you said to check delta values we should refer https://zerodha.com/tools/black-scholes/

In that it is asking the values of

VOLATILITY (%)

INTEREST (%)

DIVIDEND

from where we can get these values for particular index or stock option?

Please guide.

Put options

Case 2: Nifty is expected to move to 8230

Expected change = 8268 – 8230= 38

Delta = – 0.55

= -0.55*38

= -20.9

Here wouldn’t it be accurate if we subtract the other way round ,that is 8230 – 8268 = – 38 .So the premium automatically comes positive as well ,

-0.55 * -38 = 20.9. There it will be added anyway ,.instead of having a minus sign and still adding the value .

What about the writer?

The point is to convey that the premium of Put option increases with the decrease in the spot price.

In a reply to Richa bohra, you have stated that on a bought option, profi ts will be credited on expiry day. I thought since the option was held till expiry heavy STT will be charged on the squar ed sold option.

Also on an already short option STT would have been deducted normal,. 05percent. So on squaring on ex piry day, there should not be exorbitant STT.

Pl clarify

Ah, that is not right. When you buy options, the P&L is credited upon square off.

In the first example…when 8288 falls to 8200 and premium is 0.55….

Caluclations are -80×0.55

But when delta is negative

You take 80 vlaue as positive even though it decreases in call option.

So calculation will be

-88×-0.2 =-17.6

*I am really confused on this now.

My next confusion is lets consider if in long call the stock value falls from 8200 to 7200 . And delta is 0.5 and premium is 40 at 8200. The. Fall in underlying i.e. -1000*0.5 is -50

Then premium comes in negative….how is this possible coz you said premium cant be negative.

Correction in question.

-500 instead of -50

But im bot cases premium is negative….how is that possible.

Replied to you earlier comment.

Yes, the premium is capped to 0 on the downside, so the premium will be stuck to 0 if this were to happen.

Edward, remember this –

1) Call option lose value when the underlying drops in value. Delta is +ve for call option.

2) Call option gains value when the underlying gains in value. Delta is +ve for call option.

3) Put option gains value when the underlying drops in value. Delta is -ve for put option.

4) Put option loses value when the underlying gains in value. Delta is -ve for put option.

Given this, take the increase in points in underlying as +ve and the decrease in underlying as -ve.

Instead of making delta -ve for put options it would be simple to have them positive and to consider following formula for

New premium for put = old premium + ( strike – spot) * positive delta

Here if spot decreases below strike ,then strike > spot, overall premium is increment

If spot increases above strike then strike < spot, hence overall premium decreases

Well, this should be ok as long as it leads you to the same end results.

The following example should help you understand this better –

Nifty @ 10:55 AM is at 8288

Option Strike = 8250 Call Option

Premium = 133

Delta of the option = + 0.55 How you got delta value 0.55?

The delta value is derived from the B&S formula based on the spot value.

Very good info on delta. The delta factor influence on option price is illustrated with nice examples. Easy to understand and grasp.

Very nice info.

Glad to note that 🙂

Happy learning!

Why Delta for ITM option is high and less for ATM option?

Thats the way the delta functions, Jasdeep. Its higher for ITM, around 0.5 for ITM, and less than 0.5 for OTM.

Sir in bs calculator we enter spot price,strike price,expiry date, volatility, dividend and as a final output we get some values for ce premium,pe premium is it those values on expiry the premiums will be trading exactly and what about those delta values here suggesting.

Yes, these are fair prices of premiums all else equal. Delta is based on spot values.

what will be the nu premium value if the nifty has fallen say 300pts.

Mutiply 300 with strike’s delta value and you will get to know.

Hi Sir,

why is the delta varies for different moneyness of options? Why can’t it be same for all? Why is this disparity for different moneyness?

Thats the nature of the variable.

Hello,

In the explanation of why delta cant be less than zero, In the scenario 2 instead of -0.2 if you put -0.1.the resultant premium would come to +0.2. can you explain that bit further? does it has to do anything with the volatility or premium decay?

THANKS

But then it cannot be generalized right? as in it can work for few -ve values and not for few others?

I mean from my general observation it happens all the time in NF and BNF options.The prices are going one way but premium of option will go in opposite direction (for small amount).

THANKS

This is because the premium is not just dependent on the direction of the trade but also on various other parameters such as volatility, time to expiry etc.

sir,

I have a query please solve this. (example)

Cipla spot price is 556.

I have short 560 CE at a premium of 14.7 and 560 PE @ 17.2 (for June expiry)

if Cipla is moving upward to 600 or if Cipla is down to 520.

what will be an effect on my trade?

Is it the right strategy to trade.

Please clarify

hi Karthik

first of all your material is awesome. keep writing.

you mentioned the change in nifty prices for the calculation in a change in the value of premium but when you considered the example 2 of call option delta analysis you took the net difference as negative ie -88.

/*******

Nifty @ 10:55 AM is at 8288

Option Strike = 8250 Call Option

Premium = 133

Delta of the option = 0.55

Nifty @ 3:15 PM is expected to reach 8200

What is the likely premium value at 3:15 PM?

We are expecting Nifty to decline by – 88 points (8200 – 8288), hence the change in premium will be –

= – 88 * 0.55

= – 48.4

***/

but later on in put option example, you considered the net difference as positive.

/******

Spot value 8268

Nifty is expected to move to 8230

Expected change = 8268 – 8230

= 38

Delta = – 0.55

= -0.55*38

= -20.9

Current Premium = 128

New Premium = 128 + 20.9

= 148.9

*******/

I am not able to understand the logic behind the two different cases.

For Call option the delta is +ve meaning, with an increase in spot price the delta gets added and with a decrease in the price, the delta reduces. Likewise, for a PUT option, if with an increase in spot price the delta reduces and with a decrease in the price, the delta increases.

Good afternoon Karthikji

What I discover is one pattern of options trading amongst institutional investors or some smart professional traders is that they sell ITM calls & puts. This is beyond our retailers imagination but from OI analysis & some interviews I read (even on international websites) I came to understand this. Only thing I want to ask is your opinion in following points

1)Supose Bank of Baroda is trading at Rs 100 approx so why these smart traders sell ITM put(or Calls for that matter) at 102.5 PE & not OTM or far OTM. Is it because to negate high premium lose due to DELTA EFFECTS ?? (as u told that ITM premium moves almost in tandem with Spot)

2)From above eg ATM has little less oi standing or addition as compare to immediate ITM or OTM ? So it’s to avoid gamma effect. Am I right here

3)From ur trading experience what u think is right… is it better to sell slight ITM options or far OTM options (calls/puts) for better risk management as spreads (not naked)?? [only ur wise opinion, kindly don’t take it as trading advice I’m taking :)]

Thanking you for your time 🙂

Harsh, irrespective of who is trading, selling naked deep ITM options is not a good idea. If the institutions are selling it, then they must have a cover for it.

1) Like I said, a naked short ITM position is unlikely. They would be selling this as a spread

2) If you are selling, then naked OTMs are the best bet.

Good evening Karthikji

No u’d not read properly my query dear sir. I’d not mentioned anywhere to sell naked options of ITM nor will I take as margin is quite high too.

What is the advantage of selling ITM options with covered selling compared to OTM. Is there any Greeks benefits?

Your opinion on this query I needed. Sry for asking again. Thanking u 🙂

Ah, ITM options have higher deltas, which means that for every one-point move in the underlying, we have a near 1 point change in the premium. THis means that the ITM options behave like a futures contract and in fact, can be used as a proxy for futures.

Hi Kartik,

This content has helped me greatly.

I have a doubt, regarding topics covered before this,

Is it possible to explain the following wrt the Ajay and Venu example?

1) Cash settlement

2) Trading on premium before expiry of contract

Please help wrt what happens to the underlying asset i.e. land, does it change hands in cash settlement?

What happens to underlying asset i.e. land when option is bought and sold based on premium.

Thank You in advance 🙂

Abhi, this and more is explained in the subsequent chapters, request you to read on 🙂

Also, In the case of trading on premium, what is the role of the call option seller (Venu)?

He too is trading the premium where he has sold first and is expected to buy back later.

I think there is a correction in Delta for Call Option- “Sc. 2 When Delta is below zero”

Delta= -0.2

Nifty changed from 8288 to 8200 = -88

Therefore, change in premium = -88*-0.2 = + 17.6

Thus, new premium = 9+17.6 = 26.6

Since premium is increasing with decrease in underlying, it is impossible for delta to be negative.

Am I wrong? Since you haven’t taken the negative sign for 88 into consideration.

—–

Think of it in terms of the PUT options. Premiums increase with the decrease in the spot price right? This is a positive effect on the premium, which is what gets captured in the math above.

Hi Karthik,

Thank you very much for your effort.

Just want your view … when I am very sure for any stock/ option to go up , in that condition which one I should prefer … call option vs future

Futures 🙂

Good morning Karthikji

I’ve one question.

1)Since Futures delta is one. How should I hedge it with say Call options when I’m say long in Futures ?

2) This one is most important. Suppose I hedge Reliance or Nifty Long Futures with two 0.5 delta call options. But the problem is that when the spot moves up so is the delta and say the combined short call options delta turns 1.5 on robust upwards movement(since many times on market opening things r hardly in our control we all know). So essentially I’m at loss by 0.5 delta since Futures delta anyway remain one only ?? So how should I deal with this problem

Kindly explain with examples thoroughly esp 2nd point.

Thanking you for your time & will be pleased with ur wise opinion. Hv a great day 🙂

1) Since futures long is +1 delta, you will have to offset this with -1delta, hence 2 lots of selling ATM call (each with delta of -0.5) will help you hedge the position

2) Yes, you will have to adjust this especially if you intend to carry it overnight. You can ignore it for intraday

Hope that helps 🙂

how is delta calculate pls illustrate with example

Sridhar, plenty of examples in the chapter itself.

I think in the put option example here,

Case 2: Nifty is expected to move to 8230

Expected change = 8268 – 8230

= 38

Delta = – 0.55

= -0.55*38

= -20.9

Current Premium = 128

New Premium = 128 + 20.9

= 148.9

It’s better to calculate expected change as

8230-8268=-38

Delta= -0.55*-38 =20.9

Net premium =128+20.9=148.9

Hmm, both works.

First let me quote a portion of this chapter, “Call Option 1 has a delta of 0.05

Call Option 2 has a delta of 0.2

Now the question is, which option will you buy?

Let us do some math to answer this –

Change in underlying = 100 points

Call option 1 Delta = 0.05

Change in premium for call option 1 = 100 * 0.05

= 5

Call option 2 Delta = 0.2

Change in premium for call option 2 = 100 * 0.2

= 20

As you can see the same 100 point move in the underlying has different effects on different options. In this case clearly the trader would be better off buying Call Option 2. ”

Sir my question is as a call option buyer we should always prefer low premium isn’t it? Then why are we selecting option 2 in this case I didn’t understand.

Hmm, the selection of strike should not really depend on just the premium. You should look at greeks as well, such as the delta and the theta.

Sir in Black & Scholes formula what is ” Risk free interest rate”

You can take the T bill rate as available on RBI site.

Sir in black scholes model, how to determine dividend value for Nifty or bank nifty to input in calculator

The dividend yield is published by NSE, please do check their website for the same. Check this – https://www1.nseindia.com/products/content/equities/indices/historical_pepb.htm

Hi Karthik,

First of all, many thanks for such a wonderful writeups and sharing knowledge on all these topics.

I’m really confused by your response to query on section 9.5, “Delta for a Put option”. Strike is 8300, Spot is 8268. Option is Put. Its mentioned as slightly ITM. Shouldn’t it be slightly OTM?

No, 8300 PE is slightly ITM considering spot is at 8268. All strikes below 8268 are OTM and higher are ITM.

Got it. Revisited moneyness topic too and is clear now.

Super! Happy reading 🙂

Karthikji,

The subject is presented in an excellent manner. Thanks from the bottom of the heart to You and Your assistant who had taken these screenshots. I know it is a tedious job. Thank you again.

/jayadevan

Happy reading 🙂

Hello Sir

Thanks for the education you are giving. All the content are so arranged that a novice can also understand the subject. Superb explanation power.

May I know where can we find the DELTA value from?

Happy to note that, Satish. You can get the delta value on Sensibull or any other B&S calculator.

Thank you Sir for your prompt reply.

Regards

Satish Baichwal

Call Option 1 has a delta of 0.05

Call Option 2 has a delta of 0.2

I these two call options the later one would have bigger premium then how come it is suitable for buying, should we not prefer to pay less premium? If there is something I have missed please let me know.

BTW these articles are just mind blowing..

Thank you

The amount you pay as premium depends on many factors –

1) What is the volatility?

2) What is your expectation of future volatility?

3) What is your expectation of the price movement?

4) Time remaining for expiry

So the delta is just one parameter to look at. I’d suggest you read the rest of the chapters to connect the dots.

Sure I will

Thanks

Hi, Where can i find respective Option delta in the Option china

Not available on option chain, you will get this value in a standard B&S calculator.

Can we derive any conclusion about movements of underlying based on options chart and then put it to use in spot-market trading?

Hmm, I’ve not really explored that 🙂

Sir, for the 9.5 topic

(the Delta for Put option)

Note- 8268 is a slightly ITM option.

*i think it should be, 8268 is a slightly OTM option* because strike price is at 8300. or am i wrong? i am not sure.

By the way, i love your teachings. Thank you so much. God bless you.

I’m glad you liked the content here 🙂

Since the strike is 8300 PE, it is slightly ITM as the spot is at 8268.

Is it possible to calculate accurate delta by comparing the attributes of 15 min candle of option and that of underlying.

Say for a OTM CE, 15 min candle had a movement of 30 points bullish whilst the underlying concluded with 100 points bullish move.

Thus giving a 30 percent change i.e. 0.3 delta

Have not tried that, but you can use a B&S calculator to find out precise delta, so why reinvent the wheel 🙂

Hi karthik,

Really very beautiful and understandable content.

My Question.

Under delta for put option section.

Case 2: Nifty is expected to move to 8230

Expected change = 8268 – 8230

What i thought is expected change will 8230 – 8268 because 8230 is final price.

New premium = old premium +/- ( delta*expected change of spot price)

Where as in above formula + for call option because call option premium is directly proportional to change in spot price and – for put option because it is inversely proportional to change in spot price.

By doing this also the final premium will be same compare to your calculation because negative value of delta will take care.

Please correct me if my approach is wrong.

That’s right, the -ve sign associated with a change in underlying is multiplied with the -ve sign associated with the put delta and the resultant is a +ve change in put premium for the given change in the underlying.

Sir where can we get the delta value of the call option. I can’t find them on kite, kindly help!

You can check Sensibull for this.

should we exercise an American Call option before an ex-dividend date if yes then what are the factors we should consider….?

We don’t have American Options in India, Aditya. All options are European in nature.

Due to the quality of content I have switched to reading this rather than watching Youtube Videos.

My Question is .

1. If I have Sold PE In case the margin get short will I get some warning and how much time will I get to add funds?

2. In options and futures which time is considered as expiry explain through an example. What will be the charges/fine after expiry?

3. Future : If I have bought future of a stock(lot size 500). It requires a margin of around 1.5 Lakh. So If I buy a lot (say at 1500 )and sell after 15 days ( at 1550). Will my profit calculated by

a) the Investment (margin) 1,55,000(new future value) -1,50,000(old future value)= 5000

b) with respect to the total value of the lot which is 7.5 Lakh. ( Profit 50*500 = 25000) where I have only paid/blocked 1.5 lakh only.

4. How to roll over the future to next month on expiry?

5. How to take delivery of the stock through Futures and Options.

Happy to note that 🙂

1) Yes, usually you have to do this quickly. Please do read this up – https://zerodha.com/policies-and-procedures#tab-equities

2) The expiry date is usually the last Thursday of the month

3) Yes, that is one of the ways to calculate the profit. The other way is to just take the difference between the buy and sell price of the futures and multiply that with the lot size

4) You square off the position that you hold for this month and initiate the same position in same quantity for the next month

5) Do check this – https://zerodha.com/varsity/chapter/quick-note-on-physical-settlement/

I know that American options are not applicable in India but it is something that came up while I was studying for FRM so can you kindly answer it

“should we exercise an American Call option before an ex-dividend date if yes then what are the factors we should consider….?”

That depends on both stock and F&O settlement criteria. For example, if this was in Indian context, yes, it would make sense as you would get the stock before record date to received corporate benefits.