6.1 – Building the case
Previously we understood that, an option seller and the buyer are like two sides of the same coin. They have a diametrically opposite view on markets. Going by this, if the Put option buyer is bearish about the market, then clearly the put option seller must have a bullish view on the markets. Recollect we looked at the Bank Nifty’s chart in the previous chapter; we will review the same chart again, but from the perspective of a put option seller.
The typical thought process for the Put Option Seller would be something like this –
- Bank Nifty is trading at 18417
- 2 days ago Bank Nifty tested its resistance level at 18550 (resistance level is highlighted by a green horizontal line)
- 18550 is considered as resistance as there is a price action zone at this level which is well spaced in time (for people who are not familiar with the concept of resistance I would suggest you read about it here)
- I have highlighted the price action zone in a blue rectangular boxes
- Bank Nifty has attempted to crack the resistance level for the last 3 consecutive times
- All it needs is 1 good push (maybe a large sized bank announcing decent results – HDFC, ICICI, and SBI are expected to declare results soon)
- A positive cue plus a move above the resistance will set Bank Nifty on the upward trajectory
- Hence writing the Put Option and collecting the premiums may sound like a good idea
You may have a question at this stage – If the outlook is bullish, why write (sell) a put option and why not just buy a call option?
Well, the decision to either buy a call option or sell a put option really depends on how attractive the premiums are. At the time of taking the decision, if the call option has a low premium then buying a call option makes sense, likewise if the put option is trading at a very high premium then selling the put option (and therefore collecting the premium) makes sense. Of course to figure out what exactly to do (buying a call option or selling a put option) depends on the attractiveness of the premium, and to judge how attractive the premium is you need some background knowledge on ‘option pricing’. Of course, going forward in this module we will understand option pricing.
So, with these thoughts assume the trader decides to write (sell) the 18400 Put option and collect Rs.315 as the premium. As usual let us observe the P&L behavior for a Put Option seller and make a few generalizations.
Do Note – when you write options (regardless of Calls or Puts) margins are blocked in your account. We have discussed this perspective here, request you to go through the same.
6.2 – P&L behavior for the put option seller
Please do remember the calculation of the intrinsic value of the option remains the same for both writing a put option as well as buying a put option. However the P&L calculation changes, which we will discuss shortly. We will assume various possible scenarios on the expiry date and figure out how the P&L behaves.
| Serial No. | Possible values of spot | Premium Received | Intrinsic Value (IV) | P&L (Premium – IV) |
|---|---|---|---|---|
| 01 | 16195 | + 315 | 18400 – 16195 = 2205 | 315 – 2205 = – 1890 |
| 02 | 16510 | + 315 | 18400 – 16510 = 1890 | 315 – 1890 = – 1575 |
| 03 | 16825 | + 315 | 18400 – 16825 = 1575 | 315 – 1575 = – 1260 |
| 04 | 17140 | + 315 | 18400 – 17140 = 1260 | 315 – 1260 = – 945 |
| 05 | 17455 | + 315 | 18400 – 17455 = 945 | 315 – 945 = – 630 |
| 06 | 17770 | + 315 | 18400 – 17770 = 630 | 315 – 630 = – 315 |
| 07 | 18085 | + 315 | 18400 – 18085 = 315 | 315 – 315 = 0 |
| 08 | 18400 | + 315 | 18400 – 18400 = 0 | 315 – 0 = + 315 |
| 09 | 18715 | + 315 | 18400 – 18715 = 0 | 315 – 0 = + 315 |
| 10 | 19030 | + 315 | 18400 – 19030 = 0 | 315 – 0 = + 315 |
| 11 | 19345 | + 315 | 18400 – 19345 = 0 | 315 – 0 = + 315 |
| 12 | 19660 | + 315 | 18400 – 19660 = 0 | 315 – 0 = + 315 |
I would assume by now you will be in a position to easily generalize the P&L behavior upon expiry, especially considering the fact that we have done the same for the last 3 chapters. The generalizations are as below (make sure you set your eyes on row 8 as it’s the strike price for this trade) –
- The objective behind selling a put option is to collect the premiums and benefit from the bullish outlook on market. Therefore as we can see, the profit stays flat at Rs.315 (premium collected) as long as the spot price stays above the strike price.
- Generalization 1 – Sellers of the Put Options are profitable as long as long as the spot price remains at or higher than the strike price. In other words sell a put option only when you are bullish about the underlying or when you believe that the underlying will no longer continue to fall.
- As the spot price goes below the strike price (18400) the position starts to make a loss. Clearly there is no cap on how much loss the seller can experience here and it can be theoretically be unlimited
- Generalization 2 – A put option seller can potentially experience an unlimited loss as and when the spot price goes lower than the strike price.
Here is a general formula using which you can calculate the P&L from writing a Put Option position. Do bear in mind this formula is applicable on positions held till expiry.
P&L = Premium Recieved – [Max (0, Strike Price – Spot Price)]
Let us pick 2 random values and evaluate if the formula works –
- 16510
- 19660
@16510 (spot below strike, position has to be loss making)
= 315 – Max (0, 18400 -16510)
= 315 – 1890
= – 1575
@19660 (spot above strike, position has to be profitable, restricted to premium paid)
= 315 – Max (0, 18400 – 19660)
= 315 – Max (0, -1260)
= 315
Clearly both the results match the expected outcome.
Further, the breakdown point for a Put Option seller can be defined as a point where the Put Option seller starts making a loss after giving away all the premium he has collected –
Breakdown point = Strike Price – Premium Received
For the Bank Nifty, the breakdown point would be
= 18400 – 315
= 18085
So as per this definition of the breakdown point, at 18085 the put option seller should neither make any money nor lose any money. Do note this also means at this stage, he would lose the entire Premium he has collected. To validate this, let us apply the P&L formula and calculate the P&L at the breakdown point –
= 315 – Max (0, 18400 – 18085)
= 315 – Max (0, 315)
= 315 – 315
=0
The result obtained is clearly in line with the expectation of the breakdown point.
6.3 – Put option seller’s Payoff
If we connect the P&L points (as seen in the table earlier) and develop a line chart, we should be able to observe the generalizations we have made on the Put option seller’s P&L. Please find below the same –
Here are a few things that you should appreciate from the chart above, remember 18400 is the strike price –
- The Put option seller experiences a loss only when the spot price goes below the strike price (18400 and lower)
- The loss is theoretically unlimited (therefore the risk)
- The Put Option seller will experience a profit (to the extent of premium received) as and when the spot price trades above the strike price
- The gains are restricted to the extent of premium received
- At the breakdown point (18085) the put option seller neither makes money nor losses money. However at this stage he gives up the entire premium he has received.
- You can observe that at the breakdown point, the P&L graph just starts to buckle down – from a positive territory to the neutral (no profit no loss) situation. It is only below this point the put option seller starts to lose money.
And with these points, hopefully you should have got the essence of Put Option selling. Over the last few chapters we have looked at both the call option and the put option from both the buyer and sellers perspective. In the next chapter we will quickly summarize the same and shift gear towards other essential concepts of Options.
Key takeaways from this chapter
- You sell a Put option when you are bullish on a stock or when you believe the stock price will no longer go down
- When you are bullish on the underlying you can either buy the call option or sell a put option. The decision depends on how attractive the premium is
- Option Premium pricing along with Option Greeks gives a sense of how attractive the premiums are
- The put option buyer and the seller have a symmetrically opposite P&L behaviour
- When you sell a put option you receive premium
- Selling a put option requires you to deposit margin
- When you sell a put option your profit is limited to the extent of the premium you receive and your loss can potentially be unlimited
- P&L = Premium received – Max [0, (Strike Price – Spot Price)]
- Breakdown point = Strike Price – Premium received
thanks kartik for your reply on my previous question and also for the next chapter!
my question is
Q-since options are traded on premiums. is margin is available on premiums. i want yo ask is suppose i have 1,00,000 rs. and nifty 8280 call option is trading at a premium of 100. then by this i can buy 1000 shares of nifty. but can i buy more than this. if yes it can be NRML, MIS OR BO&CO
Yes, margin on options is possible as long you choose to execute it as a BO or a CO order. Will talk about it soon in this module.
Hi Karthik. The Nifty closed today at 8181 and here are the prices (at EOD) of May Put Options with various strike prices:
MayPut8200: 119 (IV=19; Premium = 100)
MayPut8300: 162 (IV=119; Premium = 43)
MayPut8400: 215 (IV=219; Premium = -4)
MayPut8500: 282 (IV=319; Premium = -37)
MayPut8600: 359 (IV=419; Premium = -60)
MayPut8700: 443 (IV=519; Premium = -76)
MayPut8800: 534 (IV=619; Premium = -85)
MayPut8900: 628 (IV=719; Premium = -91)
MayPut9000: 723 (IV=819; Premium = -96)
MayPut9100: 825 (IV=919; Premium = -94)
The higher the IV of the option, the lower goes the premium cost. In fact, after a point, the premium has a negative value. What’s the catch?
MayPut9000 seems to have the highest padding…that is, if my view is bearish, I can have a tolerance of 96 points for the Nifty to go in the opposite direction, before I start to make a loss. Am I right? Are there any pitfalls in choosing this method?
Well, if you notice as you traverse away from the strike price which are away from the current market price the difference crops up. This is mainly attributable to liquidity and moneyness of options. In fact in chapter 8 (will take it live in few days) I will discuss this.
My question is what happens when I sell a put and it hit strike price. Do I have to buy it in cash? If I do trading in nifty and want to buy nifty at lower price is selling put a good strategy? Then I can own the nifty and renew it for next expiry for gain.
No buying cash (at least as of now). All options are settled in Cash. What you are suggesting is sort of a covered all. You will be long and short at the same time. Returns are low, but the volatility in P&L is also low.
The MayCall8200 Option costs 181 (IV=0; Premium 181). Why is the premium cost for the Call Option so much more than the Put Option for the same strike price? Is that because the Option Sellers expect the Nifty to go up? I’ve been told that, more often than not, the Option Sellers (usually the experts) are on the right side. So here, the Option Sellers have a bullish view?
No, this has nothing to do with expecatations. Option premiums are dictated by 4 forces called the option greeks –
1) Direction of market (Delta)
2) Rate of change of market prices (Gamma)
3) Volatility of the market (Vega)
4) Time to expiry (Theta)
These forces simultaneously acts on Option (real time) and hence the premium keeps varying. We will talk about these Option Greeks and try to simplify it as much as we can.
In the option put selling you have given formula P & L =Premium Paid-[Max(0,strike price-spot price)]. As I understand in option put selling we do not pay the premium, however, we receive the premium and pay the margin amount. So I think it should be premium received. Am I correct. Please clarify.
Yes sir, you are right it should be premium received! Thanks for pointing this.
Sir, what is the in the money and out of the money in options?
This is called the moneyness of options, we will discuss the same in chapter 8.
Sir, is the derivative market impact on spot stock price?
Derivatives market does impact the sentiment on the spot market.
Would like to know about the time frame you have in mind to complete this complete guide?
We are trying our best to maintain a steady pace. I suppose another 3 – 4 weeks for the ‘Option Theory’ module to be complete.
Is this Correct
Call Opt Buyer Bullish——-Go for ITM =Strike price < Spot price
Call Opt Seller Bearish——-Go for Deep ITM= Strike price Spot price
Put Opt Seller Bullish——-Go For Deep OTM= Strike price> Spot price
I have a doubt about Put option
This is Strike selection is dependent on quite a few variables. We will start discussing this from chapter 9 onward.
Is this Correct (In earlier question one line is missing. Sending again)
Call Opt Buyer Bullish——-Go for ITM =Strike price < Spot price
Call Opt Seller Bearish——-Go for Deep ITM= Strike price Spot price
Put Opt Seller Bullish——-Go For Deep OTM= Strike price> Spot price
I have a doubt about Put option
Like I mentioned earlier strike selection is not a straight forward task. Required due diligence on various aspect. Please stay tuned, we will cover this topic in detail soon. Thanks.
Forgot to say this earlier but this is an amazing effort by Zerodha. The guide is so well structured and explanations so detailed that just it makes the whole thing fun and exciting to read and understand how one should approach trading/investing.
Like the Chinese proverb “give a man a fish and you feed him for a day; teach a man to fish and you feed him for a lifetime” Zerodha actually does just that instead of giving Sell/Buy calls all day like just about all the brokers do.
Once again thanks a bunch Zerodha. Karthik, even more so.
Thank you so much for the kind words. This is very encouraging, motivates us to deliver better content everyday 🙂
Sir
I’m new to Stock Markets. I want to start intraday trading, what are the things that I should know before getting started.
P.S. I have read all the modules. Everything is explained so well that even a new born baby would understand markets. Thanks. ☺
Thanks for the kind words and I’m glad you have read the modules 🙂
If you are new to markets, I would suggest you start with small amounts and try out simple buy and hold strategy before you can graduate to intra day trading.
sir, i have a query about margin.
on 8th may , i sold one lot of put option of nifty ( write nifty put 7700 at 20) at 20 rs. at that time my account balance was 5000 but it showed your margin exceed and it should be 13219 rs.
but i think the margin required is 20*25=1000 rs
plz clarify
20*25 = 1000 this is the premium amount you need to pay provided you are an option buyer. For a Options Seller the margins are blocked. The margins blocked are almost the same as the futures margin.
hello sir,
can we squarred off our writting position before expiry. let suppose if i sold 4 lot of nifty put option at 8400 strike price @ 55. so can i squarred off this position by buying 4 lot or it must be carried to expiry?????? i know writing an option is a obligation therotically but how it happens practically if we squarred off that order in a day
You can write an option at 9:15 AM for 55 and square it off at 9:16 AM for 54 and in the process pocket 1 Rupee profit. So yes, you can when you write there is no obligation for you to hold on to it till expiry. You can square it off anytime you wish.
Sir,
if i have sold an option, i do not square it off and it expires. what happens then?
It gets settled at the moneyness of the option. In case the option is worthless, then it gets settled at zero.
What about the money invested and the premium received?
You get to keep it, provided the option expires worthless.
Sir,
At the end of the expiry, writer of the option has to settle the contract at LTP or settlement price?
for instance: I have seen option on the expiry day LTP = 70 rs but the settlment price is 0.
being a writer, if i dont square off my option it will get settled at 70 or 0 ?
Regs
Kaushal Mehta
Settlement happens at the settlement price, Kushal.
Karthik, sorry to bother you again, I am bit confused. I am putting an example, do help me in that.
Call option writing.
Expiry : 22/02/2018
Strike Price : 10900 PE
Underlying Price : 11016
PE LTP on 1/02/2018 : 83/-
PE price on 22/02/2018 : LTP = 513.80/- and settlement price = 0
underlying price on 25/01/2018 = 10382
1) (10900-10382)=518, 83-518 = -435/- Loss (this means i have to pay 435 ?)
2) as the settlement price is 0/- i get the preminum of 83/- ( i am in profit of 83rs)
3) simply 83-513.80 = -430.8/- loss
What p/l will apply ?
Kushal, I’m a little confused with dates here. Why are you going back to 25/01/2018? Also, is this call option writing or PE?
The above example is of Put option writing.
Ok, in this case, you wrote the put option at 83, but the option is now at 513.8, so you will lose 83 – 513.8 = 430.8
Thank u sir
got it
but sir how can i get benefited if any option sold at lower price (in earlier example i e. 55) and squared off at higher price(i.e 56) as you explained above. plz explain
Oops…that was a mistake. It should have been 54 and not 56, made the changes and I suppose it makes sense now.
Thanks a lo
Welcome 😉
if the option becomes inthemoney in equity stock assignment may happen or we have to buy it back.
but in nifty we can only buy it back or how the assignment will work here
Everything in India is cash settled…this includes both stock and index. So no need to worry about physical delivery.
Hi,
I read that equity is delivery based on settlement since earlier in 2018. Is this correct OR still cash settlement for equity trades?
Thanks,
Thats right, however, this is not for all stocks. Check this – https://zerodha.com/z-connect/tradezerodha/policy-on-settlement-of-compulsory-delivery-derivative-contracts
hi karthik,
one doubt in option trading we can trade both market up trend and down trend ,in uptrend we buy call and down trend we buy put ,then why we using option selling(shorting)?
i never use shorting yet because i don’t more about it how its works after we short ,we get premium in advance right?
Yes when you short options you receive premium. To appreciate why people short – I would suggest you read this http://zerodha.com/varsity/chapter/call-option-basics/
in option selling we receive premium ,what about future selling ?
No premium concept in Futures.
In option. Never buy. Always Sell ( Short/ Write). No smart investor invests in a an asset which decreases its value with time( Time value – its call Theta). Sell far “Out of the Money” called OTM and get the Premium. That’s the way you make money in the long run. It is very easy to make 2-3 % in a month for a starter. 36% in a year! Do not expect more initially. With time once you get the grip of ” Option Selling”, I am sure you will never ever buy option again. Regards, Shyamal.
Hi Shyamal, I agree with you. option writing is always better than buying. Could you let me know your strategy of consistently making 2-3% by selling Deep OTM contracts, on what basis & how you select option strike price selection, throw some light on this, How do you hegde your position from sudden big moment?
What could be the consequenses if i sell OTM put option & waited till the expiry? in following senarios.
e.g. presently Nifty is trading above 8500+, By lookig into margin requirements and the money i have, i decided to sell Nifty 8150 Put option @ 15.55 (yesterday mornings premium) which is either OTM or Deep OTM. this is just 5th day of August and 15/16 trading sessions are there till expiry. The premium is getting erode at very slow pace. today on 6th it is trading at 12.80 ( hence at present my position is in profit of 15.55-12.80 if decided to sq off)what if….
1) Nifty started to fall say after 4/5 session (10 more sessions for expiry) and moves over below my strike price 8150. what will be the chances of increasing premium than 15.55? or with the time decay even though Nifty closes below 8150, premium may not go past 15.55?
2) Nifty started to fall as mentioned earlier but could not move past 8150, and the premium is Rs.1.50/- on expiry day, then what will be my settlement price(0 or 1.50)?
Shreya – This is from my personal experience, avoid shorting PUT options. Panic sets in faster than greed in market. Hence market falls faster than it can raise.
Coming to your query –
1) If market falls below 8150 clearly the premium can go much higher especially where there are more days for expiry. Therefore you will end up in a loss. Also do remember if the market goes below 8150 (your strike) then the option will have an intrinsic value.
2) If Nifty stays at or above 8150 the 8150 PE will expiry worthless and you will get to keep the entire premium amount.
1.For suppose if I sell 45 put (200) , stock is trading at 43 then stock gone down to 35 … how much i can get the profit.
for selling put max credit only whould recive but how can we get maximun profit can get.
2.If I go for long put 100 ,the premium will get affected by Greeks at the end of expiry. because premium keeps on changing day to day.
If I go for spread how premium will get change? I understand the profit & loss and calculation based on strikes, for 1 point move up or down it is changing 1re up/dn.
generally premium changed based on greeks so in spreads, how premium is changing based on for 1 point move up or down and it changes 1re up/dn.
3.For protecting the short put we buy the put but in real time how buy put is compensating the short put for every 1re loss of short put?
How this can happen in spreads?
Thanks and Regards,
Siva.
Siva my answers are as follows –
1) When you sell a put option you make a profit only when the stock stays flat or increases in value. When you are short put you do not make money when the spot goes lower than your strike.
2) When you create spreads the overall position will have a Greeks equivalent to the sump of the individual option Greeks. More on this when we introduce spreads.
3) To be completely insulated to market move you need to ensure your position;s delta is zero (also called Delta neutral). Suggest you read the chapter on Delta for more details.
The course has been very useful to me and am interested in option writing. But I am also aware that it is too risky to write an option apart from margin being blocked. I have used the margin calculators and found that the margin requirements are heavy. However, I have a doubt and wish you can clarify. nifty 8000pe is trading between 160 – 170 now. presuming that it nifty falls to, say 7800 in the next couple of days, the option premium should be about 360-370 or even a little higher. in effect, I would have lost about 5000 rupees per lot (October 26th expiry).
a) Will RMS require me to add 5000 immediately (Despite margin blocked being more than 5000)? If that is not the case, when i will be required to add more money?
b) Assuming spot price is strike price minus premium received, i will exit without any profit or loss on expiry day. Is that correct?
1) If there are additional funds not utilized towards other trades then RMS wont require you to add the funds immediately. Also you may want to know that you need to have minimum of SPAN margin in your account, anything lesser than SPAN the RMS will cut the position
2) Breakeven point for long put is Strike – premium paid.
Thank you. probably i did not properly frame the question. What i wanted to know is the requirement of adding funds on a daily basis based on m2m losses. Assuming that i just place one sell order for some put options and there is no additional money left in the account, will i need to add the m2m loss immediately. For example, selling 10 lots of a put option may require 2.50 lakhs including span and exposure margins. assuming that it goes against my expectation on first or subsequent days, should i need to add the m2m loss immediately.
Assume SPAN = 1 lakh and Exposure is 1.5L
SPAN + Exposure = 2.5 (Total Margin)
RMS allows you to hold the trade as long as you have at least 1 L (SPAN) in the account. Anything less than this they will cut your position. Also, it is always good to have slightly more than SPAN+Exposure for your trades.
Hi Karthik, I have few queries listed below..
1. Suppose I buy a call option on 15th Oct @strike 1000 with premium = 100, lot size = 250 and I wait till expiry(lets say 26th Oct)..
a) The M2M will be calculated on daily basis and amount will be adjusted in my account on daily basis?
b) Suppose on the day of expiry I will exercise the contract and suppose the spot is at 1200, then my profit will be [(1200-1000)-100]*250.. Will this amount again be added to my account on expiry day? If not, what is the significance of this amount?
c) For exercising a contract, do i need to explictly do anything to exercise it or the exchange will automatically exercise it on the expiry day?
d) Profit/Loss during the series (not on expiry) = (Premium received – Premium paid) * 250… Am i right on this?…. In this case strike price and Spot price wont come into picture for calculating P&L right?
1) Since you have paid the amount in full (premium) there is no M2M applicable here. You will be cash settled on expiry
2) Yes, thats how profits are calculated and the same will be credited to your account
3) Exchange will take care
4) Yup, thats right
Today I sold 10 lots of Nifty 8300CE @ 19.5 and received a premium of Rs. 4800 aprox.
Should I wait for expiry or should I square off when I get a profit.
What happens if I do not square off even at expiry? Do I get to keep the premium or will I book a loss.
1) You can choose to hold this position till expiry or book profits when deemed suitable
2) In case you dont square off the position on expiry the exchange will consider it closed
If i sold option of October 8000 put options for some premium and if i don’t buy it back before expiry what will happen since Nifty expired at 8100.
Is it just expired worth less or do i need to pay any tax, STT as seller of option
Yes, the position would have been profitable. No tax implication here.
Dear Mr. Rangappa,
I have found that option writer generally makes to trade at the same time i.e. one trade of short put and another short call. Is it to minimize the loss since put and call will move in opposite direction. More over profit will be limited to premium received. Why to go for Short trade when they know that there is limited profit?
Lalit – all these and more will be answered in the next module which is completely dedicated to Option Trading strategies. Request you to please stay tuned till then 🙂
Hi, Please tell me that how may puts/call I can sell.For example if I have 200K INR in my account and I want to sell puts/call of market prize 100 RS. then how many puts/calls I would be able to sell.
Thanks I advance
Best Regards,
Ravish
Depends on the script and lot size – I would suggest you use this calculator – https://zerodha.com/margin-calculator/SPAN/
Hi Karthik..
Thanks for wonderful lessons.
I have a basic doubt.. may be silly..
If i am bullish, i buy call option.. if bearish..buy put option.
Then why should one go for selling a put option if there is so much risk.. if the same can be done buying call option..
thnks
Well, this is because there could a situation where the Put option premium has swelled so much (maybe due to high volatility) that writing that would seem more appropriate compared to buying expensive call options.
I have one simple query: Assume I sell a put option at strike price 6800 of march 2016 options. Assume the premium is 30Rs and sold it at the start of the expiry. What if the Market takes a very strong bullish move and expires at 7500.
I don’t want to sell it till expiry and I want to have the whole premium of 30Rs.
Now my concerned is , since I sold 6800 put option, will I have any trouble in getting it executed on the expiry? Does liquidity play an important role or market will take care of it?
I am little confused here.
Liquidity does play a role, but if you are holding to expiry then the onus is on the exchange to make sure you get your dues.
Sir if I sell bank nifty call of 15500 for March series say at premium of 300, but bank nifty moves higher and is at 15600 and there are still ten sessions left for expiry. If I think I had made wrong trade and decided to exit at 15600 how much will be deducted from premium I received of 300 per lot. Or I have to pay extra from my account. In simple term would I make some profit or loss. ( premium of 15500 pe may be at say 400)
Since this is a short trade you will make a loss trade…if the premium goes to 400, then you will lose 100.
Sorry it is 15500 ce.
Hi Karthik,
Is there any tool to calculate Max Pain or any formula to calculate it manually ?? And lets say we have highest number of OI in 7500 CE and 7200 Put, so is there any way to get the exact number how much Call or Put has been written off by the option writers. Thanks in Advance.
Not sure about an online tool to calculate the Max pain value, I will try to figure this and get back to you on a reliable source. The OI value itself gives you an indication of how many options are written. Remember 1 long plus 1 short = 1 Open interest.
Thanks a lot Karthik 🙂
Welcome!
Hello,
I wanted to ask that,
If i sell sbi 140 put when spot is 180.
At expiry if the stock is at 139 and i want to buy it as the put selling defines, so how to accomplish this??
Thank you.bi
You can just press F1 on your trading system and sell the contract, as simple as that 🙂
I want to accept the obligation and accumulat the stock at that strike price.
All derivative contracts are cash settled in India.
Hello,
Here is the scenario: –
NIFTY is currently at 7970. I expect it to rise to 8100 in the next few trading sessions.Let’s say, I want to short 10 lots of NIFTY May 7700 PE @43 today which requires me to keep around 4,00,000/- as total margin. Premium receivable comes to around 30,000/- if I execute this position.
Now, please clarify the following : –
1) After 3 trading sessions, the premium is @ 20/- . What would be my NET P/L over here if I decide to close the position?
2) After 3 trading sessions, the premium is @ 70/-. What would be my NET P/L over here if I decide to close the position? – Is it going to be 30,000 – 750*(70-43) = 9750/- or is it going to be a just a loss of 20,250/- ?
Thanks and Regards,
Mangesh
1) If you choose to close the position, you stand to gain 43 – 20 = 23 points times the lot size…so that would be 23*10*75 = 17250
2) You will lose 70-43 = 27 point, translating to 20,250/-.
Where does the 75 comes into calculation ?
Lot size I guess..
Got it. Just want to clarify one thing that is the lots holds any fix or a certain amount of shares or it changes as per contract ?
Lot size varies based on the contract.
Sell Put option:
Spot price = 7970
Strike price = 7700PE@43 (an OTM contract)
Expected price = 8100
Here the delta is assumed not more than 0.16
1. After 3 sessions if the spot price moves 130 points up, the new premium will be 20
2. After 3 sessions if the spot price moves 437 points up, the new premium will be 70
Now how the 70 will make a profit or loss ?
Please correct where m wrong and show your view.
Thank you
The premium will go down as this is Put option. Remember, the Put option delta comes with a -ve sign indicating that the delta and movements in market move in opposite direction.
Isn’t delta is +ve in the case of short/sell puts?
I’m confused with the content. Kindly correct my views where m wrong.
Thank you
Short Put & Long Call = +ve Delta
Long Put & Short Call = -ve Delta
Sorry Karthik, I might have confused you with my question. Please look for the points and correct wherever it’s wrong .
1. In trading When we Buy first , we square it off by Selling.
2. When we Sell first, we square it off by Buying.
So in case of trading Option in premium,
3. Buy Call = Underlying (↑) and Premium (↑)
4. Buy Put = Underlying (↓) and Premium (↑)
5. Sell Call = Underlying (↓) and Premium (↓)
6. Sell Put = Underlying (↑) and Premium (↓)
Should the premium move with the underlying like above ?
Absolutely!
Thank you for the clarification.
Welcome!
I have 2 questions to help decide between calls and puts:
1) Assume I am bullish , how do I chose between buying a call vs selling a put?
2) Assume I am bearish, how do I chose between selling a call vs buying a put?
This depends upon the premium. For example if you are bullish, volatility is high, and therefore the premiums are higher then I’d prefer to sell puts as opposed to buying expensive calls.
Sir,Is there download option for option strategies. Am trying for long there is no download button.
We are working on the PDFs…should be out soon.
Dear sir,
There is one correction need to be made for Break down formula(In Put Option Selling chapter) in “Key takeaways” Strike – Premium received” but it is mentioned as Premium Paid
Dear Mr Karthik,
I have 2 questions. Recently I shorted [email protected]. Today position at Kite shows @4.0 with P&L 3750.
1) Can I buy/ exit now? If I exit, shall I get ( premium 7750)+3750= 11500, or get the difference 7750-3750= 4000 only?
2) When I tried by clicking the ‘exit’ button , the ‘modify’ page opened, and I got confused. How to exit/ buy back?
Shall appreciate very much if you clarify this to me.
1. Rs 4000 only.
2. When you click on exit, a buy order window will open where you can either mention the limit or market order. You can also add the scrip on the marketwatch and place a normal buying order to exit.
Thanks a lot for your answer.
Got the balance.
Welcome!
Yes, you get the profit of 3750 minus the applicable charges. To exit, just buy back the same instrument of the same quantity.
Thanks for the clarification.
It’s done as advised by you.
Cheers!
sir I am a newbee in trading with little knowledge I trade in intraday only in nifty options I require your help to sort out in which strick prise should I trade in intraday .please help or sugguest a book to follow . hopefully help THANKS
I would suggest you stick to ATM or strikes around ATM for intraday trading.
Sir, Suppose I took a Short put position of a Strike Price 50. I received a premium of Rs. 4. Next day Market price moved up to 55 and premium goes down to Rs.3. What will be it’s impact on my P/L? If I want to square off on that day.
You will make a profit of Rs.1 on the premium.
Why should one opt for writing call option when buying Put option is a better. I am questioning the very existence of writing Call/Put option.I hope you are able to understand my question.
Each act of trading options comes with its own set of attributes. Pegging one (like buying Puts) against the other (like selling call) is not the right step towards understating options. A trader needs to be neutral and not get subjective on these things. The decision to buy a put or sell a call really depends on how the premiums are positioned. If due to high volatility the premiums are expensive…then it makes sense to sell Puts as opposed to buying expensive calls.
Question 1:
At Nifty Spot Price = 8850, I sold 2 lots of 8750PE @ 17 i.e. Premium received – Rs 2550/-
After some time Nifty goes down to 8835 and if I square off the above position @ 21 then what will be my profit?
Question 2:
At Nifty Spot Price = 8850, I sold 2 lots of 8750PE @ 17 i.e. Premium received – Rs 2550/-
On the day of expiry Nifty spot closes at 8810 with the 8750PE primium value at 20. If I am not a available to square-off and the sold option expires then what will happen? Will there be any profit? Will that be adjusted to my account automatically without me squaring-off the trade manually?
If the 8750PE primium value on expiry is 10 then what will I get/loose?
1) Since you have sold a PE @ 17 and bought it back @ 21, you will make a loss of 4
2) If you are unable to square off then the contract cease to exit and will be settled by the exchanges. But make sure you always square off your In the Money option to avoid paying huge STT. Check this – http://zerodha.com/z-connect/queries/stock-and-fo-queries/stt-options-nse-bse-mcx-sx
Thanks for your immediate reply. Zerodha is doing a great work by providing such an easy but detailed documentation. Keep it up.
Cheers!
Sorting Deep OTM money call option with huge investment on expiry day gives good return unless black swan event occurs. Right?
Sorry for the typo, i meant Shorting or Writing…
Yes, you but the premiums will be too low…as low as 10 or 15 paisa.
Thank you. I wont be going that deep. I will go around 5 to 7 Rs. And also what does it mean by Naked selling of options?
Naked options is buying selling of options without any hedge.
Thank you
Cheers!
Thanks Karthik, can you please confirm that When shorting an option on the day of expiry , in any case trade will not get sold by broker before 3:30 since a trader will be waiting for the contract to expire worthless (OOM)..?
Whenever you short an option (or for that matter take up any leveraged trade), irrespective of the expiry day or not, if the position goes against you, you will be required to provide more margins, in the absence of which, the broker can close your position.
Thanks much for the reply —so as per the Zerodha margin calculator as of today, if i short Nifty 10200 CE (1 lot) with a premium of around 19.70, beneath will be the Combined margin requirements.
Span
Rs: 24,053
Exposure margin
Rs: 22,538
Premium receivable
Rs: 1,478
Total margin
Rs: 46,591
Based on this my question is, if i have margin of 47000, can you give me the exact practical scenario when my position will get squired off by broker when i am making loss …(Will it be in terms of Margin i.e. until i make a loss of 47k or in terms of premium, say 19.70 become 21 or 22..?)
Since you are short, you can hold the position as long as the margin requirement for this position is less than 46K. In case, the position goes against you, then the margins would be increased and therefore position would be lacked.
Hi,
Is there any ways to hedge futures with options? Is it possible?
Check this – http://zerodha.com/varsity/chapter/synthetic-long-arbitrage/
I know that an option buyer can square off his position anytime before expiry but I am a little confused whether an option seller can square-off his position before expiry ( so as to book profits when the opportunity presents) or will he have to wait till the expiry compulsorily ?
Seller too can square-off the position anytime he wants. No need to wait till expiry.
Sir I have a question that
Suppose on the expiry day I sell call option thats premium 10 suddenly eod premium 10 paisa and 5 paisa than i buy call option i make huge profit explane sir please
Yes you can if you can spot such opportunities.
THIS IS MY FIRST QUESTION
I WRITE NIFTY CALL OPTION @9 OF 9350 ON 17-4-2017 AND RECIVED PREMIUM OF RS. 675/-
NEXT DAY MY POSITION SHOWED LOSS OF RS. 550/- AT 12.00 PM, SUPPOSE I SQAURED OFF THAT TIME
WHAT WOULD HAPPEN TO 675/- WHICH I RECIVED. WHAT WILL BE MY LOSS 550/- OR 675-550 = 125
Your loss will be 550/-. Since you are short, you will make money only if the the premium goes down from the point you have written it. You will make a loss if the premium increases. For example if you have written the option at 9, and now the premium is 12, then your loss will be 3*lot size.
thanks for reply
Welcome!
What will happen if i didn’t square off my position. for eg I sold 9300 CE at 80 and nifty closed at 9200 on expiry day and my premium value becomes 0.05 paise with no buyer. will i get full 80 points in my account or need to pay heavy STT?
You will get the full premium. However, holding a ITM option (long position) can be dangerous from STT perspective – http://zerodha.com/z-connect/queries/stock-and-fo-queries/stt-options-nse-bse-mcx-sx
Sir, suppose i buy nifty 9600 call 01 Lot @ 10 than i hv to pay rs 75×10 i.e. 750. But if i want to sell the same call @10 than how much amount it should need in my account. Pls explain me the formula used at selling a option.
When you sell an option, the broker blocks margins. Formula for the margins is based on SPAN calculation and its proprietary to CBOE. However, you can use our calculator to know the margins – https://zerodha.com/margin-calculator/SPAN/
Sir, in the last 5/6 years i hv lost about 5lacs rs in nifty options. I am a medium class salaried person and just as a hobby doing trade in nifty options. But due to continuous loss stopped since 2017. Sir, i need your personal advise how can i recover this loss. .do you hv any specific article/chapter on nifty options only. Should i try my luck once more or closed it forever. Sir pls take your time and advise me thoroughly.
Sorry to hear that, Shiva. First and foremost, you should never come to the market with an expectation of ‘trying out your luck’. You should trade only when you know the dynamics of the trade very well. For example, if you are buying a Nifty Call, you should give 100% convincing reason as to why you are buying, what is the target expectation, stop loss, etc etc. If the reasons are not convincing, then you should not trade.
I can assure you with this kind of change in trading behavior, you can recover your loss.
Dear Kathik,
As an Option Writer (Put Option writer) to be precise,am i required to buy back the Puts i sold earlier before expiry?
For example,if i sold(wrote) ten lots of Nifty 9000PE at 3.00 Rupees and on the day of expiry it goes down to 0.05 or 0.10 paise,do i need to cover my position as it is ITM for me as a Put Writer or can i let it expire on it’s own?
Because the people i have been speaking to are giving contrasting answers,some say as a Put Writer if the premium goes down,my option becomes ITM from a Put writers perspective,so i should cover or else i would be given a penalty.
While some others say,since i have already paid the STT by taking a short position earlier by writing the Nifty9000PE at 3.00 rupees,i don’t have to worry about covering it back since it’s OTM(But it’s OTM from a Put buyer’s perspective,isn’t it?
So,who’s speaking the truth?If the Nifty Put that i wrote goes down from 3.00 rupees to 0.05 or 0.10 paise on the day of expiry,am i ITM or OTM? My broker said,i need to square it off because if i don’t i will be penalized by the exchange while others say,i don’t need to cover my Put Writing as it’s gonna explain worthless.Who’s right,who’s wrong?
Buying back is not really necessary. You can even hold to expiry and let it worth expire worthless. Also, if a 3 Rupee option tanks to 0.05, then it is an OTM option, not ATM. You can just let the OTM options expire worthless. You need to track the sport price to assess if the option is ITM or OTM…tracking the premiums is not really a good approach.
However, if you are an option buyer (Calls or Puts) and by expiry your option turns ITM, then you are better off closing the position as opposed to holding the position to expiry due to STT reasons. Do check this post for more clarity – https://zerodha.com/z-connect/queries/stock-and-fo-queries/stt-options-nse-bse-mcx-sx
Som remember…if you have sold an option…dont worry about expiry…if the option is worthless i.e if its OTM, then let it expire. However, if you have bought an option and the option turns to ITM, then close it before the expiry to avoid paying excess STT.
You guys at Zerodha are god sent angels.I mean it from the bottom of my heart.I thought the quickest possible reply i would get,would be around by Monday evening but to see you guys tirelessly replying back to queries posted here fills our hearts with warmth.So i really,really wish you guys……prosper and go on to achieve big things.
So Dear Karthik,as per the reply you gave.It’s much better to track the spot price to the strike price to decide if it’s ITM,ATM or OTM.Sothe scenario i just presented.Let me try to simplify it further –
I sold(wrote) Put Options of Nifty9000PE @3.00.
[Spot Price of Nifty at the time of Put Writing was 9390]
A day later on expiry,Nifty9000PE is trading at 0.05 paise towards the close of the markets.
[Spot Price of Nifty is now at 9509,so the difference has increased even more since yesterday]
So using that as an example,the Nifty9000PE is OTM,am i right?
(Because Nifty Spot is 509 points ahead of the Nifty9000PE and it doesn’t matter
if i am a Put Writer,since the Spot is 509 points on top of the Strike Price,its a nailed on OTM)
As a Put Writer,as long as the Spot Price is way way ahead of my Strike Price then it’s an OTM,right?
And since i have already paid the STT by taking a short position to begin my trade,there is no need
for me to cover it off because i won’t be penalized by the exchange.Right?
Please,please……..do read this post of mine and reply back.I want to get it right and don’t wanna have any false notions.
I am sorry,extremely sorry for keep tormenting you but i hope you understand.I promise this thread will end here.
And apologies for getting your name wrong in the earlier post,it was a typo.
Have a great weekend and once again,it means a lot to see you guys replying back.
Good luck.:)
Vijay, thanks so much for the good wishes and kind words…and you can keep the thread as long as you get a complete satifactory answer. This forum is meant for this. We exchange thoughts and gain knowledge from each other.
Anyway, yes…if you are dealing with a PUT option, then the Option will be ITM if the spot price is below the strike price and will be OTM if the spot price is above the strike price. So in the example you’ve quoted, 9000 PE will be OTM considering the spot is 9509.
Also, if you have written an option, you need not worry about the STT bit.
Good luck and happy learning.
Dear Karthik,
Yes,it’s crystal clear now.Thank you for showing such immense patience.I think that’s the USP of this forum along with the ease(be it the approach you take to explain something or the language that is used) with which you guys try to make us understand.The module and especially the posts are my ‘Go To’ source when it comes to gaining knowledge.I am seriously hooked on to it,i just love reading the queries and the responses given by the team at Zerodha.Learning was never this easy,i mean it.This act of yours is immeasurable and thanks for the invitation to keep the thread going but am totally satisfied now and I’m sure we’ll cross paths again.
Until then thanks a zillion. 🙂
Vijay
Thanks for the kind words, Vijay! I hope to hear back from you again 🙂
Happy learning!
Karthik,
I find buying PUT option is ITM is more beneficial than the OTM.
for ex : Bank Nifty is trading at 24230
buying any CE option will give the money .
but if index goes down, 24300 PE or 24000 PE would give more premium than the 24000 PE or the 24100 PE.
During downtrend, PUT Option in OTM will not get the required PREmium aswell.
you thoughts ?
— And when you find time, could you Please write some lessons on reading charts and how to use indicators to identify the direction .
Manju – you should check this module for charting – https://zerodha.com/varsity/module/technical-analysis/. Everything you need to know about TA is discussed here.
The other things you’ve mentioned – well, its too hard to come to such conclusions.
This question is on Option selling.. I have sold SOUTHBANK 35CE at 0.3.. by end of the contract period, if the share quotes at around 30rs and 35CE quotes at 0.05rs (only sellers).. should I need to buy back 35CE at 0.05 (this gives 0.25rs profit per lot) and close the contract or I can just leave it without out buying so that I will get 0.30rs profit per lot? My only concern is to buy at 0.05 to close the contract..
If you have sold the option and it’s worthless by the time of expiry, then you can let it just expire. However, if you have bought the option and it is turning in the money, then you are better off selling it before expiry to avoid the STT trap – https://zerodha.com/z-connect/queries/stock-and-fo-queries/stt-options-nse-bse-mcx-sx
Is there any way to predict how the stock/index will move based on the futures/options
No.
Hi,
A have a question regarding selling of put options. viz. Suppose, on the day of expiry, I have sold OPT-CNXBAN-17-Aug-2017-24200-PE at Rs 20 (Spot price : 24292). During the day, the spot price drops to 24250, thereby increasing the premium to say Rs 35. If I square off my position, I stand to lose Rs 35 – Rs 20 = Rs 15 per lot. However, If I wait till EOD (expiry) at the spot price is still holding above 24200, what happens in that case? The premium ought to drop to 0.1 by EOD? Do I get to pocket my entire premium?
Thanks!
Since this is a PUT option, you will retain the entire premium as long as the spot is above 24200.
Thanks! That clarifies my doubt.
On a different note – The content that you have put up on the website is excellent! Kudos!
Thanks Adi, the idea is to make it better by the day 🙂
Sir, I didn’t understand why the loss of a Put Option Seller is theoretically unlimited. Spot price can be ‘0’, not beyond that. So it make me think a Put Option seller will not bear unlimited risk. His maximum losing threshold is until the Spot Price becomes 0.
True that. But imagine this – Infy right now is at 900…if you intend to write 900 PE, you will receive a premium of 10500 for a margin deposit of close to 70K. Now if Infy drops to 0 your loss will be close to 50L…that for all practical purpose is únlimited.
Understood!! In practical sense, we can say it unlimited risk.
But, on the same scenario,
selling INFY 900 PE @ 21 (lot size: 500).
Received Premium = 21 * 500 = 10500/-
If Infy becomes ‘0’, then loss will be [(900 – 0)*500] – 10500 = 4,39,500/-
Is there any mistake in my calculation?
Yup, 900 * 500 will be your loss.
If spot is at 9900 I want to sell call of 10500 and put of 9500 how much margin I required
Check this – https://zerodha.com/margin-calculator/SPAN/
Sir im new to option writing…i just wanted to know if im writing a put option n holding it till expiry the premium is goin to be 5p or 10 p…then it wil b profitable only every time …or wt other factors r responsible for p&l ..pl help
This is true if the options are worthless. If the options are ITM, then it will have an intrinsic value.
Thanku so much sir..
Welcome!
Dear Karthik
My sincere thanks for excellent write-ups. However, i have an observation. You say that the put option seller might incur unlimited loss. But dont you think that the put option seller can incur a maximum loss equal to Strike Price-Premium? I mean, if the underlying price goes zero, he will have to buy a worthless asset for a price equal to Strike Price that’s all. Am i right?
Thanks, Doctor!
Well, that is true – but technically, you’ve lost everything you put on the trade and more!
Hi Karthik,
Please explain below scenario.
If I buy Bank Nifty 25600 Put Option @ Rs. 38 but I did not sell it on the expiry. At the time of expiry if its value is @ Rs. 44 and Bank Nifty closes around 25516, then would I be in profit or loss ?
Yes, you would be in profit or 25600-25516 = 84. However, you will have to adjust this towards STT and other charges.
Do you conduct any class room training on derivative? If yes plz mail me the details I am very much interested to attend.. I am from Hyderabad.
Not as of now, Raj.
1.)Option seller pays STT while selling ?
2.)Option buyer pays if price is in the money and goes to expiry, but when option buyer square off his position it is same as option selling, so here what about STT ?
1) Yes
2) Yes
If one has to pay STT either by squaring off position or on expiry, then why STT trap ? How to avoid STT ( Not paying single time ) and order executes both buy and sell of a particular option ?
STT on options is charged at 0.125% on the entire contract value, only if you hold an ITM option upon expiry. Otherwise it is 0.05% on the premium on the sell side. I’d suggest you check this as well – https://tradingqna.com/t/no-more-stt-trap-on-exercised-in-the-money-options/18977/65
Hi Karthik
If the Nifty is trading at 10400 and i intend to sell 10600 put (short sell) which is having a premium of 175 Rs. And there are 4 days for the expiry. On the expiry date if the nifty closes below 10600 say will close around 10500 will the premium of 175 Rs become zero.
10600 PE is ITM, please don’t think of selling it. Two things (based on my personal trading experience) –
1) Don’t write PUT options
2) Don’t write ITM options.
Hi Karthik
If the Nifty is trading at 10400 and i intend to sell 10600 put (short sell) which is having a premium of 175 Rs. And there are 4 days for the expiry. On the expiry date if the nifty closes below 10600 say will close around 10500 will the premium of 175 Rs become zero.
Hello,
I have a question about selling PUT. Yesterday, I sold India Cements March 28 PUT 160 for Rs. 5.15. Stock price of India Cements was Rs. 162. Today the stock price of India Cements is Rs. 159 and the PUT 160 option is at Rs. 6.90.
1) If I close the PUT option today, do I get any premium ?
2) On expiry day if India Cement stock price is at Rs. 155, and I close the PUT option for a loss do I get any premium ?
Thanks.
1) Since you’ve sold the option, you will have to buy back at 6.90, so a loss of Rs.1.75/-
2) No, you will make a deeper loss here.
Hello,
Ok thanks.
If I do not close the PUT option on expiry day and India Cements is below strike price of Rs. 160 that means the option will get exercised. Does that mean I have to purchase India Cements stock in cash to fulfill my obligation ?
Thanks.
The option will be exercised, however, it will be cash settled. Remember, when you short options, your broker will block margins. Hence no need to buy the actual shares from the market.
Dear Karthik,
Thanx for the module in options trading. I am a MBA student and have read lot about options, but the your way of explaining and the flow is great. Also I appreciate you make this knowledge and experience available for free to mass public…Great going Bro…!!
Thanks for the kind words, Aasheesh. Happy learning 🙂
Hi
Kindly explain in detail about below error which we usually see while sorting any option
rms:rule: option strike price based on ltp percentage for entity account-xxxxx across exchange across segment across product
Check this – https://tradingqna.com/t/what-does-the-error-mean-rms-blocked-for-optstk-mkt-nse-fo-broker-zerodha-remarks-option-stock-market-orders-are-not-allowed-block-type-all-mean/23998 and more here – https://tradingqna.com/c/zerodha/zerodha-order-rejection-reasons
Hi Karthik,
I was doing a paper trade today to understand the put option writing. I chose Thursday as it was the weekly expiry day of Bank Nifty.The Bank nifty strike price I chose was BANKNIFTY 5TH APRIL 24,500 PE which was trading at 65 today afternoon at 1.30 pm. The spot price was above 24,500. By 2.30 the spot price went above 24,580 and eventually above 24,700 and the put option price became zero.
My understanding is that I made a gross profit of 65*40( lot size )ie Rs 2600 per lot. Am I correct? What would have happened had the spot price gone below the strike price 24,500? I understand that the option put writer has an unlimited loss. But can you tell me what would be that amount of unlimited loss? Is it possible to quantify the loss assuming that I sold only one lot of banknifty.
Regards,
Nancy
As long as the spot stays above your strike i.e 24500, you will retain the entire profit. So yes, you would have made 65*40. If the spot falls below the strike, then every point below the strike is a loss for you. So if the spot went to 24250, you would have made a loss of 250*40.
Good luck and happy trading!
Hi,
Thank you for the clarification. I observed that even when the spot price was slightly below the strike price of 24500 the premium was in the range of Rs 63-65. So if I write a put option at Rs65 and the spot goes below 24500 what are the alternatives available for me?
1. Wait to see if the spot goes above 24500 (risk is more)
2. Buy back the sold options at( say) 63 (limited risk)
If I go for the second alternative I understand I can limit my loss to Rs 2 ie for one lot 2*40. Is my understanding right?
Regards,
Nancy
ATM options are always tricky – even at the last minute. You can never call the direction in which it can swing. So yes, if you sell 24500 PE @ 65 and the spot goes below 24500, then you will make a loss to the extent of the spot going below the strike.
1) Yes
2) Yes, if you want to cover your loss
Hi,
Sorry I made a mistake while framing my query. Let me re- write my question. I meant, the premium was in the range of 66-68. and if I buy back at 67 can I limit my loss to Rs2 per lot.
Yes, think about it – this is a closed trade and your loss will be to the extent of the difference between buy and sell price.
Thank you. I really like your style of writing. Great reading.
Happy to note that, Nancy 🙂
Hi,
Is option M2M, exactly like futures,..? Zerodha customer care said NO “Only Future is (M2M)”
If we go here “https://zerodha.com/z-connect/queries/stock-and-fo-queries/basics-on-options-shortingwriting”…i could see below which is totally misleading..
“Since the risk is unlimited for an option writer, the exchange blocks margin and similar to futures is marked to market at the end of every day. So to buy an option at Rs 100, you need to have only Rs 5000 ( Rs 100 x 50), but to write an option you will need around Rs 25,000 which is marked to market daily, which means that if there is a loss you are asked to bring in those funds to your trading account by end of the day.”
Kranti, to write options you will need margins. In case of margin shortfall, you will be asked to make up for it. However, in case of intraday profit, the P&L will not be credited to your trading account, like a Futures contract.
Hi Kartick,
Thanks much for your reply, I would like to understand this bit more with an small example
Say I short 1 lot of bank nifty on any Wednesday (sell price 25 Rs) and at the end of the day price become 50Rs (I am maintaining the margin “both exposure as well as span”, even I have few extra cash in demat account) I decided to keep the trade as it is.,,,, On Thursday contract expires worthless (OTM)
1) Is there any loss for me on Wednesday i.e. …..is zerodha going to recover my Wednesday loss of 25 rs either from free cash or margin as part of M2M (or there is no M2M in option)..? this is my original query..
2.) What will be my overall Profit and Loss in this case .?
A-(Would I gain 25 Rs as overall gain) OR
B- (will it be no profit & no loss (if 25 rs debit will happen on Wednesday as part of M2M)
1) No. However, additional margin money would have been blocked, which will be released when you close the position. So no loss, as long as the position moves in your favor.
2) YOu will retain the entire premium of Rs.25
2A) Yes
2B) No
Sir, if I sell a put contract on a stock and the value falls below the strike price at or before expiry, will I be delivered the stock by the broker for the exercise price or will the difference in the market price and strike price be deducted from my account?
For example:
HPCL stock (1 lot = 1575 quantity)
Market price on 25th April: Rs.298.05
If on 25th April, I sell 31-May-2018, Rs.290 strike put @ Rs.10.35 premium and receive Rs.10.35*1575= Rs.16301.25
Let us assume on 31-May-2018, if the stock drops and it is trading at Rs.275.
Do I receive 1575 stock of HPCL at Rs.290 and Rs.1575*290 = Rs.4,56,750 get deducted from my account OR
Does the difference (290-275)*1575 = Rs.23,625 get deducted from my bank account and I don’t receive the delivery of 1575 quantity of HPCL stocks.
Your insight on the example is much appreciated. Thank you.
Tushar, as of today, all stocks are cash settled. Meaning you will receive the difference in cash. However, I think the physical settlement will be back in the market starting July.
Hi, Currently NIFTY @10700 , if I short sell NIFTY MAY 11000 PE whose premium is 255 , and at expiry NIFTY expires at 10900 , will I get full premium of 75 x 255 = 19000 ?
Since you are selling an ITM option (11000 PE when mkts is at 10700), the chances of losing the entire premium is quite high. Anyway, if the mkt expires at 10900, you will lose the 11000 – 10900 = 300 points on this.
Yes got it Karthik,
Karthik if I want to form a NIFTY SHORT STRADDLE Stratergy (Say now Nifty @10715), how shall I choose Stikes for DELTA NUETRAL?
I’d suggest you look at the ATM strikes.
I hv bought gmrinfra PE 17.5 @ 0.05, there are no buyers , I want to sell it back at same price, what if it doesn’t sell and it expires today
Well, liquidity is a real issue with stock options. Guess the option will expire worthless, if you are unable to sell, then you will lose the premium paid.
Dear sir,
Firstly no words can describe your sheer will to help out the fellow traders.
Secondly sir in “key takeaways from this chapter” the last point says, Breakdown= Strike Price – Premium Paid……
Shouldn’t it be recieved ?
Yes, Manas. That’s a typo, thanks for point that out 🙂
Dear sir,
I understood that in long calls & long puts, we can sqaure off whenever there is increase in premium & book profit but sir i am so very confused about squaring off when we have sold the options be it call or put.
Suppose sir i am bearish about market & i tend to sell a call option. Now suppose i sell it at a particular strike say 11500, now suppose market actually falls as i expected so at what strike shall i buy it back, as my max profit would only be premium irrespective of how much the market falls so how would the profit be determined here ??
The maximum profit when when you sell options is to the extent of premium received. For example if the premium received is 20, then the entire premium of 20 can be retained only when the contract expires. However, if the premium falls to say 15, you can square-off the position at 15 and pocket 5 as profits. So yes, even when you sell an option, you can square off anytime you wish.
Wow sir, i was so confused in this but you cleared it in one go… You are the BEST ??
Good luck, Manas 🙂
Sorry same silly question but want to clarify.
Suppose I sell 1 lot of NIFTY put option at 11500 at premium Rs 80
And the amount from my account blocked as a margin is Rs 68000
And market never came below 11500 and contract got expired on its expiry day then
I’ll will get 80*75 = Rs 6000
and my blocked margin = Rs 68000
so the total amount that comes in my account will be 68000 + 6000 = 74000
Right?
Yes, that is correct, Pradeep. You get to retain the entire premium because the options expired worthless.
Hello sir, can you please clarify one doubt about options.
ITM options never become zero due to Thier intrinsic value and OTM option becomes zero on expiry date due to no intrinsic value as well as time value. In that case why would anyone buy ITM options? Its way easier to sell call option or put option of Deep OTM. Like ITC.ltd CMP is ₹250 then selling 300 or 310 CE option won’t be better to altst get premium bcz anyhow they are going to become zero by expiry date.
On personal note – (I know it’s not that easy to make money in options but please clarify my doubt what I am missing or am I wrong in understanding options)
People consider this as buying a lottery ticket, pay a low fee and hope for an asymmetric payoff, but this hardly works in reality 🙂
Hi,
Lets say I have sold a put option and the market actually falls to the strike price or lower. Can I at that point square off the option by actually buying a put option to limit my losses.
Yes, you certainly can.
Lets say I have sold an option and the premium is Rs 4, do I get paid immediately or on expiry ? Also lets say the same option is selling for Rs 2 some time later. How can I square off is it necessarily by buying an option ?
You will receive the premium right away. Yes, you can square off the option anytime you wish.
What is the Margin Zerodha holds to sell a lot of Bank Nifty( Near week expiry). Is it around Rs.65000.00 ? I was told Upstox holds only Rs.16000.00.
Can you please throw some light on this. I shall be really grateful. I have just applied for a Zerodha account. Should be activated by tomorrow.
I already have an account with AxisDirect. They holds around Rs.65000.00 too. They seems to pretty expensive. and also Boring plate form.
Regards,
Shyamal
Shyamal, if you choose to hold a position overnight, you need to have the SPAN+ Exposure margin prescribed by the exchange, i.e., currently Rs 65,000 for Bank Nifty. This is standard across all brokers failing which there is a margin penalty levied by the exchange.
For intraday, we provide 3 to 7 times leverage through means of bracket/cover order which includes a compulsory stop loss(to mitigate risk).
Please check our margin calculator for the exact figures
Thank you Faisal. Always a pleasure to get answers from all of you.
Can i sell a put option and then buy it back as the price decrease? ( Given i have a Mildly Bullish Stance on Nifty )
Yes, you certainly can.
Dear sir,
If I have sold 1 lot hdfc bank 2160 pe for Rs.33 and if on expiry the stock trades at 2100 with 60 pe price, if I have bought back the put what will be my loss. Is it Rs. 8250+ charges(250×33)? or 60-33×250 ?
Regards,
Basil
As soon as you shorted the option, you received Rs 8250(33*250) as a credit to your account. Now on expiry, you will be paying Rs 15,000(60*250) to the option buyer. Your net loss will be Rs 6,750(=(60-33)*250)
Thank you very much for reply. One more doubt, if iam not buying and expired what will be the result ( how much loss).
Thank you very much for the reply. Please clarify one doubt if I have not bought back the the sold option and got expired what will be the result ( loss or profit)
Basil, this depends on the price of the option.
Hi I am new to trading, please help me with problem.
1>if i buy nifty or banknifty put option @Rs.120 on 21-feb and expiry date will be 07-Mar.
On 22-feb price dropped to Rs.100. if I sell it on 22-feb. what will happen? or its same as Call options, contract will be closed on same day(sold time) or it will be closed on 7-Mar.?
2> same as above if i have purchase put option for Rs 120 and it raised to Rs 250 on same day how it will effect on my premium, am I entitled to wait and see till expiry or contract will be closed immediately? (when price reached Rs 250)
1) You will make a loss of 20 i.e you decide to sell at 100. Think of it as buying and selling a stock.
2) Likewise, you will make a profit of 100.
Dear Karthik,
While selling a PUT margin money is blocked. What will happen to this blocked money and when will this money be available for me to trade.
Or is there a scope that I will lose this margin money as well on expiry day.
Please explain.
Thanks
Thats right, the blocked margin money will be released as soon as you close the trade. You can close it anytime you wish, even after a few minutes of writing a put option.
Let’s say I buy a call option of SBI for 300 and the value of the stock goes at 320 and I don’t sell it. Then how much profit will I get ? what will be STT ?
You will have a notional gain of close to 20 Rupees, Sanoj. Profit will be realized only after you sell the position.
Hello,
Suppose I short-sell put options.
Now what I have understood here is I will get the the price of the option immediately, example I sell 1 lot of 75 and the price is 100, so I will get 75*100=7500 in my account.
What will happen if:
1) the price reaches 90 and I decide to close the position on the same day (intraday).
2) the price reaches 110 and I decide to close the position on the same day.
(Is is possible to close this sell position in put options on the same day and not wait till expiry)
Please guide me if I have gone wrong.
Thanks.
YOu will get 7500, only if the option closes at 0 by expiry.
1) You will get 10*75 = 750 as profit
2) You will make a loss of 750.
Hello,
I am not able to buy or sell option of stock at market value, it gets rejected whenever I put a buy or sell trade, however when I use the Limit i.e entering a value to purchase I have to wait for it to reach the limit level, can this be sorted out.
Your prompt reply will be of great assistance.
Thanks.
Market orders are on stock options are disabled due to liquidity issues. If you want immediate execution, please a limit order with a higher price.
Lets suppose I short any option say put :
1. Will I get my full margin if I square off my trade before expiry.
2. After expiry, Full margin is deposited or not ?
3. Before squaring due to change in options’ premium price, margin also got changed and my margin becomes negative, Will zerodha charge for this. If yes how much %.
1) Yes, the blocked margins will be reversed
2) As long as you have a position, the margins will be blocked. Once you square off it will release
3) No charges as such, but if you do not make good the margin shortfall, the position will be closed.
Hi, I wanted to Sell on 18th Apr 2019 Nifty 11500 PE (Expiry 25th Apr ) as 19th Apr is Trading Holiday. But , I couldn’t see that in my Kite platform. What is the cause?
I see the contract on Kite, Vrinda. Can you check for it again?
Is it that all the option contracts of a particular month(ex: NIFTY 2nd May 11500 PE) are shown with the expiry date mentioned with them except the the last expiry one(NIFTY 11500 PE)?
Nifty 11500PE is the monthly expiry and the rest are weekly expiry contracts 🙂
how to sell a covered put option in Zerodha?
Hi Karthik,
NSE bans certain stock options from trading which cross above 90% of their market wide positions!!
But, I’m able to see the volumes of those stock options during the ban period!
How is this possible??
During the ban period, no new positions can be initiated, however, old positions can be square off. This contributes to the volume.
Cheers! Thank you
dear Sir,
If I buy 1 put of 11800 and sell 2 put of 11500.
How much margin I need to pay, means for 1 lot or 2 lot?
Dharmesh, you can check the margins here – https://zerodha.com/margin-calculator/SPAN/
Person A sells a put option of BANK NIFTY at 18400 @ premium 315. Let’s consider 2 instances:-
1. The price increases and upon expiry he gets to pocket the premium. P&L = +315
2. His directional view is absolutely wrong and upon expiry the price is at 18086. P&L = +1
In both cases, Person A is making a profit irrespective of whether he is right or wrong. What I don’t understand is that A is making a profit on zero investment, since he receives the premium when he/she decides to sell. Of course, the margin will be blocked in his account but I don’t think that can be considered an investment, but rather an assurance amount. So do option writers really make unlimited return over investment(since anything over 0 is unlimited)?
The calculations are right. However, this is not a profit of zero investment. The margins get blocked when you sell options, this of it as opportunity cost as there is no free money in reality 🙂
So given that Option writers don’t make an unlimited return.
Sir,
If a person sell Put options ( out of the money) and during expiry stock is trading at high price and Put option seller is at profit.
Due to any cause if he could’t square of , does it will auto square off and he will received both his profit & margin money?
Yes, thats right Vishal. The option will be settled for you.
Hey Karthik,
Could you help me with the following…
1. Let’s say I want to buy 28000 Idea shares (one lot) at Re. 1/-. I sell the Re. 1 PUT option and lets say 10k is blocked as margin. Upon expiry if Idea spot falls to Re. 1, then I would need to keep only the remaining 18k in my account to take the physical delivery right, since 10k was already blocked while writing the put? Or will I need to keep an entire 28k separately?
2. Now let’s say I own 28000/- shares of Idea and I write a CALL option, basically a covered call. Since I have the shares in my DEMAT, will more funds be blocked as margin for the CALL or the actual shares will be taken into consideration?
3. How are you Karthik? 😛 Sorry this should have been the first question.
Thanks & Regards,
~ Abudhar al Hassan.
1) That’s right, you will have to put the additional margin
2) For now, you will have to bring the entire margins, however, we are hopeful it will reduce going forward
3) I’m doing good, hopefully all well with you as well )
Just clarifying the first point again Karthik.
“1) That’s right, you will have to put the additional margin”
By additional margin, you mean, only 18k (as 10k was already blocked while selling the PUT) or you mean I would need another 28k (the 10k blocked for PUT won’t be considered?)
Thanks for replying.
~ Abudhar al Hassan.
Dear karthik . Please make me underatand the below calculationon which you have sais yes to MR. banerjee.
Understood In practical sense, we can say it unlimited risk.
But, on the same scenario,
selling INFY 900 PE @ 21 (lot size: 500).
Received Premium = 21 * 500 = 10500/-
If Infy becomes ‘0’, then loss will be [(900 – 0)*500] – 10500 = 4,39,500/-
Is there any mistake in my calculation? My doubt is that as it is written he has sold the put option so as per my understandimg if the value of premium which is 21 in thia case gets reduced only then he will make money. In this case if the premium is reduced to 0 then he will get to keep the whole 10500 in this case. Please correct if i have done any mistake in understanding. Thanks.
Punit, yes, worst case the loss is Rs.439,500/- per lot. The max profit is to the extent of the premium received, which is Rs.10,500/-.
Sorry karthik for the question. I got my answer of the above question. The profit and loss is premium recieved -(strike – spot)* multilped by the lot size. But on the other side isn’t it practical that if the value of Infosys is reducing from 900 to zero in spot market at the same time the premium of 21 will also start reducing to a greater extent and isn’t it possible that before the Infosys value reaches from 900 0 the value of premium will reduced from 21 to 0 and making the option worthless before expiry. And at that time the trader is free to book the loss of 10500 and just out of the market or there is some sort of geek or calculation which doesn’t let the option value become zero before expiry.
It will be close to zero but not zero, Punit. This is because, time will always have some value associated with it. Btw, yes, the trader is free to get out of the position anytime.
Hello Karthik,
I’ve one doubt. Suppose spot price of nifty is at 11000 and I sold 10500 PE for premium of 50 rupees on 1st Nov 2019. Now on the day of expiry (28th Nov 2019) nifty spot is at 10600 and premium for the same option (10500 PE) is 70 rupees. How the P/L is calculated?
1) 50 – 70 = -20 (Loss)
2) 10600 – 10500 = 100 —> 100 – 70 = 30 (Profit)
1) Yes, assuming you decide to sell it at 70 and square off the position
2) No
However, if you let the option expire, and the market closes above 10500, then 10500 PE will expire worthlessly and you will retain the entire premium.
Strike Price29700 Bid
Qty360 Bid
Price7.55 Ask
Price9.15 Ask
Qty60 Net Chng-2706.4 LTP9 IV22.43 Volume4089 Chng in OI 15740 OI 2620. this is nse data for12th dec,2019banknifty expiry pe.net change is -2706. is it true someone sold(write) 29700 pe at 2706?if yes he needs to buy it or left it for expiry as iis otm.pl explain
I’m not sure about this, assuming it is, then he has the option to keep it open or square off.
why its showing price decrese of 2706?
This is OI data and not price.
Hi Karthik,
In Bank Nifty when writing put options strike price 500 points away from spot price, when spot price is going up, put premiums instead of decreasing is increasing. What might be the reason for this to happen?
Thanks and Regards
Srini
Srini, the volatility too plays a major part in influencing the premium.
Hi Sir,
I have short Put option on 26-dec-2019 which is ITM, due to some technical issues i could not squire off my position.
Next day i have seen contact copy, my entire amount has been debited.
Please help me to explain the process.
Vinod, I’d suggest you call the support desk for this. They will help you with this.
Hello,
Just one doubt , when can I exit the position held ? Basically when can I book my premium paid (profit profit) or book loss in this ?
Does it happen at expiry only directly ?
Ujwal, you can sell it anytime, no need to wait till expiry.
Suppose I have taken the below trade .
Sell SBI Put opt of SL 250 at 13 rs cost , when current Spot price is 272
Now what will happen if the next 3 sessions below scenarios happen .
1.) Spot price :- 270
2.) Spot price :- 280
3.) Spot price :- 250
4.) Spot price :- 200
Note :-
The monthly expiry is after 2 weeks , still can I square off my position ?
I’m assuming you’ve sold 250 PE @ 13 when the spot is 272.
1, 2 & 3) You will get to keep the entire premium of 13
4) You will lose 50
You can square off the position anytime you wish, no need to wait till expiry.
[…] 6. The Put Option selling […]
Finally I understood Futures and Options ( Call n Put ).
I have watched many videos on FNO but in vain.
I can imagine the amount of hard work that goes into making all the content and replying to all the comment on daily basis.
As we have Anand Kumar Sir for IIT.
We have Kartik Sir for Stock Market.
For me you are my Anand Kumar.
Thank you load Sir.
Big words, Maajid. I don’t think I deserve that 🙂
HI Karthik,
If have sold 18000 Bank Nifty PE at 585 and after some time Bank Nifty came down and my premiuem chaged to 705 and i exited my position at 705.Now,what will be My loss by selling the option i have received premiuem of 585 So,is it 705-585=120 or it will be the premiuem i received 585- 120(my loss)=465 profit.
Thank you.
If you have sold a PE and the market goes down, then you’ll make a loss. The loss is to the extent of the difference between the premiums…i.e. 120.
Hey Karthik, last Wednesday around 3 pm, the Nifty was hovering around 8300 & the 6300 PE also had activity.
So suppose, I had sold that and Nifty doesn’t change till EOD, then that’s guaranteed profit, right? Because even if Nifty hits lower circuit next day, 6300 PE is going to be outside the 20% range and will be OTM? Am I assuming this right or will the option be settled differently (like the LTP or something)?
Thanks!
Yup, most likely. But do remember we are still early in the series, so you’ll never know 🙂
Sorry, didn’t get that. I mean, yeah it’s still early for monthly expiry, but weekly expiry can still be sold!?
Yeah, I mean to say its early in the series, so theta as such will not have a big impact.
in the Key takeaways from this chapter
point no. 9 should be wriiten as:
Breakdown point = Strike Price – Premium Received
Checking this. Thanks.
Hi Karthik,
Assume I sold SBI stock put, assume spot price was 100, I sold 90 put, expiry is still 2 weeks away and SBI falls to 50, what process does Stock broker/Zerodha follow.
1] Ask me to deposit more funds when Margin is about to run out
2] Ask me to Buy so many stocks of SBI
More information will be helpful or please share any URL which has more detail
Yes, margin requirements goes up. Also depending on the time to expiry, you may have to bring stocks under physical delivery. Check this – https://support.zerodha.com/category/trading-and-markets/margin-leverage-and-product-and-order-types/articles/policy-on-physical-settlement
Thanks Karthik…
Please correct me if am wrong, so
1] if I write a put, after expiry day if stock is in the money, I have to buy the stock at the strike price.
Ex: SBI
Sold 300 put 1 lot
After expiry SBI at 250
So I have to physically buy stock at 300 and sell it to contract holder for 250, right?
My query is, how this process works, say I have enough capital to buy, what are charges per lot, how much time I will have to provide the stock? Who handles this transaction
2] what happens if the above case is writing Call 300, after expiry it is 350,
3] Exercising stocks have STT on the difference amount only, right? 50×Lot= STT?
Sorry, very new to it, want to understand the process completely
Yes, if have a long Put position, it will result in a sell transaction. Hence you’ll have to get additional cash. Do check this – https://support.zerodha.com/category/trading-and-markets/margin-leverage-and-product-and-order-types/articles/policy-on-physical-settlement
I think the above query should answer your other queries as well.
Thanks Karthik…
HI Karthik,
If i have buy Nifty PE and hold overnight
OR
If i have buy nifty CE and hold overnight
have any extra margin require for holding overnight nifty option position?
You will need to have NRML margin.
Hi Karthik.
Let me congratulate you at the outset for this effort called Varsity. Many people are benefiting from this endeavour by Zerodha. I am an avid reader of this teaching module and have developed a doubt wrt P and L of writing a Put option. In the PDF, i.e. chapter 6, para 6.3, point 2, you make a statement that ‘The loss is theoretically UNLIMITED(therefore the risk).
However, the loss in writing a put option has to be equal to the total value at the breakdown point(18085*lot size in the example mentioned), as theoretically the value of the underlying can only go to 0. That is the theoretical loss is losing the amount equal to the strike price less the premium.
Would be extremely delighted to have your views on the same and to know whether I have understood the concept correctly.
Thanks in advance
Thats right, Ashish. The max loss value is to the extent of the underlying going to zero, which is not really a common occurrence.
Continuing from above
So also, the profit of the put option buyer should also follow a mirror image of the seller ie the profit is limited, as the underlying can only go to zero. Hence the profit would be strike price- premium paid(18085*lot size) in the above example
Waiting for your comment
Thanks.
No, the theoretically the price can goto any extent, so the profit can sore. This is the asymmetric pay off of the option.
Yes, the upside of the price of the underlying is theoretically UNLIMITED (but the upside of the loss secondary to rising prices is limited to the premium paid). However a put option buyer benefits from a fall in the price, and as discussed before, the price can only fall down to zero, hence theoretically the profit too (only in a PUT option buying vs Call option) is to the extent of the underlying falling to zero. So yes, the profit can soar (that’s due to leverage as you have beautifully explained) but only to a certain point(limited to the underlying theoretically falling to zero and hence the asymmetry. That’s what I thought was a subtle THEORETICAL difference between PUT and CALL. Please pardon my persistence.
Thanks
Hmm, I get your point. But I guess this is not a very intuitive way to put things forward to someone absolutely new to options 🙂
hi, I have a query
E.g I sell HDFC Put option strike price @800 premium 8/- lot size is 500. I get premium of 4000 on expiry HDFC price is 850.
1) Scenario 1- price is > 800 . I earned premium . Do I need to take any other action in system like squaring off or any other thing to complete this transaction.
2) Scenario 2- price is < 800 again I am obliged to but @800/-. Again purchase of 500 shares will be triggered automatically or do i need to complete the transaction.
Thanks
Ajay
Example for call option writer squareoff his position.
He has to buy back the option.
Hi Karthik,
I have a very basic question, kindly clarify my doubts. Suppose if I sell a PUT options on 15 Rs premium and now the premium is 1 Rs. So I am in gain of 14 Rs times the Lot as a seller. How can I book the profit without waiting till the Expiry date so that I can just realise the profit without actually buying any Shares. I can see two buttons in Zerodha against the sold PUT – Exit and Convert Position, but I am not sure the significance. Thanks for your kind guidance.
Thats right, Raj. That is 14/- in profit if you manage to square off at 1. You need not have to wait for expiry. You can square off anytime by clicking on ‘exit’ from the positions tab.
Hi Karthik,
Thanks a ton!
Happy reading 🙂
Hi Karthik,
Please clarify how the settlement happens in the following scenario.
I sell OTM put option of a stock at strike price of say Rs 900. SPOT price is Rs. 1000.
On the day of expiry price is at Rs 500.
I am ready to take stock delivery.
What is my liability as a seller? In addition to taking stock delivery at Rs 900, am I liable for 900-500 = 400 ?
In addition, What is the total cost of assignment to the seller here? Like STT brokerage etc.
Thanks.
Short PUT results in a buy, so you need to have enough margins at the time leading to expiry. DO check this link – https://support.zerodha.com/category/trading-and-markets/margin-leverage-and-product-and-order-types/articles/policy-on-physical-settlement
Hi Karthik,
Thanks for the valuable content you have provided. I want.to ask that What is the formula of P&L if someone exit(square off) before expiry when he sells put option.
P&L = (Difference in buy and sell premium) * lot size – applicable charges.
Thanks. 🙂
Happy reading!
How to exit put sell option.?
You can exit, from the positions tab.
But how muze put option bye karana hai..
Same like buying a call option.
sir please give one example potion sell in the detail form starting date to ending date including cash handling
I’ve explained that in this and the next chapter right?
Hello, my question is – Suppose i sell a put option of SBI @ 140 strike price for 28 May expiry and the LTP for SBI on 28th is 130. In this case, can i buy 3000 shares of SBI @ 140 and close the put sell or i have to pay balance of premium received – max (0,140-130) at expiry? Is there a way instead of paying i agree to buy the stocks @140 (physical settlement)?
Many thanks,
Yes, since its ITM PUT short, you are obligated to buy. More on the physical settlement here – https://zerodha.com/z-connect/queries/policy-on-settlement-of-compulsory-delivery-derivative-contracts-update-oct-2019
HI SIR,
CAN PUT WRITER(PUT SELLER) EXIT HIS POSITION.
MANY THANKS.
Yes, he can, just like any other positions.
If I sell a PUT option for ICICI for June month for rs 220.
Will I get the premium on day of expiry or right away?
Now if price goes to 200 on day of expiry, will I have to take delivery of shares?
Do I need to manage complete funds in Zerodha account from the day I sell the options or on day of exipry? or I can just have the margin amount there?
Thanks,
-Pankaj
Content is really great and helpful.
One suggestion, the P/L = 0 situation is called Breakeven point and not Breakdown point.
Thanks. Will look into this.
Sir if am selling a deep OTM put option NIFTY Strike@8500 ; Spot@9000 on 21.05.2020 ; lot size- 75 ; Expiry- 28.05.2020
1.If I have decided to hold the option till expiry then what will be the amount I have to keep in my account as margin from 25.05.2020 to 28.05.2020.(Because I’ve heard that four days before expiry , the amount to be blocked as margin in my account should be 70% of the contract value. Does that mean the……
…….margin = Strike price*lot Size*70%
= 8500*75 *0.75= 478125/-
or will it be margin = Spot price*Lot Size*70% ) ??
2. As I’ve decided to hold this position till expiry, what will happen if the spot price becomes 8400 (i.e. ITM) on 26.05.2020 and again rises to 8700 (i.e. OTM) on 27.05.2020 and remain OTM till expiry. Will this effect my P&L if yes then how,please explain ?
3. On this platform Can questions be asked in Hindi also ?
1) Yes, the margins go up closer to expiry. You can check the margin required here – https://zerodha.com/margin-calculator/SPAN/
2) If the option is OTM, it will expire worthlessly and you will get to retain the premium
3) Yes, please switch to Hindi content and comment in Hindi, you will get a response in Hindi 🙂
Sir Please give Hindi Content link.
Here you go – https://zerodha.com/varsity/module/%e0%a4%9f%e0%a5%8d%e0%a4%b0%e0%a5%87%e0%a4%a1%e0%a4%bf%e0%a4%82%e0%a4%97-%e0%a4%95%e0%a5%87-%e0%a4%b2%e0%a4%bf%e0%a4%8f-%e0%a4%91%e0%a4%aa%e0%a5%8d%e0%a4%b6%e0%a4%a8-%e0%a4%a5%e0%a5%8d%e0%a4%af/
Hello Karthik,
I have sold 9450 PE with 04/06/2020 expiry date at 143.
My question is, Do I have to buy before expiry at any price or leave it to become 0.05? If I look for max profit and do not buy are there any fines or zerodha automatically covers the option?
For max profit, you will have to hold to expiry. Yeah, if its worthless, it gets settled.
The loss on a short put option is not unlimited, as the minimum price the stock can hit is 0, so theoretically the maximum loss on a short put option is = max(0,(strike price-0))- premium = strike price – premium. However in the case of a short call option, the loss is theoretically unlimited as the stock price can increases to infinity (meaning a very large number) and therefore the loss, which is max(0,(infinity-strike price)-premium = infinity-premium = infinity, can be theoretically unlimited.
Yeah, you can look at it that way 🙂
Hello Karthik sir,
I wanted to ask you if I sell a put option(1 lot) each of reliance and nifty at 1400 strike price and 9500 strike price(as of today spot price is 1579 & 10142) then what will happen if the spot price of reliance comes below 1400 in few days but on the date of expiry it is above 1400 let’s say 1520 something….. So my main question is this what will happen when, it drops below 1400, will I have to buy the shares as soon as it comes below the strike price or are we only concerned with the levels/price on the date of expiry??
Also I would request you that since sebi has introduced new margin rules from first of June I would request you to To make a new module for this new margin and how it will affect the option margins and strategies.
You will get to retain the entire premium if RIL closes at or above 1400 on expiry day. No, you have time till you approach expiry day.
Yes, I will try and make something on the new prescribed guidelines.
Thank you sir for the quick response…😊
Good luck!
Hello Karthik,
If I have sold NIFTY 25-Jun-2020 6500 PE for a premium of 1.62 do I have to square off the position before the expiry? If I don’t do anything before the end of the expiry day will I lose any money?
Thanks in advance,
Vinayak
You can square off the position on or before expiry anytime. No need to hold to expiry.
Hello Karthik,
Updated question:
Say, I have sold NIFTY 25-Jun-2020 6500 PE for a premium of 1.62 (actually I sold it for 2.80 but now shows up as 1.62). In that case,
1) Do I have to square off the position before the expiry?
2) If I don’t do anything before the end of the expiry day will I lose any money if the premium becomes say 3.00?
3) If I square off the position when the premium is say 3.00 will I lose money?
4) What other way is there to avoid losses in case of selling put option?
Thanks in advance,
Vinayak
1) No, its upto you as to when you want to square off
2) If you decide to sq off @ 3, your loss will be 20 paisa
3) Yes, difference in premium is what you lose
4) Once you sell, the value of the premium will have to reduce from the point you’ve sold. Else, you will lose money.
Hello Karthik,
Thanks for the valuable content.
I want to ask that I had sold Nifty 9900 PE at 20 (premium). Suppose, at expiry it closes at 1 (premium) and I do not square off my position then what will be the profit (20, 19, or 0) .
Also, is there any charge for not squaring off OTM short position.
Thanks.
If the option expires worthless i.e. the spot price should be 9900 or above, then 9900 PE will be worthless. In such case, you get to retain the entire premium of Rs.20.
Hi Zerodha Team,
Your comments and any pro tip will be very helpful. Thanks in advance
Query 1 :- If I Sell PE 600 (Lot size 1200) at a premium of 10 of Infy (CMP of INFY is 700) and it expired OTM.
Will it make any difference in my profift even when price of premium went to 20 after I sold INFY PE 600 Put Option.
Query 2 :- If I Sell CE 750 (Lot Size 1200) at a premium of 10 of Infy and it expired ITM at CMP as 760. What action will be executed here?
1) No, as long as Infy expires less than 600, you are safe. However, during the time you are holding the short position, if Infy raises then the margin required goes higher.
2) You’ll make no loss no gain here. Of course, you need to include transaction charges.
Thanks Karthik, Just one more sub-query with respect to Query 2 that:
If Infy CMP Closes at 800 , then Do I need to give delivery of Infy 1200 shares. (Assuming, I do not posses 1200 Infy shares in my Demat) as it will be huge loss.
Yes, thats right. Do check this – https://zerodha.com/varsity/chapter/quick-note-on-physical-settlement-2/
Hi,
below is trade.
i dont understand the terms & which column to enter .
OPTION BANKNIFTY 19900 PE BUY ABOVE 400 TARGET 430/470/500.
I understand bank nifty 19900 PE BUY.
What is 400? where to enter this value?
What is target 430/470/500? Where to enter this value.
Thanks
I’m guessing 400 is the premium buy value for the Bank Nifty 19,900 PE. You need to enter this in the buy order form in your trading terminal. The other numbers are possible target numbers that you need to watch out for.
Btw, is this from any stock tipping agency? If yes, please avoid trading based on tips, most of these guys are running scams. Sorry about the unsolicited advice.
If I sell 1 lot of Put option of a stock and the spot price goes below the strike price, can I ask for delivery of the underlying stocks, paying the market price?
Yes, do read this – https://zerodha.com/varsity/chapter/quick-note-on-physical-settlement-2/
Sorry, I have placed the question wrong. It should be, If I sell 1 lot of Put option of a stock and the spot price goes below the strike price, can I ask for delivery of the underlying stocks, paying the strike price?
Yes, you can.
Hi Karthik,
As per my understanding, maximum loss a put option seller would incur is Strike price – premium. How can it be unlimited as per your statement mentioned in this document?
It is Strike – Spot, the higher the stock price moves, the higher your loss Anirudh.
If I sell a put option of ITC at a strike price of Rs 150 (Market Lot 3200) and on the settlement date the spot price goes below the strike price, and as per the physical settlement norm, I have to take delivery of 3200 ITC shares @ Rs 150 paying Rs 480K. When shall I have to Pay my broker, if the settlement day is 30.07. 20 ? Because, the final spot price will be known only at the end of the settlement day. Will my broker send me any communication, or I have to keep the balance with the broker over and above the margin money?
The physical delivery process starts on Monday of the expiry week. You need to either bring stock or have 100% margins, only then you will be able to take the position forward. Do check this chapter – https://zerodha.com/varsity/chapter/quick-note-on-physical-settlement-2/
In case of spot price falls below the strike price for a put option sale, and the seller fails to take the delivery because of fund, what will happen? Will the entire margin money be forfeited?
The position will be closed. Do read the chapter I posted to your previous query.
Isn’t it a good strategy to sell put at an attractive price far below the spot price with a return of 12-15% on margin money as premium, supported by purchasing power to buy the underlying shares at the strike price, if the spot price falls below the strike price?
Yes, but when markets fall, there is no cover 🙂
Isn’t it a good strategy to sell put at an attractive price far below the spot price with a return of 12-15% on margin money as premium, supported by purchasing power to buy the underlying shares at the strike price, if the spot price falls below the strike price?
A small correction, return of 12-15% p.a. on margin money.
Like I mentioned, when markets correct (like in early March 2020), this strategy will bleed and wipe your account clean.
This might seem like a silly question. Please correct me if I am wrong.
Can’t I sell a put option, collect the premiums, and then exit the position by squaring off?
Or is that only allowed when buying an option?
Yes, you can do that. While you exit the position, you will have to buy back the option. When you buyback, you make a profit if the premium has gone lower from the price at which you sold, else you will make a loss.
Okay understood, thank you! So in this case my profit/loss will be the difference between the two premium values, right? I can receive a profit of the full premium at which I sold only if I wait until expiry, right?
That is correct.
Hi Karthik, regarding margins for selling cash covered put. For example: if I sell SBIN JUL PE @ 175 for premium of 5rs/share (current price is 185), what are the margins (cash/collateral) that are required to be maintained? How do these margins change over time as we move closer to expiry?
The zerodha page for FnO delivery suggests that 10% margin is required E-4 days etc. but the margin required to sell this option already shows ~30% (1.6Lakhs) on June 29th although the expiry is only 30th July.
Arun, check this for margins – https://zerodha.com/margin-calculator/SPAN/
This for how margins change as we approach closer to expiry – https://zerodha.com/varsity/chapter/quick-note-on-physical-settlement-2/
Hi Karthik,
I have a question to ask long time in my mind, please do clarify it.
For instance, xyz market price is 100rs i am selling Call option with strike price 105rs at a premium of 1rs on expiry date or two days before expiry date assuming the price wont spike. However on expiry the price decayed and came to 0.5 and standing in profit but i dont have buyer to trade on expiry date. Will the broker square off my trade and credit my profit along with square off charges or what happens further.
Please bare with the explanation, i believe u understood. Kindly response.
Thats right Bala, if on expiry the option is worthless i.e. it is trading less than 105, then you get to retain the entire premium. The broker will settle this for you.
Today is expiry day. When I try to sell 21900 option under ‘NRML’, Zerodha says that Margin required as ‘83000’. But, if I change the type to ‘MIS’, the margin reduced to ‘35000’. On an expiry day, both ‘NRML’ and ‘MIS’ should be treated as same since you cannot take your positions overnight and it will squared off the same say. Is there any difference ? Please correct me if my understanding is incorrect. Thanks.
If I have an NRML open, then I would close the same. But yes, you are right, NRML will be closed by 3:30 on expiry day.
Hi karthik,
Today morning I short the NIFTY 09JUL2020 10700CE with premium 130.19/- ,when the nifty is trading at 10800 .so my breakeven point is 10700+130=10830.
1.Nifty crossing after 10830 only I make loss right?But today morning when nifty is still in 10820-830 ,it is showing me ‘-ve’ in P&L,why is that?
2.Howmuch money will I get as profit (max)if nifty close exactly at 10750 tomorrow?
(130-50=80;75*80=6000(profit),Is this correct answer?)
1) The calculation you mentioned is true for expiry, not before expiry
2) YOu will lose 30 and retain 80 from the premium received.
If i have sold a put but stock price has fallen enough. At the expiry instead of booking loss I want to buy the stocks and keep them. How can I do that in Zerodha?
Vikas, if you’ve sold a PUT, then you want the market to stay flat or increase. In every other circumstance, you will have to book a loss. In this case, you will have to buy the stock at a higher price, so that’s a loss again.
M bank nifty jul 22900 ce sell m book karta hu 1000 rs m or wo 700 aa gyi to usey exit kaisey karege or kya normal m lekar next day posting m show karega ya same day exit karna padega
Hi Karthik,
Thanks for you reply.
Idea here is I will hold those share for some time and sell when right time comes. That way I can save myself from big loss.
Can you please guide how to buy those stocks in same position in Zerodha. Service brokers like hdfc security provide that facility.
Not sure how that can be done in Zerodha.
Regards,
Vikas
Got it. In that case, you just have to ensure you have the margins to buy. Do check this – https://zerodha.com/varsity/chapter/quick-note-on-physical-settlement-2/
Hi Karthik,
I am doing options trading from past 2 months in Zerodha. I mainly Sell deep OTM PE and deep OTM CE. On expiry premium remains 0.05 or 0.10. Question is – If I do not square of my position is there any charges like automatic square off charge or any other charges in the following cases:-
1. Sell deep OTM PE or deep OTM CE (remains OTM at end of expiry) with order type MIS.
2. Sell deep OTM PE or deep OTM CE (remains OTM at end of expiry) with order type CNC.
Thanks.
No, you cal let these OTM options be without square off, its ok. But if its MIS, it will get squared off anyway.
As you said earlier that MIS order will get square off anyway. Does I have to pay automatic square off charge for that?
Thanks.
No, but if you do not square off the MIS yourself, then auto square off charges are applicable.
Hi Karthik,
I have a similar question w.r.t to margin requirement to Sell PE options.
Premium of Jul 11000 PE was 0.45.
Nifty Spot was 11285
To sell 2 lots of Nifty Jul 11000 PE using NRML on 30th July 2020, the margin required is 2,64,426
To sell 2 lots of Nifty Jul 11000 PE using MIS on 30th July 2020, the margin required is 68438
Question 1 : Why does NRML and MIS margin requirement vary even on the day of expiry ?
Question 2 : If margin required is 68438 for intraday Nifty Jul 11000 PE, the Spot has to close 450 points below 11000 after which the writer starts to make loss.
Assumption : Nifty close at 10650 then loss for writer is 150*450 = 67500.
Why is such high margin required when it is quite rare to see Nifty loose 500+ points in a single day ?
Appreciate your feedback and comments.
Thank you
A % factor is set for product type (MIS/NRML), which does not change based on expiry day. I get your point, but that just leads to an operational nightmare for brokers. As far as the % movement of Nifty is concerned, we have seen 500 points move one too many times, especially early in this year right 🙂
Thank you Karthik for the superfast update. I have been going through Option modules in Varsity. Such an exhaustive read especially the chapters on Option Greeks. Thank you Karthik and the team for this great work of sharing the knowledge and helping us to understand Markets and Trading better. It keeps us motivated and guide us to continue learning.
Learning never stops.
Thank you Zerodha team !!!!
Happy Reading!!!
Absolutely, learning never stops 🙂
Hi Karthik, some new set of questions I like to clarify
Assume I sell 1 lot NIFTY Aug6th 11500CE on monday August 3rd having required margin of 1.3lacs. Spot at 11120
Premium is say 20Rs. So 75*20 is total premium I reveived excluding other charges.
Next day, Nifty goes up to 11230, so the premium of 11500CE might hv increased and let’s say it is 32 now.
1. So in this case, will required margin be revised and I need to add more balance to my account since the premium increased ?
2. Finally assume, Nifty closed on 11370 on Aug 6th expiry. My profit will be the premium 75*20 . Correct?.
3. In case of nifty, can we say all options are naked , because no one will be actually owing underlying nifty , as opposed to stock of company like TCS, IOC etc . Right? ,
4. If the writer of Nifty PUT option loses money, will buyer of PUT option exercise his position and sell the actual nifty index to writer?
If answer to 4th question is related to hedging, plz share link if any to learn more about hedging.
Thank you once again for all your time and effort to answer our queries.
1) Yes, but for such a movement, the change in the margin will be really small. The existing margin block should cover for it
2) Yes, btw Aug expiry would be on Aug 27th, not Aug 3rd
3) No, a naked trade is when you are exposed to directional risk. For example, short Nifty 11500CE is a naked trade. But short nifty 11500CE and 11300PE is a spread position
4) Nifty is cash-settled so the differential money goes from seller to buyer
Thank you Karthik for your time in clarifying our doubts.
Btw, I meant NIFTY Aug6th 11500CE weekly expiry option contract in question 2 :). I believe that contract expires on August 6 😉
Ah ok 🙂
Sir i have buy 31st fri 2020, PUT of 10800 of 6th Aug. what is the next stratergy? can hold or exit?
What do you expect from markets? If you think markets will fall, then hold the put. If you think market will go up, then exit the position. So this really depends on what you expect.
Hi Mr. Karthik,
While searching some topic, I happened to see this page. You are awesome..!! You have lots and loads of patience to answer to each and every question, which is so admirable. The way you explain the topic is amazing.
I am new, but know some basics. I will go thru all the topics. Kindly let me know the link if any. Happy to learn from you. Thanks a lot again !!!
Thanks for the kind words, Natarajan 🙂 Happy learning. Do let me know if you have any queries.
hello kartik,
My question is, if we have a multi leg strategy on a stock and on the date of expiry one of its leg ends itm then what will happen….physical delivery or cash settlement
For example– Reliance is now at 2132
Now i am selling a 2100 PE and then buying a 2000 PE to get the margin benefit, now what will happen if
1) The 2100 PE expires itm on expiry? (reliance is at 2050 on expiry)
2) There is still a week or two left before the expiry and reliance is already 1900….
What will happen in such cases? Will i have to buy the reliance @2100 in case number 1 or will i have to give the delivery for reliance for my buy option…Please guide me as i want to take some strategies in stock options ….
Also please make a module on firefighting and adjustments(Roll over,etc) when our view goes wrong which it will someday
1) The position will be offset, check this – https://zerodha.com/varsity/chapter/quick-note-on-physical-settlement-2/
2) Physical delivery is only upon expiry, before expiry there is no physical delivery
So i will lose/gain money depending on the situation and i wont have to give/take delivery as far as my option is not naked….right?
Yup…as as long as the physical delivery requirement is offset.
Hii Karthik,
Please guide me. Suppose I short ICICI 350 PE @ 8 when spot was 370. Due to increase in Volatility spot price decline to 362 and premium increased to 12.
Although the spot price is well above my strike price but premium increased sharply. Does the broker ask me for more margin money in this case if I continue to hold the position?
The broker will ask for margins only if the premium has increased quite a bit. In this particular case, I don’t think the margin will increase a great deal.
Sir, I have ZERODHA ACCOUNT I want to know if I sell Reliance 1800 Strike price PUT and if Reliance goes below or = 1800, in such case if I want to take delivery of these shares then what is the process in ZERODHA PLATFORM. I will keep sufficient funds in my zerodha account. Please let me know.
Thats right, you will have to ensure you maintain sufficient delivery margins.
Hi,
I found all these modules very helpful. Thanks for your efforts on it.
I also found the queries / comments from other readers helpful. My only query is that, to read the latest query, I need to come all the way down. Instead isn’t it possible to have latest query on the top and then the old one. Just a kind suggestion if it’s possible and it will benefit to other users as well.
Regards,
Ajit
Thanks Ajit, we just had a major overhaul on Varsity. Will share the feedback with the team anyway.
Could we close the covered put before expiry? Let’s say I collected $300 for strike price of $1000 and the stock price already moved to $1500 so could I close the contract ?
Yes, you will be settled according to the prevailing premium.
Please confirm on this part
Spot of Tata motors is 150
if I do cash secured put keeping mind at 135 strike price for premium approx @5 if suppose market went bearish and Tata motors reached 100 so my premium for sell put 135 strike will be approx 35
if I have sufficient funds to buy the lot and take physical delivery so in my demant I will get the lot at rates of 135
but on expiry do I have to bear the 35 premium loss
Please explain this with an calculation wat will be amount debit on my account on expiry day
when I am read to take the physical delivery
account will be debit for 135 * 5700 lot size and also for loss of 35* 5700 premium
Since this is a PUT sell, you will have to take delivery of shares at 135. So your net obligation will be 135*lot size.
Hi, I would like to know the short put delivery in case of I have exercised the short put before expiration and received the premium. In kite I am not able to see the short positions so not sure what is the next action item for me.
Your response will be appreciated.
Thanks,
Tush
Exercising the option happens only on the day of the expiry and not during the series. I suppose you have bought and sold the Put option hence the position is zero.
Whether i can sell stocks on T 2 day after expiry of in the money put option
Yes, you can once its in your DEMAT.
I have a query on how do we exit put writing position? E.g. as in above case where strike price is rs 18400 now any time before expiry strike price goes below rs 18400, can i exit that position to limit my losses? If yes, how do I do that? Do i need to buy put of rs 18400 at that point of time at whatever premium it is sold? Since it is before expiry so will theta value be added to IV to arrive at likely premium at that point of time? Can i manage the risk by buying the put at higher strike price?
Thats right, you can choose to sell the position anytime you wish. To square off, you just have to buy back the option by paying the premium.
what happens if I don’t have money to buy the shares after selling put options? should i pay the money before?
I’m guessing you are asking this in the context of physical delivery. In the absence of margins, the position will be closed.
Why I shouldn’t buy the value of share 0.05 in nifty option in both Call & Put optiin.Please suggest
The chances of losing 0.05 are higher than making profits out of it.
If I am trading company shares(not nifty) and if my put selling hit the strike price, do I need to buy the stocks? can you explain the loss scenario?
If you hold to expiry, then yes, you will have to give delivery of this. Do check this chapter on the physical settlement – https://zerodha.com/varsity/chapter/quick-note-on-physical-settlement-2/
Hi Kartik,
Can you please help me to understand how PUT writing stop loss is working.
For Eg.
If I write Bank Nifty PE 24400 and collect the premium of 131. My target 60 and SL is 160.
Write @ 131, SL 160, and target @ 60 is write in terms of trade setup, Jeevak.
Hello Karthik
If i have a 2500 call option for reliance for nov expiry, what can be my strategy to maximise profit by selling a put option.
Should i:
Sell a put option at strike 2200 (current premium 224) and also by a same strike call (straddle) for a premium of 38
That would reduce the overall profitability. What is your target? Maximize profit potential or contain risk?
I shorted a lot of 5nov 27000 put option at 688.6a nd exipry day I have buy it due to some reasons…closing price is at 685.
So now what happens…would I get difference of 3*25 alon with my premium paid ?? Or I loss total 688.6*25 ??
YOu shorted at 688 and bought back at 685, so you make a profit of 3, but this will get offset against the applicable charges. May even result in a loss if the charges are higher than the profit you made.
What if I SELL call option n it becomes zero before expiry
Sir,
You are doing good work by sharing your priceless knowledge.
Thank you😊
Happy learning, Niraj!
test
You are saying that the loss potential in selling a put option is unlimited, which I believe is not correct. This is because there is a limit for loss which is Premium Received – (Strike Price – 0), because the minimum price a stock can reach is 0. Please clarify.
Thats right, but if you do the math, you’ll realise that the loss will be few lakhs per lot.
Hello all,
What happens if I sell put option 3 days before the expiry? (Case:- BANKNIFTY is partially or violently bullish)
What about time decay and delta values? Will it be favourable to the seller or buyer?
Please someone clear by doubt!
The theta acceleration will be higher closer to expiry provided the stock is not trending down. So it maybe favourable to write. However, on a personal note, I’d avoid writing put options.
What we be the margin requirement if I sell put in bank notify
Please check this – https://zerodha.com/margin-calculator/SPAN/
Hello
TRYING TO Understand PUT Selling, say, I HAVE SOLD INFY PUT OF 1180 STRIKE PRICE and Again bought PUT Infy 1100 strike price of same expiry
1.what is my maximum loss and profit?
2.If the position moves against me will broker square off my position?do I have deposit additional margin?
3.On the day of expiry stock price is below 1180 and above 1100 how things will be settled…what will happen?
shall I shall the 1100 position and buyback 1180 position or Broker or Exchange will do that?
4.if price moves below both 1180 and 1100 then what happens
5.Do I have to take physical delivery or will it be cash settled on day of expiry..in cas stock price is below 1180
?
what happens to the 1100 PE I bought?
This creates two different positions, Deven.
1) I’d suggest you use the Sennsibull P&L calculator for this
2) You can hold as long as you have the margins with you
3) The strike which is ITM goes into the physical settlement, the other expires worthless. If both are ITM, then they net off.
4 & 5) Same as above
Please help me understand the above points…
Do check the previous comment.
If i buy an put option at 114 and it rises to say 200 so am i in profit or loss i am new in options market please help
That would be a loss, Harshil.
Hi Karthik,
When should we exit to get profit in selling put .can we exit immediately after selling put to get profit? Can we do intraday .
Yes, you can Manoj.
Hi Kartik ,
As i see it buying a call option has a finite downside compared to selling a put option.
That and the difference in premium are the two diffrentials.
Am i correct?
True, thats right Sanjiv.
Hi. I have a question in cash secured put ..for example if I sell HUL put option for Feb expiry and if price goes below strike price..need to know how I can buy in cash delivery..tks
You will have to ensure there is enough cash as margins as you approach the expiry, and the settlement process will take care of the rest.
What does OTM MEANS
Please check this – https://zerodha.com/varsity/chapter/moneyness-of-an-option-contract/
I have a SELL PUT done for Reliance for 1 lot. On expiry day if in loss, i plan to close this by taking deliverables of the stock . How can i do it on Zerodha app?
You have to ensure there is enough margin to take delivery of the stock, rest the system/process will take care.
if we are doing put option selling, if our loss gets exceed the margin we paid,it will get auto square off or not? please tell me.
Yes, it will.
I have sold put and kept margin money. Do I need to keep full margin during expiry (if not squared off before) even if it is well above strike price? For ex: I have sold Feb HUL put of strike price 2000, currently stock is hovering around 2240. On 25-26 (just before expiry), what would be margin required? Will it be 2000*300= 6 lac?
Yes, you need to ensure margins are fully available in the week leading to expiry.
Hi Kartik,
I sold put option of ITC with strike price of 220 in this month. Today it closed @ 217.
I guess currently this is ITM option. Let’s say it closes on 215. Then it is compulsory to buy ITC in physical settlement.
1. Is there any penalties in case I need to buy ITC @ strike price. As, I sold without any shares in my demat account.
2. What is best way to avoid loss/ physical settlement. Should I buy call option of same strike price. Then no need to go for physical settlement.
3. I collect the premium of ₹6 in this put writing. So my break even is 220-6= 214. Let’s say it closes 217 on expiry day then also I need to do physical settlement.
Thanks in advance
1) No penalty, this is a part of the regular settlement process.
2) Yes, as long as both options are ITM, it will get netted off and no physical delivery.
3) YEs, you will have physical delivery.
Thanks Karthik for detailed explanation. I have a question on put option selling.
Lets say I write a put option with below:
Stike: 950, Spot: 920, Premium received: 70
At this point, my pnl is 30. As seller has obligation, Can I still exit with 30 premium profit, if other sellers are available. Or do I need to wait till the expiry.
What are all the possibilities for a seller if he want to exit before expiry.
Yes, you can square off your trade anytime you wish. There is no need to wait till the expiry of the series.
Suppose I sell a a put option for Rs. 580 in the morning and buy it back in the afternoon when the price becomes 520, what is the gain ?
580-520 = 60.
Hi Sir,
I am getting what is mean by call option and put option with respecive of sell and buy, but here is my quetion
suppose i have buy call option at 18400 and its gone upto 18600 and then expiry date is come, so here i got, i have right to buy stock at 18400 as per contract buy call option, so should I claim to buy this at price 18400 from seller at the expiry date or broker itself settel this with both buyer and seller account?
The settlement will happen from the broker, Swapnil.
Hi,
Can you please suggest on the possible actions for the below use case..
ABC Stock Option Expiry –> Date –> Spot Price –> Strike Price –> Premium Received –> Action
25th FEB –> 1st FEB –> 920 –> 950 –> 70 –> Sell PUT.
25th FEB –> 24th FEB –> 890 –> 950 –> 70 –> Position in 10 profit and tried square-off but NO SELLER available.
25th FEB –> 25th FEB –> 960 –> 950 –> 70 –> What will happen to my put option, as my strike becomes OTM?
25th FEB –> 25th FEB –> 870 –> 950 –> 70 –> What will happen to my put option, as my strike becomes ITM?
25th FEB –> 25th FEB –> 890 –> 950 –> 70 –> What will happen if I don’t square-off and broker auto square off, seller available at 100 premium?
25th FEB –> 25th FEB –> 960 –> 950 –> 70 –> What will happen if I give consent for physical delivery but I don’t have sufficient funds in my trading account for delivery?
No sellers – order won’t go through
Premium reduces
Premium increases
It Will be squared off at 100
The position will be squared off.
Sir I have this question about settlement. Suppose I opt for put sell and that option is ITM for buyer then I’m obliged to receive the shares in a physical settlement that is shares in my demat account or cash based settlement.? And for F/Os which type of settlement does NSE and BSE follows?
Thats right Soniya, you are eligible to receive the shares in your DEMAT, provided you have enough margin blocked in your trading account.
I don’t understand a fundamental point here. How can sell something which we don’t have? Like selling a put option when I never bought it?
Thats essential like buy – sell transaction, just that the transaction happens in reverse order.
Hi, I purchased ICICI BANK PE 580 25 Mar 2021 at 6.25 and sold it at 7.65 same day on 17 Mar 2021. I am new to this options trading. Current ICICI Bank price ia 589. Is there any issue for me on margin to pay? Kindly reply.
Not really since you squared off the position and you are out of the market.
You are using the term breakdown point in most of your texts above. The correct term should be breakeven point, which you have used initially. I suggest that this needs correction. Breakeven point is always considered as no profit – no loss in all business transactions.
Sure, Vijay. Let me see what I can do about this.
Put sell in stocks – What happens when strike price is reached . Does exchange allows to use margin blocked for buying shares? If I decide to take put sell option of baja fin services of ( spot 9800) say at 8800 and 80 thousand is blocked as margin . If strike price is reached I would like to buy 125 shares at 8800 . Or this is separate decision to be taken and margin is released only after expiry . In case price falls to say another 1000 , will broker charge additional margin even if I buy shares ?
The margin will continue to be blocked till the position is open.
If I hold for example SBI 3000 shares (as delivery) and sell put option of SBI, then in this situation is it also necessary to have sufficient margins (to be blocked), despite I have one lot SLsize of SBI shares?
Yes, margins will be required.
If I hold for example SBI 3000 shares (as delivery) and sell put option of SBI, then in this situation is it also necessary to have sufficient margins (to be blocked), despite I have one lot size of SBI shares ?
Hi Karthik
Can you give a thumb rule/generalisation for the strike prices w.r.t to spot price when
a) buying call
b) selling put
Have generalized quite a bit in this entire module 🙂
I have sold a put option and it expires worthless today but my net margin is in negative. When will i get the premium amount and why is my net margin is showing me -ve just from before expiry and on the day of expiry ? Should i have to add margin ? Please help me out…
Settlement is on a T+1 basis. DId you have any other positions?
if I sell a put or a call option, when is the premium credited to my account and if the premium is immediately credited to my accounnt I immediately buy back the positions as the profit would remain fixed(is this correct) as because why should I wait for the market to move if I immediately receive the premium in my account
Yes, but when you close the position the premium is also deducted from you. Essentially you make the difference between the buy and sell price of the premium.
Kartika good evening I have a question
Contract buyer in both put and call optiond if he sells contract before expiry or on the date of expiry why does he needs to keep margin.
Margin has to be kept by seller of contract put or call. Please explain. Who all have to keep margin when and why
Margin is not required for squaring off the position. But at times when you have multiple positions open, then it maybe possible that the position that you are closing had hedged another position (hence reduced margin) and with the closure of one position, margin requirement may get back to normal. Which means more margin from you would be required.
Sir plz tell me ,if spot banknifty is 22300 and if one person sell 22300 PE and second Person sell 22700 CE
Then what is view of these person
Spot price: 22300
1) sell 22300 PE – market will be bullish ( and will not go below 22300 )
2) sell 22700 CE – market will not go above 22700
Both option will expire worthless.
I want to know can I buy share through option selling, Suppose I have analyzed Reliance Industries is a perfect but at 1850 currently it is 1931 so I sell put option of strike price 1860 if it will reach that I want to exercise my sell put option and want to take delivery by adjusting the amount which I have opt for put selling
Yup, you can either sell PUT or buy 1850 CE.
Wheather it is beneficial if I sell both put option &call option of next month in NIFTY or BANKNIFT
Depends on multiple factors, Shivaji.
Last week I had sold a NIFTY put option – Spot was 14800 at a strike of 14650 and premium received was Rs 60. I let the put expire and on closing on Thursday it was Rs 0.05 Premium and It did not reduce to 0. Why is this so as i expected the put to expire worthless to 0. If it had expired to Rs0.05 what is the implications to me in terms of profit and taxes if any?
The closing price will be 0, please check the settlement price.
I have done option writing on voltas 2 days back and on that day my position profit was Rs1000 and my fund was Rs40000 and when I saw today my position profit is Rs3000 but my funds was Rs26000. I am not able to understand the reason. Can you explain it?
And also while exiting this trade it require Rs 12000 on 2 days back and yesterday it showed Rs25000 and today it shows about Rs1100. This also I wasn’t able to understand. Can you explain this?
Maybe you had another open position, please do check with the support team once.
Can a writer of put (seller of put)have/obtain delivery of a lot he is writing/selling put option at strike price after full payment of a lot
Yes, upon expiry he/she can.
Pl clarify
If I in option, I write/sell put of June 24 @19.30 premium (I will receive) e g
Hdfc Ltd June 2200 PE
(june24 ,2021)
Can I take delivery if strike price is attained after paying 2200×300 + commission of delivery before June 24 if possible reply on my e mail I will be grateful
No Deepak, physical delivery of shares happen only upon expiry of the contract, not before that.
Sir can we sell buy put before expire and buy sell put before expire.
Reply please sir.
Yes.
Sir Im SHIVA
option seller will be knowing is maximum profit but I have a small doubt
for example
Titan company is trading around 1600 and I am thinking it will not go below 1560 and I am selling it with premium of Rs.29 and my breakeven is 1531
*Now my doubts starts still 1531 I will be in profit or not
The next one is At 1570 itself I am making my maximum profit it is real or not if it is real means I can book me profit Immediately or I should wait for still expiry
And the last one is my p&L will be decided by premium price what I bought I bought for 29 and when I exit the trade it can be 30 so my profit will be 1 +lot
YOu can book the profit at any time, no need to wait till expiry. Yes, you will make 1/- i.e. the difference between buy and sell price of the premium.
Before my Break even itself I came out means I will Be profit
Not always necessary right?
Hi….
I think you have not mentioned anything about options freezing. I want to know about that. Also in that situation why I can’t able to square off my positions.
Thanks.
Option freezing meaning?
Q1. if the stock is at 300 and I short 280 PE why I shown loss in p&l when the stock price COMES DOWN to 290 .
When you short a PE, you want the stock price to go up. If it comes down, you make a loss.
Q2. Suppose banknifty is at 35000 and I SHORT 35000 PE and the index is very bullish ( 1000+) a single day , so I suppose to get intrinsic value also or my premium would decay fast as compare to market bullishness .
Can I suppose to collect the intrinsic value + time decay also in this . Scenario . Both benefits .
Pls tell sir .
To get the intrinsic value, you need to wait for expiry.
But sir , I short 280 strike PE , I suppose to get a loss when it goes down 280 strike price and even after break even . Which is ( strike price – premium ).
Means the stock is still above my short .
But the premium will move, right?
Hello Karthik sir,
Thank you so much for sharing this wonderful knowledge.
My doubt is
1. why IV is non negative to call option?
Implied Volatility (IV) is a non-negative factor for both calls and puts.
Hi
Can I sell a PUT Option QTY 75 ( when premium is at Rs. 100/- ) and buy the same PUT Option QTY 75 ( when the Premium is at Rs.50/- )
Will I gain Rs.50 X 75 = Rs.3750/-… Is this possible or Should i Wait till the expiry to know my trade result. Kindly Answer..
Yes, thats right. No need to wait till expiry.
Hi,
Today I buy bankniftyPE 35000 on nrml .
But not sale.Now its.05paise.
It will be loss for me or I can sale in next trading
You can sell it tomorrow also.
Let’ say
EP 2280
CMP 2175
Call Option Sold
Held till maturity
Since I am entitled to receive the premium (Rs.27 say) but brokers kept it and return on maturity after adjusting profit or loss.
Now at Maturity MP = 2180
Will I get same Premium Rs.27 back or with some changes?
YOu will receive the premium as long as the spot price is below the call strike.
Hello sir,
My question is even we don’t have shares in our dmat account we are able to sell CE the call options, why the sebi or sensex is allowing for such kind if trades ? People are playing with money like gambling in options even they are not ready to buy shares they able to sell put options and they don’t have shares in there hand to hand over able to sell call options, can you please explain it .
How is it gambling? These are two different segments right?
My question is when we enter a call option contract we should have the shares, even we don’t have shares in our dmat account we are able to sell CE the call options and receiving the premium
So how the exchange is allowing it, even we don’t have the shares in hand?
If we have shares in our dmat account then only we should be able to sell CE call option right ?
I m new to options, thanks for your patience:)
No Satya. A derivative is a contract that draws its values based on the underlying. Think of Gold bonds, if I have a gold bond with me, its value is as much as gold, does that mean I have physical gold with me? No right? Its just like that.
As per NSE rules pledged debt mutual funds should be consider as cash component, but why zerodha is not considering debt mutual funds as cash?
Not all debt funds, just liquid funds and a few gilt funds are considered as a cash component.
Sir
Indeed I have doubt.
Is M2M is applicable on option contract? After buying PE can be exit before expiry and similar way again can v buy same PE?
No, only futures contract has M2M.
Need to undestand P&L in case of stock put writing becomes ITM.
Its always the difference between the buy and sell price of the premium, Ajit.
Sir, a few questions.
1. Options price is dictated by Greeks. But what we really see is options price is dictated by market participants as per their view of the stock price. When buyers are putting out their Bid prices and sellers are putting out their Offer price, certainly they are calculating bases on Greeks. Are they?
2. Its also a fact that, say, for an OTM Call, price of Call at times falls even after rise in underlying stock. Clearly Greeks are in play. But here again, it’s more of their (sellers’ and buyers’) intuitive sense in putting out their prices than actual number crunching based on Greeks calculations. Am I right in concluding this?
3. In selling options, are we assuming that we hold it till expiry and let it expire, and pocket the premium if our market view proves right? Coz if sellers wants to square off, he would have to buy the option, which, in a volatile market may be a loss making act even if the option is yet OTM. Say a seller sold SBI 400 strike Jul PE for RS 10 when spot was 430. If spot reverses and keep going down, option premium will keep increasing. At 410 spot, premium reaches 15. His current position is net loss. He may panic and square off at loss. Although, it would have been wiser to hold off and wait till expiry.
So my question is, while selling options, is basic premise to hold till expiry?
4. After recent change in regulation on physical settlement, this may change that premise. Does it mean that Physical settlement will happen for all options expired ITM or will it be compulsory for options expired OTM too? How does physical settlement of options really work?
Thanks.
1) Yes, professional traders factor in the greeks
2) Yes, but the greeks are kind of baked into this price
3) That’s right, hence the conviction to hold plays a very important part in options trading
4) It happens only for ITM options. Check this – https://zerodha.com/varsity/chapter/quick-note-on-physical-settlement/
As I understand it, there is no need, or wise counsel even,to hold till expiry. I can buy the option, if it’s giving desirable profit and square off my position.
Please explain what actually happens, from a seller’s point of view, if option is held till expiry and it expires OTM and ITM both.
If I were to take a reasonable guess, I would say, in earlier dispensation prior to change in settlement as physical, seller would receive/give Premium – IV for ITM expiry and have his remaining margins unblocked. For OTM, he will receive entire premium and have his margins unblocked. Buy clearly, as I see it, he won’t receive premium untill the option has expired. Am I right?
Now, how it will be in physical settlement of options?
Thanks for bearing with the likes of me.
If the option expires OTM, then the seller will get to retain the entire premium. If the option expires ITM, then there is a delivery obligation for the options seller and will get physically settled, which is basically give delivery of stock or take delivery of stock. Depends on your position.
As far as I know the premium falls near or to zero on expiry date, so can I make profit by selling a put option on expiry date and exiting the position before close of the market on expiry date?
Yeah, but this also depends on which option you are trading.
Thank you, Karthik, for this wonderful content!
Happy reading, Pranav!
Please suggest which option will be beneficial. I was wondering if I sell either a call or a put they both fall near to zero on expiry date so I can sell any of them.
Depends on many other factors, Ravindra. Volatility, premiums etc. Do consider all these and arrive at what really works well for you.
Sir, pls guide
If I sell put option of particular stock and same is goes in the money within series or expiry day, than it is possible to take delivery of stock with balance paying amount?
Yes, you can.
I sold out of money Nifty put option. I didn’t close it in expiry day.
What will happen in this case ? I will be getting the premium collected right
It will expire worthless anyway.
How can I calculate put writing or call writing in rupees per day?
YOu need to look at the Open interest, Subham.
Hi. If I sell a PUT of any stock, do iam obligated to buy the stock on expiry if it goes below my strike price. I heard NSE has planned to implement this system.
No, you can exit before expiry. But if you hold to expiry, then you will have to fulfil the physical delivery obligation. So in case of put sell, you will have to buy the stock.
May I know what will be the charge if we decide to take delivery of a stock after selling put options in zerodha?
Gaurav, all charges are mentioned here – https://support.zerodha.com/category/trading-and-markets/margin-leverage-and-product-and-order-types/articles/policy-on-physical-settlement
Pls tell about net profit with respect premium received and total p&l
Your ROI is profit divided over premium paid for buy or profit divided over margin blocked for sell positions.
Banknifty Market is at now @ 37800 , i wish to place order to sell call option of Dec for strike of 41100
Case 1.
no buyer is available , how can i place order
case 2
Order placed appearing in option chain with huge bid and ask quantity without any trade and no LTP price appearing in option chain
Case 1 – Not possible, since there are no buyers.
Case 2 – Yes, that’s because there is no liquidity. When more traders trade the instrument, liquidity gets created and you can trade easily.
I am unable to Sell Far OTM nifty monthly option 16800 PE and 18700 CE , please advise.
What error message are you getting?
Dear Karthik, Example.. i have sold RBL bank 190 Put option at Rs.7… At expiry the underlying is at 210 Rs.. in today’s rules SEBI is saying take physical delivery. So do I have to buy RBL at 190 X lot size on expiry
No, 190 PUT option will be worthless when spot is at 210.
Thank you for your teaching
Happy learning!
As the expiry nears, do the option sellers need extra margin?
Yes, this is with respect to the physical settlement.
A trader writes Nifty PE at Rs.76/- when the
spot is at 10,875. At what price will the trader
get square off the trade, assuming he has set a
15% stop loss on the premium.
When the premium drops to
Rs.64.6/-
2
When the spot hits 12,506
3
When the premium increases to
Rs.87.4/-
When the spot hits 9,243.75
Sorry, dint get the query 🙂
Hi sir,
I bought NIFTY 16500 PE at 11.10 * 50 and sold at 11.45 * 50. P&L shows 17.5 profit. Since it is Put option and still hasn’t reached expiry, is that why I am making profit? I am a bit confused. Could you please clarify my doubt ?
Thank you
Sushma, you can sell the option anytime you wish. There is no need to wait till expiry. In this case your profit is 17.5.
what will be the profit calculation, if i sell put option in otm in 25, and buys once the LTP comes down at 2,
25-2 = 23 Rupees. Check this – https://zerodha.com/varsity/chapter/options-m2m-and-pl/
Hi sir,
The question I have is regarding options selling payoff ?
Eg-
Net credit – 100
Max.loss – 90
Max.profit – 50
Q.1
If market expires at max.loss, am I still making a profit ???
i.e. Net credit – max.loss ( 100-90 = 10 )
Q.2
If I square off intraday/nextday at mtm loss i.e. Net credit – mtm.loss (100-70 = 30), is my trade in profit ???
This may not be relevant with the above topic discussion but I can’t find any simple answer/explanation anywhere else.
Hope you can clarify my doubt
Really appreciate your work
Thanks
When you short an option, you only know the max profit i.e. to the extent of the premium received. Max loss is left open. If you sq off the position, then the P&l is to the extent of difference in premium. Please check this – https://zerodha.com/varsity/chapter/options-m2m-and-pl/
What do you mean by settling in Cash ? When we sell a put option we are obligated to buy share at the given strike price and keep the premium if the share price is in the money. If the stock price stays out of the money then the collateral get released and you still keep the premium if it it expires without buying back the position. I like to understand settling in cash if I’m in the money what will happen to my collateral amount + premium if I let it expire worthless
Thats right, the policy was to settle in cash when I wrote this chapter. It changed to physical delivery later. Have covered physical delivery here – https://zerodha.com/varsity/chapter/quick-note-on-physical-settlement/
Sir
If I am selling a NIFTY CALL option today at strike 17500 after receiving a premium of Rs 100.25 (Expiry 30 December 2021,NIFTY spot price 17054) , also paying the margin required .
If I Buy the CAll option today evening can I get Rs 100.25 ???
Yes, thats right.
I am novice to nifty trade.can you enlighten me if put or call is purchased is it necessary to sell.
It depends on your point of view and how long you intend to hold the trade. But the maximum you can hold on to is till the expiry.
I am novice to nifty50 trade.can you enlighten me 8f nifty is purchased is it necessary to sell.
Please do refer to my previous comment.
The put option seller is bullish on the market. You have said that the maximum loss a put option seller can incur is basically unlimited, that would be the case if the underlying can go negative. If the underlying cannot go negative, the maximum loss put option seller can incur is the actual cost of the underlying right?
In a way yes, the maximum if the stock price going to 0.
What happen if I hold put option for 2 days ?
Charges applicable ?
I hold one put option over night whole amt of that option debited from my account , if I decide to hold it for one more day what will happen?
Will amt again dr from my account ?
Ankita, charges are the same for intraday and overnight for derivatives.
Sir,
I have done PUT OPTION SELL of DRREDDY Jan 4300 PE. The stock price fell below the strike price on expiry date.
How to calculate my loss. The premium offered was Rs. 14.50/- per share.
Your loss is the difference between the buy and sell price of premium, multiplied by the lot size.
Sir
Incase on expiry, if market price of share is above strike price , how much I will get as profit ?
Is it premium agreed (14.5) X lot size (125) ?
Anoop, check this – https://zerodha.com/varsity/chapter/options-m2m-and-pl/
Sir
Please consider the following situation.
I sold call option of a share and have 1 Lot of same share in my demat account.
What will happen on expiry date If the spot price is more than the strike price.
Also, in this case, do we need to add fund as exposure margin?
If the call option is ITM (spot higher than strike), your short call option will result in you giving delivery of shares. So the shares in your demat will be debited. Yes, you will also need to add funds towards physical delivery margins.
Sir
I have doubt on following scenario.
Consider TATASTEEL FEB 1000 PE sell with premium 5.3/- per share, Lot is 425.
On expiry, the spot price is more than 1000. Then what will be my net profit ? Is ist 425×5.3 or the difference in premium will be adjusted from the premium received ?
Kindly reply.
If the spot is more than the strike, then the put option will be worthless and you will retain the entire premium received.
Sir,
Thanks for your reply.
In options selling, if we exit prior to expiry date, do we receive Margin money on the same time or we need to wait until expiry date ?
Kindly clarify.
Your margins will be released right after you close the position.
Sir if we sell put option of any stock at primium of rs 5 and strike price is 120
What will be the nett delivery cost of the stock if it’s ITM n we take delivery
120-5=115
Yes, you will have to take delivery of the stock at 120, but since you have received 5 as premium, the effective rate is 115.
Sir,
Suppose I exercise Wipro Mar 600 CE Selling. Premium received is 10.25 x 800 (lot size). I hold 1 lot of Wipro @ 500 per share.
On expiry date, if the spot price is ITM, how to calculate my total profit (consider the on expiry, the premium is 11 rupees).
Is it (10.25 x 800) + (100 x 800) ? or I should consider the difference in premium as well ?
Kindly reply.
Anoop, I’m a little confused. Which is the strike price and which is the spot price? Anyway, assume you sold 500CE and 10 and the spot upon expiry is 600. In this case, 500CE is ITM, and you will have to give delivery of Wipro shares at 500, but since you received 10 as a premium, the effective rate after adjusting for the premium received is 510.
Hi Karthik,
can you please provide dark mode to versity website?
it will help in reading without straining eyes.
And thanks for the amazing content on versity. It is benefitting me a lot.
Will pass this as a feedback, Pravin.
If I sell one lot of banknifty Mar 32000pe
@200
My margin amount approx Rs 140000
Then please let me know after end of March month expiry if it goes out of the money, then how much would be my profits?
I am asking because lot size of bank nifty 25. So what is the calculation process
Premium Rs200 multiple 25 =?
Or only Rs 200 premium?
If you sell the option and at expiry, if the option is OTM, then you get to retain the entire premium.
Since cash settlement is no longer valid I’ve a doubt about the current settlement process.
Scenario
The buyer of a Call or Put option is in profit, but on the expiry date they lack sufficient funds to take delivery of the underlying at strike price, what happens then?
A) do they forfeit the trade and lose their premium?
B) is there any other way for the buyer to save the trade and not lose money?
So when you head towards the expiry, the broker expects you to park more funds as margins lacking which, the positions will be closed by the broker. Hence your question a & b won’t arise. I’d suggest you read this chapter on Physcial delivery – https://zerodha.com/varsity/chapter/quick-note-on-physical-settlement-2/
Sir my question is
BANKNIFTY can I sell the option and hold tell expiry
Yes, you can Govind.
Hi Sir,
I made a simple reference flow chart for most things discussed till now, if you prefer I can share it with the community, but I don’t see a way to add any attachments, please let me know if by any means I can send it to you and you can then share it with the community…
Dev, thanks for that. You can share it on TradingQna saying its a summary from Varsity and share the link here.
Hi Sir
How do we square off a position. Eg I sold puts for nifty 16700 mar expiry. Do I buy nifty futures to square off or just exit my position in zerodha?
Thanks
No Vinod, buying futures creates a new position. To exit, you will have to buy back 16700 Mar expiry Puts in the same quantity that you sold.
Sir I am new to trading. I ve a doubt. In banknifty pe when should we sell or buy. And in bank nifty ce when should we sell or buy. In banknifty pe should buy in peak and sell in low. Please reply.
It depends on what you expect from the market right? If you are bullish then you can buy call or sell put, and if you are bearish, you can buy put or sell call.
While writing put options price change is postive or negative like in call writing price change in to negotiate please explain
There is no negotiation Likkith. Maybe I’m not understanding your query fully. Can you please elaborate?
sir “why writing the Put Option and collecting the premiums may sound like a good idea”
can we buy Call Option?
can you give a specific reason sir.
Thanks
Sir I have sold 1400PE qty1100 @21.
Now it is at 50.
I’m thinking to hold it till expiry.
I have 240000/- left unused in my account.
Is it enough to hold it till expiry.?
Depends on the stock and the volatility of the stock.
Sir I have sold HDFCBANK 1400PE qty1100 @21.
Now it is at 50.
I’m thinking to hold it till expiry.
I have 240000/- left unused in my account.
Is it enough to hold it till expiry.?
Not sure, please do speak to customer care once. Check my previous reply.
For Option Sellling which strike price is best i mean which one…
1. In The Money (ITM)
2. At The Money (ATM)
3. Out Of The Money (OTM)
OTM. But there are so many nuances to it 🙂
Great efforts Karthik… Creating this big documentation and answering every reply are commendable job, kudos!
one question… (Put Option Seller)
lets say today morning I sell 19th May 15950 PE at premium 167Rs
and after some time I exit this with the premium of 173Rs.
1. now the P&L is calculated as … 167 – 173 = -6Rs and then -6 * 50 = -300Rs .. so 300Rs loss.
is this correct calculation?
2. on the ledger, option sold premium price, exit price(buy back) premium price only shown.. the spot prices are not shown on the ledger.. so how can we calculate the “P&L = Premium received – Max [0, (Strike Price – Spot Price)]”
Thanks for the kind words, Gayathri.
1) Yes, this is correct.
2) Since the premium is traded (and option not held to expiry), the difference in premium is shown. Do check this – https://zerodha.com/varsity/chapter/options-m2m-and-pl/
Sir, lets assume i sell a put option for 100Rs and within few seconds(lets assume nifty does not move and option price as well), i will exit this(buy it), lets assume the put option price is still 100Rs.
In this case, did i make a profit?
No, since the premium price has not changed, you will not make a profit.
For example if I bought a call option in order that underlying asset price will rise but happened reverse so here can I compensate my loss by buying a put option?
Technically yes. But you will have to ensure its well-timed, its easy said than done 🙂
Isn’t it better to buy call option as in put selling risk is unlimited and profit is restricted to premium
We just dropped a video on the same topic, check this – https://www.youtube.com/watch?v=0CnHdzTE66s&t=243s
Karthik Sir, Have you ever sold options ?
I unable to convince myself “why would anyone ever sell an option agreement”. It logically doesn’t make sense to me to take unlimited loss & also depositing higher margins.
Though I read several times trying to make sense that “options sellers have statistical advantage” & obviously there are same number of sellers as much as buyers that’s why market exists but doesn’t appealing to my intellect to “sell options ever”
Ankur, coincidently, we just dropped this video and it may help – https://www.youtube.com/watch?v=0CnHdzTE66s&t=243s
Only a very very little advantage I see to “sell option” is when “market remains flat”.
If some is is bearish he will obviously “buy put” , right ?
Please see that video I shared in the previous comment.
Sir,
I sold 1 lot Reliance PE 2200 Expiry 30 Jun at a premium of Rs 14. Now it is at 2.9. The P&L is showing as Rs 2775.
Please guide me as to what action is to be taken and What is my risk.
You are in Profit as of now. If you continue to hold the position to expiry, you will get another 2.5 (max), but you also carry the additional risk of the position reversing directions. So keep this in mind and decide on what you’d like to do 🙂
What are the possible a tions that can be taken
I understand that wait for expiry is one action and square off is another one. Anything else?
That’s it. These are the two sensible actions that you can take 🙂
Lets say I have sold the call option for 34200 call at premium of 994 and nifty closes at 32200 and but premium of my call is 1000 will i be in loss ?
Nifty Or bank nifty sell kai se kare
Check the video series, Dinesh – https://www.youtube.com/watch?v=-mO0YOTcCiQ&list=PLX2SHiKfualFiusiT9G5uE9jU3vetvW2x
I would like to know which options strategy( buying a pe/ce or seliing a pe/ce) has limited loss,
Pretty much all spreads have limited losses and limited profits. I’ve explained this in the next module, please check. Thanks.
Hi,
I am new to options, I am just trying to understand sell put option. Suppose if I am selling a put, the maximum what I can earn is the premium, rite if the price goes above the stike price. Why wouldn’t I then buy a call option to the next nearest strike price while it’s more cheaper to buy.
Secondly, about the expiry date. Is it maditory to wait till this date or can I can just close it when I am in a position to get the premium??
1) You can do that. Btw, there is a difference between buying a call versus selling a put option. Check this https://www.youtube.com/watch?v=0CnHdzTE66s&list=PLX2SHiKfualEyD05J9JsklEq1JFGbG6qJ&index=1
2) You can close the position whenever you want.
Good example driven concept.
I have a question/clarification.
If currently today 22-Nov-2022, NIFTY is 18200 and 2 Month Expiry 29-Dec-2022 premium is 200, what is the expected premium for Expiry 29-Dec-2022 on 25-Nov-2022 when 2-Month Call Option becomes 1-Month Call Option
Thanks,
YOu can use a Black & Scholes option calculator to figure this out. I guess Sensibull has this on their site.
Sir, can I sell half of the share of 1 lot of bank nifty in options trading?
No, you will have to trade in terms of lot size.
sir maine artiind sell pe 23feb 2022 ka 15 rs me liya hua hai
is situation me mujhe maximum profit or maximum loss kaise hoga
लिपटी 17600 पर है और मैंने 13600 की पुट बेची जो कि 50 पैसे पर थी ओर निफ्टी 500 पॉइंट नीचे या 500 पॉइंट ऊपर हुआ तो मुझे एक्सपायरी पर कितना प्रॉफिट होगा या नुकसान होगा
Sir,Can we short put option premium..for example if the price of put option premium is 95 Rs and if it goes down to 80 Rs..do we make profit like equity and or the stop loss should be kept above 95 that is 98 ..
Yes, you can short both call and put option.
Mene 90 pe gail buy kiya he magar spot 100 ke uper he kal expire he 26 jan 23.
Aur put sell nai ho raha he to kya hoga.
How can option sellers (put seller) loss be theoretically unlimited as stated in this chapter (generalization 2)? Let’s say i sell Put option of Adanient expiring on Feb 23 at strike price of 800 and collected premium of 30/share , spot price is 2000 , the maximum share could tank is 0 , then i would have to fulfill my obligation as put seller to the put buyer ie to buy the lot of shares at 800 which is trading at 0, so my loss would be limited to 250(lot size)x800 (strike price ) -7500 (premium collected) = 192500
Yeah, there is a cap at stock price going to 0. But then, if that were to happen, then you’d lose pretty much all your capital and more 🙂
I am rishabh saurabh
Ok. Hi!
Hi
I have buy put option for Idea share at price 0.05₹
Idea share price is 6 and I buy put for Idea 8.
And now unable to sell it due to lower circuit. What will happen if it gets expired on coming Thursday without sell?
If the option goes to expiry and its ITM, then it will be Physically settled, Nikhil.
sir, in longterm we are bullish on nifty. so, why not we sell nifty (pe) for long term and collect premiums , rollover at every expiry.
if, nifty spot price is in our favour(bullish),above our strike price , we will collect premiums.
if, nifty spot price is not in our favour, below our strike price , we will carry forward losses, because at last nifty is bullish in long term.
if, above trades are done without any leverage,can it be profitable???
Not easy, you need deep pockets to hold a short option position and maintain the margins, Saurav 🙂
SUPPOSE I SOLD BAJFINACE 7000 AUGUST PUT AT THE PREMIUM OF 95 SPOT PRICE IS APPROX 7300 WHAT CAN I DO IN EXPIRY IF THE PUT IS IN THE MONEY AT EXPIRY.
Nothing really as the option is worthless.
What will happen if I sell a CE
what will happen if I sell a PE
how will i make profit
To profit from selling –
1) Call position, then the market has to decline
2) Put position, then the market has to rally.
I sell put option and i got 147 profit but amount shown my acciunt only 97 ruppess why like this i am not understand .can give me suggetion
There are charges to pay right?
considering the situation selling will profit me but to extent of premium received but suppose one buys put option the trade goes opposite so the maximum loss can be the total margin blocked but if one don’t have stop loss or he may have certain amount sitting in his demat so will this trade effect the amount sitting in demat once the trade has moved exponentially in opposite direction please let me know before i make a mistake in live market
Sourabh, so when you buy an option, the loss is only to the extent of premium paid. There is no margin blocked when buying options.
P&L = Premium Recieved – [Max (0, Strike Price – Spot Price)]
Would this formula be different in case of PE sell for ITM?
In case of ITM put sell, spot-strike should be there, am I right?
This is the formula to find out the intrinsic value of the option, it will remain the same for buy and sell positions.
How much amount will be needed if i SELL both ( call & put ) banknifty monthly expiry at the same time…
Please do check the margin calculator for this, Shivani.
Hi all , Pls guide why Put Option premium is increasing while Nifty is getting down ..as i have done Put sell and Nifty get up for ariund 50+ Points instead of Premuium decay of Put Side it gets increasing
Pls let me know why this is happening
This happens due to an increase in volatility also, Sudeep.
how about if there are no buyers at the end of exipiry
The contract will be settled by the exchanges upon expiry.
Sir, suppose I sell a put of bank nifty today dated 12th April and the expiry is on 16th April. So if on expiry the price of bank nifty is more than the price at which I sold put, I will make profit right? Eg, if Bank nifty is today on maybe 49000 and I sold put at 48300, then at the time of expiry if bank nifty is at 48400, I will be in profit? And what will happen if I let it expire automatically?
Yes, in this case since you have sold a put option, the strike is worthless, and therefore you get to keep the premium. Upon expiry, your option will be settled and you get to retain the entire premium money received.
Sir, I am a retired engineer and am new to OPTIONS. OPTIONS is latin to me. I read some famous books. I am not able to break the sheeth. It flys above my head.
So I am limiting my self to intraday trading in OPTIONS.
With the hope that you will kindly enlighten me I am posting this comment.
I want a practical example of BANKNIFTY. So I am giving below the details of BANKNIFTY expiry 08 May 2024. Please correct me if I an wrong.
Strike Price: 49200
LTP of PE 49200 = ₹436.1 (03 May 2024)
IV of PE 49200= ₹36.06
Premium= ₹436- ₹36= ₹400
LTP of CE 49200 = ₹243 (03 May 2024)
Which SPAN of following is correct?
SPAN = ₹436.1-₹243=₹193.1
OR
SPAN = ₹243-₹436.1= – ₹193.1
If I sell 1 lot of PE 49200 on 03 May 2024, Margin required to be paid by me is ₹ 95,692/-.
Now let us presume that on 07 May 2024, the LTP of PE 49200 will be
SCENAREO(1) ₹659/-
SCENAREO(2) ₹120/-
SCENAREO(3) ₹0/-
What will happen in these three scenareos if
[1] I will square off on 07 May 2024?
[2] I let the contract expire on 08 May 2024?
I shall be highly greatful to you for your help.
Regards
I’m not sure how you are arriving at SPAN by subtracting premiums. SPAN is a margin amount levied and its depended on the volatility. Irrespective of when you square off, the P&L is dependent on the buy and sell price of the premium.
On 07 Mat 2024 if I square off 1 lot of BANKNIFTY PE 49200 @LTP ₹659/-, the money I suppose to receive, I presume, will be 25×659=16,475 and margin that I paid I.e ₹ 95,692/- i.e total ₹ 1,12,167/-.
Please correct me if I am wrong.
Dr. Saaie
Yes, and your P&L will depend on your buy and sell price of the premium.
Sir, Not understood. I gave in my comments LTP of CE & PE which will be the BUY & SELL PRICES. Can you kindly help me by giving example of detailed calculation. Alternatively can I contact you on email. I need your email address Or I earnestly request you to please send me example calculation for arriving at profit/loss to my email.
Here you go – https://zerodha.com/varsity/chapter/options-m2m-and-pl/ have explained this in detail 🙂
On 08 May 2024 LTP of BANKNIFTY PE 49200 is ₹. 1183.75. IV is ₹ 19.53. So, if I square off on 08th the one lot sold on 03 May (see my comments dt. 04 May above)what will be my return.
For selling one lot of BANKNIFTY PE 49200 on 08 May, the margin required is ₹ 1,10,107/-
For P&L,take the difference between buy price and sell price of the premium and multiply by the number of lots.
Sir,
You are doing a trmendous job of imparting knowledge to lakhs of unknown asperants.it is a spiritual duty that you are doing.In Kaliyug persons like you are real Guru as defined in Hindu philosophy.
Thank You for the link provided by you today due to examples. It gave me some understanding.Thanks once again.
I have to re read it and apply and see for different situations. Reading several books did not help. You helped me to understand. If need be I shall get back to you Sir.
But, I request you to avoid the phrases: “market is against you” or “market is in your favour”. Kindly use if market “goes up” or “goes down”.
Sir, if I can be of help to you, I shall be greatful.
Very kind regards.
Thanks for the kind words! Your point is noted 🙂
Can we short(sell) monthly expiry pe because at the expiry it will be zero right ..?
Yes, you can as long as there is sufficient margins.
If the premiums are high in Put Option, then why does a buyer buy it?
Because the buyer feels the premium will go higher.
pls help me with this doubt. Lets take an example of nifty 50. Lets assume now nifty 50 value is 25000, i buy a put sell at 24500, and then the market reachers 24600 . assume option value was 200rs and at the time of expriy, the option value reaches 0.05 at the time right. So i do get proft.. Am i right?
You wont make a profit since your option is worthless at expiry. YOu will lose the premium paid i.e. Rs.200 here.
I have sold PNB put at 105. PNB closes at 108 on expiry.
Do I just get the premium amount or am I obligated to buy the lot of shares of PNB. 8000 shares.
Since 105 PE option remains OTM, there is no settlement in this case.
Hi,
If I write (sell) a Put on Sensex and its assigned (and adjusted against the funds in my account), what exactly do I receive? Do I get allotment of a Sensex ETF or representative shares or something else?
Thank you!
There is no physical settlement for index right? Only for stock options.
Follow up question: if the Put is simply squared off, then is there an ETF or some sort of Index tracker where I can get delivery of the underlying should it be ITM?
No, as I mentioned, only stock options are settled physically. Not, index options.
Can I sell options and carry them with margin against shares held with zerodha and pledging them ? Will there be anycsgirt margin penalty in this case if I do not have any cash balance in account and only margin on pledged securities. Kindly advice.
Please do check this – https://support.zerodha.com/category/console/portfolio/pledging/articles/what-is-pledging
Hi
I want to understand few things in option trading
If I see market depth of put option for few ahead strike prices then spot price, it has more ask quantity and less bids quantity, so does that mean market is bullish or prices of that asset will rise?
Or put options are made to sell only and not buy??
It just means that that particular option is more liquid 🙂