Option trading puts and calls
We certainly hope to keep the future chapters as easy and lucid as the previous ones have been. Hi Really nice initiative sir.
Hello Sir, if I buy a lot of , call option of strike price at a premium of Rs 2 with a spot price of Now if the price moves to and premium is now at 3 so would be my profit?? Firstly, if the spot moves from to , the premium of the Call option will certainly be more than Rs. Your profits would be —. Hello Sir, I am still confused with the way the profit is calculated.
Might be, I am not able to get what u explained and I am really sorry for asking it again. In some of your replies, you mentioned that the profit is calculated as per the difference of spot price and strike price and in some replies u mentioned that it is as per the difference of premium. In case of 1 lot of shares the profit would be.
So which of the above options are correct??? Is there a difference if I am closing my position before expiry or excersize it at expiry? For all practical purposes I would suggest you use the 2nd way of calculating profits…i. Do remember the premium paid for this option is Rs 6. Irrespective of how the spot value changes, the fact that I have paid Rs. This is the cost that I have incurred in order to buy the Call Option.
Please note — the negative sign before the premium paid represents a cash out flow from my trading account. This lead to my confusion. Got your point, see if you are holding the option till expiry you will end up getting the amount equivalent to the intrensic value of the option. I have explained more on this in the recent chapter on Theta…but I would suggest you read up sequentially and not really jump directly to Theta.
The calculation provided by karthik in chapter 3 is for expiry calculation on expirt date.. Hope this clears your doubt..
The minimum value for this option should be STT stands for Security Transaction Tax, which is levied by the Government whenever a person does any transaction on the exchange. More about here — https: Hi Karthik, Thanks a lot for these wonderful modules. A ocean to learn!! I have a situation here.
I go long on call option of the underlying stock A. I enter a contract for buying a lot of shares at the time of expiry. After three days I find that the premium for the same call has moved to Rs. I feel that I should make a profit out of it.
So here is my doubt. To make profit should I sell the same contract for a higher premium say Rs. If I am doing so, should I do that by writing a put option? In the event of writing should I have the required margin in my trading account? Please bare with me if the question is so dumb… thanks a lot.
If you bought a call option 1 and the premium for the same is now trading at 3, then you can square off your position and make a profit of 2. Its just like buying a share at 10 and selling the same at When you sell, someone in the market will buy it from you and you are completely out of the trade. Thanks for the immediate reply.
This means that the person who buys the contract from me premium Rs. In that case am I writing an Call option? Yes you are right, it becomes the counterparties obligation. You are just squaring off the position.
There is a difference between writing options and squaring off…you need to be aware of this. Thanks for the great explanation. Please clarify me on this. What is square off in options? When he sells, the person buying from it becomes the holder of the contract. Traders can consider going long on Reliance Communication and Mcleod Russel India for intraday purpose as these stocks have attracted bullish bets.
Here is the article — http: Now sure which data points you are talking about. So if you have access to the same along with volumes and maybe open interest you are good to go. I have read so many books but was still apprehensive to try Options. Now I will certainly try Options. Simple, thorough, to the point and more importantly most practical guide Congrats.
Hi Karthik, Thanks to Zerodha and specially you , the content, flow of information and the examples given by you to make varsity as simple but effective practical guide.
I am sill learning the dynamics of Option, Just started trading a week ago. I would like to know the following things. A Karthik can the premium be for this call? Which one to select current month, next month or far month? In the money or at the money or out of money? Hi Karthik, I am beginner in call and put options, trying to learn this. My one friend explained one strategy in which one can earn money surely if nifty aggressively move upward or downward. I am explaining this, please let me know what loopholes are in it.
Hi Karthik, I have never ever bought or sold options, because I did not know anything about it. But after reading your article I have developed basic understanding about it.
Thanks to you and your team I want to share one strategy regarding options. Rohit in the upcoming module I will lay down a structure where you will be able to analyse such strategies yourself.
Firstly, I convey my heartily thank for this type of wonderful effort. Here, I made the simplify excel document, what i learn from here. This may be use someone. Hence, I uphold the part of excel Sheet screen short image here. I use some colour for make sense for the logical view.
Saravana — you have summarized it quite well. I hope people will benefit from the same. Rohit, this is a classic bull call spread. I understand your curiosity to get clarity, but I would request you to wait just for few days and I will upload a chapter on this. Thanks for your patience. Hi Karthik, I am eagerly waiting for that module. My doubt here is that how can a seller sell a contract before expiry as he has no right only the buyer ,, or it was due to he was in indraday and short on call option??
Please clarify sir , thanks!! Thats the beauty of derivatives — you can buy and sell a contract anytime you wish and not really wait for expiry!
Dear Karthik In your article you have mentioned that options in India are European in nature and not American. Exercising and squaring off are two different aspects. You can square off anytime you wish, but exercising is only on the expiry day, and it does make a huge difference on when you can exercise your contracts. Can you please let me know few great tools free or cheaper ones available in the market to do: Scanning of opportunities scripts of Nifty or other blue chip derivatives through Volatility Cone.
Scanning of opportunities based on OI build up across Blue chip scripts on real time basis 4. I know all these tools can be developed by me, but any ready made tool will be helpful.
I am really struggling to get such tools from the market. Great tool, but not sure if its still actively supported. I guess you will have to write a scrip to scrap this info from NSE site. Extremely thankful to you for sharing. However, having downloaded Opts Oracle, I am struggling to select the database. Not working for me having tried all troubleshooting. Pi and Kite are good, but unlike amibroker etc one cant search with OI in Tradescript. Any others you can recommend?
Have you tried Metastock? The price is not pegged to any particular time frame. It generally indicates the option price for the given set of variables, at that particular moment. When does the build up condition meet?
Can the option writer square off his position and take the profit of 8 Rs? Please correct me if im wrong. When you write an option, the maximum profit you make is to the extent of the premium you receive. So if 8 becomes 16, then you are looking at a loss of 8 and not a profit of 8. Sorry karthik , that was a wrong doubt i posted above.
Hi Sir, excellent explanation. In practical trading world, is all trades on Options done on premiums? IF latter is possible how do we do it in real trading world. Yes, its all a play on premiums, while some prefer to close it before expiry others prefer to hold to expiry. This depends on your strategy. If you decide to let it expire, then you just let it be as it is…and the exchange will work on the settlement for you.
I know its not that straight forward, what is the trend you have observed in your experience. No, options are non linear instruments and have multiple forces option Greeks acting upon them. So increase in calls does not mean Puts also have to increase. I have seen today on 28th Oct , both call and put options premiums are going up. There is a difference between exercising and square off. You can square off anytime you wish…. What would be if I exit position now. In the mid of the month m I right.
So can I do it? What is meaning of exercise.? Yes, EU Options are structured differently. However, in India all options are American, which can be exercised only on the day of expiry. How to trade the Nifty on intraday basis. How to square the Nifty call option on Intraday Basis I f one is trading the Nifty on a intraday basis how is the postion squared off? Do yoiu have to keep a track of the premium as well as the Nifty Index?
As Nifty does not have a window to buy or sell how does the Call or Put Option screen look like? A example if on a intraday basis the Nifty moves up by 10 points how does this get captured less brokerage and transaction charges when trading the Nifty Call Option ,for example in the first step on intraday basis the Nifty Call Option is brought then in the next step on the same trading day this position is squared off ,pl explain on intraday basis.
You can trade it based on your view. If you feel bullish, buy the call option …if you fee bearish, buy the put option. You can square it off intraday, no need to hold till expiry. Yes, you need to track the premiums to identify the profitability. Check the brokerage calculator to figure out the profitability — https: Hi Karthik How come large OI in a call at a particular strike price indicates resistance while it should mean that traders are expecting that price to cross thats why they are buying that call strike….?
In option selling, if I choose to wait till expiry, I guess, I shall be saving brokerage and other charges of second leg. So, which one is better, to square off beforehand or wait till expiry, if there is no risk of incurring loss? It is advisable to square off ITM options for reasons stated here — http: If you have sold and option or holding on to an option which is OTM, then you can let just expire without worrying about Sq off on expiry.
Dear sir I thank you and your team members for educating the public in stock trading. IT seems that for the same scrip at the same strike on the same day CE seller and PE seller are paying different margin amount.
Is it due to difference in premium received or in other words due to moneyness of the option? You are basically referring to the margins for ATM options.
They are very similar with very little difference I guess. Hey Karthik, small query to clear my confusion btn square off and exercising an option , as I understand I can square off anytime as per my profitability or loss but suppose have shorted the strangle and then though I am into profit but I can see that due to OTM call n put write , liquidity got reduced resulting I hesitate to square off and I allow it to exercise on the day of expiry then in that case will I get get entire profit full premium of call n put or still there will be spread impact on my profit?
Also is there any extra charge I have to pay if I allow it to get squared off automatically 3. If you have shorted, then you need to hold till expiry to get the full premium. When you hold the written option to expiry, its not referred to as exercising the option. Moreover, the dependence of the option value to price, volatility and time is not linear — which makes the analysis even more complex.
From Wikipedia, the free encyclopedia. This article is about financial options. For call options in general, see Option law.
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Puts may also be combined with other derivatives as part of more complex investment strategies, and in particular, may be useful for hedging. By put-call parity , a European put can be replaced by buying the appropriate call option and selling an appropriate forward contract. The terms for exercising the option's right to sell it differ depending on option style. A European put option allows the holder to exercise the put option for a short period of time right before expiration, while an American put option allows exercise at any time before expiration.
The put buyer either believes that the underlying asset's price will fall by the exercise date or hopes to protect a long position in it. The advantage of buying a put over short selling the asset is that the option owner's risk of loss is limited to the premium paid for it, whereas the asset short seller's risk of loss is unlimited its price can rise greatly, in fact, in theory it can rise infinitely, and such a rise is the short seller's loss. The put writer believes that the underlying security's price will rise, not fall.
The writer sells the put to collect the premium. The put writer's total potential loss is limited to the put's strike price less the spot and premium already received. Puts can be used also to limit the writer's portfolio risk and may be part of an option spread. That is, the buyer wants the value of the put option to increase by a decline in the price of the underlying asset below the strike price.
The writer seller of a put is long on the underlying asset and short on the put option itself. That is, the seller wants the option to become worthless by an increase in the price of the underlying asset above the strike price.
Generally, a put option that is purchased is referred to as a long put and a put option that is sold is referred to as a short put. A naked put , also called an uncovered put , is a put option whose writer the seller does not have a position in the underlying stock or other instrument.
This strategy is best used by investors who want to accumulate a position in the underlying stock, but only if the price is low enough. If the buyer fails to exercise the options, then the writer keeps the option premium as a "gift" for playing the game.
If the underlying stock's market price is below the option's strike price when expiration arrives, the option owner buyer can exercise the put option, forcing the writer to buy the underlying stock at the strike price. That allows the exerciser buyer to profit from the difference between the stock's market price and the option's strike price. But if the stock's market price is above the option's strike price at the end of expiration day, the option expires worthless, and the owner's loss is limited to the premium fee paid for it the writer's profit.
The seller's potential loss on a naked put can be substantial.