Practical example of call and put options
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. Only buyers of an option can exercise an option, as they have the right. You can square off the written option anytime before the expiry, but you will not get the full premium. There are no additional charges that you pay if you hold the sold option to expiry. Thanks for reply …… one more small doubt ….
If yes what premium they will square off? Now what happens here B1 just transfers his position to another person, say B2 who is interested to take position from B1.
Once B2 will take position, B1 will no longer the participant of the game. B2 can hold it till expiry or can transfer his position to B3 before expiry. If you are long, then Sq off means you are selling your long position. Likewise, if you are short, sq off means you are closing by means of buying back.
Expiry has nothing to do with this. Hello sir, I want to know in which indexes weekly options contract are traded and in which nse is going to start? What will be The charges lavied for Option call order execution at a time i. Brokerage — 40 STT total — 18 Total txn charge — Sir where can we find historical call and put data for contracts that has already expired, say for the past one year? You will have to get it from Bhavcopy — https: Karthik, If suppose I have bought one lot 75 of Nifty CE premium of 80 and now its premium at Now If I square off my position I will get including profit.
It has been mentioned time and again the Option contracts have to be held until expiry following European Call format. Hamish, technically you can hold the contract until expiry. But at the same time, you can choose to sell it before expiry, anytime after you initiate the position. Do note — If you sell options, then you will receive the full premium only if you hold it to expiry this is assuming the option you have written turns out to be a worthless option meaning the premium goes to 0.
A follow up question: No the fact that the settlement for intrinsic value happens only on expiry day, makes it European. If you can settle it anytime during the series, then it becomes American. Thanks karthik sir and zerodha team for all the efforts ur taking… I m little confused about option selling, for eg; if I sell option and it turns to be worthless than i should wait till expiry for premium right…. Devrat, as a seller of the option, you should look for situations where the option will turn worthless.
When the option turns worthless, you get to keep the entire premium. The option turns worthless only close to expiry and not before that. This is because the option will always have some amount of time value associated with it. Once we buy we become seller the moment we sell… Seller is obligated to hold until expiry. Here in the second case Sell whether we have to pay margin for it? First, we have to pay the premium buy and secondly, we have to pay margin for same trade!!. Little confusing kindly clarify me.
Why is there difference in close price and last price in a snapshot of quote? The last price at which the instrument traded should be equal to close price?
Check this — https: How to decide whether to buy call option or sell a put option as both are for bullish , similarly sell a call option or buy a put option as both are for bearish. I know the point of unlimited profit and limited profit, but why would anybody want to sell a put option as it has limited reward i. Suppose we are selling put option, the premium went from Rs. Please explain with example. If the volatility of the stock has increased, then so would the premiums.
In such situations, selling the option would be a better deal than buying the option. Thanks Karthik for reply, but i am still not clear with point number 1. I am not able to make out the difference between buying the call option or selling the put. Could you please share an example? Raj, increase in volatility increases the premium of options, therefore making the premiums quite expensive. In case, you feel the option is expensive to buy, then you can take the opposite position by selling it and pocketing the premium.
What happens if there is a loss in the options premium at the end of the trading day? And should I hold the options contract in normal, as I expect the market to go down and earn profits till the contract expires? There is no mark to market like in Futures in options. Have explained this in detail, request you to read through the chapters.
It should show the premium i require to deposit. There is no margin when you buy either calls or puts. When you buy options, you need to pay only the premium.
You need a margin only when you sell options. Please find below the pay off diagrams for the four different option variants — Arranging the Payoff diagrams in the above fashion helps us understand a few things better. Let me list them for you — Let us start from the left side — if you notice we have stacked the pay off diagram of Call Option buy and Call option sell one below the other. If you look at the payoff diagram carefully, they both look like a mirror image.
The mirror image of the payoff emphasis the fact that the risk-reward characteristics of an option buyer and seller are opposite. The maximum loss of the call option buyer is the maximum profit of the call option seller. Likewise the call option buyer has unlimited profit potential, mirroring this the call option seller has maximum loss potential We have placed the payoff of Call Option buy and Put Option sell next to each other.
This is to emphasize that both these option variants make money only when the market is expected to go higher. In other words, do not buy a call option or do not sell a put option when you sense there is a chance for the markets to go down.
You will not make money doing so, or in other words you will certainly lose money in such circumstances. Of course there is an angle of volatility here which we have not discussed yet; we will discuss the same going forward. Clearly the pay off diagrams looks like the mirror image of one another. The mirror image of the payoff emphasizes the fact that the maximum loss of the put option buyer is the maximum profit of the put option seller.
Likewise the put option buyer has unlimited profit potential, mirroring this the put option seller has maximum loss potential Further, here is a table where the option positions are summarized.
However he enjoys an unlimited profit potential 7. May 6, at 2: May 6, at 5: May 6, at May 7, at 4: September 5, at 5: September 6, at February 25, at 6: May 8, at 6: May 8, at 9: May 11, at 5: May 8, at May 9, at 5: May 11, at 6: May 12, at 5: May 25, at 1: May 26, at 4: June 28, at June 29, at 4: July 10, at 9: July 12, at 4: July 13, at 7: July 14, at 5: July 15, at 5: July 14, at September 28, at 8: September 28, at July 15, at 6: July 16, at 6: July 16, at 4: July 17, at 6: July 19, at 3: August 27, at 5: August 28, at 5: August 28, at 1: August 29, at 6: August 29, at 8: September 2, at 7: September 2, at September 10, at 6: September 10, at 7: September 11, at 5: September 21, at 1: September 22, at 7: If the stock continues to appreciate in price after the stock is sold, the seller looses the future price gain.
In most cases you must own shares of the stock for each contract you sell - this is called a covered call. Therefore, if your stock gets called away, you have the shares in your account. You can sell covered calls to generate a stream of income. If the stock price does not rise enough during the period of the contract, you won't get called and won't have to sell the stock so you keep the money you received when you sold the call.
If your broker lets you, you may sell "uncovered "or "naked" calls in a margin account. This practice lets you sell calls when you don't own the stock. If you get called, you must buy the stock at its current market value to cover the call even when the market price is higher than the strike price of the option.
Like any margin account transaction, you must execute the transaction immediately. The seller of a put collects the purchase price of the option from the buyer of the put. The seller has the obligation to buy shares at the strike price regardless of the market value of the underlying stock. So if the put buyer decides to exercise the put contract, the seller of the put has to buy the shares at the strike price no matter the current market value of the stock. When you sell a put, you want the price of the stock to go up so you don't get the stock put to you - buy the stock for more than it's worth.
Selling a put places the money you receive in a margin account so you pay interest on the proceeds until the put contract is closed.
If you don't have the financial resources to cover the obligation of buying the stock from the buyer of the put, you sold "naked puts". It tells about a trader who sold naked puts and experienced financial ruin. It was an unhedged bet, or what was called on Wall Street a "naked put" On October 27, , the market plummeted seven per cent, and Niederhoffer had to produce huge amounts of cash to back up all the options he'd sold at pre-crash strike prices.
He ran through a hundred and thirty million dollars - his cash reserves, his savings, his other stocks-and when his broker came and asked for still more he didn't have it.
In a day, one of the most successful hedge funds in America was wiped out. Niederhoffer was forced to shut down his firm. He had to mortgage his house. He had to borrow money from his children. He had to call Sotheby's and sell his prized silver collection Use calls and puts judiciously.
If you're right, you can make quick money. If you're wrong, you can lose part or all of your investment very quickly. For now, here are a few key points that you should remember —. The option sellers call or put are also called the option writers. Selling an option makes sense when you expect the market to remain flat or below the strike price in case of calls or above strike price in case of put option.
I want you to appreciate the fact that all else equal, markets are slightly favorable to option sellers. This is because, for the option sellers to be profitable the market has to be either flat or move in a certain direction based on the type of option. However for the option buyer to be profitable, the market has to move in a certain direction. Clearly there are two favorable market conditions for the option seller versus one favorable condition for the option buyer.
But of course this in itself should not be a reason to sell options. This means to say that the option writers earn small and steady returns by selling options, but when a disaster happens, they tend to lose a fortune. Well, with this I hope you have developed a strong foundation on how a Call and Put option behaves. Just to give you a heads up, the focus going forward in this module will be on moneyness of an option, premiums, option pricing, option Greeks, and strike selection.
Once we understand these topics we will revisit the call and put option all over again. This information is highlighted in the red box. Below the red box, I have highlighted the price information of the premium. If you notice, the premium of the CE opened at Rs.
Moves like this should not surprise you. These are fairly common to expect in the options world. Assume in this massive swing you managed to capture just 2 points while trading this particular option intraday. This translates to a sweet Rs. In fact this is exactly what happens in the real world. Traders just trade premiums. Hardly any traders hold option contracts until expiry. Most of the traders are interested in initiating a trade now and squaring it off in a short while intraday or maybe for a few days and capturing the movements in the premium.
They do not really wait for the options to expire. These details are marked in the blue box. Below this we can notice the OHLC data, which quite obviously is very interesting.
The CE premium opened the day at Rs. However assume you were a seller of the call option intraday and you managed to capture just 2 points again, considering the lot size is , the 2 point capture on the premium translates to Rs. However by no means I am suggesting that you need not hold until expiry, in fact I do hold options till expiry in certain cases. Generally speaking option sellers tend to hold contracts till expiry rather than option buyers.
This is because if you have written an option for Rs. So having said that the traders prefer to trade just the premiums, you may have a few fundamental questions cropping up in your mind. Why do premiums vary? What is the basis for the change in premium? How can I predict the change in premiums?
Who decides what should be the premium price of a particular option? Well, these questions and therefore the answers to these form the crux of option trading. To give you a heads up — the answers to all these questions lies in understanding the 4 forces that simultaneously exerts its influence on options premiums, as a result of which the premiums vary. Think of this as a ship sailing in the sea.
The speed at which the ship sails assume its equivalent to the option premium depends on various forces such as wind speed, sea water density, sea pressure, and the power of the ship.
Some forces tend to increase the speed of the ship, while some tend to decrease the speed of the ship. The ship battles these forces and finally arrives at an optimal sailing speed. Crudely put, some Option Greeks tends to increase the premium, while some try to reduce the premium. Try and imagine this — the Option Greeks influence the option premium however the Option Greeks itself are controlled by the markets.
As the markets change on a minute by minute basis, therefore the Option Greeks change and therefore the option premiums! Going forward in this module, we will understand each of these forces and its characteristics. We will understand how the force gets influenced by the markets and how the Option Greeks further influences the premium. We will do the same in the next chapter. A quick note here — the topics going forward will get a little complex, although we will try our best to simplify it.
While we do that, we would request you to please be thorough with all the concepts we have learnt so far.
Thanks a lot for sharing learning material, it is really helpful for beginners like me to understand the concept and strategy of share market.. We are trying out best to complete the modules as fast as we can. European option means the settlement is on expiry day. However, you can just speculate on option premiums…and by virtue of which, you can hold the position for few mins or days.
Also we have potential of unlimited profit in long call or long put and even we can trail stoploss of premiums. Thank you so much for your articles sir. Cause sitting in front of computer is not possible. Even if we r there we may miss the trade id doing some thing else at the time we are suppose to trade or squareoff the tyrade. Till now it has been very clear and crisp. Thanks for that and hope that further chapters will also come the same way.
We will be discussing SL based on Volatility very soon. Request you to kindly stay tuned till then. We certainly hope to keep the future chapters as easy and lucid as the previous ones have been. 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: