I hope by now you are through with the practicalities of a Call option from both the buyers and sellers perspective. The put option buyer is betting on the fact that the stock price will go down by the time expiry approaches. Hence in order to profit from this view he enters into a Put Option agreement. Remember this generality — whatever the buyer of the option anticipates, the seller anticipates the exact opposite, therefore a market exists.
After all, if everyone expects the same a market can never exist. So if the Put option buyer expects the market to go down by expiry, then the put option seller would expect the market or the stock to go up or stay flat.
A put option buyer buys the right to sell the underlying to the put option writer at a predetermined rate Strike price. Consider this situation, between the Contract buyer and the Contract seller —. I hope the above discussion has given you the required orientation to the Put Options. However there are 3 key points you need to be aware of at this stage —. Like we did with the call option, let us build a practical case to understand the put option better.
Backed by this reasoning, I would prefer to buy the Put Option which is trading at a premium of Rs. Remember to buy this Put option, I will have to pay the required premium Rs. Of course buying the Put option is quite simple — the easiest way is to call your broker and ask him to buy the Put option of a specific stock and strike and it will be done for you in matter of a few seconds.
Alternatively you can buy it yourself through a trading terminal such as Zerodha Pi We will get into the technicalities of buying and selling options via a trading terminal at a later stage. We discussed the concept of intrinsic value in the previous chapter; hence I will assume you know the concept behind IV.
Intrinsic Value represents the value of money the buyer will receive if he were to exercise the option upon expiry. The calculation for the intrinsic value of a Put option is slightly different from that of a call option. To help you appreciate the difference let me post here the intrinsic value formula for a Call option —.
I want you to remember an important aspect here with respect to the intrinsic value of an option — consider the following timeline —. The formula to calculate the intrinsic value of an option that we have just looked at, is applicable only on the day of the expiry. However the calculation of intrinsic value of an option is different during the series.
Of course we will understand how to calculate and the need to calculate the intrinsic value of an option during the expiry.
But for now, we only need to know the calculation of the intrinsic value upon expiry. Irrespective of how the spot value changes, the fact that I have paid Rs. Please note — the negative sign before the premium paid represents a cash outflow from my trading account. For the above discussion, set your eyes at row number 8 as your reference point —. Do bear in mind this formula is applicable on positions held till expiry.
Further, we need to understand the breakeven point calculation for a Put Option buyer. Note, I will take the liberty of skipping the explanation of a breakeven point as we have already dealt with it in the previous chapter; hence I will give you the formula to calculate the same —.
So as per this definition of the breakeven point, at the put option should neither make any money nor lose any money.
So far in this module, we have assumed that you as an option buyer or seller would set up the option trade with an intention to hold the same till expiry. But soon you will realize that that more often than not, you will initiate an options trade only to close it much earlier than expiry.
To put this more clearly let me assume two situations on the Bank Nifty Trade, we know the trade has been initiated on 7 th April and the expiry is on 30 th April —. We will discuss why this will be higher at an appropriate stage, but for now just keep this point in the back of your mind. Please find below the same —. Here are a few things that you should appreciate from the chart above, remember is the strike price —. Hello Kartik, I want to clearify on hoe to select weather to buy call or sell put, cause both will be benifited if the market goes up.
Same thing for selling a call and byuing a put, both will be profitable if market goes down. Then how to make choice or right decesion? Is it depends on margin money needed more for selling and amount to be invested is less if byuing an option? Or some other technical points or there. My next question on hoe to make use of volatility of the underlying stock? Well this depends on how cheap or expensive the premiums are.
We will discuss this topic shortly very soon in this module, request you to stay tuned. If i buy call or put and banking on increase in its premium but the time decay theta increases during the last days and everyday the option loses some value due to time decay. So can you please clarify how to trade in this situation. Is it better to stick to intraday option trading in the last 10 days? The time decay is just one of the force that acts upon the option premium…. Simultaneous there could bbe another force say Vega which can increase the option premium.
So make sure you understand the Option Greeks well. The best way to protect your loss is to have a stoploss. Volatility based stoploss is something we have not discussed yet on Varsity, we will do it in the options module.
Dear Sir, your module on options are really very good, we are also learning patience in waiting for next chapters which takes longer time. Sorry to have missed your query earlier. Also, the market opening bell is at 9: Yes, you can place orders before market opens. This is called Pre market order, suggest you read about it here — http: I have gone thru many books, out of all u people are very good knowledge, easy to undertand, very thankful to u.
For selling a call you will need to deposit margins but for buying puts you dont need margin. I would suggest you just stick to buying puts till you get comfortable with options.
You can try call option selling once you are comfortable with derivatives. Hi Karthik, Thank you for this option module. It is really good. I am having one query. Call Option sell and put option buy both represents bearish situation. As in call option sell we have to add margin amount , profit is limited to premium amount and loss is exponential where as in put option buy it is vice-versa.
So if any one is bearish then why he would sell call option insteasd he can buy put option. Umang you do have a point, however there could be circumstances where the volatility is high and therefore the option premiums would be high.
In such circumstances it makes sense to write options and collect premium rather than buy options at an expensive rate. I think Options pain is a slightly better indicator than the plain vanilla OI data. Dear Karthik, very good and informative blog on option greeks, pls continue educating your client, God bless you. You can download the excel sheet towards the end of the chapter, this should solve your 1st query. Suggest you refer the excel for more clarity on numbers. Karthik, further to my earlier mail of taday, just now as per yr theory for daily return and annual volatility, i calculated nifty spot daily and annual vol… for to Having said so, I really dont think there should be so much difference.
Let me do the calculations once again.. Why there are no difference in chart. Even though they are different strike price. I know it derives from Underlying price.
But still I want to have little bit clarity on this. Here it is, http: And you know it also. Please upload options strategy soon. Hi Karthik, I have few queries.. Does the variation of the premiums purely depends on the Options Greeks? Buyers and Sellers does not have anything to do with it? Now I put a buy order at 80 and someone sells it at It will remain at 80 till the next order gets executed right..
Now, where does the Option Greeks comes into picture for determining the Premium value?? Then I kept stop loss order for the same. When the price was reached at Now there was no open order.
And then when I tried to put 1 stop loss order for the remaining 1 buy order qty at the price And how to put stop loss order after removing partial buy order qty.? Nifty Spot is the underlying and not the Futures.
You can track the spot data from your trading terminal. You have done a great job in explaining stock market in simple language and examples. I have one doubt, in call options or put options I have read that open interest of for example of CE of nifty is more , so it will act as resistance and similarly some PE OI is more so it will act as support for nifty.More...