Option premium in zerodha
Most retail traders usually buy options, i. Selling options is used when exiting options that were already bought. What this means is that by buying an option calls or puts the odds of losing are significantly more. Now the question is if options buyers are inherently taking a higher risk, who is on the other side of the trade with better odds of winning?
Let me explain with a basic introduction to what comprises option premium, different types of options, open interest and an example showing how most options expire worthless. Option premium, the value of calls or puts that you see on your trading screen has two components, Intrinsic value, and time value. Intrinsic value is how much the option is in the money, or simply how much you would get if the options were to expire right now. Time value is the portion of premium which is over and above the intrinsic value of an option, i.
The total number of open contracts for any option is called its Open Interest. In the example above if Nifty were to expire today atthe total options that would expire worthless would be: Yes, an option buyer can take quick intraday trades for a profit, or be on the right side of the market and have the potential of making unlimited profits, but the odds of winning are always in favor of an option writer who benefits with majority of options expiring worthless.
An option buyer has limited risk and unlimited profit potential, so if 1 lot of Nifty call was bought at Rsthe maximum loss on this trade is the Rs Rs x 50and if Nifty went to the call would make a profit of Rs 45, When you write an option, say 1 lot of calls at RsRs Rs x 50 which is the premium paid by the buyer is credited to your trading account and this Rs on the premium is your maximum profit potential.
After taking this trade if. Since the potential losses are unlimited, it is best as a beginner option writer to be conservative, and allocate only a small portion of your trading capital when starting off.
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 Rsyou need to have only Rs Rs x 50but to write an option you will need around Rs 25, 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.
Option writing margin requirement varies for every contract, and as on today Zerodha is the only brokerage in India to offer a web based SPAN tool that lets you calculate this. You have a bearish view of the market and Nifty is presently at Check the SPAN calculator for the margin required as shown below:. Love playing poker, basketball, and guitar.
Around Rs required to short option. You can check it out yourself here: If i am exiting the call written mid wayis the process in Zerodha same as in case of buying a option. I mean just by a single click on exit option i can the call option written. Can I hold the options over night [or till expiry] after shorting or is this settled at EOD automatically everyday? Will you charge interest for margin provided?
Should I buy back my option before expiry or should I leave it to expire, especially if it is in the money ITM. I have written November callnow today is expiry day, if market closes above what should I do? How we calculate vix for a stock like Infosys, Last time 11 October Result Day I observed that Option prices increased from 6 October to 10 October, this time prices decreased from 6 Jan o 10 Jan.
Calculation of Vix for a stock is pretty complex, let me see if I can find tool for you, nothing in the back of mind. Dr Sir I a little confused on This point Nifty is on expiry, value of calls on expiry is 0, and you get to keep the entire Rs Nifty is on expiry, value of calls is still 0, and you get to keep the entire Rs Did You mean no profit no loss?
In mis at I totally agree with you. Very important and required information for all of us. I understand that margin is required when one writes the naked option and has to arrange MTM funds. A question in my mind for a long time is, when one takes a debit spread, say long call and short call, the maximum the person looses is the difference in premium which was already paid.
In such a case why should a margin be collected, though the margin is less than naked option writing? Is it not sufficient to block selling the long option alone before covering the short option? The margins blocked are as per the exchange requirements, and yes the Indian exchanges are extra stringent about this.
Coming to your example, Long call and Short call, and assume only Rs 10, is blocked for this the buy premium. Yes the scenario is unlikely, but possible. I guess the only way such spreads will become popular is if NSE starts letting people trade the spreads directly itself, similar to calendar spreads.
I want to write call and put nifty options Positionally. In this case we can get profit from premium melting.
Other wise the lose also will be minimum and limited. Can you give exposure? For above trading method, what is the margin for 4 lots qty? Ranganathan, you can check all margin requirements on our SPAN calculator: Krishna, it depends on what spread you are taking, check this blog on SPAN calculatorwhich shows how you can see the margin requirements of such spread using our SPAN calculator.
Just tried out your suggestion, but the math does not add up. Suppose I get into a bear call spread on Nifty, as follows:. SPAN margin — Rs: The total margin required is still Rs. The maximum loss on this spread is only Rs. The risk is limited, and so should the margin. The difference between the return on capital is almost 5x. Why is the margin benefit so little? Is it possible to enable SPAN minimum requirements on individual trading accounts?
Guc, what you need to realize is that the risk for such contract is never limited, there is always a big execution risk which is open and one of the reasons why margins are higher.
What if while exiting you got out of your buy CE position and market suddenly bounced up in this little time? The risk on your short CE would then be unlimited. Unless the spread itself starts trading on the market similar to calendar spreadsit will never be possible to block margins based on what you have suggested.
Also, this is an exchange regulation and the SPAN calculator gives what exchange asks us to block. DC, advisory is tricky because: People will never follow advise properly, but the adviser is liable for it. If it starts working, traders will become puppets to the adviser. What is missing is the liquidity, basically we need a lot more traders coming to the market, when they do, new products will automatically come about.
The bigger problem for everyone to solve is bringing in liquidity to the markets. I wish you include two parts like buying and writing in brokerage calculator. Which helps writers to include STT. STT changes for option buy positions, if it is in the money and you let it expire. You can read this blog for that. If you look at the default example on http: If it is possible to set a trigger in the trading terminal for executing option strategy, it makes life easier.
I mean when nifty futures trades at a set price, then the option strategy gets executed at market prices. Something like SL-M order. Setting trigger like what you said, take an option strategy if Nifty trades at a price, it is little tricky, mainly because of the regulations. Exchange would consider that as an algo, which is not allowed for retail. For In the money options, Do we have facility to exercise the options at Spot price at end of Day?
How it will be carried out. Mukesh, all Indian options are Europen options. If you exercise them, they will be cash settled. For more, check out the options trading module on Varsity.
Nitin, On the last line algo for retailthere were a couple of SEBI circulars which wanted brokers to demonstrate appropriate risk management processes before offering algo access to their customers.
Is there some SEBI circular that prohibits retail from using algos? Is there also a SEBI circular under which exchanges derive power to validate algos? What SEBI has recently mandated is that for brokers providing algo, to compulsorily take part in mock trading sessions and a stricter audit. Let me try getting you the circular numbers on these. Hi This is very wonderful article. Really I appreciate you. Recently I have opened trading account with OpetionsXpress.
It is really wonderful system for trading in Options and Futures. I recommend to you to visit that site and create a Virtual trading account and evaluate the platform which they are providing to their clients. Still we are far behind in technologies. Sir, I appreciate you. It is a very good article.
In the previous chapter, we understood the basic call option structure. In the next chapter i. Call Option Part 2we will attempt to understand the call option in a bit more detail. However before we proceed further let us decode a few basic option jargons. Discussing these jargons at this stage will not only strengthen our option premium in zerodha, but option premium in zerodha also make the forthcoming discussion on the options easier to comprehend.
Do remember, since we have only looked at the basic structure of a call option, I would encourage you to understand these jargons only with respect to the call option. Consider the strike price as the anchor price at which the two parties buyer and seller agree to enter into an options agreement.
We also looked into a stock example where the anchor price was Rs. Needless to say he will buy ITC at Rs. Besides this information, the option chain has a lot more trading information such as Open Interest, volume, bid-ask quantity etc. I would suggest you ignore all of it for now and concentrate only on the highlighted information —. As we know, a derivative contract derives its value option premium in zerodha an underlying asset.
The underlying price is the price at which the option premium in zerodha asset trades in the spot market. This is the underlying price. For a call option, the underlying price has to increase for the buyer of the call option to benefit. Exercising of an option contract is the act of claiming your right to buy the options contract at the end of option premium in zerodha expiry.
Clearly he or she would do it only if the stock is trading above option premium in zerodha strike. Here is an important point to note — you can exercise the option only on the day of the expiry and not anytime before the expiry. Further assume, after he buys the call option, the stock price increases to the very next day. Under such a scenario, the option buyer cannot ask for a settlement he cannot exercise against the call option he holds.
Settlement will happen only on the day of the expiry, based on the price the asset is trading in the spot market on the expiry day. Similar to a futures contract, options contract also has expiry.
In fact both equity futures and option contracts expire on the last Thursday of every month. Just like futures contracts, option contracts also have the concept of current month, mid month, and far month. Have a look at the snapshot below —.
This is the snapshot of the call option to buy Ashok Leyland Ltd at the strike price of Rs. As you can see there are 3 expiry options — 26 th Option premium in zerodha current month30 th April mid monthand 28 th May far month. Of course the premium of the options changes as and when the expiry changes. We will talk more about it at an appropriate time. But at this stage, I would want you to remember just two things with respect to expiry — like futures there are 3 expiry options and the premium is not the same across different expiries.
Against the payment of premium, the option buyer buys the right to exercise his desire to buy or sell in case of put options the asset at the strike price upon expiry. If you have got this part clear till now, I guess we are on the right track. Option premiums play an extremely crucial role when it comes to trading options. Eventually as we progress through this module you will see that the discussions will be centered heavily on the option premium.
Consider the circumstances under which Venu accepted the premium of Rs. Now let us consider both these points in isolation and figure out the impact it would have on the option premium. News — When the deal was done between Ajay and Venu, the news was purely speculative, hence Venu was happy to accept Rs.
However for a minute assume the news was not speculative and there was some sort of bias. Maybe there was a local politician who hinted in the recent press conference that they may consider a highway in that area. With this information, the news is option premium in zerodha longer a rumor. Suddenly there is a possibility that the highway may indeed come up, albeit there is still an element of speculation.
With this in perspective think about this — do you think Venu will accept Rs. Option premium in zerodha not, he knows there is a good chance for the highway to come up and therefore the land prices would increase. However because there is still an element of chance he may be willing to take the risk, provided the premium will be more attractive.
Maybe he would consider the agreement attractive if the premium was Rs. Now let us put this in stock market perspective. Assume Infosys is trading at Rs.
The Call option with a 1 month expiry is at Rs. Assume for the next 1 month there is no foreseeable corporate action which will trigger the share price of Infosys to go higher.
Considering this, maybe you may accept the premium of Rs. However what if there is a corporate event like quarterly results that tends to increase the stock price? Will the option seller still go ahead and accept Rs. Clearly, it may not be option premium in zerodha to take the risk at Rs. Having said this, what if despite the scheduled corporate event, someone is willing to offer Rs.
I suppose at Rs. Let us keep this discussion at the back of our mind; we will now take up the 2 nd point i.
When there was 6 months time, clearly Ajay knew that there was ample time for the dust to settle and the truth to emerge option premium in zerodha respect to the highway project. However instead option premium in zerodha 6 months, what if there was only 10 days time? Since the time has shrunk there is simply not enough time for the event to unfold.
Maybe he would option premium in zerodha a lesser premium, say Rs. Anyway, option premium in zerodha point that I want to make here keeping both news and time in perspective is this — premium is never a fixed rate.
It is sensitive to several factors. Some factors tend option premium in zerodha increase the premium and some tend to decrease it, and in real markets, all these factors act simultaneously affecting the premium. To be precise there are 5 factors similar to news and time that tends to affect the premium. We are too early to understand Greeks, but will understand the Greeks at a much later stage in this module.
For now, I want you to remember and appreciate the following points with respect to option premium —. If you have gathered and understood these points so far, I can assure that you are on the right path. The expiry is 26 th March The premium is Rs. Trader A wants to buy this agreement option buyer and Trader B wants to sell write this agreement. Considering the contract is for shares, here is how the cash flow would look like —. However, this does not mean that Trader B should have shares with him on 26 option premium in zerodha March.
Options are cash settled in India, this means on 26 th March, in the event Trader A option premium in zerodha to exercise his right, Trader Option premium in zerodha is obligated to pay just the cash differential to Trader A.
Another way to look at it is that the option buyer is making a profit of Rs. Because the option is cash settled, instead of giving the option buyer shares, the option seller directly gives him the cash equivalent of the profit he would make.
Which means Trader A would receive. Of course, the option buyer had initially spent Rs. The fact that one can make such large asymmetric return is what makes option premium in zerodha an attractive instrument to trade. This is one of the reasons why Options are massively popular with traders.
We will talk about it at a much later point in this module. Hi Karthik, thank you for the very good explanations! Below is my understanding of the options. Please correct if I am wrong. In options market, nobody is a permanent seller or buyer for option premium in zerodha option unless they hold the option till expiry.
Both the buyer and seller can square-off their position before expiry, by selling option or buying option respectively. Their profit or loss will depend upon the premium at which they bought and sold their option. The buyer will be profitable only if this difference is more than the premium paid. If the option gets exercised, the buyer will have to pay higher STT.
On expiry, for call option, if the spot price is less than strike price, the option will be considered worthless expired. First S1 will tries to sell one call option and B1 agrees on premium and strike price. B1 pays the premium to S1 and one new contract gets created. Now suppose premium increased and B1 wants to square-off his position by selling this option. A new buyer B2 who wants to enter the contract or Seller S1 who wants to get out of the contract can buy from B1 by paying current option premium in zerodha. If S1 agrees on the premium asked by B1, this contract will get closed.
If B2 agrees for premium asked by B1, the contract will just change hands from B1 to B2. B2 will pay the premium to B1. If B2 wants to hold this option till expiry, and there are no other buyers in the market for this option, S1 will be forced to hold this option till expiry. On expiry, whether this option will exercise or expire worthless, depends upon spot price on expiry.
If the spot price is more than option premium in zerodha price, option will be exercised and if spot price is less than strike price, it will expire worthless.