Nifty call put option meaning
Options are contracts traded on different exchanges around the world like stocks. Options come in the derivative category i. These are known as underlying for the options. Formal definition for option is given as follows: An option is a contract that gives the buyer the right, but not the obligationto buy or sell an underlying asset at a specific price on or before a certain date Let's look at all the keywords one by one: It means a person owning an option can exercise it if he wishes to do so.
However if he decides not to exercise the option no one can force him to do so. If the person does not exercise the option before the expiry date the nifty call put option meaning of the option becomes zero.
Option in itself is not an instrument like stock that gives you something like a unit of ownership in a company. It is only a contract which gives you the right to buy or sell such instruments that are already being traded. These instruments are known as underlying for the option. Options derive their value from the value of its underlying assets specific price: Each Option has a strike prike price. A strike price is the price at which you get the right to buy or sell the underlying certain date: Unlike stocks which continue to exist as long as the company is running, options nifty call put option meaning an expiry date after which they are not traded anymore and their value becomes zero Anything that is traded on an exchange can have corresponding option contracts also being traded provided they meet certain regulatory criterias like minimum daily traded volume, etc.
Any such instruments or a combination of such instruments can be used to construct an Option contract. Options are said to mirror the movement of its underlying but there is a premium attached to it.
This premium is the value attached to the optionality of the options. Stocks are valued based on several factors like the company earnings, fixed assets, book value.
There are certain factors that add premium to the value of the stocks like the fundamentals of the company, market monopoly in the product and services offering by the company, expected future growth of the company. Similarly Options have a fair value and a premium value. Calculating the fair value of option is simple.
Options are not traded at its fair value. The price of the option only tends towards its fair value as the expiry date comes closer. There is always a premium attached to its fair value. For example if the NIFTY index is atit does not mean that you can buy the option for zero dollars, you will still have to pay some dollars to get this option depending upon the expected level of NIFTY on the option expiry date. However if NIFTY stays at levels then the option value will tend to zero towards the expiry date.
On the positive side nifty call put option meaning option value will keep increasing as long as the NIFTY is moving above Thus at least in theory options offer limitless profit and limited loss. Option trading is more a nifty call put option meaning of numbers than fundamental analysis. For the same instrument there can be multiple options for different trading levels. Add nifty call put option meaning dimension to it and you have put and call options at each level.
Add one more dimension to it and you can either go long or short on these options. So many dimensions can get intimidating at first for a new investor, but nifty call put option meaning are interesting. Let's try to understand it with nifty call put option meaning help of two simple charts given below. From the Put Options chart it is easy to understand that the price of the put option is close to its fair value for higher index nifty call put option meaning in the range of to Option premium over fair value increases for lower NIFTY levels in the range of toindicating that the market expects the NIFTY index to fall from the current level of to From the Call Options chart the premium over fair value for higher index levels in the range of tois extremely high because all the theoretical negative fair value adds up as premium.
However practically the option value can at minimum be zero and not negative and hence the premium for these options will be close to zero nifty call put option meaning is the price at which these options are being traded. Thus the value of call options is either zero or close to its fair value. After making adjustments for the negative put and call premiums the charts would look more like what we usually see in the financial text books as given below NIFTY Index: Both the charts nifty call put option meaning towards a bearish market.
The market expects NIFTY which is currently at to tend to levels by the option expiry date. The high value of put options in the Index region of to shows that the market expects that this level will not be reached by the Index, hence investors are selling the index at this level hoping to cover it by squaring off at lower levels.
Similarly the high value of call options in the Index region of to suggests that the market expects the Index to reach above this nifty call put option meaning level, hence investors are buying at this level hoping to square off when the index reaches above this level.
Thus from the above argument we can conclude that the NIFTY index will trade below level and above levels. Also note that a higher premium in the to put and call options indicate that these options are relatively expensive to their fair value, nifty call put option meaning most probably these are the levels at which most of the trading is happening and the market is most interested in.
If the Index continues to fall towards the put options will gain more premium while the call options will tend more to zero. If the market turns around and starts moving towards then the call options will start adding premium while the put option premium will start going down.
Trading in options would then simply mean to guess correctly the direction in which NIFTY will move and take a corresponding position where you can earn more premium. Another interesting column in the above table is Open Interest which indicates how many contracts are still open for the respective option.
Higher Open Interest nifty call put option meaning more liquid option. Increasing open interest at a particular level is also considered as an indication of market expectation that the index will reach that level by the contract expiry date.
One of the factors influencing the value of the options is the volatility index VIX. VIX value provides the expected fluctuation perceived by the market over the next 30 calendar days.
When the market is range-bound or has a mild upside bias, volatility is globally observed to be typically low. On such days, call option buying a position taken on the view that the market will move higher generally outnumbers put options buying a position taken on the view that the market will move lower.
This kind of market may indicate lower risk. Conversely, when the selling activity increases significantly, investors rush to buy puts, which in turn pushes the price of these options higher. Investors also buy puts to hedge their stock exposure in the market against generally negative market trends. This increased number of investors willing to pay for put options shows up in higher readings on the volatility index.
High readings indicate a higher risk in the market place. As far as options trading nifty call put option meaning it always pays to be well aligned with the long term market trend.
In the short term the market may flip - flop between bullish and bearish market causing the option values to fluctuate widely. However if an investors position is well aligned with the long term trend then he need not worry about these short term fluctuations.
One of the indicators of the long term trend is Nifty call put option meaning future values. If the NIFTY index is being traded at a discount in the futures market then the long term trend in bearish.
On the other hand if the NIFTY index is being traded at a premium in the futures market then the long term trend in bullish. We have seen in the Option Valuation section how to analyze options from the table of numbers giving strike price, traded price and open interest for different option levels. We have also seen how to spot the most active options using option premium and open interest.
Trading in options is all about taking the right position and squaring it off at the right time. Also option premium values tend to zero close to expiry date. It is important for all option traders to keep a close tab on their investments. One cannot simply take a position in options and forget about it because its value is bound to be zero and non-tradable after the expiry date. Hence, squaring off at the right time is of utmost importance. You can make good money in options if you play it statistically correct rather than trying to perfect each buy like we do for stocks.
There are many factors that contribute to the pricing of the options like price of underlying, volatility, open interest, time to expiry, market expectations. The price changes wildly based of news flows into the market, which is not in our control. An investor needs to learn the trick of the game nifty call put option meaning gaining experience from nifty call put option meaning with small investments in the begining. Market specific research and trade execution skills is required to make money in the options market.
This nifty call put option meaning is only meant to serve as a basic introduction to understanding and analyzing option quotes. A combination of put and call options can be used to trade several more complex innstruments that can earn profits depending on the market conditions.
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Contents 1 Options 2 Options Valuation 2.
Further we looked at four different variants originating from these 2 options —. Think of it this way — if you give a good artist a color palette and canvas he can create some really interesting paintings, similarly a good trader can use these four option variants to create some really good trades. Imagination and intellect is the only requirement for creating these option trades.
Hence before we get deeper into options, it is important to have a strong foundation on these four variants of options. For nifty call put option meaning reason, we will quickly summarize what we have learnt so far in this module. Arranging the Payoff diagrams in the above fashion helps us understand a few things better. Let me list them for nifty call put option meaning —. Going by that, buying a call option and buying a put option is called Long Call and Long Put position respectively.
Going by that, selling a call option and selling a put option is also called Short Call and Short Put position respectively. However I think it is best to reiterate a few key points before we make further progress in this module. Buying an option call or put makes sense only when we expect the market to move strongly in a certain direction. If fact, for the option buyer to be profitable the market should move away from the selected strike price. Selecting nifty call put option meaning right strike price to trade is a major task; we will learn this at a later stage.
For now, here are a few key points that you should remember —. The option sellers call nifty call put option meaning put are also called the option writers. Selling an option makes sense when you expect the market to remain nifty call put option meaning 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 nifty call put option meaning 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 nifty call put option meaning 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 nifty call put option meaning isthe 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 nifty call put option meaning 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 nifty call put option meaning 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 nifty call put option meaning 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 nifty call put option meaning as easy and lucid as the previous ones have been. Hi Really nice initiative sir. Hello Sir, if I buy a lot ofcall 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 tothe premium of the Call option will certainly be more than Rs. Your profits nifty call put option meaning 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 nifty call put option meaning 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 nifty call put option meaning any transaction on the exchange.