Options trading- zerodha

varsity
Created @January 2, 2022 4:28 PM

Last Edited Time @January 2, 2022 4:55 PM

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2nd Jan-

Buy Call Option

You enter into this contract by paying the premium and get the right to buy
the stock in future at a strike price

Loss limited by the premium you pay

Infinite profit possibility

Sell Call Option

You enter into this contract by receiving the premium and with the obligation
to sell the stock to the buyer at the strike price if the spot price of the
underlying stock is ITM (in the money).

Profit limited by the premium you receive

Infinite loss possibility

Buy Put Option

You enter into this contract by paying the premium and get the right to sell
the stock in future at a strike price

Loss limited by the premium you pay

Infinite profit possibility

Sell Put Option

You enter into this contract by receiving the premium and with the obligation
to buy the stock to the buyer at the strike price if the spot price of the

Options trading- zerodha varsity 1

 underlying stock is ITM (in the money).

Profit limited by the premium you receive

Infinite loss possibility

Intrinsic value of a call option = max(0, (spot price - strike price))

P/L of a call option buyer = max(0, (spot price - strike price)) - premium
P/L of a call option seller = premium - max(0, (spot price - strike price))

Intrinsic value of a put option = max(0, strike price - spot price)

P/L of a put option buyer = max(0, (strike price - spot price)) - premium
P/L of a put option seller = premium - max(0, (strike price - spot price))

Your market view Option type Premium

Bullish Call options (Buy), Long call Pay

Options trading- zerodha varsity 2

 Flat or Bullish Put options (Sell), Short Put Receive
Flat or Bearish Call Options (sell), Short Call Receive

Bearish Put Options (Buy), Long put Pay

The above P/L diagram is applicable if you wish to hold the contract till the
expiry. Usually traders trade over the premium in the intra day.

Moneyness of a contract

Deep in the money

In the money (ITM)

At the money (ATM)

Out of the money (OTM)

Deep out of the money

If the intrinsic value of a contract is positive, it is in the money. if the strike

price is close to the spot price of the underlying, it is at the money. Else, it is
Out of the money.

Options Greek

Delta - Measures the rate of change of options premium based on the

directional movement of the underlying

Gamma - Rate of change of delta

Vega - rate of change of premium based on the change in volatility

Theta- measures the impact on premium based on the time left for the
expiry

Delta

for call option, of 1 lot, range of delta is 0 to 1

for put option of 1 lot, range of delta is -1 to 0

ITM have delta in the range of 0.5 to 1 (for call options, for put it is -1 to
-0.5)

Options trading- zerodha varsity 3

 ATM have delta around 0.5 (-0.5 for put)

OTM have delta in the range of 0 to 0.5 (-0.5 to 1 for put)

Expected change in option premium = Option Delta * Points change in

underlying

Options trading- zerodha varsity 4

 Deltas of contracts of same underlying add up to give the actual
direction sense of the combined contract

if you have a combined delta of 0, that means its delta neutral. It will be
affected by the other factors only (time, volatility)

delta of a single contract can be viewed as probability of the contract

ending up in the ITM on the date of expiry (for a single lot)

Options trading- zerodha varsity 5