Basic Knowledge About "Option"

Option is called a "Derivative"

because price of an Option does not
depend on its own, it depends on the
price of other Asset or the price of an
Option is derived from the price of
other Asset.

The price of the Asset is called "Spot

Price" (for example, the price of Nifty
50, Nifty Bank, Stocks, etc.) from
which the price of an Option is
derived.

Option of an Asset has various "Strike

Prices". All Strike Prices of the same
expiry date at one place is called
"Option Chain".

The prices of Options of each "Strike

Price" are different to one another.

Options are two types, one is called

"Call Option" and other is called "Put
Option’.

When price of the Spot price

increases, the price of a Call Option
increases and the price of a Put
= Option decreases.

When price of the Spot price

decreases, the price of a Call Option
decreases and the price of a Put
Option increases.

The price of an Option is also called

"Premium".

The price of an Option is consisted of

two types of values, one is called
"Intrinsic Value" and other is called
"Time Value".

Every Option must have a certain

expiry date.

Only "Time Value" becomes zero on

the day of the expiry of an Option.
"Intrinsic Value" never be zero at
expiry of an Option.

According to the distance of Strike

Prices from the Spot Price, Strike
Prices have been divided into four
categories, (i) In The Money (ITM)
Option (ii) Out of The Money (OTM)
Option (iii) At The Money (ATM) (iv)
Near The Money (NTM).

In case of Call Option, when Strike

Price is greater than the Spot Price, it
is called OTM Call Option.

In case of Put Option, when the Spot

Price is greater than Strike Price, it is
called OTM Put Option.

In case of Put Option, when Strike

Price is greater than the Spot Price, it
is called ITM Put Option.

In case of Call Option, when the Spot

Price is greater than Strike Price, it is
called ITM Call Option.

When the Spot Price and Strike Price

are equal, it is called ATM Option. In
case of ATM Options, the prices of
Call Option and Put Option are almost
same.

The nearest Strike Price of the Spot

Price is called NTM.

Only ITM Option has both Intrinsic

Value and Time Value. OTM Option
has only Time Value.

For example, the present price of

Nifty Bank is Rs.39573.70 and the
price of the Call Option at Strike Price
of 39700 is Rs.683.65 and the price
of the Put Option at Strike Price of
39700 is Rs.742.

Here, Rs.39573.70 is the Spot Price.

The Strike Price of 39700 Call Option

is OTM Call Option because Strike
Price is greater than the Spot Price.
Therefore, Rs.683.65 has only Time
Value.

The Strike Price of 39700 Put Option

is ITM Put Option because the Spot
Price is greater than the Strike Price.
Therefore, Rs.742 has both Intrinsic
Value and Time Value. The Intrinsic
Value in Rs.742 is Rs.126.30 (39700 -
39573.70) and Time Value is Rs.
615.70 (742 - 126.30). 20:42