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2/7/2019 Moneyness of an Option Contract – Varsity by Zerodha
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Module 5 — Options Theory for Professional Trading
Chapter 8
Moneyness of an Option Contract

316
8.1 – Intrinsic Value

The moneyness of an option contract is a classification method wherein each option (strike) gets classified as either – In the money (ITM), At the money
(ATM), or Out of the money (OTM) option. This classification helps the trader to decide which strike to trade, given a particular circumstance in the market.
However before we get into the details, I guess it makes sense to look through the concept of intrinsic value again.
The intrinsic value of an option is the money the option buyer makes from an options contract provided he has the right to exercise that option on the given day.
Intrinsic Value is always a positive value and can never go below 0. Consider this example –
Underlying CNX Nifty

Spot Value 8070
Option strike 8050
Option Type Call Option (CE)
Days to expiry 15
Position Long
Given this, assume you bought the 8050CE and instead of waiting for 15 days to expiry you had the right to exercise the option today. Now my question to you
is – How much money would you stand to make provided you exercised the contract today?
Do remember when you exercise a long option, the money you make is equivalent to the intrinsic value of an option minus the premium paid. Hence to answer
the above question we need to calculate the intrinsic value of an option, for which we need to pull up the call option intrinsic value formula from Chapter 3.
Here is the formula –
https://zerodha.com/varsity/chapter/moneyness-of-an-option-contract/ 1/93
Intrinsic Value of a Call option = Spot Price – Strike Price
Let us plug in the values
= 8070 – 8050
= 20
So, if you were to exercise this option today, you are entitled to make 20 points (ignoring the premium paid).
Here is a table which calculates the intrinsic value for various options strike (these are just random values that I have used to drive across the concept) –
Option Type Strike Spot Formula Intrinsic Value Remarks

Long Call 280 310 Spot Price – Strike Price 310 – 280 = 30
Long Put 1040 980 Strike Price – Spot Price 1040 -980 = 60
Long Call 920 918 Spot Price – Strike Price 918 – 920 = 0 Since IV cannot be -ve
Long Put 80 88 Strike Price – Spot Price 80 – 88 = 0 Since IV cannot be -ve
With this, I hope you are clear about the intrinsic value calculation for a given option strike. Let me summarize a few important points –
1. Intrinsic value of an option is the amount of money you would make if you were to exercise the option contract
2. Intrinsic value of an options contract can never be negative. It can be either zero or a positive number
3. Call option Intrinsic value = Spot Price – Strike Price
4. Put option Intrinsic value = Strike Price – Spot price
Before we wrap up this discussion, here is a question for you – Why do you think the intrinsic value cannot be a negative value?
To answer this, let us pick an example from the above table – Strike is 920, spot is 918, and option type is long call. Let us assume the premium for the 920 Call
option is Rs.15.
Now,
1. If you were to exercise this option, what do you get?

a. Clearly we get the intrinsic value.
2. How much is the intrinsic value?
a. Intrinsic Value = 918 – 920 = -2
3. The formula suggests we get ‘– Rs.2’. What does this mean?
a. This means Rs.2 is going from our pocket
4. Let us believe this is true for a moment, what will be the total loss?
a. 15 + 2 = Rs.17/-
5. But we know the maximum loss for a call option buyer is limited to the extent of premium one pays, in this case it will be Rs.15/-
a. However if we include a negative intrinsic value this property of option payoff is not obeyed (Rs.17/- loss as opposed to Rs.15/-). Hence in order to
maintain the non linear property of option payoff, the Intrinsic value can never be negative
6. You can apply the same logic to the put option intrinsic value calculation
Hopefully this should give you some insights into why the intrinsic value of an option can never go negative.
8.2 – Moneyness of a Call option

With our discussions on the intrinsic value of an option, the concept of moneyness should be quite easy to comprehend. Moneyness of an option is a
classification method which classifies each option strike based on how much money a trader is likely to make if he were to exercise his option contract today.
There are 3 broad classifications –
1. In the Money (ITM)

2. At the Money (ATM)
3. Out of the Money (OTM)
And for all practical purposes I guess it is best to further classify these as –
1. Deep In the money

2. In the Money (ITM)
3. At the Money (ATM)
4. Out of the Money (OTM)
5. Deep Out of the Money
Understanding these option strike classification is very easy. All you need to do is figure out the intrinsic value. If the intrinsic value is a non zero number, then
the option strike is considered ‘In the money’. If the intrinsic value is a zero the option strike is called ‘Out of the money’. The strike which is closest to the Spot
price is called ‘At the money’.
Let us take up an example to understand this well. As of today (7th May 2015) the value of Nifty is at 8060, keeping this in perspective I’ve take the snapshot of
all the available strike prices (the same is highlighted within a blue box). The objective is to classify each of these strikes as ITM, ATM, or OTM. We will
discuss the ‘Deep ITM’ and ‘Deep OTM’ later.
As you can notice from the image above, the available strike prices trade starts from 7100 all the way upto 8700.
We will first identify ‘At the Money Option (ATM)’ as this is the easiest to deal with.
From the definition of ATM option that we posted earlier we know, ATM option is that option strike which is closest to the spot price. Considering the spot is at
8060, the closest strike is probably 8050. If there was 8060 strike, then clearly 8060 would be the ATM option. But in the absence of 8060 strike the next closest
strike becomes ATM. Hence we classify 8050 as, the ATM option.
Having established the ATM option (8050), we will proceed to identify ITM and OTM options. In order to do this we will pick few strikes and calculate the
intrinsic value.
1. 7100
2. 7500
3. 8050
4. 8100
5. 8300
Do remember the spot price is 8060, keeping this in perspective the intrinsic value for the strikes above would be –
@ 7100
Intrinsic Value = 8060 – 7100
= 960
Non zero value, hence the strike should be In the Money (ITM) option
@7500
= 560
Non zero value, hence the strike should be In the Money (ITM) option
@8050
We know this is the ATM option as 8050 strike is closest to the spot price of 8060. So we will not bother to calculate its intrinsic value.
@ 8100
= – 40
Negative intrinsic value, therefore the intrinsic value is 0. Since the intrinsic value is 0, the strike is Out of the Money (OTM).
@ 8300
= – 240
Negative intrinsic value, therefore the intrinsic value is 0. Since the intrinsic value is 0, the strike is Out of the Money (OTM).
You may have already sensed the generalizations (for call options) that exists here, however allow me to restate the same again
1. All option strikes that are higher than the ATM strike are considered OTM
2. All option strikes that are below the ATM strike are considered ITM
In fact I would suggest you relook at the snapshot we just posted –
NSE presents ITM options with a pale yellow background and all OTM options have a regular white background. Now let us look at 2 ITM options – 7500 and
8000. The intrinsic value works out to be 560 and 60 respectively (considering the spot is at 8060). Higher the intrinsic value, deeper the moneyness of the
option. Therefore 7500 strike is considered as ‘Deep In the Money’ option and 8000 as just ‘In the money’ option.
I would encourage you to observe the premiums for all these strike prices (highlighted in green box). Do you sense a pattern here? The premium decreases as
you traverse from ‘Deep ITM’ option to ‘Deep OTM option’. In other words ITM options are always more expensive compared to OTM options.
8.3 – Moneyness of a Put option

Let us run through the same exercise to find out how strikes are classified as ITM and OTM for Put options. Here is the snapshot of various strikes available for
a Put option. The strike prices on the left are highlighted in a blue box. Do note at the time of taking the snap shot (8th May 2015) Nifty’s spot value is 8202.
As you can see there are many strike prices available right from 7100 to 8700. We will first classify the ATM option and then proceed to identify ITM and OTM
option. Since the spot is at 8202, the nearest strike to spot should be the ATM option. As we can see from the snapshot above there is a strike at 8200 which is
trading at Rs.131.35/-. This obviously becomes the ATM option.
We will now pick a few strikes above and below the ATM and figure out ITM and OTM options. Let us go with the following strikes and evaluate their
respective intrinsic value (also called the moneyness) –
1. 7500
2. 8000
3. 8200
4. 8300
5. 8500
@ 7500
We know the intrinsic value of put option can be calculated as = Strike – Spot
= – 700
Negative intrinsic value, therefore the option is OTM
@ 8000
= – 200
Negative intrinsic value, therefore the option is OTM
@8200
8200 is already classified as ATM option, hence we will skip this and move ahead.
@ 8300
= +100
Positive intrinsic value, therefore the option is ITM
@ 8500
= +300
Positive intrinsic value, therefore the option is ITM
Hence, an easy generalization for Put options are –
1. All strikes higher than ATM options are considered ITM

2. All strikes lower than ATM options are considered OTM
And as you can see from the snapshot, the premiums for ITM options are much higher than the premiums for the OTM options.
I hope you have got a clear understanding of how option strikes are classified based on their moneyness. However you may still be wondering about the need to
classify options based on their moneyness. Well the answer to this lies in ‘Option Greeks’ again. As you briefly know by now, Option Greeks are the market
forces which act upon options strikes and therefore affect the premium associated with these strikes. So a certain market force will have a certain effect on ITM
option while at the same time it will have a different effect on an OTM option. Hence classifying the option strikes will help us in understanding the Option
Greeks and their impact on the premiums better.
8.4 – The Option Chain

The Option chain is a common feature on most of the exchanges and trading platforms. The option chain is a ready reckoner of sorts that helps you identify all
the strikes that are available for a particular underlying and also classifies the strikes based on their moneyness. Besides, the option chain also provides
information such as the premium price (LTP), bid –ask price, volumes, open interest etc for each of the option strikes.
Have a look at the option chain of Ashoka Leyland Limited as published on NSE –
Few observations to help you understand the option chain better –
1. The underlying spot value is at Rs.68.7/- (highlighted in blue)

2. The Call options are on to the left side of the option chain
3. The Put options are on to the right side of the option chain
4. The strikes are stacked on an increasing order in the center of the option chain
5. Considering the spot at Rs.68.7, the closest strike is 67.5, hence that would be an ATM option (highlighted in yellow)
6. For Call options – all option strikes lower than ATM options are ITM option, hence they have a pale yellow background
7. For Call options – all option strikes higher than ATM options are OTM options, hence they have a white background
8. For Put Options – all option strikes higher than ATM are ITM options, hence they have a pale yellow background
9. For Put Options – all option strikes lower than ATM are OTM options, hence they have a white background
10. The pale yellow and white background from NSE is just a segregation method to bifurcate the ITM and OTM options. The color scheme is not a standard
convention.
Here is the link to check the option chain for Nifty Options.
8.4 – The way forward

Having understood the basics of the call and put options both from the buyers and sellers perspective and also having understood the concept of ITM, OTM, and
ATM I suppose we are all set to dwell deeper into options.
The next couple of chapters will be dedicated to understand Option Greeks and the kind of impact they have on option premiums. Based on the Option Greeks
impact on the premiums, we will figure out a way to select the best possible strike to trade for a given circumstance in the market. Further we will also
understand how options are priced by briefly running through the ‘Black & Scholes Option Pricing Formula’. The ‘Black & Scholes Option Pricing Formula’
will help us understand things like – Why Nifty 8200 PE is trading at 131 and not 152 or 102!
I hope you are as excited to learn about all these topics as we are to write about the same. So please stay tuned.
Onwards to Option Greeks now!
Key takeaways from this chapter

1. The intrinsic value of an option is equivalent to the value of money the option buyer makes provided if he were to exercise the contract
2. Intrinsic Value of an option cannot be negative, it is a non zero positive value
3. Intrinsic value of call option = Spot Price – Strike Price
4. Intrinsic value of put option = Strike Price – Spot Price
5. Any option that has an intrinsic value is classified as ‘In the Money’ (ITM) option
6. Any option that does not have an intrinsic value is classified as ‘Out of the Money’ (OTM) option
7. If the strike price is almost equal to spot price then the option is considered as ‘At the money’ (ATM) option
8. All strikes lower than ATM are ITM options (for call options)
9. All strikes higher than ATM are OTM options (for call options)
10. All strikes higher than ATM are ITM options (for Put options)
11. All strikes lower than ATM are OTM options (for Put options)
12. When the intrinsic value is very high, it is called ‘Deep ITM’ option
13. Likewise when the intrinsic value is the least, it is called ‘Deep OTM’ option
14. The premiums for ITM options are always higher than the premiums for OTM option
15. The Option chain is a quick visualization to understand which option strike is ITM, OTM, ATM (for both calls and puts) along with other information
relevant to options.
Module 5
Chapters
1. Call Option Basics

2. Basic Option Jargons
3. Buying a Call Option
4. Selling/Writing a Call Option
5. The Put Option Buying
6. The Put Option selling
7. Summarizing Call & Put Options
8. Moneyness of an Option Contract
9. The Option Greeks (Delta) Part 1
10. Delta (Part 2)
11. Delta (Part 3)
12. Gamma (Part 1)
13. Gamma (Part 2)
14. Theta
15. Volatility Basics
16. Volatility Calculation (Historical)
17. Volatility & Normal Distribution
18. Volatility Applications
19. Vega
20. Greek Interactions
21. Greek Calculator
22. Re-introducing Call & Put Options
23. Case studies – wrapping it all up!
316 comments
1. khyati verdhan says:

May 12, 2015 at 11:47 am
Hi kartik,
Thanks for new chapter. You have magical writing power which makes the learning so interesting and easy. I completely understood the concept of this
chapter and very excited for next chapter.
¶Reply
Karthik Rangappa says:

May 13, 2015 at 4:44 am
Thanks for the kind words and we are really glad you were able to understand the chapter :). Will put up the next chapter as soon as we can.
¶Reply
CHIDA says:
April 18, 2017 at 2:20 pm
Hi
what happens when the sold OTM option becomes ITM option? I am referring to Bank Nifty options and moreover why cann’t we sell ITM
options for bank nifty?
¶Reply

April 19, 2017 at 10:48 am
When OTM becomes ITM and you are short on OTM, then you will lose money. I guess you can sell ITM options for Bank Nifty,
although not a great idea to do so. Are you facing any problems with this?
¶Reply
2. kieron says:
May 14, 2015 at 7:58 pm
Very excited for next chapter please update it as soon as possible
¶Reply

May 15, 2015 at 1:34 pm
Thanks. We will update it sometime soon next week.
¶Reply

May 15, 2015 at 5:09 am
Hi kartik
If I place an order to buy nifty8050CE at premium of 100 with a trailing stop loss of 100 points. After sometime premium is 120, can I modify my trailing
stop loss to 80 points or 60 points or can I square off my position at current price
¶Reply

May 15, 2015 at 1:36 pm
You can do anyone of them – either trail it or book profits!
¶Reply
4. ManojBaliyan says:
May 15, 2015 at 2:57 pm
Hi Karthik,
Varsity is the great effort of you and Zerodha. I do not have words to appreciate, thanks a lot….
¶Reply

May 17, 2015 at 5:05 pm
Thanks for the kind words Manoj! Really glad you are liking Varsity.
¶Reply
jOSE says:
February 25, 2018 at 6:40 pm
VERY GOOD. oF YOU TO USE THE OPTION CHAIN VISUAL.,KARTHIK R, I CAN SEE YOU HAVE TAKEN PAINS TO EDUCATE. US
TRADERS.THANK YOU
¶Reply

February 26, 2018 at 11:12 am
Welcome! Happy trading
¶Reply
5. keshav says:
May 16, 2015 at 5:11 am
Sir, please try to upload atleast one chapter per week.
¶Reply

May 17, 2015 at 5:06 pm
We will try our best Keshav. In fact that is our aim as well..but sometime things get hectic and its not possible to upload. But nevertheless we will
do our best. Thanks.
¶Reply
6. iyengarnsv says:
May 16, 2015 at 5:26 am
@ 8300
= – 260 (It should be -240)
¶Reply

May 17, 2015 at 5:07 pm
Thanks for pointing this, will make the changes.
¶Reply

May 17, 2015 at 8:06 am
Hi kartik,
I have 50000 rs in my trading account. How many shares of nifty CE with strike price of 8200 and premium of 100 under bo & co order can I buy???
¶Reply

May 17, 2015 at 5:14 pm
Are you looking at intraday trade – BO & CO is for intraday day only.
¶Reply
khyati verdhan says:

May 18, 2015 at 5:13 am
i kartik,
I have 50000 rs in my trading account. How many shares of nifty CE with strike price of 8200 and premium of 100 under bo & co() order can
I buy??intradat trade
¶Reply

May 19, 2015 at 4:55 am
Roughly 28 lots.
¶Reply
khyati verdhan says:
May 19, 2015 at 5:55 am
One lot of nifty = 100 shares

28 lot of nifty= 2800 shares
This means 2800 shares I can buy in one trade. Am I right???
¶
May 20, 2015 at 6:22 am
One Nifty Lot = 25 Nifty Units

28 Lots = 28*25 = 700 Nifty Units.
So for every 1 point up or down move you can make or lose Rs.700 respectively.
¶
JAWAHAR Bhaya says:
June 26, 2018 at 10:32 am
What is BO and CO?
¶Reply

June 26, 2018 at 11:28 am
BO = Bracket Orders CO = Cover Orders

More on it here – https://tradingqna.com/t/what-is-differrence-between-bracket-orders-and-cover-orders/352
¶Reply
8. NARSIMHA says:
May 18, 2015 at 5:37 am
sir.when trading options which graph should we look into,is it nifty ce,pe we r in or spot.bcoz as chart trader iam confused which chart to follow, as and
every strikewill hav diff setup,trading cycolegy greeks lot more,got it
¶Reply

May 19, 2015 at 4:56 am
For trading options please look into the charts of the spot market and not really the chart of the Options.
¶Reply
NARSIMHA says:
May 19, 2015 at 12:28 pm
sir,ok should we look spot r fut nifty &when looking nifty charts how can we rely as it consists of 50 stocks&each chart will tell differently
how can we attribute to spot nifty,ce,pe clarify detailly
¶Reply

May 20, 2015 at 6:33 am
You should look at the spot charts. The index is made up of these 50 stocks, check this http://zerodha.com/varsity/chapter/the-stock-
markets-index/
¶Reply
NARSIMHA says:
May 20, 2015 at 12:01 pm
sir,ok today i was observing spot nifty chart how can we calculate t analysis as it doesnt have volume,why cant nifty fut
¶
May 21, 2015 at 5:34 am
You do get the volume information on Nifty charts. Request you to please double check.
¶
jOSE says:
cannot agree. it is important to keep an eye on spot while watching the option chart in 3minute frame and also watch the support and
resistances in 3mntf. during. opening moves. option chart will respond. immediately to changes in underlying. after 10:15a.m. sluggish
response, until lunch time or two thirty when actual operational intension of the day is displayed. then. another bout of responsivenes near
close at 3:10. or. thereabout. by the way elliott waves can be seen in option charts
¶Reply
Narasimha says:
May 21, 2015 at 11:50 am
Sir,I don’t think nifty spot will be traded so how can we get the volume correct me if I’m wrong
¶Reply

May 22, 2015 at 2:48 am
The volume of Nifty spot is cumulative volumes of all the 50 stocks. Check this – http://chartink.com/stocks/nifty.html.
¶Reply
NARSIMHA says:
May 25, 2015 at 8:07 am
sir,ok but what about in pi i hav double clicked but couldnt help,and what about theoratical option price like in nest plus u said its
comming soon in pi,when can we expect,it will be game changer
¶Reply

May 26, 2015 at 4:44 am
Sometime soon Narsimha, I’m not in any position to specify a timeline on this matter.
¶
NARSIMHA says:
May 26, 2015 at 8:12 am
sir,i asked about volume of nifty spot which iam not getting even after double clicking&the link u provided is for eod what for
iday&tick/tick
¶
May 27, 2015 at 4:47 am
For intraday it may not be possible Narsimha. I will get back to you on this soon, meanwhile you can certainly use the Nifty
futures chart.
¶
9. Vidhyalakshmi says:
May 19, 2015 at 8:01 am
Hi Karthik, the bid-ask spread for the Nifty is quite close; and when I square off an order at market price, there are no major surprises. But with the Bank
Nifty, there is a huge difference between the LTP and the market price. So while trading larger volumes, is it safer to trade Nifty?
¶Reply

May 20, 2015 at 6:31 am
Well the bid – ask spread for both Nifty and BankNifty are quite the same
Do this –
1) Take the difference between the bid and ask (this is called the spread)
2) Divide the spread by the average of Bid and Ask
3) Express this as a %
If you do this you will realize the % is almost the same (ard 0.015%).
The spread is tight when liquidity is abundant. In simpler words – when there are more people trading a particular contract liquidity improves and
therefore the spreads get better (it gets tighter). Tighter spreads imply lesser damage when you place market orders (lesser surprise). You may also
want to read about ‘Impact Cost’ here – http://zerodha.com/varsity/chapter/nifty-futures/ section 9.2
¶Reply
Vidhyalakshmi says:
May 20, 2015 at 7:55 am
Karthik, I was asking about the spread in absolute terms (not percentage). With Bank Nifty options, I see a difference of over 10 rupees
between the bid price and the ask price onscreen. A few days ago, before I squared off my (Bank Nifty options) positions, the screen showed
a decent profit (which was calculated on the LTP I suppose); but when I hit the button to square off, I ended up with a loss This hasn’t
happened when I’ve traded Nifty options.
¶Reply

May 20, 2015 at 9:18 am
Got it. Yes in absolute terms the difference is kind of bigger on Bank Nifty. It makes sense to trade Nifty especially when you know
that you will use market orders.
¶Reply
jOSE says:
MADAM, TRY PLACING A LIMIT ORDER TO BOOK YOUR PROFITS
¶Reply
10. Chetan says:

May 20, 2015 at 6:17 am
Hi Karthik, Hats off buddy… Amazingly good chapters… Work highly appreciated Sir Cheers
¶Reply

May 20, 2015 at 7:27 am
Thanks for the kind words Chetan, very encouraging for all of us at Zerodha
¶Reply

May 20, 2015 at 9:50 am
Thanks a lot for this information.

Even 700 shares of nifty CE/PE option per trade is quite more than future market.
Also one thing that I want to ask is – approximately nifty daily change is of 100 points (day’s high- day’s low) ,is the same change is observed in the
premium’s of ATM strike price of nifty options or other stock options like idea cellular????
¶Reply

May 21, 2015 at 5:32 am
The lot of 25 is fixed for both futures and options. I think 700 came about because one of the comments posted earlier. Also, it may not be safe to
assume 100 point daily moment in Nifty. The change in premium based on the change is underlying is captured by delta…which is the focus in
chapter 9.
¶Reply
jOSE says:
PLEASE USE A SPREAD SHEET, DOWN LOAD NIFTY OHLC DATA.NEXT, CALCULATE HIGH – CLOSE AND OPEN-CLOSE.
TAKE THE AVERAGE FOR THESE TWO COLUMNS FOR AT LEAST 100 DAYS. WILL GIVE YOU AN IDEA ABOUT THE
DAILY RANGE.
¶Reply

Hi Jose, request you not to use caps lock. It strains the reader’s eye. Please use small case letters. Thanks.
¶Reply
12. keshav says:

May 21, 2015 at 9:15 am
When will u upload next chapter?
¶Reply

May 22, 2015 at 2:35 am
Sorry for the delay, but we should have it up over the next 2 days max. Thanks for your patience.
¶Reply
13. Keerthan says:

May 21, 2015 at 11:08 am
Hi Karthik, as always an excellent job in explaining concepts of options and futures. I have a question which is probably related to next chapter but it
would be great if you could answer them. When calculating the delta for any option, what values of historical volatility do we take? Where can I get this
data from?
The other question is a few days ago put option volatility(around 24%) was higher than average volatilty (18.23% ,this data I got from one of the option
tools I use) and the premium of put options eroded quickly, and since yesterday the put option volatility has come down near the average range but the call
option volatility has dropped to around 13% while average and put volatilities are around 18%. Call option premiums decayed quickly. So can we
generalise this into saying when Average volatility>Call volatility ,calls are being written and it may be the right time for me to write calls whereas when
Put volatility is greater than average volatility put options are being written and perhaps we can write some too? I hope you understand my question.
Again the details of the volatility I got from the option tool I use.
¶Reply

May 22, 2015 at 2:46 am
Which options tool do you use Keerthan?
Delta can be calculated using a simple Black & Scholes option calculator. You don’t really need historical volatility for this. Also, historical
volatility can be calculated very easily – I will explain the same in chapter 11 or 12 of this module.
With volatility % like 18% and 24% you must be referring to bank Nifty (or some other Index) if I’m not wrong. Anyway, whenever current
volatility > Average volatility …and you expect the volatility to drop ..you should look at option writing opportunities and thereby collecting the
premiums. Likewise whenever current volatility < Average volatility ...and you expect the volatility to increase..you should look at option buying
opportunities. This is because the option premium increases/decreases with increase/decrease in volatility. Also, dont mix up call and put volatility.
Treat them separate and clutter free for a clear understanding. Of course more on this topic in the subsequent chapters.
¶Reply
Keerthan says:
May 23, 2015 at 5:57 am
Karthik, I use an excel sheet which was given to me by a friend(custom made) where it asks for Historical Volatility to calculate the Greeks
and Theoretical option prices( I guess it is Black Scholes Model).
For average volatility I use data from FOVOLT.csv files from NSE. When I meant “PE Volatility” and “CE Volatility” it is the average values
of the top 5- 6 PE.CE strikes .
Anyway in your explanation what do you mean by “current volatility” and “Average volatility”? I mean, what values are we using here? Also
can you let me know where does India VIX fit in all these?
Thanks for your help!! You are doing a wonderful job!!
¶Reply

May 24, 2015 at 9:42 am
Current Volatility is the volatility in the market as of now while the average volatility is historical average volatility. This can be a bit
confusing now, but we will discuss these in detail over the next few chapters…so you should have greater clarity then.
¶Reply
14. kay kay says:

May 24, 2015 at 2:44 pm
Hi,
As we know from previous chapter that an option can’t be exercised before expery date. Why do you mention to exercise it before expery date in this
chapter.
If one can exercise before expery then
What will happen if I write an option which is in the money and someone exercised it? Profit or loss
¶Reply

May 26, 2015 at 4:38 am
It was a deliberate statement, an assumption to drive the point across – here is what I’ve mentioned
“Given this, assume you bought the 8050CE and instead of waiting for 15 days to expiry you had the right to exercise the option today. Now my
question to you is – How much money would you stand to make provided you exercised the contract today? ”
So in reality this does not happen in Indian markets as all options are European in nature.
¶Reply
15. Saurabh Garg says:

July 24, 2015 at 1:43 am
Hi Karthik, what is the difference between settle price and closing price?? e.g. on 15 July BHel 180CE has a closing price of 2.90 and settle price of
11.40. (Expiry 27 august). Also, what CE an CA in call options??
¶Reply

July 24, 2015 at 6:25 am
CA is call option American and CE is call option European. Check section 4.6 here for more details –
http://zerodha.com/varsity/chapter/sellingwriting-a-call-option/
BHEL does not seem to have 180 strike price at all – http://www.nseindia.com/live_market/dynaContent/live_watch/option_chain/optionKeys.jsp?
segmentLink=17&instrument=OPTSTK&symbol=BHEL&date=27AUG2015
Am’I missing something?

¶Reply
Saurabh Garg says:

July 24, 2015 at 8:12 pm
My apologies…that is 280* not 180…that was a typing error…
¶Reply

July 25, 2015 at 1:39 pm
Guessed as much. Anyway settlement price reflects the last closing price…if the contract has not traded today (due to liquidity
concerns) then the settlement price reflects the previous the most recent closing price and that could be 2 days before. Hence the
difference.
¶Reply
16. priya says:

July 30, 2015 at 3:34 am
Hi Karthik,
a small and a silly doubt.
for trading equity, we see spot price charts, for futures we have particular futures chart. On these two we apply TA and predict a direction for the market
movement. For options, I read in few places, we should not apply TA, then are we deciding the direction by observing the primary or intermediate markets
or news is it based or just the instincts? To trade options, I understand from your writings, options greeks will help us select a proper strike rate after
which we’l be benefitted. But how to select bullish or bearish firmly???
thanks in advance.
¶Reply
jOSE says:
LADY, TAKE A LOOK AT INTRA-DAY OPTIONS IN 3MNT FRAME . LOCATE SUPPORT AND RESISTANCE LOCATIONS.
USE OPTION CHARTS. TRY 8PERIOD STOCHASTICS IN 3MNTFS. LOOK FOR A ELLIOTT WAVE STRUCTURES INTRA-DAY.
FREQUENTLY ELLIOTT WAVE STRUCTURES TURN UP EVEN IN INTRA-DAY. ABOVE ALL USE STOP LOSS COMPULSARILY.
JUST AS MEDICINE IS MULTIDISCIPLINARY (PHYSIOLOGY,ANATOMY, PHARMACOLOGY,ORGANIC PATHWAYS AND WHAT
NOT) SO IS TRADING. REMEBER, A CHART CANNOT PREDICT A NORTH KOREAN MISSILE LAUNCH. HENCE THE
STOPLOSS ORDER FOR EVERY TRADE.
¶Reply
17. priya says:

July 30, 2015 at 4:17 am
Hi Karthik,
one silly doubt, for spot and futures trading, seeing the respective charts we apply TA to find some candle stick pattern and predict market direction. I
have read in few places, for options we should not apply TA. From your writings I understand options greeks will help us select the strike rate properly,
hence we can be profited. but my doubt is, how will we select call or put, bullish or bearsish? by observing primary or intermediate market direction?
news or instincts? very basic, after too much of reading I am confused. thanks
¶Reply

July 30, 2015 at 5:48 am
Priya to get a directional sense you can depend on TA or FA, once you develop a direction sense you can either use Futures or Options to leverage
your directional view. Also to get I would suggest you read this chapter – http://zerodha.com/varsity/chapter/getting-started/ I guess this will give
you an orientation
¶Reply
18. priya says:

July 31, 2015 at 3:30 am
thanks Karthik,
just for reconfirmation, I can use the checklist which you gave in TA module(mainly a candliestick pattern) and go long or short in options market??
¶Reply
19. Darshan says:

July 31, 2015 at 8:34 am
Hello Karthik,
Your efforts in explaining the nitty gritty of each and every concept is highly appreciated that to with example. For instance till today I was only knowing
that Intrinsic value of options cannot be -ve.. But why it can’t be -ve is what I came to know from this chapter. You and your team are doing awesome job
with VARSITY knowledge sharing. Thanks
Please continue with the good work.
¶Reply

August 2, 2015 at 5:27 am
Darshan, thank you so much for the kind words and encouragement. Please do stay tuned for more quality content on Zerodha Varsity.
¶Reply
20. ShreyaDR says:

what role intrinsic value plays in deciding premium price of an option? why above ashok leyland example show IV 45.72 for the strike price 67.50 for the
spot price 68.70. it should be 68.70-67.50=1.20. am i correct?
¶Reply

Shreya – Option Premium can be split as Time value + Intrinsic value….so clearly intrinsic value plays an important role. The IV you are referring
to in the option chain stands for implied volatility and not intrinsic value
¶Reply
21. ShreyaDR says:

Ops! What does it mean by implied volatility? how it behaves in context with premium? and why( we could make out higher the IV, lower was the
premium and vice versa)?
¶Reply

You will know all about Implied Volatility very soon Will be talking about in chapter 19 I guess.
¶Reply
22. madhu nair says:

August 13, 2015 at 4:57 am
Hi Karthik, based on the result expectations of HPCL i had gone long by buying a far OTM CE 1100 option.the stock then was at 950. now, the results
were fantastic but, the stock corrected as if there is no tomorrow. the delta of the option was 0.09 and i was expecting the stock to move by 50 points . this
would give me a leg up of 4.5 points as far as the premium was concerned( 0.09 * 50). i brought the call at 4 and now its less than 1. my question is with
almost all stocks the price does go up after a favorable result. here though it was a good result the stock fell. i have attached the chart for you, can you
point out what could the reasons be for such a fall? thanks.
¶Reply

August 13, 2015 at 6:25 am
Madhu – This is a very typical reaction. If the results are generally anticipated to be good, then the stock runs up before the result announcement in
the backdrop of the announcement. Once the announcement is made people book profits and liquidate their positions. However if the results are
expected to be bad or avergae but the company surprises with good set of numbers…then the stock usually tends to rally.
¶Reply
23. OptionTrader says:

September 22, 2015 at 7:56 am
HI Karthik,
Firstly Thanks to Zerodha in general and a big thanks to you in specific for making things as simple as possible.
I am still learning dynamics of options trading. Can you please take look at my below trade which went very bad. I also know many would have come
across such situation.
1. I had bought PUT(15 Rs) and CALL(19Rs) both options as a hedge and I knew there would be one side move on 18th Sep post fed outcome.
Then opening was as expected on 18th Sep Nifty was at 120+, then I see both put and call prices nose diving(PUT fell by 82% and CALL fell by 42%).
What happened here?
2. I know it’s out of the money options and close to expiry. I have noticed in similar situations when Nifty opens 120+ even out of the money CALL
option would jump by 200%. correct? what happens here?
3. It was so pathetic, So how do we have some idea of such situations a day prior so we could exit at least. What metrics would help – volumes, open
interest, etc? looking forward to your reply. Thanks.
¶Reply

This is quite common Suraj. Whenever an even is lined up, the volatility shoots up, therby driving the option premiums (for both calls and puts)
very high. As soon as event is over the premiums drop since the volatility drops. Add to this the fact that expiry is close…the OTM options tend to
fall even more. I would suggest you read up the chapter on vega to appreciate this better.
¶Reply
24. aehsan4004 says:

November 9, 2015 at 6:24 pm
QUESTION :- BEARISH / BULLISH CHARACTER OF AN OPTION WITH RESPECT TO ITS UNDERLYING ?
1) TODAY NIFTY NOV FUT WAS BULLISH . ALL IN THE MONEY CE SHOWED SAME BULLISH MOVEMENT . WHEREAS ALL OUT OF
THE MONEY CE SHOWED OPPOSITE BEARISH MOVEMENT ….. WHY SO ? KINDLY EXPLAIN
2) question regarding standard tick-size of an option ? the buy-sell difference between certain CE are too high like at the time of closing of 8450 CE (
market sell = 3.35 & market buy = 4.25 ) …. kindly explain this .
thank you
¶Reply

November 10, 2015 at 5:32 am
1) Can you share the data, will be much easier for me to go through the details.
2) This is because of liquidity. OTM options are less liquid hence the bid ask spread is wider. Higher the liquidity in the contract, lower is the bid
ask spread.
¶Reply

1) sir , i did not take the screen shot but i shall try to make same study today as well . but did u get my point ? surprisingly such was not the case with
nifty JAN16 options ….. in here all out of the money , in the money options stayed bullish same as the underlying .
2) in case of OTM options how to benefit from (HIGH BID-ASK SPREAD) when buying & how to benefit / safeguard / get a fair selling value when we
decide to sell ?
¶Reply

Got it, suggest you look at this chapter, section 19.4 – http://zerodha.com/varsity/chapter/vega/
¶Reply

sir attached example of NIFTY NOV15 CE prices today .
NIFTY NOV 15 was bearish today 10-nov-15 till 2:15 pm …… prices till that shows certain CE are bearish in line with underlying …… while certain are
bullish ….. kindly guide us in detail
¶Reply

You can attribute this to Vega, please do refer to this – http://zerodha.com/varsity/chapter/vega/
¶Reply
27. Manoj Acharya says:

Hi ,
I have been going through the Varsity modules and would like to appreciate the kind of efforts must have put for its creation and the way it has been
presented. People who have no exposure or knowledge of Derivatives would surely benefit from it and would go a long way towards making them good
traders.
Hats off Zerodha team. God bless you all.
¶Reply

Thanks Manoj. Please stay tuned we have a lots more content coming up!
¶Reply
28. Hari says:

January 17, 2016 at 4:52 pm
Hi Karthik bro,
One question – How can I get Nifty 28Jan2016 chart in kite(i.e. with premium in Y-axis and date/time in x-axis). I mean what do I search in the search
box to get it in the “market watch”.
Thank You for this wonderful content and helping us out
¶Reply
Hari says:
got it
still thank you for your wonderful effort
¶Reply

January 18, 2016 at 6:10 am
Welcome
Good luck!
¶Reply

Hari – just search for “Nifty 28 Jan” and the contract should show up…once this is loaded, just click on the chart icon by hovering over the contract
in your market watch.
¶Reply
Hari says:
Yup got it Thanks.

Hope this helps someone.
The format is “derivative name” + expiry day + expiry month for example “NIFTY 28 JAN”.
¶Reply

Cheers!
¶Reply
29. Deepak says:

Hi Karthik Sir,
small doubt (if) i bought NIFTY16FEB7500CE @79, 2 lots (lot size 75) on 9:30am and sell it on 2:00pm
need cash – 79*150 = 11850
if yes than profit is 125*150=18750-11850=6900 ??
am i correct or not waiting for reply Thanks in advance
¶Reply

Absolutely, you profit will be the difference in premiums multiples by the number of lots.
¶Reply
Deepak says:
and sell it on 2:00pm @125 ******(text missed)
¶Reply

I’d kind of sensed, the answer still remains the same
¶Reply
30. sushil says:

Hello Karthik,
First of all let me thank you for this enlightenment, you know how to write stuff. Putting Bollywood analogy with simplified version of stock market
makes these articles great. The more I read the more curious I become.
I have loads of question I’ll try to sum up my understanding my making up story below. Please correct me if I understood incorrectly.
So basically there are 4 types of trades in options.

Call, Put, Short Call, Short Put.
Let’s take example of Ashok Leyland. Currently Ashok Leyland is trading at 90 in call option with premium of 2 INR. So if I buy Call current month
option the break even would be 92? We expecting market is bullish here
But as I trader I want to earn back my premium so I will short the same Call 90 option of current month. So I will get my premium back. i.e. 2 INR. I will
immediately close this short call option trade or I will wait till or below before touching to 92.
So once I closed short call option now I have only call 90 option of Ashok Leyland. If the prize goes above 92 I will be in profit, if below 90 I will be in
loss if it stays in between 90 to 92 I will be in break even.
This should be my strategy in the bullish market. Same goes for Call with Call short if market is bearish.
Please let me know if I am right? Please add up if it is possible to short call option immediately? I haven’t done real time option trading this is just reading
about options & coming up with strategy to earn some profit. I want your insights as option trader for this strategy. Give me pros n cons if possible
Another question I see no one asking is we have 3 expiry dates in the every option i.e. Current month, next month, & Far month. For this time we have
25th Feb 2016, 31st March 2016, & 28th April expiry.
If I buy 31st march expiry same option in feb & if I get profit in same month i.e. feb, can I close this position in feb instead of waiting till march? Actually
I didn’t get next month expiry logic.
& the last one basically Options are zero sum game, so if I wanted to buy call option there has to be put option buyer, right? So what does it mean open
interest? I can see in every option tradable stock.
my implied understanding from options is that if there more people buying Call options then it means market expecting to go up & it should eventually
goes up ( not necessarily) but I can say like this?
I’m really sorry for bombarding with loads of questions but I will be very grateful if you able to answer those.
Thanks in Advance.
¶Reply

First of all, thanks for going through the content here and I’m glad you really liked it
Now with your queries –
1) Yes, if you pay Rs.2 as premium on 90 strike, then breakeven will be 92, and the outlook is bullish
2)If you short the same call option, then your expectation is ‘flat to bearish’and your breakeven will be 88 (90-2)
3) You can short a call option and close the position anytime you wish
4) You cannot buy call and sell call of the same strike simultaneously as it would nullify your position
5) You can buy March series option in Feb and close the same in Feb, there is no problem with the same.
6) Suggest you read this to understand open interest – http://zerodha.com/varsity/chapter/open-interest/
¶Reply
sushil says:
hello karthik,
Thanks for the apt reply. i will be going through open interest content.
¶Reply

Good luck Sushil!
¶Reply
31. Arpan says:

March 2, 2016 at 12:19 pm
Sir,
I read somewhere that selling options requires a margin amount but do they require margin in hedged positions ( I think , they are probably called covered
positions) ?
i.e In a contract like “Buying an At the Money Option and Selling Out of Money Option”
¶Reply

March 3, 2016 at 8:26 am
Answered the same earlier.
¶Reply
32. Kankana Banerjee says:

March 14, 2016 at 1:29 pm
Sir,
First of all thank you for such a beautiful real life explanation. It helped a lot in understanding the concept in real life. I have a question: Say, for a stock
having same stock and strike price, a call option is priced higher than a put option having the same underlying. Why is the call option priced higher than
the put? Thanks in advance
¶Reply

March 15, 2016 at 12:47 pm
Its hard to explain this in a comment, but please be aware this is because of ‘Put Call parity’, an equation which relates the prices of calls and puts.
¶Reply
33. Nitin Desale says:

June 9, 2016 at 11:37 am
sir
If I bought nifty call option eg Nifty30June8400CE @ 100 rs one lot (25) . If I hold till expiry. At the expiry nifty at 8700 then can I exercise the option at
the expiry.? is there any switch for exercise like square off..? how it works?
And from above example how much profit I made..?
¶Reply

June 10, 2016 at 2:22 pm
You can let the option expire ITM, the exchange will automatically settle this for you. However, letting letting the option expire ITM would attract
huge STT charges, check this – http://zerodha.com/z-connect/queries/stock-and-fo-queries/stt-options-nse-bse-mcx-sx
¶Reply
34. Mrs. Shetty says:

August 9, 2016 at 6:17 pm
I have read 8 chapters of Options, and I can only say WOW, again understood the whole thing till now theorically. I had seen as many videos and gone
thru so many you tube videos on OPTIONS.. so I knew something but it never gave me a full understaning of IV/moneyness , prem for call and put and
why is its need, spot prices vs strike prices. All these were greeks to me.
But hats off to you, you have been teaching us the ABCD of the OPTIONS which is priceless. I was contemplating for going to the classes many a times,
wh wud have cost me a great deal, but what cud I have learnt in 2/3 days with more than 20/30 students in a batch.
Here I will read and re-read again and again if I have not understood some jargons of the trading.
Thanks once again. I have no questions since I have NEVER traded options on my own. I hope I will b able to comprehend the rest of the chapters too.
TOO GOOD.
¶Reply

August 10, 2016 at 10:49 am
Thank you so much for the kind words! Good luck and stay profitable
¶Reply
35. venkat says:

October 6, 2016 at 3:48 pm
What is expiry time on expiry day ? is the value of option based on index/stock at 3 PM on expiry day ??
¶Reply

3:30 PM. The value is based on the closing price, which get updated at around 3:40 PM.
¶Reply
36. Ankit says:

December 6, 2016 at 6:38 pm
Hi KARTHIK
i have a small doubt in (8.1) IV
if i remember correctly, from previous chapters, one should buy a call option when he is bullish about the underlying.
But in the very first table of Underlying & CNX Nifty, where the spot price = 8070.
Why one would buy 8050CE, if he is bullish about the underlying,
i know i must have gone horribly wrong somewhere because no one else asked this question and i couldn’t figure it out myself, so just asking to correct
me.
¶Reply
Ankit says:
I think i got it, please correct me if i am wrong,

The person would have bought the call option when spot price was below the strike price of 8050,
his prediction was correct and now the spot price is moved to 8070, which is Rs.20 above the strike price and hence he will make Rs.20 out of it,
(ignoring the premium paid) if he has to execute the contract.
So this was the 2nd half of the story
¶Reply

December 7, 2016 at 11:33 am
Right
¶Reply

Well, you are still buying a call option. Its just that the moneyness of the option is different.
¶Reply
37. seemapv says:

January 21, 2017 at 11:40 am
Hi, as I have already admitted about the impressive nature of your wisdom, it can be more beneficial if you can make audio-visual (videos) series, as I am
sure that the depth of “communication” would certainly surpass than just reading and more importantly a lot of mileage for varsity public!.., right? Kindly,
do the needful… Best Regards!!!
¶Reply

January 23, 2017 at 11:30 am
Thanks for you kind words. We are looking at this option, and hopefully something should follow through very soon.
¶Reply
38. sandip021 says:

Hi I’m sandip yadav , i recently open my acct with zerodha its vry good 4 Trader where re getting study material with support. My question is here if i
bought bank nifty bought ce bought at 20500ce@50 so how much premium i ve to pay here.
¶Reply

Premium is Rs.50 in this case.
¶Reply
39. 9SR says:
March 1, 2017 at 4:46 pm
Hi
I am new to NFO. Suppose I buy Nifty CE 9050 Strike Price. (Exp March), today morning @ 130. When I open the chart of the same, premium rose to
145 +. Then I square off the same contract @ 145. (Which means intraday) What is the effect on my capital. Thanks in advance.
Regards
¶Reply

March 1, 2017 at 6:30 pm
You make a profit of Rs.15 (i.e your sell price 145 – your buy price 130) times the lot size i.e 75
=15*75
=1125/-
¶Reply
40. Pranay Shah says:

March 8, 2017 at 11:55 pm
This page is very resourceful for someone like me who is a beginner. Every thing here is explained in a very subtle way. Kudos.
Just noticed something improper on the content of this page.
In the first section you were explaining why the intrinsic value cannot be negative. You took the example of 920 Call option and Spot price 918. Here’s
my understanding, since you cannot exercise the option until the strike price is reached by the underlying and intrinsic value is the money that you will
make if you were to exercise your right to buy today. In this case since the spot is below strike so you may never exercise your right to buy the underlying
which mean you make zero money, therefore intrinsic is zero.
¶Reply

March 9, 2017 at 11:33 am
Hi Pranay..thanks for the kind words.
Your understanding is right. I read through the chapter again, I’m unable to find the inconsistency.
¶Reply
41. Ananth Gopal says:

April 11, 2017 at 3:37 pm
Hello Karthik,
You are super. Like many even i have gone through multiple videos, pdf files trying to understand options, but that was of very little help. Please clarify
few questions. I hope these questions doesn’t sound silly.
1. It has been said through the chapters about the Intrinsic value that it is “NON-NEGATIVE NUMBER”, like say as buyer i am exercising an option on
the expire day irrespective of call or put on the last day of the expiry and if the odds are against my strike price then yes i would be losing my premium
and then the statement “NON-NEGATIVE NUMBER”, holds good. However when i am Seller/writer of a call or put option, then on the expiry date if the
odds are against my strike price then my Intrinsic value will be negative because i will be under huge loss, wouldn’t the statement “NON-NEGATIVE
NUMBER” doesn’t hold good in this scenario.
2. How should be the difference in the point from ATM for it to be called “Deep in the money” or “Deep out of the money”.
3. I also see that there is a chapter in regards to Option strategies where there are 12 strategies have been explained which i will go through, however out
of curiosity i would like to know if you could suggest few books on option strategies with more strategies. Hope i am not asking for more?
Please Clarify. Thank you in advance.
¶Reply

April 12, 2017 at 7:55 am
1) You can think about it this way – intrinsic value is a non negative number. If it a non zero number then the buyer makes money and if it is 0, then
seller makes money. By the way, if you are a buyer of an option and it turns out to be ITM, then it makes sense to square off the position rather than
letting it expire for reasons stated here – http://zerodha.com/z-connect/queries/stock-and-fo-queries/stt-options-nse-bse-mcx-sx
2) There is no formal definition for this. I generally consider a 10-15% away from strike (on either direction) as deep strikes.
3) You could refer to Sheldon Natenberg;s book on options.
Good luck.
¶Reply
Ananth says:
April 12, 2017 at 10:27 am
Thank You
¶Reply

April 13, 2017 at 8:00 am
Welcome!
¶Reply
42. Mani says:

April 24, 2017 at 11:42 pm
Hi karthik,
I am new to trading few days back i have opened AC and i was going through chapter 8
Today my Fri was doing intraday in that he bought axis Apr 450pe at call 0.90 and sold at 1.80
But today axis spot price 487.5 if my question is that if strike price is higher than the spot price it is on
Otm right and he should be in loss but how come he gained profit i am getting confused
Pls clarify me
¶Reply

April 25, 2017 at 7:20 am
Firstly, welcome to Zerodha family
Well, looks like he did an intra day trade and the price was favorable for him. Anyway, please do read this chapter, it will give you clarity on the
ITM, OTM, and ATM options.
¶Reply
43. Mani says:

April 25, 2017 at 9:43 pm
Hi karthik,
What is the difference between intraday and other trading and how does it works : for example if iam trading in intraday suppose if bhel spot price 170.06
and my closest strike price is 160 or 180 ryt
But my guy bought bhel at Apr CE 190 as a strike price and spot price was 170.06 how?
My question is that we can choose any strike price in intraday pls clear my doubt
¶Reply

April 26, 2017 at 11:11 am
I’d suggest you read this whole module to get a grip on strike selection. Selecting the right strike is a function of many different things
¶Reply
44. Anish Chandrasekaran says:

May 4, 2017 at 11:09 am
In OTM calls, if the underlying stock price increases but still below the strike price, then still premium is increasing. Why is it so? I think it should be
purely because of IV.
Eg.Federalbk CE May 115. In this case, the price is 111.85 but whenever the price rises to say 112.10, the premium also increases. Since even at 112.10,
there is no intrinsic value, volatility should be the only factor affecting premium.Am I right?
¶Reply
Anish Chandrasekaran says:

May 4, 2017 at 11:47 am
Volatility can increase irrespective of whether underlying stock price increases or decreases.Then why the premium goes down when underlying
stock price goes down?
¶Reply

May 4, 2017 at 11:48 am
Not necessary – Vol has the same effect on premiums irrespective of the stock going up or down.
¶Reply

May 4, 2017 at 3:53 pm
I think the premium goes down as spot goes down because of Delta effect. So delta only affects the time value of the premium in all
types (OTM, ATM and ITM). In the case of ITMs, does delta affect the intrinsic value or the time value?
¶Reply

May 5, 2017 at 7:22 am
Delta measures the impact of direction on the premiums, does not impact time value.
¶
May 5, 2017 at 9:22 am
As ITM options’ intrinsic value is 0, change in spot price has no effect in premium value? That cannot be true, assuming
volatility and time to expiry is constant for the given day. Pls explain.
¶
May 6, 2017 at 3:28 am
It has, ITM options behave just like a futures contract. For every 1 point change in the spot, premium too changes by 1.
¶
45. Anish Chandrasekaran says:
May 6, 2017 at 3:20 pm
Sorry typo It should be OTM instead of ITM.

Due to delta effect, change in spot price will result in very small change in premium value in OTMs. Does that mean this change will add to time value?
This I am asking because intrinsic value is zero for OTMs and change in premium will only have to get added to the time value.
¶Reply

May 6, 2017 at 7:36 pm
Yes, thats because the OTM option has very low gamma
Delta is dependent on gamma which is dependent on the spot.
¶Reply
46. sumeet says:

May 19, 2017 at 9:27 pm
sir i have a doubt as follow as I am new in options trading:

suppose I buy a call option of SAIL of strike price 70 ,lot qty is 12000 at 1rs premium and spot price at this time is 65rs
after some days the spot price reaches 72rs and suppose premium also increases to 2rs.and now I exercise my right to sell this call option at this 72rs.
so will my profit be 3rs*12000=36000(i.e. 1rs profit from premium and 2rs profit from difference of current spot price and strike price)
plz correct me if I am wrong.
¶Reply

May 21, 2017 at 5:45 pm
To exercise, you need to hold the position to expiry. Yes, your profit would be Rs.2 minus the premium you have paid.
¶Reply
sumeet says:
May 22, 2017 at 7:23 pm
ok sir thanx ,so on expiry day do I need to square off my position for exercising the options ?? or should I do something else plzz clear my
this doubt.
¶Reply

May 23, 2017 at 11:28 am
Its best if you square off the positions yourself and not let your options run into expiry.
¶Reply
47. rohit sharma says:

May 25, 2017 at 10:01 pm
Hi,
I want to know how many index have weekly expiry contract?
¶Reply

May 26, 2017 at 5:24 pm
Just Bank Nifty for now.
¶Reply
48. Shiva Pathre says:

May 27, 2017 at 2:21 pm
Sir, do u also provides nifty option tips to your customers. . .
¶Reply

May 27, 2017 at 6:38 pm
No.
¶Reply
49. Roy David says:

June 2, 2017 at 3:12 am
Hi
The banknifty is currently trading at Bank nifty Jun 23300 CE (june 1, 2017)
I wanted to buy otm calls of Banknifty Aug 25000CE, but I am not able to buy the same on zerodha, can you please assist
¶Reply

June 4, 2017 at 6:50 pm
I’d suggest you type Banknifty Aug 25000 on the universal search area…you should be able to get the contract.
¶Reply
50. samir says:

July 4, 2017 at 1:17 pm
Hello sir, I have 3 questions:-

1) Recently I saw jul Nifty spot trading at 9530 & jul future at 9535 , while 9000 jul PE @ 15 & 10000 JUL CE @ 5. WHY 9000 JUL PUT PREMIUM
IS HIGHER THAN 10000 JUL CALL ?
2)WHY NIFTY FUTURE TRADING BELOW THE SPOT PRICE(LIKE NIFTY JUL FUT TRADED IN 30jun2017) ALMOST 10 PONTS DOWN
THE PRICE OF SPOT PRICE ?
3)WHAT CAN WE DO? IF THIS CAN HAPPEN :-

SUPPOSE- BANKNIFTY CURRENT MONTH 22500 CE @550
WHILE BANKNIFTY NEXT MONTH 22500 CE @ 550 (BOTH TRADING AT SAME PRICE)
¶Reply

July 4, 2017 at 4:39 pm
1) Maybe market considers 9000 as a more likely event than 10000, hence PE is valued higher
2) Supply demand
3) Not sure if this is a common occurrence, anyway, if you spot – you can buy the next month and sell this month I guess
¶Reply
51. Rao says:

July 9, 2017 at 10:52 pm
Hi. karthik.
I have a query.
What are the pros & cons of Selling (writing) Deep In The Money (ITM) Call and Put Bank Nifty weekly expiry options.? The premium received is more
in ITM compared to OTM. Can I exercise / square off ITM options before expiry such as after 3, 4 days after selling if in profit.
Thanks in advance.
¶Reply

July 10, 2017 at 10:59 am
Selling deep ITM options is quite dangerous, I’d not suggest you venture into this, unless you know what you are dealing with.
¶Reply
52. sam says:

July 11, 2017 at 1:32 pm
Hi Karthik,
Thank you for creating these modules.They are extremely simple and comprehensive to learn the basics.
While going through the chapter on moneyness of an option where you have dealt with moneyness of a call and put , the Intrinsic Value formula provided
for call options is Spot price – Strike price while for Put options is Strike price – Spot price.
However in the examples you have given in the moneyness of call and put the values of Intrinsic value are not reflecting that.
Example in the moneyness of put option , the strike is 8200 and the spot price provided is 7500.The IV should be = Strike – Spot which is 8200-7500 =
700 while what has been calculated in the module is 7500 – 8200 = -700 (which is 0)
Could you let me know if i am going in the wrong direction or is there an error from your end.
Once again thanks for the modules.I look forward to reading all of them.
Regards
¶Reply
sam says:
July 11, 2017 at 1:41 pm
Pls ignore the above. I realized my mistake.
Regards
¶Reply

July 12, 2017 at 10:46 am
Cheers!
¶Reply

July 12, 2017 at 10:46 am
Sam, the IV of a CE is Max[spot-price, 0] and for PE its Max[strike-spot, 0].
¶Reply
53. Pankaj Chauhan says:

July 13, 2017 at 8:49 pm
banknifty spot@ 23888 inthe money option expire@ 2.35 how much stt will have to paid by me strike price was 23900
¶Reply

July 14, 2017 at 10:53 am
Were you long or short on this?
¶Reply
54. punterdgr8 says:

sir can we manually exercise an option anytime on the last day of expiry;say at 12:00 pm or we have to wait for the exchange to do it for us?
¶Reply

No, you will have to wait for the contract to expire.
¶Reply
55. Brahma kumar says:

i have bought a bank nifty 25100 call on 1 aug at a premium of 180 and spot bank nifty is 25122, expiry is 3 aug. let us have a scenario where the spot
bank nifty comes to 25150 on expiry. please give me what would happen to the call option on expiry
¶Reply

The option will expire ITM with an intrinsic value of Rs.50. As a trader, if you are holding an option and its turning out to be ITM before expiry,
then you are better off squaring this position for reasons stated here – https://zerodha.com/z-connect/queries/stock-and-fo-queries/stt-options-nse-
bse-mcx-sx
¶Reply
56. anshul says:

Sir I am only 10th pass can I learn call and put options please motivate me to gain knowledge and I am still struggling , and I left my study
¶Reply

August 7, 2017 at 11:26 am
I’d suggest you pursue your basic education first. It is really important you do that. You can always learn options, it is never too late. Check this
interview – https://zerodha.com/z-connect/zerodha-60-day-challenge/winners/10th-std-pass-market-wizard-from-thrissur
¶Reply
57. Bharath says:

August 17, 2017 at 1:47 pm
You are a excellent teacher for new comers like me. I have read only upto this module and will read the other modules soon, I am confused and have few
doubts
I buy a call option for a premium of Rs.5 on nth day, the contract expires on (n+10)th day. On (n+3)rd day i decide to square off because the premium is
Rs.7. Is margin required to sell the call option i bought on nth day and willing to sell on (n+3)rd day?. When i square off do i become the call option seller
and another person becomes the buyer or is it nullified? because the contract expiry day is only on (n+10)th day. If i square off on (n+3)rd day for a
premium of Rs.7 and on (n+10)th day the premium rises even more lets say to Rs.10, What happens to the premium of Rs.5 i paid on nth day to the seller?
¶Reply

August 18, 2017 at 10:45 am
Good to know you liked the content here, Bharath.
1) No margin required.
2) You are just squaring off an existing position, so no new position is created
3) Since you are out of the market, this will not have a P&L impact for you.
¶Reply
Bharath says:
August 19, 2017 at 8:54 am
Thank you Karthik,

One more doubt. If the call option buyer squares off before contract expiry time, what happens to the contract and how the change in
premium at expiry time affects the call option seller?
¶Reply

August 19, 2017 at 9:29 am
The contract will continue to exist. It will cease to expire on the expiry day. If the option has an intrinsic value upon expiry, then both
the seller and buyer will be settled based on the value of this option.
¶Reply
58. Shashi says:

August 28, 2017 at 3:56 pm
if i buy a option for next month .

Let’s take example .suppose, in aug month , i bought a option Cipla 600sepCE @ 20 rs ;cipla stock value is 574.
and i take position for one moth . now if option value of Cipla 600sepCE @ ZERO on next day opening . so can i still hold that position ? or it will
squareoff automatically ?
or if once value got zero and again 10th of Sep value would be 30 , so can i sell that option @ 30 ? which bought on Aug.
¶Reply

August 29, 2017 at 10:44 am
You can continue to hold it till expiry.
¶Reply
Shashi says:
August 29, 2017 at 3:10 pm
txs alot Karthik
¶Reply

August 30, 2017 at 10:20 am
Cheers.
¶Reply
59. Sohan says:

Hi Karthik,
I am new to options trading and have recently got an acct opened with Zerodha and happy with that.
In last one month I have burnt my hands losing about 30k in Fut. And have now come to options to burn it even more I think… ha ha. I am learning
options now and your study mtrls, articles and the Q&A are really very helpful in understanding the concept really well and I really appreciate that. You
guys are doing a fabulous job. Further, at present I want to do intraday trades in options as I am left very less cash in hand to waste or try my luck. I am
confused by the statement that you need to hold the contract till expiry in order to exercise your right but at the same time you say that you can square off
your position anytime if you are running in profit. Can you pl elaborate on this a little more plz. Can I buy or sell on the same day. And if I do so, am I
trading the stock option or the premium? I know it might sound very stupid but then my understanding is this much only. Thanks for your help.
¶Reply

October 22, 2017 at 8:32 am
Sohan, I’m sorry to hear about the losses incurred. Consider this as a fee paid to markets to learn valuable lessons
There are two things that you can do when you buy options – either hold till expiry or square it off anytime you wish. If you choose to hold till
expiry then you will get the intrinsic value of the option as your profit or loss. Intrinsic value is the difference between the spot and strike. However,
if you choose to sell the option at any time before expiry, then your P&L will be the difference between the premium paid and received.
¶Reply
60. HIMANSHU SINGHAL says:

October 26, 2017 at 11:24 pm
I have noticed on expiry of bank nifty many times that the itm option is not traded on its intrinsic value.
eg, 25022= spot
25000ce LTP @₹7 only but it has to be 22 isn’t it, after expiry
the question is what would a buyer get ₹7 or 22 after the expiry.
¶Reply

October 27, 2017 at 10:04 am
Agreed, this is because of the STT implication. Out of the 22 odd points, at least 15 would go away as STT, hence the options kind of discounts
this.
¶Reply
61. MOHMMAD says:

Hey Karthikbhai
I want to know
1) In Banknifty option – CE For intraday can we use Bracket Order(BO) ?
2) If yes, what is margin I get ?
3) BO is use consider premium amount
( Ex. If Premium is Rs. 5 and I have Rs. 1000 in demat and suppose margin I get for option – call is *20 then I can invest 20,000/- in option ? )
4) Brokerage +STT + Stamp duty = in total trade value ( in % )
( Ex. Trade value 1000 then total expense rs 20 (I,e – 2.0% of trade value)
Thanks in advance
I am waiting for your guidance
¶Reply
Faisal Mohammed says:

1. For Option Buying, Bracket Order is allowed only for Nifty

2. No leverage is given for Banknifty option Buy orders.
4. Brokerage for all Option orders is a flat Rs 20 regardless of the lot size (Option Premium value might be Rs 1000 but the Contract Value is Strike
Price* Lot Size+ Premium* Lot Size)
¶Reply
MOHMMAD says:
1. For Option Buying, Bracket Order is allowed only for Nifty -> Ok .. but margin given !!!!
2. No leverage is given for Banknifty option Buy orders. – > Ok
4. Brokerage for all Option orders is a flat Rs 20 regardless of the lot size (Option Premium value might be Rs 1000 but the Contract Value is
Strike Price* Lot Size+ Premium* Lot Size) -> Is Rs. 20 all cost to trader or 20+STT+SD+etc ??
¶Reply

1. For Nifty Options buying, leverage given is 1.4 times

4. Brokerage is Rs 20, STT will be 0.05% on premium(charged while selling only) and Stamp Duty differs as per your state.
You can calculate the charges in the Brokerage Calculator here
¶Reply
62. ABESH GHOSH says:

Hi
Thanks a lot for the knowledge but I still have some doubt. Would like to know if I’ll be in profit or not by buying Bnaknifty Dec CE 27000 for which the
premium right now is 0.05. Suppose I buy this today and the premium goes up to 5 rupees by 15th Dec. But the bank nifty spot price could not Cross
27000 by 15th of Dec. In that case how will the profit calculation takes place?
¶Reply

You will make a profit if the option hits any value higher than your purchase value. In this example, you will make 14.5 as profits.
¶Reply
ABESH GHOSH says:

Thanks a lot Karthik for the response. But still not clear with profit of rupees 14.50. Should not it be 4.95 rupees profit on each unit of bank
nifty?
Moreover, want to confirm one more doubt. I need not wait till expiry of Dec. I can indeed exit the position when ever I want before Dec if
option premium goes up, right?
¶Reply

Hey sorry, it is 4.95 not 14.5
You can exit the position anytime you want.
¶Reply
63. Sahil says:

I have been trying to study options for the past 4 years.Trust me …this is best thing i am reading about options…..this is just Woow…
¶Reply

Thanks for the kind words, Sahil! Happy learning
¶Reply
64. Nachiketa says:

Hi Karthik,
First of all I can’t thank you and your team enough for creating this amazing resource and keeping it free to access. I have opened an account with
Zerodha in May and soon after found this treasure trove of knowledge. I have gone through the modules on TA and FA at least twice, I think. Few days
back I started with the modules on F&O. Thanks to these well explained articles with appropriate examples, I’m now able to comprehend Options as a
precise and methodical calculated risk-reward instrument instead of a vague gamble. (PS: I’m a big fan of the caricatures that accompanies these articles. I
remember you had mentioned the name of the person behind these drawings in one of the comments, forgot the name though)
Moving on to the question I had regarding moneyness of options, this is more for my understanding than a question. Can we interpret the strike options
that would result in profit if it was to expire right now (making current spot price = expiry price) as ITM options? Similarly result in loss as OTM?
¶Reply

Nachiketa, I’m so happy to learn that you found the content useful. I’ll pass on the feedback to our illustrator, he will be equally thrilled
Yes, if you were to exercise your Call option right now, you will get the intrinsic value measured as Current Spot Price – Strike. This would be an
ITM option. Likewise, for a Put option, the intrinsic value would be Strike – Current Spot price.
¶Reply
65. muthu mariappan says:

Karthik,
Pls let me know what is IV column in option chain sheet?
¶Reply

IV in the option chain stands for implied volatility.
¶Reply
muthu mariappan says:

Thank you.
¶Reply

Welcome!
¶Reply
66. Rakesh Aggarwal says:

Sir, I chanced upon these modules while browsing on internet. First I will like to thank you for you fabulous work in bringing the varisty and knowledge
to the reach of common person.
Sir, my question is intrinsic value of call is spot price -strike price. The ITM call prices should be around this as explained in your aforesaid chapter. But
on going through the option sheet of nifty of date 29.12.2017 I calculated the same for strike ITM 10350 it should nifty spot 10530-10350=180. But it is
priced at 262.30. Similarly for other ITM strike rates they are higher priced.
Sir, I should take it as overpriced and can be sold or their is time value added in the pricing.
Sir please clarify my doubt. Regards.
¶Reply

The option price of an ITM will be ‘at least’ equal to the intrinsic value of the option. Over and above this, everything else is attributable to the time
value of money.
¶Reply
67. Rajesh says:

Intrinsic value of call option = Spot Price – Strike Price

Intrinsic value of put option = Strike Price – Spot Price
But you took values in reverse order for calculation
@ 7100
Intrinsic Value = 8060 – 7100 (call option ) 8060 is Strike price
= 960
Intrinsic Value = 7500 – 8200 ( put option) 8200 is Strike price
= – 700
Kindly check .if I am wrong kindly reply
¶Reply

The calculations are correct and as explained. Not sure if I’m missing something.
¶Reply
68. MJ says:
When new option strikes will be opened for trading? For example – Today RNAVAL options are available only till 77.5 and its opened today only. When
80 strike option will opened?
¶Reply

As and when the price increases, new strikes open up.
¶Reply
69. Ankit says:

Hello sir,
kartik sir i posted a problem here few days back about JP associates option chain. Now i am unable to find that here on this forum. i dont know what
happend
¶Reply

Where did you post it? As in, under which chapter?
¶Reply
70. Ankit says:

sorry sir,
Now its saying (your comment is awaiting moderation) what is mean by this????
¶Reply

You must have posted some link, hence it requires moderation.

¶Reply
71. Abhishek Jha says:

In the image of Option Chain of ASHOKLEY, Intrinsic Value for few of the Strike Price is empty. (for eg. For the strike price of 40, 42.5, 45 in CALLS
section.) What does it mean and signify?
¶Reply
Abhishek Jha says:

Sorry, I mistook Implied Volatility as Intrinsic Value as it abbreviated as IV in the sheet.

Thanks for the great article
¶Reply

Ok
¶Reply
72. Harsha says:

January 10, 2018 at 12:12 pm
Am I right in assuming that the Intrinsic Value is applicable only for Longs and not for Shorts? As a result, what we term ‘ITM’ for Long Call is actually
‘OTM’ for Short Call and what we term ‘OTM’ for Long Call is actually ‘ITM’ for Short Call, right?
I ask this because if a seller chooses a Short Call strike of 8700 which is Deep OTM as per Section 8.2 above, there is high likelihood that he gets to keep
the premium received – and hence he is essentially ‘In The Money’ contrary to what NSE displays the strike as OTM.
¶Reply

January 11, 2018 at 11:04 am
The intrinsic value calculation remains the same irrespective of long or short position. So if an option is ITM, it will remain ITM irrespective of the
long or short position.
¶Reply
73. Madana Gopal says:

Hi karthik,
Is there direct option to trade ITM, ATM & ITM on zerodha? Or we have to trade like call 2 lot buy & put 1 lot buy in different strike rate ?
Thanks in advance..
¶Reply

January 22, 2018 at 11:59 am
Madana, I’m not sure if I fully understand your question. However, you can select any strike or any option type and transact in it. No restriction as
such.
¶Reply
Anil says:
January 27, 2018 at 12:23 am
Madana Gopal Based on intrinsic value strike prices are segregated in to ITM ATM and OTM options looks like you didn’t understand clearly go
through tutorials again…..
¶Reply
74. Anil says:

January 27, 2018 at 12:21 am
Karthik you did awesome job.. I have 5 years of experience Never saw this kind of amazing super easy tutorials earlier…
you are the besttttttttttttttttttttttttttttttttttttttttttttttttttttttttttt
¶Reply

Happy learning, Anil
¶Reply
75. Ankit says:

Hello sir
Sir I am watching CD option chain
RBI reference rate is 63.4983
So 63.50 strike is ATM but look at their premiums:-
63.50 Call is @ 0.4925/- & IV = 4.47%
63.50 Put is @ 0.2475/- & IV = 4.97%
Call is almost double than Put.
I think there is no intrinsic value in both side both are almost totally time values & I don’t think volatility playing any major role behind the scene.
Then why there is HUGE difference in their value. Could you pls… Explain this ..
Thank you so much sir….
¶Reply

If the premium cannot be attributed to intrinsic value, then it has to be time value
¶Reply
76. Ankit says:

Yeah that’s ok sir, but I didn’t get why there is HUGE difference in their price above. I guess both are ATM option
So their values should close to each other but they are not. In fact CALL option is double than PUT option in price in this case.
Assume:- At ATM STRIKE
Put is at 100/- than CALL at 70 to 140 is digestible but if call is 200/- it’s too much
That is what I want to know about …in my previous query…
Why there is HUGE difference In CALL AND PUT OPTION value at ATM strike
I hope you got my question……
Thank you sir..??
¶Reply

January 29, 2018 at 11:55 am
Ah, yes got your question. Clearly, the volatility is not playing a role here as the IVs is similar to both the options. The only explanation is that since
the calls are at almost twice the price – the market is perhaps expecting the USD INR to increase (as in the Rupee to weaken against the $). Hence
owing to aggressive buying the call option has increased. Now if this explanation is true, the volumes of calls should be much higher compared to
Puts. Can you validate that?
¶Reply
jOSE says:
VERY GOOD OBSERVATION! YOUR REPLY IS GIVEN BELOW AND THE CUSTOMER VALIDATED IT
Ah, yes got your question. Clearly, the volatility is not playing a role here as the IVs is similar to both the options. The only explanation is
that since the calls are at almost twice the price – the market is perhaps expecting the USD INR to increase (as in the Rupee to weaken
against the $). Hence owing to aggressive buying the call option has increased. Now if this explanation is true, the volumes of calls should be
much higher compared to Puts. Can you validate that?
ONE DOES NOT EXPECT BLACK SCHOLES TO CAPTURE DEMAND & SUPPLY, BUT YOU HAVE PREDICTED THE SITUATION
CORRECTLY! QUITE AN ACHIEVEMENT CONGRATS !
¶Reply
77. santosh patidar says:

Please consider small Suggestion : For particular topic, you can also mention books ( recommended ) related to that topic, as in many comments it is
asked ? + link to some videos also can be added.
¶Reply

January 30, 2018 at 11:20 am
sure, Santosh. Will try and do that going forward. Thanks.
¶Reply
78. Ankit says:

Yes sir you are volumes are increasing at call side at steady pace
Thanks for replying sir…?
¶Reply

January 30, 2018 at 11:20 am
Good luck!
¶Reply
79. Ravi says:

Hey,
so at the day of expiry all OTM contracts become worthless but are we suppose to square off the positions (NRML & MIS both) before expiry to avoid
excess STT or we can just let it decay?
¶Reply

If the option is worthless, then maybe you can let it expire. But do make sure you sq off the ITM options before expiry.
¶Reply
80. Aishwarya says:

March 6, 2018 at 3:36 pm
Hello sir,
You have mentioned “Before we wrap up this discussion, here is a question for you – Why do you think the intrinsic value cannot be a negative value?
To answer this, let us pick an example from the above table – Strike is 920, spot is 918, and option type is long call. Let us assume the premium for the
920 Call option is Rs.15.”
If the buyer can buy the stock at 918 in the open market, why would he exercise his right to buy the stock at 920. Hence the option became worthless. So
for this reason an intrinsic value can never become negative. Is my understanding correct sir??
Thank you so much for all your efforts of responding queries.

Aishwarya
¶Reply

March 7, 2018 at 10:56 am
Hmm, I think you need to spend a little more time on understanding options, Aishwarya.
I’d buy a 920CE when the spot is at 918, by paying a premium of 15, only if I expect the market to go much higher than 918+15.
¶Reply
Aishwarya says:
March 7, 2018 at 11:02 am
Hello Sir,
Thank you for your reply. But the above scenario is on day of expiry. Its for the reason why the intrinsic value can never become negative. (in
referene to the above chapter). Pls correct me if Im wrong.
Thank you so much sir

Aishwarya
¶Reply

March 7, 2018 at 11:24 am
Have explained why the IV cant be negative. Yes, I understand your concern about expiry, but then before the expiry, there is always
time value.
¶Reply
81. Kiran Raj says:

March 28, 2018 at 3:13 am
Hi Karthik,
I just wanted to say that this is awesome work. I have just started taking options trading seriously, but I wanted to know more before I could jump in. I
accidentally happened come across your awesome work. I have gone through the 11 chapters in just a matter of 2 hours, I couldn’t stop myself from
praising the one who framed this. The examples were kept simple, language was kept basic, making sure that even a novel reading kind of approach
would register all the stuff into the brain. Thanks a lot once again. I would go through all the modules and write to you if I have any queries.
¶Reply

March 28, 2018 at 11:18 am
Kiran, thanks so much for the kind words
I hope you continue to find the contents on Varsity useful, please feel free to ask your queries.
¶Reply
82. bharadwaj says:

April 3, 2018 at 6:40 am
I’m sorry if I’ve understood it wrong, but I thought IV for call options is Max[Spot Price – Strike Price] and vice versa for put options. In that case, any
value below the current level 8060 will have a -ve value and hence 0 IV. In the example above for Moneyness of Call option, it’s mentioned the other way
round. Let me know. Thanks!
¶Reply

April 3, 2018 at 11:08 am
The intrinsic value of Call option is Max[Spot-strike, 0], so if the value is -ve, we consider it as 0.
¶Reply
83. achal says:

April 10, 2018 at 10:57 pm
Dear Sir
As a lot of persons has earlier said that they come to this great work only by chance; it is true in my case ALSO.
The material has been put in a quite simple manner so that it can be easily understood by anyone. I find it so interesting. I am reading it 3rd time. Each
time I get more and more knowledge. Thanks to the author for presenting the material in a simple manner. I am finding the stock options as a treasure as I
have been and investor in cash market. Though i am using it as a hedging. Earlier in cash market i could not have decided my exit.
Sir I bought 305 shares of Indus Ind bank @ 1700. At the rate of 1800, I came to know about options. As I was in a profit so I decided to sell a call of
1920 @ 9 keeping in mind that i will sell my stock at the strike price.
Pls guide me about the consequenses and what would be my profit or loss if the spot price goes above 1920. and what should be my strategy.
Thanks & regards,
¶Reply

April 11, 2018 at 10:56 am
Thanks for the kind words, Achal. Happy to note that you are liking the content here.
YOu will retain the entire profit of Rs.9, as long as Indus Ind Bank is below 1920. For every Rupee increase in the scrip (beyond 1920), is a Rupee
loss for you.
¶Reply
achal says:
April 12, 2018 at 12:06 am
Thanks sir
Truely, I was not expecting a reply.
¶Reply

April 12, 2018 at 12:13 pm
Of course, I’d reply. Why would want to give an opportunity to help
¶Reply
84. Arjun Kapoor says:

April 21, 2018 at 1:10 pm
I am not sure what type of teaching power you possessed. Amazed by the simplicity of this article explaining a complex topic.
¶Reply

April 21, 2018 at 5:13 pm
Hahaha, thanks Arjun for the kind words. I guess you do things with a lot of love, the outcome will be sweet
¶Reply
85. Rakesh Aggarwal says:

April 24, 2018 at 6:58 pm
Sir while scanning the increase in OI for the expiry 31.05.2018, it is observed that there is huge increase in OI for call options strike 8600 and 9000. Both
these strikes are deep ITM having no time value premium. Sir can you explain the reason for the increase in OI for these strikes. Regards
¶Reply

April 25, 2018 at 11:24 am
Rakesh, it is really hard to figure out a reason. Perhaps, there are a bunch of people who believe these trades are worth taking on
¶Reply
Shivam says:
June 19, 2018 at 8:05 pm
It is also possible that prevoiusly they had opened positions now it became deep ITM and they wanted to close their position so you are
seeing a huge OI in deep ITM.
Just a random guess…
¶Reply

June 20, 2018 at 12:17 pm
As long as the position stays open, it will reflect in the OI.
¶Reply
86. Vivek says:

May 19, 2018 at 9:14 pm
Hello Kartik,
Thanks for the details.

I have one doubt which no one in my circle answered it to my conclusion.
On 17th May 2018 BankNifty was @26200-26300 range it was bearish.
I was tracking BANKNIFTY 17th May PE of Strike price 27000 and premium was 700+(ITM)
My Question was if I sell/Write this 27000PE contract I was in a gain of premium and it was expiry day for that contact. But the end of the day I saw an
increase in premium price as Banknify went down by 200 points but as it was expiry I was expecting the price to reduce to zero and seller of PE would
gain profit. End of market price was 900+. I am missing something here. Please help.
Regards,
Vivek
¶Reply

May 20, 2018 at 10:58 am
Vivek, the put option gains moneyness (or gains in premium) when the stock price drops. So with the drop in Bank Nifty, the premium also
increased.
¶Reply
Vivek says:
May 21, 2018 at 1:22 am
Thanks, Kartik for the reply.

Increase in premium is clear but on expiry as I know price crease to zero.
Suppose someone sells Put of that strike price will be entitled to gain all the premium.
But as I said EOD price was not zero but 900+ and that was an expiry day for that option.
What will happen in this situation?
¶Reply

May 21, 2018 at 3:24 pm
900 is the last traded price which will be different from the settlement price. The settlement will happen at the settlement price.
¶Reply
Daniel says:
June 1, 2018 at 9:42 am
What would be the settlement price in this case sir ? Will it come down to 0 since it’s the expiry ?
¶
June 1, 2018 at 12:30 pm
There is a lot of time to expiry, Daniel. Anyway, the settlement is always at the intrinsic value.
¶
deep says:
August 10, 2018 at 11:05 pm
The strike you chosen was ITM(if it expired as ITM) …I think ITM options are immune to time decay and most OTM options
are more likely to expire worthless and ITMs expire with some worth. plz correct me if i am wrong
¶
August 11, 2018 at 5:52 pm
I’d put this in a slightly different way – the rate at which an ITM option loses value owing to time is slower compared to an OTM
option.
¶
87. Daniel says:
June 1, 2018 at 9:29 am
Dear sir, today is the start of a new contract. I visited NSE website to have a look at the option chain for ‘FEDERAL BANK’ and to my surprise not all
strike prices mentioned in the chart had a Premium value, some of them were represented by a ‘-‘ .
Could you please tell me why this happens?
¶Reply

June 1, 2018 at 12:26 pm
That means there are no trades in the contract, Daniel. Check towards the 2nd half of the day.
¶Reply
Daniel says:
June 1, 2018 at 1:30 pm
Now evrything on the list has a premium value. Thank you sir
¶Reply

June 2, 2018 at 7:49 am
Good luck, Daniel!
¶Reply
88. Sushanta Meher says:

June 8, 2018 at 11:41 pm
Hi Karthik,
Just a basic query. I didn’t find anyone asked that earlier. Will appreciate your clarification please.
Hypothetical situation :
Stock XYZ spot price = 100
Theta per lot 200
Day1: Bought 1lot(1000) 100CE @10
Day2: no trade. Spot price= 90
Day3: spot price = 105
So zerodha shows me profit of (105-100)*1000 =5000.
Is it the true profit. If yes then where is the calculation of theta?
¶Reply

June 9, 2018 at 6:52 pm
Yes, that is how your P&L is calculated. Theta is an options Greek, ts calculation is based on the B&S options calculator.
¶Reply
89. Shivam says:

June 19, 2018 at 7:48 pm
Hi…
If my sell position expires ATM then I’ll get full premium/partial premium or I’ve to pay more money than the premium to close my position?
¶Reply

June 20, 2018 at 12:13 pm
If you sell and the option is ATM or OTM, then you will retain the entire premium. If the option is ITM, then you will lose money.
¶Reply
90. Ashish says:

June 20, 2018 at 8:33 pm
Hi Sir
As you mentioned , Call option Intrinsic value = Spot Price – Strike Price.
When I am checking at today’s scenario Axis Bank June 18 530 CE , where spot price is 519.10.
so IV = 519 -530 = -11 which is not realistic as you said.
But when I am checking it at Nifty Website in option chain , its showing IV 30.71.
How is it? Can you please clear?
¶Reply

June 21, 2018 at 11:40 am
The call option intrinsic value upon expiry is = Max[Strike – spot, 0].
The IV on NSE website refers to “Implied Volatility” and not intrinsic value
¶Reply
Ashish says:
June 22, 2018 at 7:04 pm
Thanks for clarify…
¶Reply

June 23, 2018 at 6:28 pm
Welcome, Ashish.
¶Reply
91. rajesh says:

June 26, 2018 at 7:53 pm
Kindly reply me, sir

ATM can be negative or positive, but it should be very close to the spot price… Is it correct?
¶Reply

June 27, 2018 at 12:24 pm
ATM is the strike closest to spot. There is no +ve or -ve side to it, Rajesh.
¶Reply
92. Chirag I Sharma says:

July 26, 2018 at 9:54 am
Hi Karthik, as I post this BNF is at 27146 and the 27000CE is at 158 which is almost the intrinsic value of the call. But, the 27100 CE is at 93, which is
2X of its intrinsic value, i.e. there’s time value involved.
Why such a difference in the ATM call? Both should be at almost intrinsic or nearby, right?
¶Reply
Chirag I Sharma says:

July 26, 2018 at 10:37 am
Now at 10:37 even 27100 has come to near its intrinsic value. Do help me understand what happened here in the morning.
¶Reply

July 26, 2018 at 3:03 pm
Like I mentioned, these options are factoring in STT.
¶Reply

July 26, 2018 at 3:02 pm
This is ITM option. The difference you see is factoring in the STT. Check this to figure out how STT is applicable on ITM options –
https://tradingqna.com/t/no-more-stt-trap-on-exercised-in-the-money-options/18977
¶Reply
93. akshat sharma says:

July 30, 2018 at 7:06 pm
so we have the border for otm and itm which is atm, similarly can we generalise a percentage for a border between deep otm and otm for any stock?
¶Reply

July 31, 2018 at 11:08 am
Border meaning?
¶Reply
94. Nakul says:

August 14, 2018 at 2:46 pm
Yesterday i buyed a call with 3.3 premium & it closed at 3.4 Today 3.4 is being shown as my buy price & not 3.3 Why so sir ?
¶Reply
Nakul says:
August 16, 2018 at 1:25 pm
Please help…
¶Reply
Kavita says:
August 17, 2018 at 3:23 pm
Yes sir, same thing i also noticed. Why is it so ?
¶Reply

August 20, 2018 at 10:13 am
Can you contact our Support team? This shouldn’t have happened.
¶Reply
95. Manas Pandey says:

August 18, 2018 at 12:27 pm
Dear sir,
Firstly sorry to go a bit off topic but only an expert like you can answer such a thing.
I came to know about a gambler called Bill Benter who is said to be world’s richest gambler & have amassed 1billion $ just by betting on horse races. But
the strange fact is that he didn’t just randomly bets on any horse, instead he has developed a statistical model which could very accurately predict the
winner of the race. But sir, how in the world is this possible ? A horse race would be won by the most fastest horse, how come is it related to
mathematical formulas anyway. Is mathematics really so powerful ??
¶Reply

August 19, 2018 at 9:17 am
Manas, I don’t know about Bill Benter, but this sure sounds possible and it does not surprise me. Have you watched the money, Moneyball? If not,
I’d suggest you do to understand the role of stats in game theory
¶Reply

August 22, 2018 at 5:14 pm
Sir, i tried to open an account with zerodha so i clicked on “open an account” in the website, entered my details & clicked “continue to sign up” but
nothing is happening. I tried multiple times but nothing happened. Then i downloaded kite, tried signing up through there but it says “duplicate entry
lead”. What to do…
¶Reply

August 23, 2018 at 12:38 pm
Manas, can you try this link – https://zerodha.com/?ref=varsity
The link is working perfectly fine, don’t see any issues from our end.
¶Reply
Manas Pandey says:

August 23, 2018 at 6:57 pm
Still nothing happening sir will try the offline method & go to nearby branch
¶Reply

August 24, 2018 at 3:28 pm
Manas, online signup is working fine. Is there a problem with your broadband? Can you double check please?
¶Reply
Manas Pandey says:

Finally after a long wait, got started with zerodha ??
¶
Welcome to the Zerodha family, Manas!
¶
97. Gaurav says:
September 9, 2018 at 2:34 pm
Sir, I want clarity on this. We know that if in the money option is not squared off in expiry, STT is charged on full settlement. I had a bank nifty 27500
PUT which ended up in the money. It closed at 27478 last week expiry. Now SEBI gives option of “DO NOT EXERCISE” these days. I did not get that
from zerodh side. Hence I contacted support. They said it’s automatic if profit is less than STT than option won’t be exercised. I understand that STT
would have been higher, so it’s a loss saver for me. But suppose in some stocks we don’t find a buyer on expiry, or bids aren’t what in the money option
deserves, and we are forced to keep the option. In that case what to do then? We will never credited our profits? I can’t even see your shadow in back. It’s
someone else.Dont you think “Do not exercise” option must be provided like other brokers?
¶Reply
Gaurav says:
In above case I had 25 lots of bank nifty . So, 22 points (2700-2478) will make it 22000 Rs profit on 25 lots. Had I squared off my purchase
premium was around 2 and it ended at 15, so 13 points would be 13000 profit in that case (if I squared off before 3:30). Shouldn’t I get 13000
credited because my option is considered “not exercised” by your system automatically?
¶Reply

The credit would have been given, in case you had sold the option. Not if you held it to expiry where STT would kick in.
¶Reply

Gaurav, your comment has this line – ” I can’t even see your shadow in back. It’s someone else”, I’m curious to know what this means
Yes, in case of low liquidity, you’d be stuck with a position, although exchange would ensure its settled for you. The Do not exercise option would
be applicable in this situation as well.
¶Reply

Dear sir,
This question may sound stupid but sir i am really intrigued to know is it really possible ?.
Sir, suppose i have 1 crore rupees to trade. Now if buy call option of premium 30 by using whole 1 crore then i would be able to buy 4444 lots. & if it
moves just 1 point above, that is 31, it is showing a whopping profit of 315,174 rupees.
That means if someone do this only 4 times in a day properly he crosses 10 lakhs per day in earnings.
So is it really possible to earn such crazy money if we have a large capital ??
¶Reply

Yup, its possible
But you need to ensure there is ample liquidity like the Nifty contracts.
¶Reply
Manas Pandey says:

Thank you very much for replying Sir.

& yes i was actually talking about Nifty index only, i have never even searched for stock options.
¶Reply

Sure, Manas.
¶Reply

Dear sir,
I recently read somewhere about what people were saying as exchange lot restriction is 100 lots per order. But i am not able to get any info. on it. I have
heard people trading many many lots intraday but never heard about this 100 lots per order restriction. Is this true ?
¶Reply

No official communication on this Manas, so this is just a rumor.
¶Reply
Manas Pandey says:

Thank you for the confirmation sir.

& i finally found out the link where i saw people saying this
https://tradingqna.com/t/will-the-liquidity-in-nifty-and-bank-nifty-allow-me-to-sell-options-worth-rs-30-crores-on-a-normal-trading-day/7068
¶Reply

Yes, liquidity is a real issue with options.
¶Reply

Sir, can u please tell about open interest in terms of lots ?? Like suppose lot size is 75 & open interest for a particular strike is 4 million. So does that mean
that 4 million lots have been traded today ?
¶Reply

Divide 4Mil by 75, you will get it in terms of lots.
¶Reply
Manas Pandey says:

Thank you very much sir ??
¶Reply

Welcome!
¶Reply
101. lakshmi devi says:

Hi..
if we sell a call option .. at the end of expiry do we need to buy compulsorily if the premium heading to zero
¶Reply

Not required, you can square off the position any time you wish.
¶Reply

Hello Karthik,
Understanding that we don’t have to wait till the expiry of the option, however what if the exchange happens to square off the trade on the expiry day,
then what is the penalty for the buyer of an option and what is the penalty for the seller of an option, irrespective of the underlying and strike price.
¶Reply

The exchange will be considered is settled and do the needful only if you have an open position by expiry. There are no penalties as such.
¶Reply

Hello Karthik,
Please let me know how can send you a screen shot for which I have a query. Thanks in advance.
¶Reply

You can always upload this on Google drive and share, Ananth.
¶Reply
Ananth Gopal says:

Hello Karthik,
Please find the image with this link – https://drive.google.com/file/d/1NSDyyP2mQe2FzH925YVvgDvdQ1WCqp-5/view
This is the image taken after the closing hours of market on 15th Nov 2018.
My queries related to the Image that I have shared.
1. Banknifty 15th Nov 26100 PE – Since it is the expiry day of the week the price of the option contract has come down to Rs.0.05/-. which is
understandable.
2. Banknifty 15th Nov 26100 CE and Banknifty 15th Nov 26000 CE – Even though it is the expiry day the prices have not come down and
even at the last minute we can see the prices were increasing which shows that people were buying and selling the option contract at the last
minute. Please clarify:
A) Is it not necessary to have the prices of the option contract coming down to zero on the expiry day?
B) What will happen to the option Contract from the buyers point of view and from the sellers point of View?
C) How does P&L will look like from buyers perspective and from seller perspective?
¶Reply

A) I’m guessing this was close to the spot price, hence the premiums would also factoring in the STT rate
B) Option buyers will have to pay a heafty STT if the option expires ITM. Do check this – https://tradingqna.com/t/no-more-stt-trap-
on-exercised-in-the-money-options/18977
C) The Buyers gains will be the sellers loss and vice versa
¶Reply
104. sm jain says:

Hello karthik sir, i have no words for the entire zerodha team… Great great job… My question is that why we see small lot size on some Strike Prices
whereas minimum lot size is already pre determined and kindly let us also known that on which types of strike prices may be option buyers don’t get out
when they feel profitable or something like that they feel that they are blocked because of suddenly nobody wants to buy the contract (cause buyers now
want to square off their opened position).. Thanks a lot again you guys did a brilliant and highly appreciable work for all types of investors and traders…
¶Reply

Thanks for the kind words, Jain.
Which lot size are your referring to? They are predetermined as you said and does not vary based on strikes.
¶Reply
105. Akash Haridas Padole says:

What is
nifty8050PE
Or what what PE stands for is it PUT option in European
¶Reply

Thats right, PE for put option, CE for call options, both being European in nature.
¶Reply
106. Vishal says:

Why Zerodha don’t allow to buy deep out of money or in the money options?
¶Reply

January 11, 2019 at 11:32 am
Which contract are you talking about, Vishal?
¶Reply
Vishal says:
Nifty, Bank Nifty………..Is there any rule?
¶Reply
107. karthik says:

January 31, 2019 at 10:17 am
Sir, today when bank nifty spot was at 26940 ,the 26700CE was trading at 205, which should atleast be ideally 27940-26700=240 and plus suitable time
value? can u explain why so?today is expiry day..JAN 31 Expiry
¶Reply

Y’day was weekly expiry Karthik. So the ITM option would adjust for the STT applicable, hence it tends to trade at a slight discount.
¶Reply
karthik says:
sir, then how do we calculate the precise intrinsic value (also accounting the STT)? Can you give the formula or method?
¶Reply

Interesting, I’ll get back on this.
¶Reply
karthik says:
Ok sir.
¶
108. Chirag I Sharma says:
As per this module depends on whether we’re in the first half or second half of expiry AND when can the target hit.
My question is- How would someone know when it’s target would hit. You had taken an example of 4% target hit in 2-3 days, but how’d I figure that out?
¶Reply
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Modules
1. Introduction to Stock Markets
14 chapters
2. Technical Analysis
20 chapters
3. Fundamental Analysis
16 chapters
4. Futures Trading
12 chapters
5. Options Theory for Professional Trading
23 chapters
6. Option Strategies
13 chapters
7. Markets and Taxation
7 chapters
8. Currency, Commodity, and Government Securities
19 chapters
9. Risk Management & Trading Psychology
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10. Trading Systems
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2/7/2019 Moneyness of an Option Contract – Varsity by Zerodha

Module 5 — Options Theory for Professional Trading

Moneyness of an Option Contract

8.1 – Intrinsic Value

Underlying CNX Nifty

Here is the formula –

Intrinsic Value of a Call option = Spot Price – Strike Price

Let us plug in the values

Option Type Strike Spot Formula Intrinsic Value Remarks

1. If you were to exercise this option, what do you get?

8.2 – Moneyness of a Call option

1. In the Money (ITM)

1. Deep In the money

Intrinsic Value = 8060 – 7100

Intrinsic Value = 8060 – 7500

Intrinsic Value = 8060 – 8100

Intrinsic Value = 8060 – 8300

In fact I would suggest you relook at the snapshot we just posted –

8.3 – Moneyness of a Put option

Intrinsic Value = 7500 – 8200

Negative intrinsic value, therefore the option is OTM

Intrinsic Value = 8000 – 8200

Negative intrinsic value, therefore the option is OTM

Intrinsic Value = 8300 – 8200

Positive intrinsic value, therefore the option is ITM

Intrinsic Value = 8500 – 8200

Positive intrinsic value, therefore the option is ITM

Hence, an easy generalization for Put options are –

1. All strikes higher than ATM options are considered ITM

8.4 – The Option Chain

Few observations to help you understand the option chain better –

1. The underlying spot value is at Rs.68.7/- (highlighted in blue)

8.4 – The way forward

Onwards to Option Greeks now!

Key takeaways from this chapter

1. Call Option Basics

1. khyati verdhan says:

Karthik Rangappa says:

May 13, 2015 at 4:44 am

Karthik Rangappa says:

Very excited for next chapter please update it as soon as possible

Karthik Rangappa says:

Thanks. We will update it sometime soon next week.

3. khyati verdhan says:

Karthik Rangappa says:

You can do anyone of them – either trail it or book profits!

Karthik Rangappa says:

Karthik Rangappa says:

Welcome! Happy trading

Sir, please try to upload atleast one chapter per week.

Karthik Rangappa says:

Intrinsic Value = 8060 – 8300

= – 260 (It should be -240)

Karthik Rangappa says:

Thanks for pointing this, will make the changes.

7. khyati verdhan says:

Karthik Rangappa says:

khyati verdhan says: