How to Select Correct Strike Price for Trading Nifty Options

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Options are contracts traded on different exchanges around the world like stocks. Options what is premium in nifty options in the derivative category i. These are known as underlying for the options. Formal definition for option is given as follows: An option is a contract that gives the buyer the right, but not the obligationto buy or sell an underlying asset at a specific price on or before a certain date Let's look at all the keywords one by one: It means a person owning an option can exercise it if he what is premium in nifty options to do so.

However if he decides not to exercise the option no one can force him to do so. If the person does not exercise the option before the expiry date the value of the option becomes zero. Option in itself is not an instrument like stock that gives you something like a unit of ownership in a company.

It is only a contract which gives you the right to buy or sell what is premium in nifty options instruments that are already being traded. These instruments are known as underlying for the option. Options derive their value from the value of its underlying assets specific price: Each Option has a strike prike price.

A strike price is the price at which you get the right to buy or sell the underlying certain date: Unlike stocks which continue to exist as long as the company is running, options have an expiry date after which they are not traded anymore and their value becomes zero Anything that is traded on an exchange can have corresponding option contracts also being traded provided they meet certain regulatory criterias like minimum daily traded volume, etc.

Any such instruments or a combination of such instruments can be used to construct an Option contract. Options are said to mirror the movement of its underlying but there is a premium attached to it. This premium is the value attached to the optionality of the options. Stocks are valued based on several factors like the company earnings, fixed assets, book value. There are certain factors that add premium to the value of the stocks like the fundamentals of the company, market monopoly in the product and services offering by the company, expected future growth of the company.

Similarly Options have a fair value and a premium value. Calculating the fair value of option is simple. Options are not traded at its fair value. The price of the option only tends towards its fair value as the expiry date comes closer. There is always a premium attached to its fair value. For example if the NIFTY index is atit does not mean that you can buy the option for zero dollars, you will still have to pay some dollars to get this option depending upon the expected level of NIFTY on the option expiry date.

However if NIFTY stays at levels then the option value will tend to zero towards the expiry date. On the positive side the option value will keep increasing as long as the NIFTY is moving above Thus at least in theory options offer limitless profit and limited loss. Option trading is more a game of numbers than fundamental analysis. For the same instrument there can be multiple options for different trading levels.

Add another dimension to it and you have put and call options at each level. Add one more dimension to it and you can either go long or short on these options.

So many dimensions can get intimidating at what is premium in nifty options for a new investor, but options are interesting. Let's try to understand it with the help of two simple charts given below.

From the Put Options chart it is easy to understand that the price of the put option is close to its fair value for higher index levels in the range of to Option premium over fair value increases for lower NIFTY levels in the range of toindicating that the market expects the NIFTY index to fall from the current level of to From the Call Options chart the premium over fair value for higher index levels in the range of tois extremely high because all the theoretical negative fair value adds up as premium.

However practically the option value can at minimum be zero and not negative and hence the premium for these options will be close to zero which is the price at which these options are being traded. Thus the value of call options is either zero or close to its fair value. After making adjustments for the negative put and call premiums the charts would look more like what is premium in nifty options we usually see in the financial text books as given below NIFTY Index: Both the charts point towards a bearish market.

The market expects NIFTY which is currently at to tend to levels by the option expiry date. The high value of put options in the Index region of to shows that what is premium in nifty options market expects that this level will not be reached by the Index, hence investors are selling the index at this level hoping to cover it by squaring off at lower levels. Similarly the high value of call options in the Index region of to suggests that the market expects the Index to reach above this lower level, hence investors are buying at this level hoping to square off when the index reaches above this level.

Thus from the above argument we can conclude that the NIFTY index will trade below level and above levels. Also note that a higher premium in the to put and call options indicate that these options are relatively expensive to their fair value, but most probably these are the levels at which most of the trading is happening and the market is most interested in. If the Index continues to fall towards the put options will gain more premium while the call options will tend more to zero.

If the market turns around and starts moving towards then the call options will start adding premium while the put option premium will start going down. Trading in options would then simply mean to guess correctly the direction in which NIFTY will move and take a corresponding position where you can earn more premium.

Another interesting column in the above table is Open Interest which indicates how many contracts are still open for the respective option. Higher Open Interest indicates more liquid option. Increasing open interest at a particular level is also considered as an indication of market expectation that the index will reach that level by the contract expiry date. One of the factors influencing the value of the options is the volatility index VIX.

VIX value provides the expected fluctuation perceived by the market over the next 30 calendar days. When the market is range-bound or has what is premium in nifty options mild upside bias, volatility is globally observed to be typically low.

On such days, call option buying a position what is premium in nifty options on the view that the market will move higher generally outnumbers put options buying a position taken on the view that the market will move lower.

This kind of market may indicate lower risk. Conversely, when the selling activity increases significantly, investors rush to buy puts, which in turn pushes the price of these options higher. Investors also buy puts to hedge their stock exposure in the market against generally negative market trends. This increased number of investors willing to pay for put options shows up in higher readings on the volatility index.

High readings indicate a higher risk in the market place. As far as options trading goes it always pays to be well aligned with the long term market trend. In the short term the market may flip - flop between bullish and bearish market causing the option values to fluctuate widely.

However if an investors position is well aligned with the long term trend then he need not worry about these short term fluctuations. One of the indicators of the long term trend is NIFTy future values. If the NIFTY index is being traded at a discount in the futures market then the long term trend in bearish. On the other hand if the NIFTY index is being traded at a premium what is premium in nifty options the futures market then the long term trend in bullish.

We have seen in the Option Valuation section how to analyze options from the table of numbers giving strike price, traded price and open interest for different option levels. We have also seen how to spot the most active options using option premium and open interest.

Trading in options is all what is premium in nifty options taking the right position and squaring it off at the right time. Also option premium values tend to zero close to expiry date.

It is important for all option traders to keep a close tab on their investments. One cannot simply take a position in options and forget about it because its value is bound to be zero and non-tradable after the expiry date.

Hence, squaring off at the what is premium in nifty options time is of utmost importance. You can make good money in options if you play it statistically correct what is premium in nifty options than trying to perfect each buy like we do for stocks.

There are many factors that contribute to the pricing of the options like price of underlying, volatility, open interest, time to expiry, market expectations. The price changes wildly based of news flows into the market, which is not in our control. An investor needs to learn the trick of the game by gaining experience from trading with small investments in the begining.

Market specific research and trade execution skills is required to make money in the options market. This article is only meant to serve as a basic introduction to understanding and analyzing option quotes. A combination of put and call options can be used to trade several more complex innstruments that can earn profits depending on the market conditions.

More details regarding these can be researched using other wiki articles. From the makers of. Retrieved from " http: Track your investments automatically. By continuing past this page, you agree to abide by what is premium in nifty options terms. Any information provided by Wikinvest, including but not limited to company data, competitors, business analysis, market share, sales revenues and other operating metrics, earnings call analysis, what is premium in nifty options call transcripts, industry information, or price targets should not be construed as research, trading tips or recommendations, or investment advice and is provided with no warrants as to its accuracy.

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Contents 1 Options 2 Options Valuation 2.

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An Option is a contract that gives the right, but not the obligation, to buy or sell the underlying asset on or before a stated date, at a stated price. The party taking a long position, i. Options, which give you a right to buy the underlying asset, are called Call Options. On the other hand, the Options that give you a right to sell the underlying asset are called Put Options. These Options have Index as the underlying asset. For example, options on Nifty, Sensex, Bank Nifty etc.

These Options have individual stocks as the underlying asset. The buyer of an Option has a right but not the obligation in the contract. The writer of an Option receives the Option premium and is thereby obliged to sell the asset if the buyer of Option exercises his right. This is the day on which a derivative contract ceases to exist. It is the last trading date of the contract.

The expiration day of Nifty contracts is Aug 31, in the following example. It is the price at which the underlying asset trades in the spot market. Underlying stock value of Nifty option was as on Aug 28, Strike price is the price per share for which the underlying security may be purchased or sold by the Option holder. As discussed in futures section, Open Interest is the total number of Option contracts outstanding for an underlying asset.

For an Option, intrinsic value refers to the amount by which an Option is in the money, i. Therefore, only in-the-money Options have intrinsic value whereas at-the-money and out-of-the-money Options have zero intrinsic value. The intrinsic value of an Option can never be negative. Thus, for call Option, which is in-the-money, intrinsic value is the excess of spot price S over the exercise price X. Intrinsic value of a Call Option can be calculated as S-X, with a possible minimum value of zero because no one would like to exercise his right under no advantage condition.

Similarly, for Put Option which is in-the-money, intrinsic value is the excess of exercise price X over the spot price S.

Thus, intrinsic value of Put Option can be calculated as X-S, with minimum possible value of zero. It is the difference between premium and intrinsic value, if any, of an Option.

Delta measures the change in Option price for a unit change in the price of underlying. So if my delta is 0. Gamma measures the change in Delta with respect to per unit change in underlying. If Gamma value is 0. So Gamma shows what will be the next change in Delta with respect of change in underlying.

Vega measures the change in Options price per unit change in volatility. A Vega value of 6. Thus, Vega shows effect of volatility on Option price. Theta measures the change in Option price per day change in time to expiry. If Theta is Rho measures the change in Option price per unit change in interest rate. A Rho value of 2 shows that for every unit increase in interest rate, Option price will change by 2.

Rho is inversely related to puts and directly related to calls. For example, last traded price of different ITM Calls and Puts, when underlying Nifty is trading at , are as follows:. At-The-Money Options have no intrinsic value, but it may still have time value. Call Option is said to be OTM, when spot price is lower than strike price.

For example, last traded price of different OTM Calls and Puts, when underlying Nifty is trading at , are as follows:. In case of American option, buyers can exercise their Option any time before the maturity of contract.

On Aug 28, , Nifty was trading at Assume that you buy a Call Option with strike price of at a premium of Rs. On Aug 28, , Nifty is at Assume that you buy a Put Option with strike price of at a premium of Rs.

An opening transaction is one that adds or creates a new trading position. It can be either a purchase or a sale. With respect to an Option transaction, we will consider both:. Opening purchase — This is done with the purchasing intention of creating or increasing a long position in a given series of Options.

Opening sale — This is done with the selling intention of creating or increasing a Short position in a given series of Options. A Closing transaction is one that reduces or eliminates an existing position by an appropriate offsetting purchase or sale. With respect to an Option transaction:. Closing purchase — This is done with the purchasing intention of reducing or eliminating a short position in a given series of Options. Closing sale — This is done with the selling intention of reducing or eliminating a long position in a given series of Options.

You cannot close out a long call position by purchasing a Put or any other similar transaction. A closing transaction for an Option involves the sale of an Option contract with the same terms. You, as an Option buyer, pay a relatively small premium for market exposure in relation to the contract value. This is known as Leverage. You can see large percentage gains from comparatively small, favorable percentage moves in the underlying equity.

Leverage also has downside implications. A Long Option position has limited risk premium paid and unlimited profit potential. A Short Option position has unlimited downside risk, but limited upside potential to the extent of premium received. Long Call Ladder Strategy. Call Back —Spread Strategy. Put Back- spread Strategy. Long Put Ladder Strategy. Long Call Butterfly Strategy. Short Iron Butterfly Strategy. Long Call Condor Strategy. Long Call Calendar Spread Strategy. Short Put Ladder Strategy.

Short Call Ladder Strategy. Long Iron Butterfly Strategy. Short Call Condor Strategy. Short Call Butterfly Strategy. Back to Chapter List Previous Chapter. Options An Option is a contract that gives the right, but not the obligation, to buy or sell the underlying asset on or before a stated date, at a stated price.

Types of Options There are two types of Options: Stock Option These Options have individual stocks as the underlying asset. Buyer of an Option The buyer of an Option has a right but not the obligation in the contract. Writer of an Option The writer of an Option receives the Option premium and is thereby obliged to sell the asset if the buyer of Option exercises his right.

Lot Size Lot size is the number of units of underlying asset in a contract. Expiration Day This is the day on which a derivative contract ceases to exist. Spot Price It is the price at which the underlying asset trades in the spot market. Strike Price or Exercise Price Strike price is the price per share for which the underlying security may be purchased or sold by the Option holder.

Option Premium Intrinsic Value Option premium, consists of two components - intrinsic value and time value. Time Value It is the difference between premium and intrinsic value, if any, of an Option. Option Greeks Delta Delta measures the change in Option price for a unit change in the price of underlying. Important points for Delta: Call Delta ranges from 0 to 1 and Put Delta ranges from 0 to -1 Total of absolute value of call Delta and put Delta always comes to 1 Gamma Gamma measures the change in Delta with respect to per unit change in underlying.

Important points for Gamma: Gamma of Option is always positive. Gamma of Call and Put Option is same. Vega Vega measures the change in Options price per unit change in volatility.

Theta Theta measures the change in Option price per day change in time to expiry. Rho Rho measures the change in Option price per unit change in interest rate. For example, last traded price of different ITM Calls and Puts, when underlying Nifty is trading at , are as follows: For example, last traded price of different OTM Calls and Puts, when underlying Nifty is trading at , are as follows: