Hi, When the market is going up, CE values goes up much faster than the decay in PE values. For example, if I have sold CE and PE at rupees 20 each, the CE value goes up to rupees 30, but the PE value comes down to only 17 rupees. Why does this happen like this and how can an option seller can protect himself from this?
Appreciate if someone can help me to understand this. Thanks in advance.
Hi @Kamesh_Ganapathiraju
This happens due to differences in their delta and gamma values. You can learn more about options greeks by visiting The Option Greeks (Delta) Part 1 – Varsity by Zerodha
When the market goes up, the CE’s Delta becomes more positive, making its price increase faster. Meanwhile, the PE’s Delta becomes more negative, slowing down its price decrease. Also, the Gamma effect causes the Call Option’s Delta to increase at a faster rate, due to which the options price rises at a faster rate as the underlying price rises. In contrast, the Put Option’s Delta decreases at a slower rate, causing the options price to slow down as the underlying price rises. Theta (time decay) is also one of the factors, but it also depends upon time to expiration, volatility etc etc. The above-linked varsity module will help you to understand this in a much more simplified way.
Hedging is the best way to protect yourself when selling options. You can visit Sensibull - India’s Largest Options Trading Platform to learn more about hedging strategies.
Adding to what @Himalay_Sharma just said, here are few points about market in general which are worth noting -
Most of the times, market participants are bullish in general. I’d say bull to bear ratio is generally 75:25 if not more.
In an uptrending market, greed trumps fear therefore rise in call options more than fall in put premiums. But, in general fear rules over greed and more investors n traders hedge their longs hence the premium decay is slower in puts.
eventually, it all depends on what type of markets we are. Of late, we are in bear markets with sudden rallies so market is mimicking this pattern in premiums as well.