I am unable to decide which which option to hedge by buying a call or put option when i buy or sell nifty futures intraday.
hw can i tell which option is in the money or out of money.
plse explain with an example.
First you read this post your maximum answer in this post http://zerodha.com/z- connect/queries/stock-and-fo-queries/basics-on-options-shortingwriting
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Generally… Traders Hedge to cover there losses…
For Example:- You buy infosys share 3 months back at 1000 rs in january… now in feb. stock is trading at 1150…but in short term you think, prices will go down, say near to 950… so trader buy Put Option of that Stock… so that he earn profit in put option… which cover his losses of portfolio…
In the money and Out of money options…
let assume cipla is tarding at 540… you want to buy call option of cipla…
so, you buy call option of 520… which is In-the-money call option… because Strike Price is less than spot price…
and if you buy call option of 560… it is out of money call option… because Strike Price is upper than Spot Price…
here Spot price - 540
Strike prices are - 520 and 560
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