How the buy price is determined in Option?


#1

I buy a call at 8600 of 110 Rs on 3/8/15 expiry on 27.8.15. in Nifty. That time nifty was at 8525. Now today nifty ends at 8568 means 43 bonus point. But today buy price of 8600 call is Rs104. How is it possible that with 43 + point buy price shows 6% loss.??
Can any tell me the exact formula by which the buy price of options r calculated.


#2

Hi Sagar

             Many people trade in the future and option (F&O) segment of the stock market with the hope of making quick money in less time. Its true that if traded smartly you can make decent money otherwise you can lose a big amount. Before making entry in the F&O you should first understand its basics. Trading in futures requires good amount of money but trading in options does not requires much amount. With options you can earn more with less money. The loss is limited while profit is unlimited. Let us try to understand the basics of options trading.

Types of Options

 There are two types of options the put option and the call option.

 Call option: This type of option increases in value when the things go in positive direction. Call options are bought when you are bullish. If you buy nifty  8600 call option when the nifty is trading at 8525 . You are hoping that nifty will hit the 8600 mark (even higher). If nifty moves towards 8600, the value of call option will increase. In the same way if nifty moves below 8525 the value of call option will decrease. It can become zero also if there are no chance of nifty touching 8600 towards the end of month.

 Put option: The put options are bought when you are bearish. The value of put option increases when the things go in negative direction and decreases when the price goes in positive direction.

 Beside the above two types of options, there are also three categories of options. They are

  1. In the money (ITM)
  2. Out the money(OTM)
  3. At the money(ATM)

In the money (ITM) When the stock price is greater than strike price of option then it is called as in the money(ITM). If nifty is currently at 8600, then all the calls of strike price below 8600 like 8500,8400,8300 etc will be ITM calls. In case of put options when the stock price less than the strike price it will be ITM. For example if nity at 8600 then all the put options above 8600 like 8700,8800 etc will be ITM put options

 At the mony(ATM) When the stock/index price is equal to the option strike price then that option will be At the money options. If nifty at 8600 then the put and call options of strike price 8600 will be at the money options

 Out the money(OTM) When the stock price is less than the strike price (in case of call options) or when the stock price is greater then the strike price(in case of put options) then it will be called as out the money. For example if nifty is at 8600 then call options of strike price 8700,8800,8900 etc  will be out the money(OTM) calls and put options of strike price 8500,8400 etc will be out the money put options.

As far as your case is concerned:-

You bought Nifty 8600 (Strike) Aug Expiry when nifty is at 8525 at Rs 110.

In this case you bought out of money option that means it has only time value.

People are buying this this option at Rs 104 today anticipating that nifty may go up more than 8600.

Suppose, If you hold this call upto 28 Aug 15 and nifty on 28 Aug 15 is at 8602

You will get 8602 (Spot price) - 8600 (Strike) = 2 x 25 (1 Lot) = 50 Rs

Suppose, If you hold this call upto 28 Aug 15 and nifty on 28 Aug 15 is at 8700

You will get 8700(Spot price) - 8600 (Strike) = 100 x 25 (1 Lot) = 2500 Rs

Suppose, If you hold this call upto 28 Aug 15 and nifty on 28 Aug 15 is at 8599

You will get 8599(Spot price) - 8600 (Strike) = 0 (NIL).

On Today value of 8500 strike call option will be = Time value upto 28 Aug 15 + (Spot Price - Strike Price)

Sagar Check this post also http://tradingqna.com/17302/is-my-trading-strategy-right

Hope you understand Happy Trading

https://niftyoptioncallputeasy.wordpress.com


#3

You are betting that Nifty will rise 75 points (8600 CALL - 8525 Nifty market price when you bought the call option ),
by paying premium of rs110 to the seller of the call option.

NIFTY points will not affect the premium point by point, its entirely depend on the buyers & sellers of that particular option…

If you are holding till the expiry:
you will be in profit if nifty crosses 8635 (110-75 = 35 + 8600 = 8635).

You read this book you get clear


#4

Nice Explanation … But still u havent answer my question " How is it possible that with 43 + point in nifty buy price shows 6% loss.??"


#5

It will not have life until it reaches 8600. After reaching 8600, it goes to 8643, then ur premium will also increase 43 points.


#6

Today nifty tried to break 8580 mark several times, but unable to breach it, that may be the reason also.


#7

I think the calculation is done via volatility , rate of price, delta , gamma vega etcc… Still i am not able to understand how they all r calculated


#8

Its simple… forget mathematics… its a contract… of strike price x and spot price y … if y crosses x then you are making profit and if y doesnot reaches x till expiry date …at the end of expiry date … value or premium will start becoming negative and move towards zero


#9

Hi did u find the answer