Options are non linear!

I’m a beginner in options so this question might be silly for you.

Let’s assume that I buy 1 lot of Nifty 15000 CE when nifty is trading around 15800.
Now what actually happens ? My strike price was 15000 while nifty was trading around 15800.
Will I be in profit because the real price is already above my strike price .
Is this even possible / logical ?

No. You would have paid more to buy that ITM option than the moneyness of that option.

1 Like

Option price consist of 2 components.

Option price = time value + intrinsic value.
Time value = amount of time left till expiry
Intrinsic value = difference between spot and strike and some factor of IV (implied volatility)

So given your case, you purchased a 15000CE when the market is at 15800. Let’s say your the price of your option was Rs. 830*75(lot size). So applying the formula,

830 = 20(time value) + 810(intrinsic value)

If the market moves from 15800 to 15900, you’ll get 100 rs more in intrinsic value. As days go by, you’ll lose money in time value. So towards the expiry, you’ll be left only with the intrinsic value. (ie) difference between your ITM option and spot price.

The value of money you loose every day when you hold an option is called theta decay.

So if you end up buying 15000CE when the market is at 15800, and the market remains at 15800, you’ll end up making a loss because of theta decay. (ie) Basically your time value decreases. The market needs to move significantly higher for you to make a decent return.


Don’t jump into Derivatives trading before understanding it. You will wipe out your entire money (earned by you or your near ones). Don’t get attracted by the Profit screenshots of traders posting on social media. Most of them will never post screenshots when they go bust. Please go through the Zerodha varsity modules 1-7. They have explained in detail most of the stuff. Do some paper trading (use Opstra.definedge.com) on a consistent basis for 3-6 months.


Thanks @teenscm

Thanks for your detailed answer @Younus_Farveaz

Thanks @Vij

Hi Everyone,
I would appreciate your attention to this problem.
Today at 9:21 am (14th June) HDFC Ltd was trading at 2542 and HDFC June 2550 CE at 54.
After that, HDFC went down to 2513 and recovered back to 2542 again by 1:49 pm but HDFC June 2550 CE was trading at 47.
How can one explain this, at the same spot price, within four and a half hours a difference of 7 points in call price?? Theta decay or vega can’t affect so much in such a short time??

Demand Supply is at play. Market participants decide what to pay.

1 Like

@Vij Thank you for your answer :pray:
That means we should take Black & Scholes , greeks etc with a pinch of salt. Things may go haywire despite all the calculations and analysis :grinning:

All stock options price should be taken with a pinch of salt. Adani Enterprises stock closed Rs. 100/- down, yet the OTM CE option prices closed at an increase over the previous day.


1 Like

This is really weird, this Adani Enterprise example.
Is the market maker same for a particular stock and its options or there are different market makers for providing liquidity in stock options? sometimes bid and ask jumps all over the place without any significant movement in the underlying.

Is there any good resource to understand the calculus of Options?

I think all the points mentioned below in the discussion are valid. However, what drives the price of an option in a short duration i.e. within 30 minutes approximately or less is primarily due to short covering (rapid rise in prices) and also due to longs unwinding, which is not as fast as when the shorts are covering. You can as see this by looking at implies volatilities. Therefore, decide why you want to buy the option (have a valid reason for it) and when you what to buy.

Although, a deep dive into options and understanding the Greeks is highly recommended it is also important to understand the option chain and open interest analysis. I hope this helps.