Query about options trading

A complete newbie here🙋‍♂️… I’ve been checking some videos on options trading and almost all the videos talk about that the profit n loss of buying options is (spot price-strike price-premium)…but I’ve seen that,people make profit without hitting the strike price! how’s that so?From what I’ve understand is that if the premium increases after we buy,then even if it doesn’t hit the stike price we can still make profit right??
A reply will be highly appreciated… Thank you

Yes. Even if underlying doesn’t hit strike price you can make profits if premium increases. This is called m2m or market to market profit.
For this you need to square off your position.
If you let the option expire you will make profit if underlying closes above the price that is equal to strike price + premium paid.

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If the price has reasonably progressed towards strike price, with considerable time value left, an option buyer can make profit.

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Watch Sensibull videos . While buying options you have to be right in your direction that too in short period of time , before buying options consider all these : market direction , strike price , moneyness of the option , theta ,iv all are important , be clear on these things before enter trades , :+1:

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Yes you are absolutely right…
As you are learning options, then you may know that option is made up of two things,
Option value (premium) = intrinsic value + extrinsic value ( volatility and time value)

According to your question,
In case of an OTM option, there is no intrinsic value, but it has only extrinsic value.

Now as the price of the underlying(spot price) is approaching the strike price, the delta increases as a result intrinsic value increases which increases the premium… So you can sell the option at higher premium and earn the difference.
Or, if the spot price > strike price
Then profit will be = spot price-strike price-premium .

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Above answers are correct. What I understand from your question is that you are just starting with options.
I am glad you are asking right questions. Options has its own learning curve, interesting one though. My 2 cents would be, read the varsity chapters on options at least 2-3 times and the trade with very low quantity that you are willing to lose(consider this as training fee).
You start to understand more only by trading. As they say, Experience is the best teacher :beers:


One more doubt :sweat_smile:…So if it crosses the strike price the profit &loss will be spot-strike-premium and not the premium difference!?

At expiry option price becomes zero. And physical settlement is the game. So profit loss will be the based on your buy price of underlying stock and strike price. Option seller secures the full premium and bears the implications of the physical settlement.

Zerodha charges 0.25% brokerage for physical settlement.

Both are same…

Because as the option becomes ITM, it will start having intrinsic value ( spot - strike price) along with extrinsic value.
So the new premium for that ITM option will become
P(new) =( spot price - strike price )+ extrinsic value(with is negligence at expiry)

So, when you are squaring it off:-
= p(new) - p(old)
= spot price - strike price - premium(which you paid)