BeginnerQ:Is Options profit calculated based on the premium r underlying's movement?

[rajasahdevan]

Hello guys,
My question is that Options profit calculated on basis of premium's movement or the underlying assets's movement(say nifty)?!

 

[tradingstudent]

Re: BeginnerQ:Is Options profit calculated based on the premium r underlying's moveme

Hello guys,
My question is that Options profit calculated on basis of premium's movement or the underlying assets's movement(say nifty)?!

The underlying movement has a direct impact with regard's to an option's premium's.

Option's profitability depends upon change in premium ( premium's movement) when you entered and when you exited.

The order is like this:

Options Profitability---> Premium's Change/Premium Movement--->Underlying Movement.

The symbol ---> means depends on...


I think you are slightly confused, so i will give you an example to clarify this concept...


Example:

Underlying Instrument: Nifty Futures

The Last Traded Price of Nifty was 8500

Say,

You bought a 8700 CE @ 50..

The bought option will be in profit provided you are able to sell for an amount higher than 50 i.e. the amount higher than 50 will be your profit..

So, if you sold the

8700 CE @ 51-->1 Rs. Profit
8700 CE @ 60-->10 Rs. Profit
8700 CE @ 80--> 30 Rs. Profit

Do note that the profit of 1 Rs.; 10 Rs; 30 Rs coincides with the premium change..

So it is clear that our profit is determined by the premium change or as you per your language premium movement..


But, how is the premium of the option changing?

The movement of the underlying has an impact on the premium..

we bought the 8700 CE @ 50 when Nifty Future was trading @ 8500.

For 8700 CE value to go to @ 51, Nifty Future should be trading @ 8530

For 8700 CE value to go to @ 60, Nifty Future should be trading @ 8650

For 8700 CE value to go to @ 80, Nifty Future should be trading @ 8750

[Note: The above are hypothetical values]

Important: There are other factors which will impact, the option's premium in addition to the movement of the underlying..

I am also learning options, so i can understand your confusion.. Let me know if the answer helped..

Thanks

 

[rajasahdevan]

Re: BeginnerQ:Is Options profit calculated based on the premium r underlying's moveme

The underlying movement has a direct impact with regard's to an option's premium's.

Option's profitability depends upon change in premium ( premium's movement) when you entered and when you exited.

The order is like this:

Options Profitability---> Premium's Change/Premium Movement--->Underlying Movement.

The symbol ---> means depends on...


I think you are slightly confused, so i will give you an example to clarify this concept...


Example:

Underlying Instrument: Nifty Futures

The Last Traded Price of Nifty was 8500

Say,

You bought a 8700 CE @ 50..

The bought option will be in profit provided you are able to sell for an amount higher than 50 i.e. the amount higher than 50 will be your profit..

So, if you sold the

8700 CE @ 51-->1 Rs. Profit
8700 CE @ 60-->10 Rs. Profit
8700 CE @ 80--> 30 Rs. Profit

Do note that the profit of 1 Rs.; 10 Rs; 30 Rs coincides with the premium change..

So it is clear that our profit is determined by the premium change or as you per your language premium movement..


But, how is the premium of the option changing?

The movement of the underlying has an impact on the premium..

we bought the 8700 CE @ 50 when Nifty Future was trading @ 8500.

For 8700 CE value to go to @ 51, Nifty Future should be trading @ 8530

For 8700 CE value to go to @ 60, Nifty Future should be trading @ 8650

For 8700 CE value to go to @ 80, Nifty Future should be trading @ 8750

[Note: The above are hypothetical values]

Important: There are other factors which will impact, the option's premium in addition to the movement of the underlying..

I am also learning options, so i can understand your confusion.. Let me know if the answer helped..

Thanks

Thank you so much!! That was very helpful!
Is this how profit is calculated on the expiration day too when you exercise??

Another doubt can i square off on expiration day if i dont want to exercise??

 

[tradingstudent]

Re: BeginnerQ:Is Options profit calculated based on the premium r underlying's moveme

Thank you so much!! That was very helpful!
Is this how profit is calculated on the expiration day too when you exercise??

Another doubt can i square off on expiration day if i dont want to exercise??

The profit is always calculated just like in the example: It doesn't matter if we do it during the beginning of the series or on expiry day or any time in between..

Note: If you don't sqaure-off the options within the expiry day [expiry day closing is the latest] the exchange will auto sqaure off and if any of your options are in the money, ITM, it will attract a heavy surcharge..

As far as my knowledge goes, in India at least for Index options, the concept of exercising is different.

All index options are cash settled i.e. the calculations are based on our entry and exit prices & on squaring off if you are in profit amount gets credited and if in loss amount get's debited..

You can always square off any time and not necessarily wait till expiry date..

 

[rajasahdevan]

Re: BeginnerQ:Is Options profit calculated based on the premium r underlying's moveme

I am also learning options, so i can understand your confusion.. Let me know if the answer helped..

Thanks

Thank you!

I am too in the early stage of Options. If you could tell me how you approach could be useful for me!

i am taking Nism exam next month. Not for just for certification, would be useful when i trade in the future.

 

[tradingstudent]

Re: BeginnerQ:Is Options profit calculated based on the premium r underlying's moveme

Thank you!

I am too in the early stage of Options. If you could tell me how you approach could be useful for me!

i am taking Nism exam next month. Not for just for certification, would be useful when i trade in the future.

Good Luck on your NISM exam.. The approach is just education, there is an ocean out there, but the more we know the better.

When it comes to options:

1. Options as an entity: The more we understand the better. Download as many books on options as you can exclusively on options. Give all of them a quick glance, you will find one book which your eye will catch on either due to it's simplicity or the language or some X reason will be comfortable. Start with this and assimilate as much as you can and go for other books.

At the very least you need to have a clear understanding of basics such as Calls, Puts, & Strike Prices.

Greeks will also enter the picture: Delta, Gamma, Theta etc..

I am guessing there are traders who exclusively trade using greeks only & i am sure we also have traders who discard them and still make profit. At the minimum have a rough idea too..

2. Technical analysis: Price Action, support & resistance, volume etc...

Having an understanding of the above can help us initiate an appropriate option strategy based on market conditions..

Say, we feel market is in sideways mode, we can initiate short straddle and try to capture some time decay..

3. Option Strategies: There are various combinations for various market conditions, once you start playing with calls and puts, you will come up with various combinations, more often than not, the strategy you constructed will be in existence and you will already find that a name has been assigned to it.

You can browse for them...

4. Hedging: This is the key element, we can go against the market and out of 1000 times, we can win 999 times. The downside is, that 1 time it wins against you, we have ensure that our trading account's capital is not broken..

In my opinion, it is better to have a strategy that has high risk profile, but has hedging i.e. known risk capital..

Example: Say some strategy that Rs. 5,000 risk in worse case conditions than opposed to say a very high probability trade without hedging like shorting very far OTM options and letting it to expire worthless.. Some unforsaken event and if circuits fall, your account will be wiped out clean..

Then again, this is my opinion, each one will have their own trading style and risk appetite..

Other's might chip in with their inputs..

Thanks

 

[rajasahdevan]

Re: BeginnerQ:Is Options profit calculated based on the premium r underlying's moveme

Good Luck on your NISM exam.. The approach is just education, there is an ocean out there, but the more we know the better.

When it comes to options:

1. Options as an entity: The more we understand the better. Download as many books on options as you can exclusively on options. Give all of them a quick glance, you will find one book which your eye will catch on either due to it's simplicity or the language or some X reason will be comfortable. Start with this and assimilate as much as you can and go for other books.

At the very least you need to have a clear understanding of basics such as Calls, Puts, & Strike Prices.

Greeks will also enter the picture: Delta, Gamma, Theta etc..

I am guessing there are traders who exclusively trade using greeks only & i am sure we also have traders who discard them and still make profit. At the minimum have a rough idea too..

2. Technical analysis: Price Action, support & resistance, volume etc...

Having an understanding of the above can help us initiate an appropriate option strategy based on market conditions..

Say, we feel market is in sideways mode, we can initiate short straddle and try to capture some time decay..

3. Option Strategies: There are various combinations for various market conditions, once you start playing with calls and puts, you will come up with various combinations, more often than not, the strategy you constructed will be in existence and you will already find that a name has been assigned to it.

You can browse for them...

4. Hedging: This is the key element, we can go against the market and out of 1000 times, we can win 999 times. The downside is, that 1 time it wins against you, we have ensure that our trading account's capital is not broken..

In my opinion, it is better to have a strategy that has high risk profile, but has hedging i.e. known risk capital..

Example: Say some strategy that Rs. 5,000 risk in worse case conditions than opposed to say a very high probability trade without hedging like shorting very far OTM options and letting it to expire worthless.. Some unforsaken event and if circuits fall, your account will be wiped out clean..

Then again, this is my opinion, each one will have their own trading style and risk appetite..

Other's might chip in with their inputs..

Thanks

Thats very helpful, Thanks!!