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What is intrinsic value?
As we are going to trade any option I.e. index option or stock option first we have to decide whether particular option is costly or cheaper.
To decide option valuation holder must go through this concept of intrinsic value plus time value.
Buying any option is not easy task rather selling any option is not complex task if you did enough exercise before initiating trade.
Let's focus more on concept of intrinsic value.
Nifty is trading at 10850.
Buying a call of 10900 strike is .....
Decide whether strike is At the money option, In the money option or out of money option.
Buying call at 10850 or below is having intrinsic value why?
Pay off of call option is .....
Current price less strike price
Here, if I am buying call of 10800 strike .....
10850 nifty less 10800 call strike
So, Rs. 50 is intrinsic value.
While in put option pay off of put will be.....
Intrinsic value = strike price less current price
Put option 10850 or above all will be in the money option having intrinsic value.
So, in nutshell we can conclude that for call option any underlying trading at any price below that price all call will be in the money and for put above that price all put will be in the money option.
What is time value?
Time value define value of time remain for expiration of option. Time value is most important factor for option holder as real action involve in this term one has to pay or receive this amount till option expiration.
90% of case option seller here time value hunter win a race.
Example:
Nifty trading @ 10850 and value of call @ 10850 is 70 rs. And value of put @ 10850 is 71, this entire amount is time value for option. As intrinsic value is NIL at same expiration of nifty I.e. 10850.
Is there any relation of VIX with option premium?
Yes, if VIX is trading at 12 option value will be much cheaper than trading at 15. VIX is directly affecting option valuation due to fear factor prevailing in the market.
Who win the race in option market? Seller or buyer
It is very tuff question to answer perfectly but in 90% cases option seller end up with positive return compare to buyer of option. During entire year except 2 months seller win the race. To identify such period need to track few event on going globally as well as news involved in system like result, policy, international events, govt events etc.
Method & Implication:
Can I earn constant return from option if I have 10 lakh Rs.?
Answer is not universal same for all. Here, it depends on capacity of risk taking. But if you are ready to invest entire amount in 2 script with 5 lakh each.....
Like taking equity shares of like stock where one can build portfolio buying Tata motor share @ 180 quantity of 2000 shares.
So, every moth one can sell call option 195 strike 10% far from current price around @ 3 rs. So, total gain in case stock moved above 195 rs. 15*2000 plus 3*2000 comes around 36,000 rs.
Else 6000 is confirm here, only negative point or weakness of position is in case Tata motor goes below 177 or more down will be notional loss for my position. If Tata motor goes 10-15% down then shorting option will be difficult as strike above 180 rs. Might not be having much premium. But if you have bought for portfolio stock then one can exercise this strategy to earn around 2% monthly return.
If I have 5 Lakh and willing to buy stock of my choice is there any strategy where I can earn money ?
Yes, one can sell put option of that stock if stock is in future and option only. Like I am willing to buy sun pharma @ 447 but I am selling put of sun pharma @ 10 rs. Strike 440 put. So buying 1000 shares I will wait and buy at 440 if it comes till 440 then will buy 1000 @ 440 in case stock move up I will end up with 10,000 Rs. Till time i will try to short put till i am getting premium up to 6000-10000 of 440 put strike only.
Strategy for Nifty:
Liquid Bees expected Earning = 0.50%
Option Expected Short Earning = 0.50%
Option Expected Short Earning = 0.50%
Nifty 50 is at 11000, and its nearest available strike is 11000 CE & PE, Add Both Say 200+200= 400 point is our Danger Zone.
This Level has effect of all market factors and smart market Participants actively hold position. Read more how find Strike to short Here
Consider the Strike Paying us 1.5% pm of margin used amount.
Say per lot nifty margin Rs. 100000/75 = 1333 Rs.
On the Monthly Expiry day sell Put Naked Option having premium of 18 Rs. and let it expire OTM or Book Position if Target Achieved.
IN case Nifty reach Danger Zone keep tracking position and shift According to the Movement.
Thanks
Derivativelearn
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