INTRODUCTION
CALL OPTION (CE )- option that gives buyer a right but not an obligation, to buy an asset at a fixed price on or before expiry ( fixed ) date.
PUT OPTION (PE) - option that gives a seller a right but not an obligation, to sell an asset at a fixed price on or before expiry date.
AMERICAN OPTION- can be exercised at any time
EUROPEAN OPTION- Can only be exercised on expiry date
(INDIAN OPTIONS ARE DERIVED FROM EU OPTIONS)
STRIKE PRICE- basically it is the exercising price
Eg NIFTY 16800 CE expiry month JULY 2022. So, 16800 CE is call option strike price.
OTM(OUT OF THE MONEY)
Eg. Strike price NIFTY 16800 CE WEEKLY EXPIRY@ JUNE 15th 2022 with NIFTY currently trading at 16400. Or
Strike price NIFTY 16200 PE WEEKLY EXPIRY@JUNE 15th 2022 with NIFTY currently trading at 16400
ATM(AT THE MONEY)
Eg. Strike price NIFTY 16500@ JUNE EXPIRY, NIFTY currently trading at 16500
ITM( IN THE MONEY) -Has INTRINSIC VALUE
On Expiry ( ITM = INTRINSIC VALUE, because there will be no time value)
Eg NIFTY 16400 CE (EXPIRY JUNE ) , NIFTY currently trading at 16500(underlying price),so it is an IN THE MONEY option.
OPTION PREMIUM - premium that buyer has to pay to seller
Eg. NIFTY 16800 CE (EXPIRY JUNE ) at 100, NIFTY currently trading at 16400(underlying price)
So it is OTM option with a premium of 100
INTRINSIC VALUE - ONLY FOR IN THE MONEY OPTIONS
TIME VALUE- MORE THE TIME TO EXPIRE , GREATER WOULD BE THE VALUE.
Option Seller is taking risk of time, so buyer has to pay more.
Volatility- Higher the volatility, change in the price of an option will be higher.
Statistical- Historical volatility of underlying asset over a period of time which helps in assessing the price fluctuations of option of that underlying asset.
Implied volatility (IV)- it is basically the prediction of volatility in the future till expiry based on the current market participants
Option strategies
SHORT STRANGLE - NEUTRAL STRATEGY - 2 legs
Sell DEEP OTM options
1.SELL CE - NIFTY 17500 CE with JUNE 2022 Monthly Expiry
2.SELL PE - NIFTY 15800 PE with JUNE 2022 Monthly Expiry
Nifty currently trading at NIFTY 16470 on 08/JUNE/2022