Understanding Put-Call Parity

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Further we looked at four different variants originating from these 2 options —. Think of it this way — if you give a good artist a color palette and canvas he can create some really interesting paintings, similarly a good trader can use these four option variants to create some really good trades.

Imagination and intellect is the only requirement for creating these option trades. Hence before we get deeper into options, it is important to have a strong foundation on these four variants of options. For this reason, we will quickly summarize what we have learnt so far in this module.

Arranging the Payoff diagrams in the above fashion helps us understand a few things better. Let me list them for you —. Going by that, buying a call option and buying a put option is called Long Call and Long Put position respectively. Going by that, selling a call option and selling a put option is also called Short Call and Short Put position respectively. However I think it is best to reiterate a few key points before we make further progress in this module.

Buying an option call or put makes sense only when we expect the market to move strongly in a certain direction. If fact, for the option buyer to be profitable the market should move away from the selected strike price. Selecting the right strike price to trade is a major task; we will learn this at a later stage. For now, here are a few key points that you should remember —.

The option sellers call or put are also called the option writers. Selling an option makes sense when you expect the market to remain flat or below the strike price in case of calls or above strike price in case of put option. I want you to appreciate the fact that all else equal, markets are slightly favorable option put call graph option sellers. This is because, for the option sellers to be profitable the market has to be either flat or move in a certain direction based on the type of option.

However for the option buyer to be profitable, the market has to move in a certain direction. Clearly there are two favorable market conditions for the option seller versus one favorable condition for the option buyer. But of course this in itself should not be a reason to sell options. This means to say that the option writers earn small and steady returns by selling options, but when a disaster happens, they tend to lose a fortune.

Well, with this I hope you have developed a strong foundation on how a Call and Put option behaves. Just to give you a heads up, the focus going forward in this module will be on moneyness of an option, premiums, option pricing, option Greeks, and strike selection.

Once we understand these topics we will revisit the call and put option all over again. This information is highlighted in the red box. Below the red box, I have highlighted the price information of the premium. If you notice, the premium of the CE opened at Rs. Moves like this should not surprise you. These are fairly common to expect in the options world.

Assume in this massive swing you managed to capture just 2 points while trading this particular option intraday. This option put call graph to a sweet Rs. In fact this is exactly what happens in the real world. Traders just trade premiums. Hardly any traders hold option contracts until expiry.

Most of the traders are interested in initiating a trade now and squaring it off in a short while intraday or maybe for a few days and option put call graph the movements in the premium. They do not really wait for the options to expire. These details are marked in the blue box. Below this we can notice the OHLC data, which quite obviously is very interesting.

The CE premium opened the day at Rs. However assume you were a option put call graph of the call option intraday and you managed to option put call graph just option put call graph points again, considering the lot size option put call graphthe 2 point capture on the premium translates to Rs. However by no means I am suggesting that you need not hold until expiry, in fact I do hold options till expiry in certain cases. Generally speaking option sellers tend to hold contracts till expiry rather than option buyers.

This is because if you have written an option for Rs. So having said that the traders prefer to trade just the option put call graph, you may have a few fundamental questions cropping up in your mind. Why do premiums vary? What is the basis for the change in premium? How can I predict the change in premiums? Who decides what should be the premium price of a particular option?

Well, these questions and therefore the answers to these form the crux of option trading. To give you a heads up — the answers to all these questions lies in understanding the 4 forces that simultaneously exerts its influence on options premiums, as a result of which the premiums vary.

Think of this as a ship sailing in the sea. The speed at which the ship sails assume its equivalent to the option premium depends on various forces such as wind speed, sea water density, sea pressure, and the power of the ship. Some forces tend to increase the speed of the ship, while some tend to decrease the speed of the ship.

The ship battles these forces and finally arrives at an optimal option put call graph speed. Crudely put, some Option Greeks tends to increase the premium, while some try to reduce the premium. Try and imagine this — the Option Option put call graph influence the option premium however the Option Greeks itself are controlled by the markets. As the markets change on a minute by minute basis, therefore the Option Greeks change and therefore the option option put call graph Going forward in this module, we will understand each of these forces and its characteristics.

We will understand how the force gets influenced by the markets and how the Option Greeks further influences the premium. We will do the same in the next chapter. A quick note here — the topics going forward will get a little complex, although we will try our best to simplify it. While we do that, we would request you to please be thorough with all the concepts we have learnt so far.

Thanks a lot for sharing learning material, it is really helpful for beginners option put call graph me to understand the concept and strategy of share market. We are trying out best to complete the modules as fast as we can. European option put call graph means the settlement is on expiry day.

However, you can just speculate on option premiums…and by virtue of which, you option put call graph hold the position for few mins or days. Also we have potential of unlimited profit in long call or long put and even we can trail stoploss of premiums. Thank you so much for your articles sir. Cause sitting in front of computer is not possible. Even if we r there we may miss the trade id doing some thing else at the time we are suppose option put call graph trade or squareoff the tyrade.

Till now it has been very clear and crisp. Thanks for that and hope that further chapters will also come the same way.

We will be discussing SL based on Volatility very soon. Request you to kindly stay tuned till then. We certainly hope to keep the future chapters as easy and lucid as the previous ones have been. Hi Really nice initiative sir. Hello Sir, if I buy a lot ofcall option of strike price at a premium of Rs 2 with a spot price of Now if the price moves to and premium is now at 3 so would be my profit??

Firstly, if the spot moves from tothe premium of the Call option will option put call graph be more than Rs. Your profits would be —. Hello Sir, I am still confused with the way the profit is calculated. Might be, I am not able to get what u explained and I am really sorry for asking it again. In some of your replies, you mentioned that the profit is calculated as per the difference of spot price and strike price and in some replies u mentioned that it is as per the difference of premium.

In case of 1 lot of shares the profit would be. So which of the above options are correct??? Is there option put call graph difference if I am closing my position before expiry or excersize it at expiry? For all practical purposes I would suggest you option put call graph the 2nd way of calculating profits…i. Do remember the premium paid for this option is Rs 6. Irrespective of how the spot value changes, the fact that I have paid Rs.

This is the cost that I have incurred in order to buy the Call Option. Please note — the negative sign before the premium paid represents a cash out flow from my trading account. This lead to my confusion. Got your point, see if you are holding the option till expiry you will end up getting the amount equivalent to the intrensic value of the option.

I have explained more on this in the recent chapter on Theta…but Option put call graph would suggest you read up sequentially and not really jump directly to Theta. The calculation provided by karthik in chapter 3 is for expiry calculation on option put call graph date.

Hope this clears your doubt. The minimum value for this option should be STT stands for Security Transaction Tax, which is levied by the Government whenever a person does any transaction on the exchange.

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It's very helpful to be able to chart the payoffs an option can return. This page discusses the four basic option charts and how to set them up. The first chart we'll make shows what happens when you Long a Call buy a call option. When you buy a call option, you must pay a premium the price of the option.

You can make a profit if the value of the underlying asset sufficiently increases. The x-axis represents the price of the underlying asset or "S" like the stock. To draw the lines we will be placing on the chart, it is best to set up the following helpful table.

The next row shows the value of the call option for each scenario. If the asset's value is less than or equal to the strike price, then the call option is worthless; however, if the asset's value is greater than the strike price, then the call option can be used to make a profit of S-X.

The next line shows the cost of the premium at each scenario--since we are long on the option, the premium is some negative number whatever was payed to purchase the option. The last row is simply a total of the two rows above it. To make the chart, we first must plot the strike price on the x-axis. This is represented with an "X". The blue line represents the payoff of the call option. If S is less than X, the payoff of the option is 0, so it will follow the x-axis. After reaching the strike price, the payoff of the option is S-X, so the line will increase at a 45 degree angle if the numbers are spaced the same on both axes.

The green line represents the profit from excersizing the call option. It runs parallel to the payoff line but since it takes into account the price that was payed for the premium the cost of the call option it will be that far below the payoff line. Perhaps an example would be helpful: Let's say you are purchasing a call option for ABC stock X strike price: Now that we've got the first chart out of the way, we can move a bit quicker and show a few other charts.

Now we'll see what happens when you Short a Call sell a call option. Since you are writing the option, you get to collect the premium. You'll only end up losing money if the value of the underlying asset increases too much since you'll be forced to sell the asset at a strike price lower than market value.

Here's our nifty table: The chart doesn't really need a payoff curve since you're not the one holding the call option. The profit will hold steady at the premium until it reaches the strike price, at which point every dollar the asset gains is a dollar you will lose.

Buying a put option gives you the right to sell the underlying asset at the strike price. When you long a put buy a put , you will profit only if the price of the underlying asset decreases. Let's start by setting up the table; this time we'll use "p" as the price of the premium: This makes sense--the option will only give a payoff if the asset is below the strike price.

The payoff less the premium will be your profit. The chart looks just like the "Long a Call" chart except it's flipped vertically at the strike price. Our last simple but helpful option chart shows what happens when you short a put sell a put. Since you are the writer of the put in this case, you are happiest when the asset's value doesn't fall below the strike price. Again, since you don't hold the option we've only included a "Profit" line and not a "Payoff" line. Now that you have seen the four basic types of options charts, we can do some stuff that's a lot more fancy and understand option-trading strategies that are a bit more tricky.

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