There are many investors who have been investing in the cash segment of market but are still unaware of the term Nifty options and what is meant by the Nifty Call and Put options.
In this article let’s take a detailed look at:
- What are Nifty Options?
- What are the different types of Options?
- What is meant by Nifty Call & Put Option?
- What are weekly and monthly Call and Put options?
- What are In-the-money (ITM) and Out-of-the-money (OTM) call options?
What are Nifty Options?
Options are derivatives based on the value of underlying securities such as an index or stocks.
Depending on the type of \”option\” that a person holds, the contract offers the person the opportunity to buy or sell. Options are used by traders for speculation or hedging.
What are the different types of Options?
There are two types of Options known as Call options and Put options. While Call options simply means the right to buy, Put options means the right to sell an underlying asset (stock or index options) at a price agreed upon with an expiry date for that particular contract.
By choosing a Call option the buyer gets an option to “BUY” the underlying asset at a price agreed upon with an expiry date for that particular contract. In such a case the buyer is confident that price of the underlying asset will increase.
Similarly, a Put option gives the buyer an option to “SELL” the underlying asset at a price agreed upon with an expiry date for that particular contract. In this case the person who purchases the Put option is confident that the price of the underlying asset is likely to fall and hence is betting on the same.
Let’s understand the above with the help of some real examples:
Below is the Call option snapshot of Reliance Industries Ltd. for a contract expiring on 27th May 2021. The current market price of the stock is Rs. 1946.
Source: Moneycontrol
As you can see from the above image, for a strike price of Rs. 2100, the buyer of a Call option would have to pay Rs. 25.90 x 250 shares (Lot size of RIL) = Rs.6475. Basically, what this means is the buyer of this particular Call option is confident that the stock price of Reliance Industries will increase in the month of May.
Similarly, in the above image one can see that for a strike price of Rs. 2200 the buyer of call option would have to pay Rs. 12.75 x 250 share (Lot size of RIL) = Rs. 3187.50. In this case the buyer of this particular Call option is positive that the stock of Reliance Industries will go up to Rs. 2200.
Now, let’s take a look at the Put option snapshot of Reliance Industries Ltd. for a contract expiring on 27th May 2021.
Source: Moneycontrol
For a strike price of Rs. 1900, the buyer of a Put option would have to pay Rs. 99.50 x 250 shares (lot size of RIL) = 24875. In this case the buyer of this particular Put option is positive that the stock price of Reliance Industries Ltd. will fall to Rs. 1900.
Similarly, in the above image one can see that for a strike price of Rs. 1800 the buyer of Put option would have to pay Rs. 170 x 250 share (Lot size of RIL) = Rs.42500. In this case the buyer of this particular Call option is positive that the stock of Reliance Industries Ltd. will decrease further to Rs. 1800.
In both the above cases, as and when the stock price starts moving towards the strike price, the buyers of Call or Put option start making profits.
What are weekly and monthly Call and Put options?
Weekly options refer to those Call and Put options which expire every week while monthly options refer to those Call and Put options that expire on the last Thursday of the month.
What are In-the-money (ITM) and Out-of-the-money (OTM) call options?
In-the-money (ITM) call options refer to those call options where the market price is more than the strike price. The Out of the money (OTM) call options refer to those call options where the market price is less than the strike price.
Key Takeaways
- Call and Put options are financial contracts that give the holder rights to buy and sell respectively, an underlying asset at a strike price on a future date.
- When the price of the underlying asset increases in the market, a call option becomes premium.
- The market price of the call option (premium) is determined on the basis of the difference between the spot and strike price of the underlying asset and the duration until the option expires.
Closing thoughts
Traders use both put and call options as a part of their trading/ hedging strategies. While a call option gives a person the right to buy an underlying asset at a strike price on a future date the put option gives the trader the right to sell an underlying asset at a strike price on a future date.
However, in reality very few traders are able to consistently able to generate profits. Besides, it is practically very difficult to create sustainable wealth over the long term.
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