Nifty call put option meaning
If you look at the payoff diagram carefully, they both look like a mirror image. The mirror image of the payoff emphasis the fact that the risk-reward characteristics of an option buyer and seller are opposite. The maximum loss of the call option buyer is the maximum profit of the call option seller. Likewise the call option buyer has unlimited profit potential, mirroring this the call option seller has maximum loss potential We have placed the payoff of Call Option buy and Put Option sell next to each other.
This is to emphasize that both these option variants make money only when the market is expected to go higher. In other words, do not buy a call option or do not sell a put option when you sense there is a chance for the markets to go down. You will not make money doing so, or in other words you will certainly lose money in such circumstances. Of course there is an angle of volatility here which we have not discussed yet; we will discuss the same going forward.
Clearly the pay off diagrams looks like the mirror image of one another. The mirror image of the payoff emphasizes the fact that the maximum loss of the put option buyer is the maximum profit of the put option seller. Likewise the put option buyer has unlimited profit potential, mirroring this the put option seller has maximum loss potential Further, here is a table where the option positions are summarized. However he enjoys an unlimited profit potential 7.
May 6, at 2: May 6, at 5: May 6, at May 7, at 4: September 5, at 5: September 6, at February 25, at 6: May 8, at 6: May 8, at 9: May 11, at 5: May 8, at May 9, at 5: May 11, at 6: May 12, at 5: May 25, at 1: May 26, at 4: June 28, at June 29, at 4: July 10, at 9: July 12, at 4: July 13, at 7: July 14, at 5: July 15, at 5: July 14, at September 28, at 8: September 28, at July 15, at 6: July 16, at 6: July 16, at 4: July 17, at 6: July 19, at 3: August 27, at 5: August 28, at 5: August 28, at 1: August 29, at 6: August 29, at 8: September 2, at 7: September 2, at September 10, at 6: September 10, at 7: September 11, at 5: September 21, at 1: September 22, at 7: September 22, at 8: September 26, at 5: September 26, at 1: September 29, at 6: September 30, at 6: November 22, at 6: November 23, at November 8, at 2: November 10, at 5: November 14, at 6: November 15, at 3: November 14, at 8: November 14, at 3: November 14, at 5: November 15, at 7: November 16, at 8: June 19, at November 15, at November 16, at 9: November 16, at 2: November 17, at 5: December 19, at 1: December 21, at 5: January 11, at 7: January 12, at 5: January 31, at February 1, at 6: April 15, at April 17, at 7: April 18, at 3: April 18, at April 20, at 6: April 21, at 6: April 21, at 3: April 22, at 5: April 22, at 6: April 23, at 1: May 9, at 9: May 9, at 3: May 15, at May 15, at 7: July 9, at 8: July 10, at 8: July 9, at 9: July 28, at 4: July 28, at 6: August 26, at 2: August 28, at 7: October 28, at 2: October 30, at 5: October 30, at 6: December 7, at December 8, at December 11, at 4: December 12, at December 12, at 5: December 13, at December 27, at 2: December 27, at 3: December 27, at 7: December 28, at February 12, at February 13, at March 31, at 8: April 1, at 7: May 25, at 9: May 26, at 5: May 30, at May 30, at 6: June 7, at 6: June 7, at 8: June 8, at 6: June 9, at September 7, at 2: September 8, at 1: September 15, at September 16, at October 16, at 6: October 17, at November 23, at 9: November 24, at 5: November 25, at 1: November 30, at 7: December 1, at December 3, at December 4, at 9: December 20, at 8: December 20, at December 26, at 3: December 26, at 9: December 27, at December 30, at December 31, at 8: January 1, at 7: January 1, at 8: A call option , often simply labeled a "call", is a financial contract between two parties, the buyer and the seller of this type of option.
The seller or "writer" is obligated to sell the commodity or financial instrument to the buyer if the buyer so decides. The buyer pays a fee called a premium for this right. The term "call" comes from the fact that the owner has the right to "call the stock away" from the seller.
Option values vary with the value of the underlying instrument over time. The price of the call contract must reflect the "likelihood" or chance of the call finishing in-the-money.
The call contract price generally will be higher when the contract has more time to expire except in cases when a significant dividend is present and when the underlying financial instrument shows more volatility. Determining this value is one of the central functions of financial mathematics.
The most common method used is the Black—Scholes formula. Importantly, the Black-Scholes formula provides an estimate of the price of European-style options.
From the Put Options chart it is easy to understand that the price of the put option is close to its fair value for higher index levels in the range of to Option premium over fair value increases for lower NIFTY levels in the range of to , indicating that the market expects the NIFTY index to fall from the current level of to From the Call Options chart the premium over fair value for higher index levels in the range of to , is extremely high because all the theoretical negative fair value adds up as premium.
However practically the option value can at minimum be zero and not negative and hence the premium for these options will be close to zero which is the price at which these options are being traded. Thus the value of call options is either zero or close to its fair value.
After making adjustments for the negative put and call premiums the charts would look more like what we usually see in the financial text books as given below NIFTY Index: Both the charts point towards a bearish market. The market expects NIFTY which is currently at to tend to levels by the option expiry date. The high value of put options in the Index region of to shows that the market expects that this level will not be reached by the Index, hence investors are selling the index at this level hoping to cover it by squaring off at lower levels.
Similarly the high value of call options in the Index region of to suggests that the market expects the Index to reach above this lower level, hence investors are buying at this level hoping to square off when the index reaches above this level.
Thus from the above argument we can conclude that the NIFTY index will trade below level and above levels. Also note that a higher premium in the to put and call options indicate that these options are relatively expensive to their fair value, but most probably these are the levels at which most of the trading is happening and the market is most interested in. If the Index continues to fall towards the put options will gain more premium while the call options will tend more to zero.
If the market turns around and starts moving towards then the call options will start adding premium while the put option premium will start going down. Trading in options would then simply mean to guess correctly the direction in which NIFTY will move and take a corresponding position where you can earn more premium.
Another interesting column in the above table is Open Interest which indicates how many contracts are still open for the respective option. Higher Open Interest indicates more liquid option. Increasing open interest at a particular level is also considered as an indication of market expectation that the index will reach that level by the contract expiry date. One of the factors influencing the value of the options is the volatility index VIX.
VIX value provides the expected fluctuation perceived by the market over the next 30 calendar days. When the market is range-bound or has a mild upside bias, volatility is globally observed to be typically low.
On such days, call option buying a position taken on the view that the market will move higher generally outnumbers put options buying a position taken on the view that the market will move lower.
This kind of market may indicate lower risk. Conversely, when the selling activity increases significantly, investors rush to buy puts, which in turn pushes the price of these options higher. Investors also buy puts to hedge their stock exposure in the market against generally negative market trends. This increased number of investors willing to pay for put options shows up in higher readings on the volatility index. High readings indicate a higher risk in the market place.
As far as options trading goes it always pays to be well aligned with the long term market trend. In the short term the market may flip - flop between bullish and bearish market causing the option values to fluctuate widely. However if an investors position is well aligned with the long term trend then he need not worry about these short term fluctuations.
One of the indicators of the long term trend is NIFTy future values.