Derivatives Options

Bullet Advisory Indian Stocks-how to buy Nifty Call-Put Option and calculate profit or loss

Everyday we listen  about Nifty Option price closing up or down,Call Option,Put Option, market bullish or bearish .We wonder how to trade in Nifty Option and earn profit with limited loss and unlimited profit. What are the points we have to keep in mind while trading Nifty Option, how to calculate the profit and loss.First of all we have to determine the direction of the market whether market will  be up or down.We can take the position in Nifty Option in the expected direction bullish or bearish.If we are bullish then we can buy Nifty Call Option and if bearish then we can buy Nifty Put Option.What trade we can execute and what would be our position in terms of profit and loss are explained below with examples.

If current price of Nifty is 2900 and Nifty Call Option Strike Price 3000 and Put Option Strike Price 2800 in January is 100=00 INRs and last date of expiry is on nth January. What trades we can do in Call and Put Option of Nifty and what will be our profit and loss position is as stated below.

 If bullish we can Buy Nifty Call Option

(1)Buy Nifty Call Option January Strike Price 3000@100 INRs.  Lot Size 50

Premium Paid=100*50=5000 INRs.

Maximum Loss=5000=00 INRs.

Maximum Profit=Unlimited

Break-even Price=3100

We can sell Nifty Call Option which we have bought anytime till last day of expiry i.e., nth January and can book profit or loss. If we do not sell Nifty Call Option we have bought till lasts day also then our trade will be automatically squared off at the settlement price of Nifty on last day of expiry decided by the exchange.

.Different Possibilities with our Nifty Call Option Buy position

(1) Nifty Call Option price 140 and sold before expiry then

140-100=40*50=2000.00 INRs. Profit

(2)Nifty Call Option price 60 and sold before expiry then

100-60=40*50=2000 INRs. Loss

(3)Nifty settlement price 3200 and we have not sold  Nifty Call Option till expiry then

3200-3000=200*50=10,000-5000=5000=00  INRs. Profit

(4)Nifty settlement price equals to or below 3000 and we have not sold Nifty Call Option till expiry then

5000=00  INRs Loss

This is the maximum loss we can have even if Nifty falls to any level beyond 3000.

(5)Nifty settlement price 3100 and we have not sold Nifty Call Option till expiry then

3100-3000=100*50=5000-5000=0.0 INRs. No Profit No Loss

If bearish we can Buy Nifty Put Option

(1) Buy Nifty Put Option Strike Price 2800.@100 INRs. Lot Size=50

Premium Paid=100*50=5000.00 INRs.

Maximum Loss=5000.00 INRs.

Maximum Profit=Unlimited

Break-even Price=2700

We can sell  Nifty Put Option bought anytime  till last day of expiry i.e., nth January and can book profit or loss.If we do not sell Nifty Put Option we have bought till lasts day also then  our trade will be automatically squared off at the settlement price of Nifty on last day of expiry decided by the exchange.

Different Possibilities with our Nifty Put Option Buy position

(1) Nifty Put Option  price 140 and sold before expiry then

140-100=40*50=2000.00 INRs. Profit

(2)Nifty Put Option price 60 and sold before expiry then

100-60=40*50=2000 INRs. Loss

(3)Nifty settlement price 2600 and we have not sold  Nifty Put Option till expiry then

2800-2600=200*50=10,000-5000=5000=00  INRs. Profit

(4)Nifty settlement price equals to or above 2800 and we have not sold Nifty Put Option till expiry then

5000=00  INRs Loss

This is the maximum loss we can have even  if Nifty rises to any level beyond  2800.

(5)Nifty settlement price 2700 and we have not sold  Nifty Put Option till expiry then

2800-2700=100*50=5000-5000=0.0 INRs. No Profit No Loss.

What is the advantage of buying Option compared to Future.Maximum loss is fixed and predefined.We cannot lose more then the premium paid to buy the Option under any circumstances and it is known to us before we trade.We can square up the Option  position anytime after buying just like Future.We have to pay only amount of premium and not the margin which is required for buying future.