What is options premium? Know this as options are safer than futures for controlling buyer risks Sameer Bhardwaj explains option Greeks, which influence options premiums
Sameer Bhardwaj explains option Greeks, which influence options premiums.
#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;}
Budget with ET
Budget 2025: A CFO’s playbook for operational excellence and long-term growth
Rising Bharat may need to take center stage for India’s game-changing plans
Will Indian Railways accelerate to global standards with govt’s budgetary allocation?
What is options premium?
To acquire the right to buy or sell the underlying asset (stock or index) at a defined price on a stated expiry date, buyers pay a price to the options sellers. This price is called the options premium.The payment of premium limits the risk for buyers and opens opportunities for unlimited gains.The options sellers have the obligation to buy or sell the underlying asset (stock or index) from the buyer at the defined strike price on expiry.To sell the right, sellers receive a premium.Sellers have limited profit potential to the extent of the premium received, but are exposed to unlimited risks.Constituents of option premium
Options premium is the sum of intrinsic value and extrinsic value (or time value).RIL spot price on 20 Jan 2025: Rs.1,304 Options expiry date: 30 Jan 2025
Intrinsic value
The money that an options buyer makes if there is a right to exercise that option on a given day.Intrinsic value is always positive.If intrinsic value is negative, it is taken as zero.For call options, intrinsic value equals underlying or spot price minus strike price.For put options, intrinsic value equals strike price minus spot price.Examples of intrinsic value
Rs.1,290 strike call intrinsic value is Rs.14 (Rs.1,304 minus Rs.1,290).Rs.1,320 strike call options intrinsic value of zero. It is not worth buying RIL at Rs.1,320 on 20 August, when the same is available at Rs.1,304 in spot market.Extrinsic value
Also called time value, it’s the part of an option's price linked to the time until expiration.In other words, it is the amount that buyers are willing to pay for the possibility of the option turning profitable before it expires.
Examples of extrinsic value
Rs.1,290 strike call options time value is Rs.11.25, which is premium (Rs.25.75) minus intrinsic value (Rs.14).Rs.1,320 strike price call option available at a premium of Rs.10.75. The intrinsic value is zero. Therefore, the entire price is due to time value.Call options premium loses intrinsic value as the underlying price falls below strike price
Artificial Intelligence(AI)
Java Programming with ChatGPT: Learn using Generative AI
By - Metla Sudha Sekhar, IT Specialist and Developer
Artificial Intelligence(AI)
Basics of Generative AI: Unveiling Tomorrows Innovations
By - Metla Sudha Sekhar, IT Specialist and Developer
Artificial Intelligence(AI)
Generative AI for Dynamic Java Web Applications with ChatGPT
By - Metla Sudha Sekhar, IT Specialist and Developer
Artificial Intelligence(AI)
Mastering C++ Fundamentals with Generative AI: A Hands-On
By - Metla Sudha Sekhar, IT Specialist and Developer
Artificial Intelligence(AI)
Master in Python Language Quickly Using the ChatGPT Open AI
By - Metla Sudha Sekhar, IT Specialist and Developer
Marketing
Performance Marketing for eCommerce Brands
By - Zafer Mukeri, Founder- Inara Marketers
Office Productivity
Zero to Hero in Microsoft Excel: Complete Excel guide 2024
By - Metla Sudha Sekhar, IT Specialist and Developer
Finance
A2Z Of Money
By - elearnmarkets, Financial Education by StockEdge
Marketing
Modern Marketing Masterclass by Seth Godin
By - Seth Godin, Former dot com Business Executive and Best Selling Author
Astrology
Vastu Shastra Course
By - Sachenkumar Rai, Vastu Shashtri
Strategy
Succession Planning Masterclass
By - Nigel Penny, Global Strategy Advisor: NSP Strategy Facilitation Ltd.
Data Science
SQL for Data Science along with Data Analytics and Data Visualization
By - Metla Sudha Sekhar, IT Specialist and Developer
Artificial Intelligence(AI)
AI and Analytics based Business Strategy
By - Tanusree De, Managing Director- Accenture Technology Lead, Trustworthy AI Center of Excellence: ATCI
Web Development
A Comprehensive ASP.NET Core MVC 6 Project Guide for 2024
By - Metla Sudha Sekhar, IT Specialist and Developer
Marketing
Digital Marketing Masterclass by Pam Moore
By - Pam Moore, Digital Transformation and Social Media Expert
Artificial Intelligence(AI)
AI-Powered Python Mastery with Tabnine: Boost Your Coding Skills
By - Metla Sudha Sekhar, IT Specialist and Developer
Office Productivity
Mastering Microsoft Office: Word, Excel, PowerPoint, and 365
By - Metla Sudha Sekhar, IT Specialist and Developer
Marketing
Digital marketing - Wordpress Website Development
By - Shraddha Somani, Digital Marketing Trainer, Consultant, Strategiest and Subject Matter expert
Office Productivity
Mastering Google Sheets: Unleash the Power of Excel and Advance Analysis
By - Metla Sudha Sekhar, IT Specialist and Developer
Web Development
Mastering Full Stack Development: From Frontend to Backend Excellence
By - Metla Sudha Sekhar, IT Specialist and Developer
Finance
Financial Literacy i.e Lets Crack the Billionaire Code
By - CA Rahul Gupta, CA with 10+ years of experience and Accounting Educator
Data Science
SQL Server Bootcamp 2024: Transform from Beginner to Pro
By - Metla Sudha Sekhar, IT Specialist and Developer
DELTA
Measures how much an options price changes due to the change in the underlying asset (stock or index).It ranges between 0 and 1 for call options and between -1 and 0 for put options.For example, a call option Delta of 0.4 means that the call price will increase by four points for every 10 point jump in the underlying asset.A call option becomes valuable as the underlying price rises.A put option of a Delta of -0.5 means that the put premium will fall by five points for every 10 point jump in the underlying asset.A put option loses worth as the underlying asset's price rises.ATM call options Delta is near 0.5, ATM put options Delta is close to -0.5.OTM options Delta is close to zero for both call and put options.ITM call options Delta is close to 1, ITM put options Delta is close to -1.GAMMA
Measures how much Delta changes due to the change in the underlying stock or index.Delta is not fixed and continues to change as the moneyness of an option varies.In other words, as the option transits from OTM towards ATM or ITM, the associated Delta values change.Proves useful in risk management. Low Gamma is desirable for conservative traders.A high Gamma means that Delta will move significantly for even a small change in the underlying asset.What influences options prices?
Premiums are influenced by certain factors that are collectively termed ‘Greeks’.Though there are five Greeks that influence options premiums, the primary four are: Delta, Gamma, Theta and Vega.Greeks are themselves controlled by the market forces.The Delta and Gamma influence the intrinsic value, whereas Theta and Vega influence the extrinsic or time value.Understanding of Greeks helps in taking informed decisions in options trading.As stock or index values change during the trading day, the value of Greeks changes, which in turn influences the options premiums.THETA
With a given expiry date and keeping other factors constant, the option loses value as the number of days to expiry reduce.In other words, the time value portion of an options price erodes on a daily basis due to the passage of time.Theta measures the rate at which the option loses value as the expiry date approaches.For example, a 0.6 Theta means that the option will lose 0.6 points daily.For options buyers, the value of Theta is negative.For options sellers, Theta is favourable as the eroding option value increases the prospects of gains from the premium received.VEGA
Measures the sensitivity of an option's price to changes in volatility.An increase in volatility leads to an increase in options prices and vice versa.Higher volatility increases the possibility of prices moving in the desired direction and, thereby, make the options profitable.A Vega of 0.2 means that the option will gain 0.2 points for every 1% jump in volatility, and vice versa.The effect of volatility is higher when there are more days to expiry.Vega declines as the options approach expiration.Moneyness of an option contract
Intrinsic value helps to judge the moneyness of options contractsOptions with zero intrinsic value are OTM or out of money.Options with positive intrinsic value are ITM or In the money.Options with spot price equal to strike price or very close to strike price are ATM or at the money. #sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;}This story originally appeared on: India Times - Author:Faqs of Insurances
