Basics of Nifty Option Trading

In this Article, we will discuss about OPTIONS TRADING in NIFTY in most simple Language. Nowadays everyone wants to do Options Trading and trust me its very exciting.

Important terms in case of Option Trading:

  • Stock/Index
  • Strike Price
  • Expiry Date
  • Call/Put
  • Premium
  • Lot Size

So, we will understand each of the above Segments one by one and trust me in the end , everything will look very simple.

Segments of Options Trading

Options Trading can be done in Stocks or you can do Options Trading in Index like Nifty & Bank Nifty. In this Article we will take Nifty Options.

Options Trading in Nifty Options or Nifty Option Trading

As the term suggest, in Nifty Options Trading we are going to trade in Nifty Options.

Lets take an example now:

For Example: We have a Option like this : Nifty JULY 15000 CE or Nifty JULY 15000 PE

Which Stock or Index we are taking about ?

In the above example we are talking about Nifty Index.

What does JULY means in this example ?

JULY here means that this Option is for July Month.

What do we mean Expiry Date ?

When we say the Nifty option is of July Month means this Option is going to Expire on the Last Thursday of the July Month, please note which ever Thursday will be the last Thursday will be expiry date of that Nifty Option and hence Nifty Options have Monthly Expiry (Please Note: Nifty Options have Weekly Expiry as well)

What do we mean by Strike Price ?

Now in the above example , if you notice we are talking about Nifty for July Expiry for the Price of 15000 , so this 15000 is the Strike Price.

What does CE and PE mean here ?

What is this CE at the end of the Nifty Option: CE means Call and PE means PUT.

What does Call and Put means ?

Call means you want the Nifty to go up and PUT means you want Nifty to go down

What we Understood till now ?

So, till here we understood that we have a Nifty Index Option for July Month for Strike Price 15000 and we either have a CALL or PUT – But what does all that means to me ?

Now, let’s assume you bought Nifty JULY 15000 CE at Premium of 100 Rs , but hey what is Premium ??

What do we mean by Premium ?

Premium, is the Price you Pay to buy this Nifty Index Option, its just like for buying Infosys stock you need to pay the price of the stock similarly for buying Nifty Option you need to pay Premium.

So now Read Carefully, we are Buying Nifty 15000 CALL Option for July Expiry and we are Paying Premium of 100 Rs . This means now if Nifty starts moving up you will be making Profit. But how is it calculated and is that so simple ?

What is Lot Size ?

Every Stock Option has its Lot Size. When you buy a Stock you can buy one share or 1 crore shares it depends on your choice , but in case of Nifty options Nifty has its own lot size Lot Size of 50 .

How Much Money is Invested to Buy this NIFTY Option ?

You are Paying 100 Rs for each one share of Nifty option, so total money we need to invest for buying this Option is 100×50= 5000 (this amount can change as well , so you can check margin calculator for the broker you use).

When we will start making Profit – Most Important Question.

For Example, you took the Nifty July 15000 CE at 100 Premium on 3rd July and last Thursday of the July Month is falling for example on 29th July, now on 29th July NIFTY closed at 15250.

How is the Profit Calculated in the above Case:

Since you took NIFTY Call Option of 15000 Strike and NIFTY Closed at 15250, so you were correct by 250 points, means you thought NIFTY will go up above 15000 but till where it will go you didn’t know but it went till 15250, so the Premium of NIFTY JULY 15000 CE will become 250 on expiry day.

How is the Premium Calculated at the Time of Expiry ?

It’s simple the Price it closed on Last Thursday in our case NIFTY Closed at 15250 minus the strike price you choose which in our case was 15000 , so the difference is 250 and that will be the final Premium.

Still what is my final Profit ?

Premium you Paid for Buying this NIFTY JULY 15000 CE was 100 and now the Premium is 250 , so you gained 150 Points of Premium .

Nice , so means my profit is just 150 Rs ?

No your profit is the Premium Gained multiplied by the Lot Size which in our case is 50 , so our Profit is 150×50= 7500 Rs.

So, you Paid 5000 Rs and you made Profit 7500 Rs , this is the Power of Options , if you and your view is correct at the end of Expiry you can make a lot of Money.

But what if what if NIFTY Closed below 15000 on Expiry date ?

If NIFTY Closed below 15000 on Expiry date, what will happen to your Option , in this case since your view went wrong and NIFTY closed above 15000 at the expiry day hence your Investment of 5000 becomes 0

What if NIFTY Closed at 15070 on Expiry date ?

What if NIFTY Closed at 15070 on Expiry date, what will happen to your Option, in this case even though your view of NIFTY closing above is correct , but NIFTY just closed 70 points above the strike price you selected which means the Premium at the time of Expiry become 70 Rs but you paid 100 Rs Premium , so here also you made a loss of 30 premium points which means 30×50 = Rs 1500 Loss.

So, it means if NIFTY closed above 15100 you start making Profit.

What if NIFTY moves to 15250 in mid July and comes back below 15000 at the time of Expiry ?

If NIFTY moves to 15250 in mid July and comes back below 15000 at the time of Expiry then also you loose all your investment because at the end of expiry NIFTY closed below 15000

Can we sell NIFTY option before Expiry ?

Can we sell NIFTY option before Expiry for example when it went up till 15200 or 15250 , yes you can sell it anytime you like or when you see Profit or Loss, you can sell before expiry anytime or at expiry.

If you don’t sell at Expiry then automatically the Premium gets settled as discussed above.

This was the basics of Nifty Options Trading which every trader should know, there are many other Concepts in Options which we will cover in the coming articles, if you want to understand Options in more details watch the below Video:

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