Strike Price

the price at which the stock can be bought on the expiry day

Underlying Price
The underlying price is the price at which the underlying asset trades in the spot
market

Exercising of an option contract

Exercising of an option contract is the act of claiming your right to buy the options
contract at the end of the expiry

Option Expiry
Similar to a futures contract, options contract also has expiry. In fact both equity
futures and option contracts expire on the last Thursday of every month. Just like
futures contracts, option contracts also have the concept of current month, mid
month, and far month

Option Premium
Premium is the money required to be paid by the option buyer to the option
seller/writer. Against the payment of premium, the option buyer buys the right to
exercise his desire to buy (or sell in case of put options) the asset at the strike price
upon expiry

Intrinsic value of a call option

IV = Spot Price – Strike Price

Call option P&L

P&L = Max [0, (Spot Price – Strike Price)] – Premium Paid

breakeven point
B.E = Strike Price + Premium Paid

P&L of a Call option seller

P&L = Premium – Max [0, (Spot Price – Strike Price)]

Breakdown point for the call option seller = Strike Price + Premium Received
the intrinsic value formula for a Call option –
IV (Call option) = Spot Price – Strike Price

The intrinsic value of a Put option is –

IV (Put Option) = Strike Price – Spot Price

The P&L of a Put Option buyer can be calculated as

P&L = [Max (0, Strike Price –Spot Price)] – Premium Paid

The breakeven point for the put option buyer is calculated as

Strike – PremiumPaid
the P&L from writing a Put Option position
P&L = Premium Recieved – [Max (0, Strike Price – Spot Price)]

Breakdown point = Strike Price – Premium Received

P&L (Long call) upon expiry is calculated as P&L = Max [0, (Spot Price – Strike
Price)] –
Premium Paid
P&L (Long Put) upon expiry is calculated as P&L = [Max (0, Strike Price – Spot
Price)] –
Premium Paid

P&L for a short call option upon expiry is calculated as P&L = Premium Received
– Max
[0, (Spot Price – Strike Price)]
P&L for a short put option upon expiry is calculated as P&L = Premium Received
– Max
(0, Strike Price – Spot Price)

moneyness of an option contract

The moneyness of an option contract is a classification method wherein each

option
(strike) gets classified as either – In the money (ITM), At the money (ATM), or
Out of
the money (OTM) option. This classification helps the trader to decide which strike
to trade, given a particular circumstance in the market

The intrinsic value of an option is the money the option buyer makes from an
options contract provided he has the right to exercise that option on the given day.
Intrinsic Value is always a positive value and can never go below 0.

the concept of moneyness

should be quite easy to comprehend. Moneyness of an option is a classification
method which classifies each option strike based on how much money a trader is
likely to make if he were to exercise his option contract today. There are 3 broad
classifications –
1. In the Money (ITM)
2. At the Money (ATM)
3. Out of the Money (OTM)
And for all practical purposes I guess it is best to further classify these as –
1. Deep In the money
2. In the Money (ITM)
3. At the Money (ATM)
4. Out of the Money (OTM)
5. Deep Out of the Money

Understanding these option strike classification is very easy. All you need to do is
figure out the intrinsic value. If the intrinsic value is a non zero number, then the
option strike is considered ‘In the money’. If the intrinsic value is a zero the option
strike is called ‘Out of the money’. The strike which is closest to the Spot price is
called ‘At the money’.

Intrinsic value of an option is the amount of money you would make if you were
to
exercise the option contract

Intrinsic value of an options contract can never be negative. It can be either zero or
a positive number
Call option Intrinsic value = Spot Price – Strike Price
Put option Intrinsic value = Strike Price – Spot price

The premiums for ITM options are always higher than the premiums for OTM
option

1. Delta – Measures the rate of change of options premium based on the directional
movement of the underlying
2. Gamma – Rate of change of delta itself
3. Vega – Rate of change of premium based on change in volatility
4. Theta – Measures the impact on premium based on time left for expiry

Delta
delta measures the rate of change of premium for every unit
change in the underlying.

The delta is a number which varies –

1. Between 0 and 1 for a call option, some traders prefer to use the 0 to 100 scale.
So
the delta value of 0.55 on 0 to 1 scale is equivalent to 55 on the 0 to 100 scale.
2. Between -1 and 0 (-100 to 0) for a put option. So the delta value of -0.4 on the -1
to 0
scale is equivalent to -40 on the -100 to 0 scale

Expected change in option premium = Option Delta * Points change in

underlying