Payoff Profile of Option Positions
Buyer of an option has a right and no obligation with regard to buying asset in the contract. When you are long on equity option contract:
Option Buyer
- Buyer has the right to exercise that option. The potential loss is limited to the premium amount paid for buying the option. Profit would depend on the level of underlying asset price at the time of exercise/expiry of the contract.
Consider an illustration of buyer of a call option, also considered “Long Call”, NIFTY call option of strike 17650, with a premium of about Rs 155 and Lot Size of 50 with expiry date of 1 Sept 2022.
Quantsapp Option architect opens up the doors for option traders to view strategy payoff and be aware of the payoff profile of option strategies, for sounder decision making.
Consider another illustration of buyer of a put option, also considered “Long Put”, NIFTY put option of strike 17650, with a premium of about Rs 160 and Lot Size of 50 with expiry date of 1 Sept 2022.
Option Seller
Seller of an option is also called “short option” or “option writing”. When you are short an equity option contract, option seller :
- Your maximum profit is the premium received. You can be assigned an exercised option upon expiry of option contract. Your potential loss is theoretically unlimited.
An illustration of seller of a call option, also considered “Short Call”, NIFTY call option of strike 17650, with a premium of about Rs 155 and Lot Size of 50 with expiry date of 1 Sept 2022.
Short/Sell Put
Similarly, illustration of a put option seller, also considered “Short Put”, NIFTY put option of strike 17650, with a premium of about Rs 160 and Lot Size of 50 with expiry date of 1 Sept 2022. The maximum profit for an option seller is the premium received i.e. Rs 160.80 * 50 = Rs 8040/-, as highlighted ahead in the screen shot of Nifty option architect of Quantsapp.
Money Spinner
An observation: The underlying NSE index, quoting at 17600 approximately and the weekly option premium is about 1% of the value i.e. about Rs 160 (as seen in earlier illustrations). Now if Nifty were to move by just 1%, the option could be a money doubler, while the loss is limited to only the option premium. So returns on Nifty options is manifold as compared to Nifty futures and risk is limited in options.
Frequently asked questions
What are positions in options?
The trading position established by a trader in an option leg may be a buy position or sell position.
What is the best option strategy for beginners?
Beginners, who are new to the option markets, should prefer strategies with limited losses and should prefer to buy options and trade, rather than selling options.
Can I execute a call option at any time?
Yes, buying or selling of call or put options can be done before the expiry date of that contract, subject to the trader has sufficient money to execute the transaction.
Do options expire end of the day?
No, Options expire on a pre-determined date as mentioned in the option contract, which is called expiry date.
Examples are for education only, not investment advice. Derivatives trading carries risk; read all scheme and risk documents before trading.