![]() ![]() Lower the implied volatility, lower will be the contracts’ premium and vice versa.Īdditional Read: Why Liquidity Matters to an Options Trader? 3. On the other hand, Options in the money or out of the money are less susceptible to implied volatility. Options contracts that are near the money are sensitive to implied volatility. Implied volatility means the amount of volatility that an underlying asset in an Options contract will be exposed to. Look at the implied volatility of the Options contract It is more likely to depend on the volatility and the time left in the expiry. In the case of Out of the Money (OTM) Options, the change in premium is not the same as of spot price. ![]() 1 change in spot price is likely to move the Option price by Re. For In the Money (ITM) Options, the change in the Option price is likely to be the same as of spot price, i.e., every Re. The other thing that should be considered here is the Option price movement with respect to the change in the spot price. Please note that an Option buyer's risk is limited to the premium paid while the Option seller's risk is unlimited. A risk-averse investor may go with near ATM or OTM Options, while those who want to make more significant profits and assume more risk may opt for the deep ITM Options. A Call Option with a very low strike price and a Put Option with a very high strike price compared to spot prices are known as deep ITM Options. Deep In-the Money are those Options where intrinsic value and hence the premium is very high. When the strike price is deep In-the-Money, the risk is higher. The risk is lower for Options contracts whose strike prices are very close to the underlying asset's spot price. When choosing the strike price for your Options contract, you need to consider your risk appetite. When choosing the strike price, you need to be clear on these fronts.Īdditional Read: Option strategies to trade for upcoming assembly elections in 5 states How to choose the right strike price? 1. We can see that Put Option with higher strike prices has higher intrinsic value. Intrinsic value of Put Option with a strike price of 1200 = Max (0, Strike price - Spot price) = Max (0, 1200 - 1000) = Max (0,200) = 200 Intrinsic value of Put Option with a strike price of 1100 = Max (0, Strike price - Spot price) = Max (0, 1100 - 1000) = Max (0,100) = 100 The scenario will be the opposite for Put Options. We can see that Call Option with lower strike prices has higher intrinsic value. Intrinsic value of Call Option with a strike price of 800 = Max (0, Spot price- Strike price) = Max (0, 1000 - 800) = Max (0,200) = 200 Intrinsic value of Call Option with a strike price of 900 = Max (0, Spot price- Strike price) = Max (0, 1000 - 900) = Max (0,100) = 100 That is because the difference between strike and spot prices will be more. In a Put Option, the opposite is true – the higher the strike price, the more valuable the Option will be. In case of a lower strike price, the difference between spot and strike price will be higher and the premium will be more. Intrinsic value of a Put Option = Max (0, Strike price - Spot price) ![]() Intrinsic value of a Call Option = Max (0, Spot price - Strike price) Option premium = Intrinsic value + Time value An Option premium is the total of intrinsic value and time value. Intrinsic value is the difference between the spot and strike prices and can't be negative. ![]() When it comes to a Call Option, the lower the Option's strike price, the more valuable or expensive the Call Option will be due to higher intrinsic value. If the spot price is below the strike price, the Option is ITM otherwise, it will be out of the money. In the case of Put Options, the scenario would be reversed. If the underlying market price remains below the strike price, it will expire worthlessly or Out-of-The-Money (OTM). If the spot price is equal to the strike price, the Option contract is said to be At-the-Money (ATM). In the case of a Call Option, if the spot price is more than the strike price, then the Option contract is said to be In-the-Money(ITM). The strike price plays a crucial role in determining the premium paid for an Options contract. In other words, it is the price at which an Option buyer will buy or sell an underlying asset if they wish to exercise their right. The strike price is the price at which an Options contract can be exercised. Before you trade an Options contract, you need to make two critical decisions: the strike price you want to trade and the expiration date. Derivatives trading, particularly Options trading, is complex and requires many considerations. ![]()
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