Before we go ahead let me explain the fundamental concept on which Options are traded. Options gives you the right to buy a particular instrument, however, you are not obligated to buy it. You just have to pay a small amount for that right.
The value of this amount includes intrinsic value and premium. Suppose you buy an Out of the Money Call Option with a strike of 9800 when the index is trading at 9600, it will have more of premium and less of intrinsic value. Once the Call Option goes In The Money i.e above 9800, intrinsic value will increase and premium will decrease.
One thing to remember before trading is that the amount which you pay for the Option factors in the concept of TIME VALUE OF MONEY.
This means that all Out Of the Money Calls and Puts will turn ZERO during the expiry day.
This is exactly where most of the traders make a killing.
Let’s say today is the starting of the expiry. You are pretty Bullish on Nifty. As of now, Nifty is trading at 9800. You expect Nifty to touch 10,000 by expiry. The value of 10,000 Call Option is Rs 65. You buy it.
On the expiry day, even if Nifty closes at 9950. The value of 10,000 Call Option will turn Zero.
Result – Total Loss
Let’s consider the above index values and sentiment as given in the above scenario. Now instead of buying 10,000 Call Option, you Short or Sell 9600 Put Option which is trading at Rs 50.
On the expiry day, in a worst case scenario, even if Nifty cracks 100 points and closes at 9700, your option will turn Zero.
Result – You earn Rs 50 per lot.
Hence, it is always a nice idea to Short Nifty Options at those levels which you think cannot be achieved by Nifty in any given expiry.
If you are Bullish, Short Put Options; If you are Bearish, Short Call Options.