Why is selling options high risk?

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Basics of Option Higher initial Margin risk is the big risk in selling or writing options. When you buy options, you pay premium margins, which is the maximum loss on the
transaction. However, when you sell options your losses can be potentially unlimited just like a long or short futures position.

Intrinsic+ Extrinsic
Extrinsic value

Option Chain (OTM (out of the money)-ATM (at the money)-ITM (in the money)

Extrinsic Intrinsic+
value Extrinsic

Calculation

The breakeven point for a call option is the point at which the option holder neither makes a profit nor
incurs a loss. In the context of call options, the breakeven point can be calculated using the following
formula:

Breakeven Price = Strike Price + Premium Paid

Option Pay-Off Graph
Here's how it works:

1. Strike Price (X): This is the price at which you have the right to buy the underlying asset if you
choose to exercise the call option.
2. Premium Paid (C): This is the initial cost you paid to purchase the call option. It's the price you
paid for the right to buy the underlying asset at the strike price. The premium is determined by
market factors and the option's pricing model.
The breakeven point for a put option is the point at which the option holder neither makes a profit nor
incurs a loss. In the context of put options, the breakeven point can be calculated using the following
formula:

Breakeven Price = Strike Price - Premium Paid

 All Strike Price -OTM

All Strike Price -ITM

Put Option
Call Option
ATM

All Strike Price -OTM

All Strike Price -ITM

Put Option
Call Option

Note:: Note:

Any option that has an intrinsic value is classified as 'In the Money' (ITM) option. Any Several factors like implied volatility, interest-free rate, time decay, etc. determine the
option that does not have an intrinsic value is classified as Out of the Money' (OTM) option’s extrinsic value. The longer the time an option has until expiration, the higher its
option. If the strike price is almost equal to spot price, then the option is considered as extrinsic value will be. As the expiration approaches, the extrinsic value of an option
'At the money' (ATM) option. decreases and it becomes worthless as it expires.

Note:
Note:
Price go up Call premium increases and Price go down Put increase.
Several factors like implied volatility, interest-free rate, time decay, etc. determine the
Sometimes you will notice price increases, but call is not increasing at same rate before-
option’s extrinsic value. The longer the time an option has until expiration, the higher its
this is time of reversal.
extrinsic value will be. As the expiration approaches, the extrinsic value of an option
decreases, and it becomes worthless as it expires. This creates with Open Interest. That means not much buyers are willing to buy call at
that particular strike. Same as put side
How to Calculate Break Even if you Buy Call Option: This calculation must be known by Trader who is doing Option Trading

Example: XYZ Stock trading at 410$, Stock looks like will go up, I am willing to buy Call Option as stock expected to move higher.

What is your prediction to go? Sure 450$ Note:

Let’s take 420 strike price Call option @18$ : Expired 10D after. Buy Call or Buy Put option are only work when trader are quite
Calculate the breakeven: Strike Price + Premium Price = Breakeven Price
confirmed that price going to move higher/lower with a higher
speed and cross the breakeven. Many trader doing scalping
420$+18$=438$ Breakeven with Option. Only risk that if price not move as expected then
How Much Max profit? Unlimited premium reduced through extrinsic value.

Risk: Max loss: 18$* (lot size) if stock expires below strike price=420, still you will be losing below 438

OMG: That means my profit will start after 438? YES Right Normally trader use Buy/Call to hedge their Sell position.
Calculation? Stock closing price on expiry day-strike price= Profit/Loss
Need less Margin as Risk defined. Win Chance less, can make
How is it calculated? good money with scalping.

When you choose OTM strike (420) @ CE premium 18$ expecting stock will go up = all the premium have extrinsic value (mainly time value).

Each day, time decay and Premium price reduces, and slowly nearer to the expiry it will minimum and expiry day worthless.

So stock price must overcome breakeven to get the profit.

Let’s do: Strike Price 420 CE buy

Day: 1 Day: 2 Day: 3 Day: 4 Day: 5 Day: 6 Day: 7 Day: 8 Day: 9 Day: 10

Prem:18$ Prem:18.5$ Prem:17$ Prem:19$ Prem:16$ Prem:16.5$ Prem:16$ Prem:14$ Prem:6$ Prem:8$

Stock Price: 410$ Stock Price: 412$ Stock Price: 410$ Stock Price: 414$ Stock Price: 414$ Stock Price: 420$ Stock Price: 415$ Stock Price: 425$ Stock Price: 420$ Stock Price: 430$

Even though stock moves from 410$ to 430$ still buyer loose 10$ as it could not be able to cross break even 438$

Let’s do a simple calculation: What will be the value at expiry.

Stock expired below 420 strike prices = Prem. 0 (all extrinsic value zero worth less)

Stock expires at 421$ = Prem? 421-438= -17$

Stock expires at 425$ = Prem? 425-438= -13$

Stock expires at 430$ = Prem? 430-438= -8$

Stock expires at 435$ = Prem? 435-438= -3$

Stock expires at 438$ = Prem? 438-438= -0$

Stock expires at 440$ = Prem? 440-438= +2$

Stock expires at 450$ = Prem? 450-438= +12$

Note: Stock closing price on expiry day-strike price= Profit/Loss

Note that when you buy a call OTM strike price, even price will move higher, nearer to expiry every day premium reduces because of other extrinsic variable (mainly for time)
How to Calculate Break Even if you Sell Put Option: This calculation must be known by Trader who is doing Option Trading

Example: XYZ Stock trading at 410$, Stock looks like will go up, I am willing to Sell Put Option as stock expected to move higher.
Note:
What is your prediction to go? Sure 450$ and good support at 400$
Sell Call or Put option, profit comes with different strategy to eat extrinsic value as every day
Let’s take 400 strike price Put option @18$ : Expired 10D after.
nearer to expiry extrinsic value reduces and at exp. It is zero. So, trader make full profit even
Calculate the breakeven: Strike Price - Premium Price = Breakeven Price though stock does not move and also can make money even though stock expires above break
even.
400$-18$=382$ Breakeven

How Much Max profit? 18$* Lot Size

Normally consolidate market traders are happy to sell both Call and Put to eat both side’s OTM
extrinsic value – Strangle/Straddle. These Strategy generates good amount of money.
Risk: Unlimited below 382$
Traders who does not like to take risk of unlimited because of sudden overnight scenarios)
Aha: If Stock trading above 400$, you will get 18$*lot size
GAP-Up/Down) they does Iron Fly/Iron Condor – so these strategy gives defined loss and
Calculation? Stock closing price on expiry day-strike price= Profit/Loss defined profit.
How is it calculated? Positive Bias Put Sell only, and Negative bias Call sell only works also with higher SL above
When you choose OTM strike (400) @ PE premium 18$ expecting stock will go up = all the premium have extrinsic value (mainly time value). Strike price/Break even.

Each day, time decay and Premium price reduces, and slowly nearer to the expiry it will minimum and expiry day worthless. Sell Option need higher Margin as undefined loss, but Iron Condor/Iron Fly type strategy have
defined loss, hence margin need less
So stock price must overcome breakeven to get the profit.

Let’s do: Strike Price 400 PE sell

Day: 1 Day: 2 Day: 3 Day: 4 Day: 5 Day: 6 Day: 7 Day: 8 Day: 9 Day: 10

Prem:18$ Prem:17$ Prem:16$ Prem:12$ Prem:10$ Prem:7$ Prem:8$ Prem:4$ Prem:2$ Prem:0$

Stock Price: 410$ Stock Price: 412$ Stock Price: 410$ Stock Price: 414$ Stock Price: 414$ Stock Price: 420$ Stock Price: 415$ Stock Price: 425$ Stock Price: 420$ Stock Price: 430$

Stock moves from 410$ to 430$ seller make full profit of 18$

Let’s do a simple calculation: What will be the value at expiry.

Stock expired above 400 strike prices = Prem. 0 (all extrinsic value zero worth less)

Stock expires at 400$ or above = Prem? 400-400=0$

Stock expires at 395$ = Prem? 395$-400$=-5$ (Sold at 18$- Current Premium at exp. 5$=13$*lot size profit)

Stock expires at 390$ = Prem? 390$-400$=-10$ (Sold at 18$- Current Premium at exp. 10$=8$*lot size profit)

Stock expires at 385$ = Prem? 385$-400$=-15$ (Sold at 18$- Current Premium at exp. 15$=3$*lot size profit)

Stock expires at 382$ = Prem? 382$-400$=-18$ (Sold at 18$- Current Premium at exp. 18$=0$*lot size profit)

Stock expires at 380$ = Prem? 380$-400$=-20$ (Sold at 18$- Current Premium at exp. 20$=2$*lot size loss)

Stock expires at 370$ = Prem? 370$-400$=-30$ (Sold at 18$- Current Premium at exp. 30$=12$*lot size loss)

Note: Stock closing price on expiry day-strike price= Profit/Loss

Note that when you sell a put OTM strike price, even price will move lower you still make profit up to break even – only loss if it crossed breakeven lower.

If you know price action then you must make a SL, and play just opposite. CE Sell/
Greeks with Concept:

The "Greeks" in the context of options trading refer to a set of risk measures or sensitivities that help traders and investors understand how changes in various factors can affect the value and
behavior of options. These measures are often used to assess and manage the risks associated with options positions. The primary Greek letters associated with options are:

1. Delta (Δ): Delta measures the rate of change of an option's price in relation to a $1 change in the price of the underlying asset. It indicates how sensitive the option's price is to movements in the
underlying asset. A delta of 0.50 means that for every $1 increase in the underlying asset's price, the option's price will increase by $0.50 (and vice versa).

2. Gamma (Γ): Gamma measures the rate of change of an option's delta in relation to a $1 change in the price of the underlying asset. It reflects the rate of change in an option's sensitivity to the underlying
asset's movements. High gamma values indicate that delta will change rapidly with even small movements in the underlying asset.

3. Theta (Θ): Theta measures the rate of time decay of an option's value. It quantifies how much the option's price is expected to decrease with the passage of time, assuming all other factors remain
constant. Theta is particularly important for traders who engage in options strategies that rely on time decay, such as selling options.

4. Vega (ν): Vega measures the sensitivity of an option's price to changes in implied volatility. Implied volatility represents the market's expectations regarding future price fluctuations of the underlying asset.
Options with higher vega values are more sensitive to changes in implied volatility. Traders often look at vega when assessing the potential impact of volatility changes on their options positions.

5. Rho (ρ): Rho measures the sensitivity of an option's price to changes in interest rates. It indicates how an option's value will change with a 1% change in interest rates. Rho is typically more relevant for
long-term options, such as LEAPS (Long-Term Equity Anticipation Securities), which are more sensitive to interest rate fluctuations.