There’s a famous saying among option traders ~
“Option sellers eat like chicken & poop like elephant?”
Why is it so?
Let’s explore.
📖OPTIONS KI PAATHSHAALA📖
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#optionstrading
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“Option sellers eat like chicken & poop like elephant?”
Why is it so?
Let’s explore.
📖OPTIONS KI PAATHSHAALA📖
#threadbytradersushma
#optionstrading
#StockMarketindia
Before analysing the above saying we need to understand the parity (intrinsic value) graphs of option position.
It shows the value of an option position at expiry.
It shows the value of an option position at expiry.
If u have bought an option, intrinsic value of that option will represent a credit whereas if u have sold option, its intrinsic value will represent debit for u.
For more information on intrinsic value visit the thread below.
For more information on intrinsic value visit the thread below.
LONG CALL OPTION (Call Option Buying)
•Intrinsic value is 0 below the strike price.
•Above strike price, for every one-point increase in market price, option price gains one point in its intrinsic value.
•Intrinsic value is 0 below the strike price.
•Above strike price, for every one-point increase in market price, option price gains one point in its intrinsic value.
SHORT CALL OPTION (Call Option Selling)
•Intrinsic value is 0 below the strike price.
•Above strike price, for every one-point increase in market price, option price loses one point in its intrinsic value.
•Intrinsic value is 0 below the strike price.
•Above strike price, for every one-point increase in market price, option price loses one point in its intrinsic value.
LONG PUT OPTION (Put Option Buying)
•Intrinsic value is 0 above the strike price.
•Option price gains one point in its intrinsic value for every one-point fall in market price.
•Intrinsic value is 0 above the strike price.
•Option price gains one point in its intrinsic value for every one-point fall in market price.
SHORT PUT OPTION (Put Option Selling)
•Intrinsic value is 0 above the strike price.
•Option price loses one point in its intrinsic value for every one-point fall in market price.
•Intrinsic value is 0 above the strike price.
•Option price loses one point in its intrinsic value for every one-point fall in market price.
LONG CALL OPTION
SHORT CALL OPTION
LONG PUT OPTION
SHORT PUT OPTION
Parity graphs highlight that ~
🔹Buyers of option has limited risk & unlimited potential. They can never lose more than the price of the option.
🔹Sellers of option have limited profit potential only up to the amount of premium received whereas risk is unlimited.
🔹Buyers of option has limited risk & unlimited potential. They can never lose more than the price of the option.
🔹Sellers of option have limited profit potential only up to the amount of premium received whereas risk is unlimited.
That's the reason why option sellers "eat like chicken & poop like elephant."
That's all for this thread. More shall be covered on options basics in forthcoming posts. Stay tuned.
That's all for this thread. More shall be covered on options basics in forthcoming posts. Stay tuned.
If u found the thread useful, RT the 1st post of this thread to share the knowledge.
Meanwhile follow @tradersushma for more such informative posts on trading & investing.
Meanwhile follow @tradersushma for more such informative posts on trading & investing.
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