how does the price differ in the call option contract when it gets closer to the expiry date?
i had seen the price around 68 for call 4600(on 24th friday), and it had come down to 48 on monday although the nifty ended with +3.
could any one clarify why this has happend and what is the right time to buy an option contract and when to sell it.
~thanks
Usually the extrinsic value (sometimes called the time value) of an option decreases as expiration gets closer. That means the price of the option usually goes down as time passes, but that is certainly not always true. The value of a specific option can change due to any of the following changing:
(1) The price of the underlying asset
(2) The amount of time before expiry
(3) The implied volatility of the option
(4) The risk-free interest rate
(5) The next ex-dividend date
<<<i had seen the price around 68 for call 4600(on 24th friday), and it had come down to 48 on monday although the nifty ended with +3.
could any one clarify why this has happend>>>
I don’t follow options on the Nifty index, and you did not specify the expiry for the option, so I can only give you an educated guess. If the option expires soon, say at the end of the month, the decrease was probably primarily due to "theta" (the decrease in the price of an option due to the passage of time). If expiry is at least a month away, the decrease was probably primarily due to "vega" (the change in the value of an option due to a change in implied volatility).
<<<what is the right time to buy an option contract and when to sell it.>>>
The right time depends upon the risk-reward profile you want. For example, if you buy an out-of-the-money option near expiry you will probably pay a low premium, hence have a low risk, and you will have a chance of a huge percentage profit, but you will also have a 100% loss most of the time. Some people find that attractive, others do not.
I generally prefer to buy options with more time until expiration and sell options with less time until expiration. Unless it is being used to hedge another position, I usually prefer to close a long options position at least two weeks prior to expiration to prevent holding the option when theta is at its highest.
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hi saravan, the option has what is known as time decay, as the time moves closer to the expiry date the price moves close to the price of the underlying asset and it will finally meet at the day of expiry
References :
Usually the extrinsic value (sometimes called the time value) of an option decreases as expiration gets closer. That means the price of the option usually goes down as time passes, but that is certainly not always true. The value of a specific option can change due to any of the following changing:
(1) The price of the underlying asset
(2) The amount of time before expiry
(3) The implied volatility of the option
(4) The risk-free interest rate
(5) The next ex-dividend date
<<<i had seen the price around 68 for call 4600(on 24th friday), and it had come down to 48 on monday although the nifty ended with +3.
could any one clarify why this has happend>>>
I don’t follow options on the Nifty index, and you did not specify the expiry for the option, so I can only give you an educated guess. If the option expires soon, say at the end of the month, the decrease was probably primarily due to "theta" (the decrease in the price of an option due to the passage of time). If expiry is at least a month away, the decrease was probably primarily due to "vega" (the change in the value of an option due to a change in implied volatility).
<<<what is the right time to buy an option contract and when to sell it.>>>
The right time depends upon the risk-reward profile you want. For example, if you buy an out-of-the-money option near expiry you will probably pay a low premium, hence have a low risk, and you will have a chance of a huge percentage profit, but you will also have a 100% loss most of the time. Some people find that attractive, others do not.
I generally prefer to buy options with more time until expiration and sell options with less time until expiration. Unless it is being used to hedge another position, I usually prefer to close a long options position at least two weeks prior to expiration to prevent holding the option when theta is at its highest.
References :