Option value calculator

Options are financial contracts that offer the buyer a right, but not an obligation, to buy or sell an asset on a specific date at a particular price called the strike price, which is predetermined at the date on which the option is being purchased or sold.

Thus, buyers can exercise the contract only if they feel that there is going to be a potential benefit. Otherwise, they can simply let go of the contract by not exercising it.

As a derivative product, options derive their value from an underlying asset such as Stocks, bonds, indices, foreign currencies and even commodities. There are basically two kinds of options: call options (which give the trader an option to buy the underlying asset) and put options (which give the trader an option to sell the underlying asset).

The European option can be exercised only at the expiration date, whereas the American Option can be exercised anytime before the expiration date when the option holder desires. Since 2010, all options in India are European options.

The price of an option is a function of many variables such as time to maturity, underlying volatility, spot price of underlying asset, strike price and interest rate, it is critical for the option trader to know how the changes in these variables affect the option price or option premium. The Option Greeks sensitivity measures capture the extent of risk related to options trading.

The sensitivity measures are Delta, Gamma, Theta, Vega and Rho

As an investor or trader, one may seek an answer to how much will the price of my option move if the stock moves ₹1? That’s where “delta” comes in. Delta is the amount an option price is expected to move based on a ₹1 change in the underlying stock. Calls have positive delta, between 0 and 1. If the stock price rises and other pricing variables remain constant, then the price for the call will go up.

For example:If a call has a delta of 0.75 and the stock goes up ₹1, in theory, the price of the call will go up about ₹0.75. If the stock goes down ₹1, in theory, the price of the call will go down about ₹0.75.

Puts have a negative delta, between 0 and -1. If the stock price rises and all other variables remain unchanged, then the price of the option will go down.

For example, if a put has a delta of -0.70 and the stock goes up ₹1, in theory, the price of the put will go down ₹0.70. If the stock goes down ₹1, in theory, the price of the put will go up ₹0.70.

As a thumb rule, in-the-money options will move more than out-of-the-money options, and short-term options will react more than longer-term options to the same price change in the stock.

It is the rate that delta will change based on a ₹1 change in the stock price. So if delta is the “speed” at which option prices change, gamma is the “acceleration.” Options with the highest gamma are the most responsive to changes in the price of the underlying stock.

Theta is the amount the price of calls and puts will decrease for a one-day change in the time to expiration. Therefore, at-the-money options are likely to have relatively significant rupee losses over time than in- or out-of-the-money options with the same underlying stock and expiration date. This is because at-the-money options have the most time value built into the premium. And the bigger the span of time value built into the price, the more is the downside.

It is the amount call and put prices will change, in theory, for a corresponding one-point change in implied volatility. Vega does not have any effect on the intrinsic value of options; it only affects the “time value” of an option’s price. Typically, as implied volatility increases, the value of options will increase. That’s because an increase in implied volatility suggests an increased range of potential movement for the stock.

For example, a 30-day option on stock ABC with a ₹40 strike price and the stock exactly at ₹40. Vega for this option might be 0.03. In other words, the value of the option might go up ₹0.03 if implied volatility increases one point, and the value of the option might go down ₹0.03 if implied volatility decreases one point.

To get the output, the user must input all the following variables: underlying, market price and strike price, transaction and expiry date, rate of interest, implied volatility and the type of option (i.e. call option or put option) and accordingly evaluate the output.

To get the output, the user must input all the following variables: underlying, market price and strike price, transaction and expiry date, rate of interest, implied volatility and the type of option (i.e. call option or put option) and accordingly evaluate the output.

Yes, our option value calculator can be used for both index options (such as Nifty50 and Bank Nifty) as well as stock options.