All About Options

5.1 Option Terminologies

Options trading involves several key terms that are essential to understand. These include call options (which give the holder the right to buy the underlying asset), put options (which give the holder the right to sell the underlying asset), strike price (the price at which the underlying asset can be bought or sold), expiration date (the date on which the option expires), premium (the price paid for the option), and underlying asset (the asset on which the option is based).

An option is a derivative financial instrument that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price within a set period. There are two types:

• Call Option: Gives the right to buy.
• Put Option: Gives the right to sell.

Example:

Imagine you are considering buying shares of a company but are unsure whether the price will increase. You purchase a call option that gives you the right to buy the shares at ₹100 (strike price) within the next month. If the stock price rises to ₹120, you can exercise your option to buy at ₹100, gaining ₹20 per share.

Underlying Asset

The underlying asset is the financial instrument on which the option derives its value. It can be stocks, indices, commodities, currencies, or bonds. A call option on TCS stock means the stock (TCS) is the underlying asset.

Strike Price (Exercise Price)

This is the price at which the option buyer has the right to buy (call) or sell (put) the underlying asset. If you hold a call option with a strike price of ₹500, you can buy the asset for ₹500, even if its market price increases to ₹550.

Premium

The premium is the cost of purchasing the option. It’s the price paid by the buyer to the seller (writer) for the rights the option provides. If an option has a premium of ₹10, you pay ₹10 per share for the contract. If the contract represents 100 shares, the total premium cost is ₹1,000 (₹10 × 100).

Expiration Date

Options contracts are not valid indefinitely. The expiration date is the last day on which the holder can exercise the option. If you buy a call option that expires on January 31st, you must decide whether to exercise or let it expire before that date.

5.2. How Options Pricing is Done?

An option is a financial contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset (like a stock) at a predetermined price (called the strike price) before or at a specific expiration date.

Key Components of Options Pricing

1. Intrinsic Value: This is the difference between the current price of the underlying asset and the strike price. For example, if you have a call option with a strike price of ₹50, and the stock is currently trading at ₹60, the intrinsic value is ₹102.
2. Time Value: This is the extra amount that traders are willing to pay for the option above its intrinsic value. It reflects the potential for the option to gain value before expiration. Time value decreases as the option approaches its expiration date.

Main Models Used for Pricing Options

1. Black-Scholes Model: This is the most widely used model for pricing European-style options. It uses factors like the current stock price, strike price, time to expiration, risk-free interest rate, and the stock’s volatility to calculate the theoretical price of an option. The Black-Scholes Model is a cornerstone in financial theory, used primarily for European-style options. It was developed by Fischer Black, Myron Scholes, and Robert Merton in the early 1970s.

Assumptions

• Markets are efficient (i.e., they do not predictably rise or fall).
• No dividends are paid out during the option’s life.
• No transaction costs or taxes.
• The risk-free rate and volatility of the underlying asset are constant.
• Prices follow a lognormal distribution and changes in price follow a stochastic process

Formula

The Black-Scholes formula for a call option price is:

C= S₀⋅N(d₁) −X * e−^rT   * N(d₂)

Where:

• S₀ is the current stock price.
• X is the strike price.
• r is the risk-free interest rate.
• T is the time to expiration.
• N is the cumulative distribution function of the standard normal distribution.
• d₁ and d₂ are calculated as follows:

2. Binomial Option Pricing Model: This model uses a tree-like structure to represent the possible paths the stock price can take over time. It’s particularly useful for American-style options, which can be exercised at any time before expiration. This model is particularly useful for American options, which can be exercised at any time before expiration.

Assumptions

• The underlying asset price can move to one of two possible values over each small-time interval until expiration.

Method

1. Create a Price Tree: Starting from the current price, calculate the up and down movements.
2. Calculate Option Values at Each Node: Work backward from the expiration to the present.
3. Discount Back to Present Value: Adjust for the risk-free rate.

Example

If a stock is currently priced at ₹100, and it can either go up by 10% or down by 10% in one period, the possible prices after one period are ₹110 and ₹90

3. Monte Carlo Simulation: This method uses random sampling and statistical modeling to estimate the price of an option. It’s useful for complex options and situations where the underlying asset’s price path is uncertain.

Factors Affecting Options Pricing

1. 1. Underlying Asset Price: The price of the stock or asset the option is based on.
   2. Strike Price: The price at which the option can be exercised.
   3. Volatility: The expected fluctuation in the price of the underlying asset. Higher volatility usually leads to higher option premiums.
   4. Time to Expiration: The amount of time left until the option expires. Options with more time until expiration are generally more valuable.
   5. Interest Rates: Higher interest rates can increase the price of call options and decrease the price of put options.

Method

1. 1. Simulate Price Paths: Generate a large number of possible price paths for the underlying asset using random sampling.
   2. Calculate Payoff for Each Path: Determine the option payoff for each simulated path.
   3. Average the Payoffs: Take the average of all the payoffs and discount it back to the present value.

Comparison

• • Black-Scholes: Best for European options, assumes constant volatility and interest rates.
  • Binomial: Flexible for American options, easier to understand and implement for discrete-time periods.
  • Monte Carlo: Powerful for complex options, computationally intensive but flexible.

Each model has its own strengths and limitations, and the choice of model often depends on the specific characteristics of the option and the preferences of the trader or analyst.

Greeks

These are measures of the sensitivity of the option price to various factors:

• • Delta: Measures the change in the option price relative to the change in the price of the underlying asset.
  • Gamma: Measures the rate of change of delta.
  • Theta: Measures the change in the option price due to the passage of time (time decay).
  • Vega: Measures the change in the option price due to changes in volatility.
  • Rho: Measures the change in the option price due to changes in interest rates.

Example

Let’s say you buy a call option on XYZ stock with a strike price of ₹50, expiring in one month. If XYZ is currently trading at ₹55, the intrinsic value is ₹52. If the stock is expected to be volatile, the time value will be higher, and the option premium will reflect both the intrinsic value and the time value.

5.3. Moneyness in Options

Moneyness refers to the intrinsic value of an option in its current state, that is, whether it would be profitable if it were exercised right now.

Types of Moneyness

1. In-the-Money (ITM):

• Call Option: An option is considered in-the-money if the current price of the underlying asset is higher than the option’s strike price. For example, if you have a call option with a strike price of ₹50, and the current price of the stock is ₹60, the option is in-the-money by ₹10.
• Put Option: An option is in-the-money if the current price of the underlying asset is lower than the option’s strike price. For instance, if you have a put option with a strike price of ₹50, and the stock is currently trading at ₹40, the option is in-the-money by ₹10.

2. At-the-Money (ATM):

• Both call and put options are considered at-the-money when the current price of the underlying asset is equal to or very close to the option’s strike price. For example, if the strike price of an option is ₹50 and the stock is also trading at ₹50, the option is at-the-money.

3. Out-of-the-Money (OTM):

• Call Option: A call option is considered out-of-the-money if the current price of the underlying asset is lower than the strike price. For example, if you have a call option with a strike price of ₹50, and the current price of the stock is ₹40, the option is out-of-the-money.
• Put Option: A put option is out-of-the-money if the current price of the underlying asset is higher than the strike price. For instance, if you have a put option with a strike price of ₹50, and the stock is currently trading at ₹60, the option is out-of-the-money.

Importance of Moneyness

Understanding the moneyness of an option helps traders:

1. Assess Risk and Potential Profit: ITM options have intrinsic value and are more expensive, but they carry less risk and higher potential for profit. OTM options are cheaper, but riskier with lower chances of profit.
2. Choose the Right Option Strategy: Depending on market conditions and individual trading goals, traders might prefer ITM options for stability, ATM options for balance, or OTM options for speculative opportunities.

Calculation Examples

• In-the-Money Call Option: If a call option has a strike price of ₹50 and the stock price is ₹60, the intrinsic value is ₹60 – ₹50 = ₹10.
• Out-of-the-Money Put Option: If a put option has a strike price of ₹50 and the stock price is ₹60, it has no intrinsic value, and is out-of-the-money by ₹10.

Visualization

To visualize moneyness, you can think of a spectrum with the strike price as the midpoint:

• ITM: Current price > Strike price (Call) or Current price < Strike price (Put)
• ATM: Current price ≈ Strike price
• OTM: Current price < Strike price (Call) or Current price > Strike price (Put)

5.4   Open Interest and Options Chain

Open Interest

Open interest refers to the total number of outstanding derivative contracts, such as options or futures, that have not yet been settled. It’s a measure of the number of contracts that are currently active in the market. Here’s how it works:

• New Contracts: When a new option contract is created, open interest increases by one.
• Closing Contracts: When a trader closes an existing position by buying or selling an option, open interest decreases by one.
• Liquidity Indicator: High open interest indicates high liquidity, meaning there are many buyers and sellers in the market. This can make it easier to enter and exit positions without significantly impacting the price.
• Market Sentiment: Increasing open interest along with rising prices often signals strengthening market sentiment, as more participants are entering the market.

Options Chain

An options chain is a list of all available option contracts for a specific security, organized by expiration date and strike price. It provides a wealth of information at a glance, including present prices, trading volume, and implied volatility for both call and put options3. Here’s how to read an options chain:

• Strike Price: The price at which the option holder can buy (for calls) or sell (for puts) the underlying asset.
• Expiration Date: The date on which the option contract expires.
• Bid Price: The highest price a buyer is willing to pay for the option.
• Ask Price: The lowest price a seller is willing to accept for the option.
• Volume: The number of contracts traded during a given period.
• Open Interest: The total number of outstanding contracts that have not been settled.
• Implied Volatility (IV): A measure of the market’s forecast of a likely movement in an asset’s price.

Example

Imagine you’re looking at an options chain for XYZ stock with an expiration date in one month. The chain will show various strike prices (e.g., ₹50, ₹55, ₹60) and corresponding data for call and put options at each strike price. You can quickly compare options with different characteristics to make informed trading decisions.

Understanding open interest and options chains can significantly enhance your trading strategies and help you interpret market dynamics more effectively

5.5 Call and Put Options Payoff Charts

Call Option Payoff

A call option gives the holder the right, but not the obligation, to buy an underlying asset at a specified strike price before or at the expiration date. The payoff chart of a call option shows the profit or loss for different possible prices of the underlying asset at expiration.

Payoff Calculation

• If the stock price (S) is above the strike price (K): The payoff is S−K (profit).
• If the stock price (S) is below the strike price (K): The payoff is 0 (no profit).
• Example
• Strike Price (K): ₹100
• Premium Paid: ₹10

Payoff Formula: Payoff=max (0,S−K)−Premium Paid

Payoff at Expiration:

• If S=₹120 then payoff = ₹120 – ₹100 – ₹10 = ₹10
• If S=₹ 90 , then payoff = 0 – ₹10 = -₹10 (loss is limited to the premium paid)

Put Option Payoff

A put option gives the holder the right, but not the obligation, to sell an underlying asset at a specified strike price before or at the expiration date. The payoff chart of a put option shows the profit or loss for different possible prices of the underlying asset at expiration.

Payoff Calculation

• If the stock price (S) is below the strike price (K): The payoff is K−S (profit).
• If the stock price (S) is above the strike price (K): The payoff is 0 (no profit).

Example

Strike Price (K): ₹100

Premium Paid: ₹10

Payoff Formula: Payoff=max (0,K−S)−Premium Paid

Payoff at Expiration:

• If S=₹80 then payoff = ₹100 – ₹80 – ₹10 = ₹10
• If S=₹110 , then payoff = 0 – ₹10 = -₹10 (loss is limited to the premium paid)

Summary

• Call Options: Profitable when the stock price rises above the strike price. Loss is limited to the premium paid.
• Put Options: Profitable when the stock price falls below the strike price. Loss is also limited to the premium paid.

5.6 Options Buying vs Options Selling

Buying Options

• Buying a Call Option: Purchasing the right to buy the underlying asset at a specified strike price before or at expiration.
• Buying a Put Option: Purchasing the right to sell the underlying asset at a specified strike price before or at expiration.

Advantages

• Limited Risk: The maximum loss is limited to the premium paid.
• Unlimited Profit Potential: For calls, if the underlying asset’s price rises significantly, the profit potential is unlimited. For puts, if the price drops significantly, the profit potential is also high.
• Leverage: Options allow you to control a large amount of the underlying asset with a relatively small investment.

Disadvantages

• Time Decay: Options lose value as they approach expiration, which can work against the buyer.
• Premium Cost: The cost of the premium can be expensive, especially for options with favourable strike prices and long expiration times.
• Complexity: Requires understanding of the underlying asset’s price movements, volatility, and time decay.

Example

• Call Option: You buy a call option on XYZ stock with a strike price of ₹100, paying a premium of ₹10. If XYZ stock rises to ₹150, your profit is ₹40 (₹150 – ₹100 – ₹10).
• Put Option: You buy a put option on XYZ stock with a strike price of ₹100, paying a premium of ₹10. If XYZ stock falls to ₹60, your profit is ₹30 (₹100 – ₹60 – ₹10).

Selling Options

• Selling a Call Option: Granting the buyer the right to buy the underlying asset at a specified strike price before or at expiration.
• Selling a Put Option: Granting the buyer the right to sell the underlying asset at a specified strike price before or at expiration.

Advantages

• Premium Income: The seller receives the premium upfront, which can provide a steady income.
• Higher Probability of Profit: Many options expire worthless, allowing the seller to keep the premium.
• Flexibility: Various strategies can be employed, such as covered calls or cash-secured puts.

Disadvantages

• Unlimited Risk: For call options, the potential loss is unlimited if the underlying asset’s price rises significantly. For put options, the potential loss is substantial if the price falls significantly.
• Margin Requirements: Selling options often requires maintaining a margin account, which can tie up capital.
• Obligation: The seller is obligated to buy or sell the underlying asset if the option is exercised.

Example

• Call Option: You sell a call option on XYZ stock with a strike price of ₹100, receiving a premium of ₹10. If XYZ stock rises to ₹150, your loss is ₹40 (₹150 – ₹100 – ₹10).
• Put Option: You sell a put option on XYZ stock with a strike price of ₹100, receiving a premium of ₹10. If XYZ stock falls to ₹60, your loss is ₹30 (₹100 – ₹60 – ₹10).

Comparison

5.7 Options Greek

Options Greeks are vital tools in options trading that help measure the sensitivity of an option’s price to various factors. Here’s a detailed look at each of the key Greeks:

Delta (Δ)

• Definition: Measures the rate of change of the option’s price with respect to changes in the price of the underlying asset.
• Range: For call options, Delta ranges from 0 to 1. For put options, it ranges from -1 to 0.
• Interpretation: A Delta of 0.5 means that for every ₹1 change in the price of the underlying asset, the option’s price will change by ₹0.50. Delta is also known as the hedge ratio and can be used to gauge the probability of an option expiring in-the-money.

Gamma (Γ)

• Definition: Measures the rate of change of Delta with respect to changes in the price of the underlying asset.
• Range: Gamma is highest for at-the-money options and decreases as the option moves further in-the-money or out-of-the-money.
• Interpretation: High Gamma indicates that Delta is very sensitive to price changes in the underlying asset. Gamma helps in assessing the stability of Delta and can be crucial for managing risk.

Theta (Θ)

• Definition: Measures the rate of decline in the value of an option due to the passage of time, also known as time decay.
• Range: Theta is usually negative for long options and positive for short options.
• Interpretation: A Theta of -0.05 means that the option’s value will decrease by ₹0.05 each day, all else being equal. Theta increases as the option nears expiration, reflecting the accelerated time decay.

Vega (ν)

• Definition: Measures the sensitivity of the option’s price to changes in the volatility of the underlying asset.
• Range: Vega is typically highest for at-the-money options and decreases for deep in-the-money or out-of-the-money options.
• Interpretation: A Vega of 0.10 means that for every 1% change in the volatility of the underlying asset, the option’s price will change by ₹0.10. Vega is crucial for options traders as changes in volatility can significantly impact option prices.

Rho (ρ)

• Definition: Measures the sensitivity of the option’s price to changes in interest rates.
• Range: For call options, Rho is positive. For put options, it is negative.
• Interpretation: A Rho of 0.05 means that for every 1% change in the risk-free interest rate, the option’s price will change by ₹0.05. Rho is more significant for longer-term options.

Example

Let’s consider a call option on a stock currently trading at ₹100, with the following Greeks:

• Delta (Δ): 0.60
• Gamma (Γ): 0.05
• Theta (Θ): -0.02
• Vega (ν): 0.10
• Rho (ρ): 0.04

Scenario Analysis:

• Stock Price Increases by ₹1: The option price will increase by ₹0.60 (Delta effect).
• Volatility Increases by 1%: The option price will increase by ₹0.10 (Vega effect).
• One Day Passes: The option price will decrease by ₹0.02 (Theta effect).
• Interest Rates Increase by 1%: The option price will increase by ₹0.04 (Rho effect).

Visual Summary

5.8 Implied Volatility

Implied Volatility (IV) is a cornerstone concept in options trading, representing the market’s expectations for future price fluctuations of the underlying asset. Unlike historical volatility, which looks at past price movements, IV is forward-looking, providing insights into how much the market thinks the price of an asset will fluctuate over a specific period. Understanding IV is crucial for options traders because it directly influences the pricing of options and helps in making informed trading decisions.

The Basics of Implied Volatility

Implied Volatility is the estimated volatility of an underlying asset’s price as implied by the market prices of its options. It is derived from option pricing models like the Black-Scholes model. While historical volatility measures past price movements, IV reflects market sentiment and expectations for future volatility.

To calculate IV, traders start with the current market price of an option and work backward using an option pricing model. By adjusting the volatility input until the theoretical price matches the market price, they arrive at the implied volatility. This process involves complex mathematical computations, often handled by trading software and financial calculators.

Role in Option Pricing

IV plays a pivotal role in determining the price of an option. Options are financial derivatives that grant the holder the right, but not the obligation, to buy (call option) or sell (put option) an underlying asset at a predetermined strike price before or at the expiration date. The price of an option, known as the premium, consists of intrinsic value and time value.

• Intrinsic Value: This is the difference between the current price of the underlying asset and the strike price of the option. For example, if a call option has a strike price of ₹100 and the underlying asset is trading at ₹110, the intrinsic value is ₹10.
• Time Value: This is the extra amount that traders are willing to pay for the option above its intrinsic value. It reflects the potential for the option to gain value before expiration. Time value decreases as the option approaches its expiration date.

Implied Volatility primarily affects the time value component of the option premium. Higher IV indicates greater expected price movements, leading to higher option premiums, while lower IV suggests lower expected volatility, resulting in lower premiums.

Factors Influencing Implied Volatility

Several factors can influence IV, including:

1. Market Events: Earnings announcements, economic data releases, and geopolitical events can significantly impact IV. For example, an upcoming earnings report for a company can lead to increased IV as traders anticipate potential price swings.
2. Supply and Demand: The dynamics of supply and demand for options also affect IV. Increased demand for options typically drives up IV, while decreased demand can lead to lower IV. This is because higher demand implies that traders expect more significant price movements.
3. Historical Volatility: Although IV is forward-looking, it can be influenced by the asset’s past price movements. If an asset has exhibited high volatility in the past, traders might expect similar behaviour in the future, leading to higher IV.

Interpreting Implied Volatility

Interpreting IV involves understanding its relationship with option pricing and market sentiment. Higher IV generally means higher option premiums, as traders expect more significant price swings. Conversely, lower IV leads to lower premiums, reflecting expectations of smaller price movements.

Traders often use IV to identify potentially overvalued or undervalued options. For example, if an option’s IV is higher than the historical volatility, it might be considered overvalued, suggesting that the market expects more significant price movements than what has occurred historically. Conversely, if the IV is lower than the historical volatility, the option might be undervalued.

• Volatility Smile and Skew : Implied Volatility is not constant across different strike prices and expiration dates. When plotted, IV often forms a “smile” or “skew” pattern, reflecting varying expectations of volatility for different options.
• Volatility Smile : The volatility smile is a graphical representation of IV across different strike prices. Typically, IV tends to be higher for deep in-the-money (ITM) and out-of-the-money (OTM) options, forming a smile-like curve. This pattern suggests that traders expect more significant price movements for options that are far from the current price of the underlying asset.
• Volatility Skew : Volatility skew shows how IV varies with different expiration dates and strike prices. It reflects market expectations for future volatility and can indicate potential market sentiment. For example, a positive skew suggests that traders expect higher volatility for OTM options compared to ITM options, indicating concerns about potential price declines.

Applications of Implied Volatility

Trading Strategies

Traders use IV in various trading strategies to capitalize on market expectations and price movements. Some common strategies include:

1. Volatility Trading: Traders can profit from changes in IV by buying or selling options based on their expectations of future volatility. For example, if they expect IV to increase, they might buy options to benefit from higher premiums.
2. Straddle and Strangle: These strategies involve buying both call and put options with the same expiration date but different strike prices. They are designed to profit from significant price movements, regardless of the direction. Higher IV can increase the potential profitability of these strategies.
3. Covered Calls and Protective Puts: These strategies involve holding the underlying asset and simultaneously selling options to generate income or protect against potential losses. IV can influence the premiums received or paid for these options.

Risk Management

Understanding IV is essential for risk management in options trading. Traders can use IV to assess the risk and potential reward of their positions. For example, higher IV indicates higher potential profits but also greater risk. By monitoring IV, traders can adjust their positions to manage risk effectively.

Example Scenario

Let’s consider an example to illustrate the practical application of IV in options trading:

Suppose you are considering a call option on XYZ stock, currently trading at ₹100, with a strike price of ₹100 and an expiration date in one month. The market price of this option is ₹5. Using an option pricing model, you determine that the implied volatility is 30%.

Market Events

You are aware that XYZ is scheduled to release its quarterly earnings report next week. Given the potential impact of the earnings report on the stock price, you expect increased volatility. As the earnings date approaches, you notice that the IV for XYZ options starts to rise, reaching 35%.

Trading Decision

Given the rising IV, you anticipate that the market expects significant price movements following the earnings announcement. You decide to buy the call option to benefit from the expected increase in volatility and the potential rise in the stock price.

Post-Earnings Reaction

After the earnings report is released, XYZ stock price jumps to ₹110 due to better-than-expected results. The IV, which had risen to 35%, now starts to decline as the uncertainty around the earnings is resolved. Your call option, initially purchased for ₹5, now has an intrinsic value of ₹10 (₹110 – ₹100), and the premium increases due to the higher stock price. You decide to sell the option for a profit.

Limitations and Risks of Implied Volatility

While IV is a valuable tool, it also has limitations and risks that traders should consider:

1. Uncertainty and Forecasting Errors: IV is based on market expectations and can be influenced by various factors, including trader sentiment and external events. Predicting future volatility accurately is challenging, and errors in forecasting can lead to significant losses.
2. Volatility Clustering: Volatility tends to cluster, meaning periods of high volatility are often followed by more high volatility, and low volatility periods follow each other. This can make IV predictions less reliable in certain market conditions.
3. Changes in Market Conditions: IV can change rapidly due to unexpected events, such as geopolitical developments or economic data releases. Traders need to stay informed about market conditions and be prepared to adjust their positions accordingly.
4. Complexity: Calculating and interpreting IV requires a solid understanding of option pricing models and market dynamics. Inexperienced traders might find it challenging to use IV effectively without proper knowledge and tools.

5.9 Margin Requirement for Options

Margin Requirements for Options Trading

Margin requirements are crucial in options trading as they act as collateral to ensure that traders can cover potential losses. Here’s a detailed explanation of the different types of margins and how they work:

Types of Margins

1. Initial Margin (SPAN Margin):

The initial margin, also known as SPAN (Standard Portfolio Analysis of Risk) margin, is the minimum amount of funds required to open an options position. It is calculated based on a portfolio-based approach, considering various loss scenarios for a collection of option positions. The margin is revised multiple times during the trading day. To ensure that traders have enough funds to cover potential losses in adverse market conditions.

2. Exposure Margin:

An additional margin collected to protect the broker’s liability in case of adverse market movements. For index options, it is typically 3% of the notional value of open positions. For stock options, it is the higher of 5% or 1.5 times the standard deviation of the notional value of the gross open position. To provide extra protection against market volatility and potential losses.

3. Assignment Margin:

This margin is collected from sellers of options contracts when their options are exercised. It is based on the net exercise settlement value payable by the traders who are writing options. To ensure that sellers can cover the obligations arising from exercised options.

Margin Requirements for Buyers and Sellers

• Option Buyers: Typically, buyers of options do not need to pay margins. They only need to pay the premium for the option contract.
• Option Sellers: Sellers of options are required to maintain margins to cover potential losses if the options are exercised. This includes the initial margin, exposure margin, and assignment margin.

Example

Let’s consider an example to illustrate margin requirements:

Suppose you want to sell a call option on XYZ stock with a strike price of ₹100, and the premium received is ₹10. The initial margin requirement is ₹20, the exposure margin is ₹5, and the assignment margin is ₹10.

• Total Margin Requirement: ₹35 (₹20 + ₹5 + ₹10)
• Premium Received: ₹10
• Net Margin Requirement: ₹25 (₹35 – ₹10)

In this case, you need to maintain ₹25 in your account to cover the margin requirements for selling the call option.

Tools for Calculating Margin Requirements

Many brokers provide online margin calculators to help traders determine the required margins for their options trades. These calculators take into account various factors such as the type of option, underlying asset, strike price, and expiration date to provide accurate margin requirements.

Importance of Margin Management

Proper margin management is essential for successful options trading. Failing to maintain the required margins can result in trade cancellations or fines levied by the exchanges. Traders should regularly monitor their margin levels and ensure they have sufficient funds to cover potential losses.