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Call Option Put Option Pricing Differences as Stock Moves Up and Down


In this article we will discuss why Call Options behaves exactly opposite of Put Options as the stock or the underlying moves up and down.

But before we discuss, it let me tell you that there are primarily six factors that effects Option Prices where liquidity is high. Where it is less liquidity unfortunately there is one more factor that determines Option Pricing.

We will discuss all of them over the next few days.

Let’s start with the most important factor then go down to the lower factors. So the factors that influence option prices are in decreasing order.

1. Stock/Underlying Price:

Whenever market makers like NSE, BSE, or MCX software decide to price an option the first thing that they see is the stock or underlying current price in trading markets or the spot price.

For example right now today Nifty is at 8674. As we have already discussed the nearest is the At The Money (ATM) Option which is 8650. Now 8650 will be taken as base and option prices will be decided.

NIFTY 8,650.00 CE Call Option expiring on 27-Oct-16 is currently trading at 59.00.

Since it is a Call Option it has to rise (go In The Money (ATM)), if Nifty rises and fall (go Out of The Money (OTM)), if Nifty falls. Therefore Call Options of the same expiry above 8650 must be cheaper than 59.

Lets check:
NIFTY 27-Oct-16 CE 8,850.00 2.95
NIFTY 27-Oct-16 CE 8,800.00 7.40
NIFTY 27-Oct-16 CE 8,750.00 16.00
NIFTY 27-Oct-16 CE 8,700.00 32.90
NIFTY 27-Oct-16 CE 8,650.00 59.00

As you can see as we move up Call Option prices start decreasing because they all are Out of The Money (OTM).

If we move down Call Options will start increasing because they all go ITM (In The Money):

NIFTY 27-Oct-16 CE 8,650.00 59.00
NIFTY 27-Oct-16 CE 8,600.00 95.75
NIFTY 27-Oct-16 CE 8,550.00 137.40
NIFTY 27-Oct-16 CE 8,500.00 182.60
NIFTY 27-Oct-16 CE 8,450.00 215.10

I will discuss later why these things happen.

Please note that exact opposite will be for the Put Options (PE), because as Nifty falls Put Options must increase (go In The Money (ATM)), and if Nifty goes up it has to decrease (go Out of The Money (OTM)).

ATM PE of 8650 Nifty 27-Oct-16 expiry is at:

NIFTY 27-Oct-16 PE 8,650.00 34.65

Now let’s go up and see prices for Put Options (PE). Remember that it has to increase as they become In The Money (ITM). Exact opposite of Call Options (CE) when they move up they become Out of The Money (OTM).

NIFTY 27-Oct-16 PE 8,850.00 174.40
NIFTY 27-Oct-16 PE 8,800.00 131.00
NIFTY 27-Oct-16 PE 8,750.00 90.55
NIFTY 27-Oct-16 PE 8,700.00 57.80
NIFTY 27-Oct-16 PE 8,650.00 34.65

Now let’s go down and see prices for Put Options. Remember that it has to decrease as they become Out of The Money (OTM). Exact opposite of Call Options as they move down they become In The Money (ITM).

NIFTY 27-Oct-16 PE 8,650.00 34.65
NIFTY 27-Oct-16 PE 8,600.00 20.60
NIFTY 27-Oct-16 PE 8,550.00 12.30
NIFTY 27-Oct-16 PE 8,500.00 7.50
NIFTY 27-Oct-16 PE 8,450.00 4.35

I hope after reading this you have understood why option prices increase or decrease as the stock moves up or down.

Tomorrow we will discuss the other factors that influence Option Pricing like Option Time Value and Intrinsic Value.

Recommended Reading:

Options Greeks Explained – DELTA GAMMA Theta VEGA RHO


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About the author: I started trading stock markets since 2007. However my first 3 years were losses. Then I dedicated almost 1 year on studying, researching, paper trading options and learned a lot in that time. Since 2011 I am trading Nifty options profitably. Call me if you need any help trading options on 9051143004.

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