How is Option Premium calculated when there are multiple trades?

Option premium is calculated when there are multiple trades by:

1. The option premium is calculated based on the strike price, time to expiration, volatility, and interest rates.
2. When multiple trades occur, the option premium is calculated based on the prices at which the trades were executed.
3. The premium for each trade is then added together to determine the overall premium for the option.
4. The option premium can change over time as the underlying security's price moves, the time to expiration changes, or the volatility or interest rates change.
5. To determine the option premium value, you can take the average price of all sell orders submitted for the particular contract is added together in the case of multiple transactions.

For Ex.:

Suppose, you carried any long position in a contract of “Nifty24Feb15000CE” in multiple lots and then you again took an intraday long position in the same contract, then to calculate option premium you can do the average price of premium.

Now we need to understand about the margin calculation in the above scenario:

1. FIFO (FIRST IN, FIRST OUT) Method:

• The first trade in a series of multiple trades is considered the "oldest" trade and is used as the base for calculating margin.

• Any subsequent trades are then compared to the first trade and the margin is calculated based on the price difference between the first trade and the subsequent trades.

  For Ex.: Calculation:

  • (Carried Position)
    • 1st lot = 25 x 50 (Premium x Lot size) = 1250
    • 2nd lot = 30 x 50 (Premium x Lot size) = 1500
    • Total = 1250 + 1500 = 2750
  • (Intraday Position, Assuming Profit)
  • Total Profit in intraday = {(35-30) x 50} = 250
  • Net Margin = 2750 + 250 = 3000

2. Averaging Method:

• All sold Carried Position:
  • Premium Received = 25 x 50 + 30 x 50 + 35 x 50 = 4500
• Bought Intraday Position:
  • The premium Paid is = 50 x 30 = 1500
• The difference between (Premium Received – Premium Paid) = 4500-1500
  • Net Margin = 3000
• Now we know the Net Margin So, we will calculate the Premium:
  • Average of sell price of all trades = (25 + 30 + 35) / 3 = 30
  • Out of that if 2 lots has been sold = 30 x 100 = 3000

The amount of 3000 shows the margin utilised for the transaction and average of option premium shows the amount credited.

Note: The average buy indicates on Tiqs is for an open position based on all trades executed during the day for that particular contract including intraday & carry forward position.