marcus, can you elaborate on these ITM Options/Delta near one as I completely don't understand options. Or may be point to a resource where I can help myself.
tks
nitesh
sure i can nitesh this forum is all about sharing from one another and growing together,see its best you read a book but I try to tell u briefly. You know that an option is a derivative as its value is derived from an underlying asset, in this case the nifty. So if the nifty goes up by a point how much would price of nifty option go up by? Would it also go up by a point? Well not necessarily it depends on what we call the value of the greeks. The greeks are so called coz they are mathematical characteristics of the Black Sholes option pricing model named after greek alphabets which the represent in the equation. They are ratio's which measure the sensitivity of the price of the option with respect to 5 factors, the change in price of underlying asset (delta), change in volatility (wega), time to expiration (theta), risk free interest rate (rho), and rate of change of delta (gamma)
The greek which affects the price of the option the most is delta, u can also define it as a ratio (no units) the change in price of the option for a change of one unit in price of the underlying asset. Delta varies from 0 to 1, if its 0 then for a change in one point of the asset there will be no change in the option price and if its 1 for a change of 1 point in the asset the option price wi change by 1. Its imp to note delta isn't constant it also changes with option price and that is determined by gamma. Delta also represents the probability of the option expiring ITM. So an option with delta 1 has 100% chance of not wxpiring worthless, option with delta 0.5 has 50% chance and delta 0 has 0% chance of not expiring worthless. So now you know what deta is (this is only very brief ok)
Options have 3 basic states ITM/ATM(this is only theoretical practical ATM is very rare)/OTM. In the money means the option price has intrinsic value, it will not expire worthless you can exercise it at expiration to buy the asset at a price lower than the prevailing market price or sell the asset at a price higher than the prevailing market price. So by definition ITM call options have strike price below prevailing market price, (in prder to have intrinsix value) ATM has same strike and CMP, and OTM call option has strike price above CMP. So this explains ITM concept.
Lastly ur question of why ITM and delta near 1. This actually is not necessary, but I said it for simplicity sake only. You can also buy ATM or OTM option what you have to do is calculate the delta of your futures position and buy an equal but opp delta option quantity. For eg if total delta is say +5 then you can buy 10 ATM options of delta (0.5*10) or if you like 25 OTM option of delta (0.2*25), the basic idea it to delta neutral hedge. But if you do this gamma also come into play and changes delta. Gamma is max for ATM options (delta 0.5) and decreases to 0 as the option becomes deeper ITM or farther OTM. So to make Gamma 0 we have either far OTM option or deep ITM option. So its best to buy ITM option as gamma is zero and delta is naer 1 its simple and no need for laborious calculation. It also has its drawbacks like being expensive and having least % profit but we are hedging and not interested in profit.
Hope this helps somewhat