How to trade in option market example in india

Options Basics: How Options Work. Options contracts are essentially the price probabilities of future events. The more likely something is to occur, the more expensive an option would be that profits from that event. This is the key to understanding the relative value of options. Let’s take as a generic example a call option on International Business Machines Corp. (IBM) with a strike price of $200 IBM is currently trading at $175 and expires in 3 months. Remember, the call option gives you the right , but not the obligation , to purchase shares of IBM at $200 at any point in the next 3 months. If the price of IBM rises above $200, then you “win.” It doesn’t matter that we don’t know the price of this option for the moment – what we can say for sure, though, is that the same option that expires not in 3 months but in 1 month will cost less because the chances of anything occurring within a shorter interval is smaller. Likewise, the same option that expires in a year will cost more. This is also why options experience time decay: the same option will be worth less tomorrow than today if the price of the stock doesn’t move. Returning to our 3-month expiration, another factor that will increase the likelihood that you’ll “win” is if the price of IBM stock rises closer to $200 – the closer the price of the stock to the strike, the more likely the event will happen. Thus, as the price of the underlying asset rises, the price of the call option premium will also rise. Alternatively, as the price goes down – and the gap between the strike price and the underlying asset prices widens – the option will cost less.

Along a similar line, if the price of IBM stock stays at $175, the call with a $190 strike price will be worth more than the $200 strike call – since, again, the chances of the $190 event happening is greater than $200. There is one other factor that can increase the odds that the event we want to happen will occur – if the volatility of the underlying asset increases. Something that has greater price swings – both up and down – will increase the chances of an event happening. Therefore, the greater the volatility, the greater the price of the option. Options trading and volatility are intrinsically linked to each other in this way. With this in mind, let’s consider a hypothetical example. Let's say that on May 1, the stock price of Cory's Tequila Co. (CTQ) is $67 and the premium (cost) is $3.15 for a July 70 Call, which indicates that the expiration is the third Friday of July and the strike price is $70. The total price of the contract is $3.15 x 100 = $315. In reality, you'd also have to take commissions into account, but we'll ignore them for this example. On most U. S. exchanges, a stock option contract is the option to buy or sell 100 shares that's why you must multiply the contract by 100 to get the total price. The strike price of $70 means that the stock price must rise above $70 before the call option is worth anything furthermore, because the contract is $3.15 per share, the break-even price would be $73.15. Three weeks later the stock price is $78. The options contract has increased along with the stock price and is now worth $8.25 x 100 = $825. Subtract what you paid for the contract, and your profit is ($8.25 - $3.15) x 100 = $510. You almost doubled our money in just three weeks! You could sell your options, which is called "closing your position," and take your profits – unless, of course, you think the stock price will continue to rise. For the sake of this example, let's say we let it ride.

By the expiration date, the price of CTQ drops down to $62. Because this is less than our $70 strike price and there is no time left, the option contract is worthless. We are now down by the original premium cost of $315. To recap, here is what happened to our option investment: So far we've talked about options as the right to buy or sell (exercise) the underlying good. This is true, but in reality, a majority of options are not actually exercised. In our example, you could make money by exercising at $70 and then selling the stock back in the market at $78 for a profit of $8 a share. You could also keep the stock, knowing you were able to buy it at a discount to the present value. However, the majority of the time holders choose to take their profits by trading out (closing out) their position. This means that holders sell their options in the market, and writers buy their positions back to close. According to the CBOE​, only about 10% of options are exercised, 60% are traded (closed) out, and 30% expire worthless. At this point it is worth explaining more about the pricing of options. In our example the premium (price) of the option went from $3.15 to $8.25. These fluctuations can be explained by intrinsic value and extrinsic value, also known as time value. An option's premium is the combination of its intrinsic value and its time value. Intrinsic value is the amount in-the-money, which, for a call option, means that the price of the stock equals the strike price.

Time value represents the possibility of the option increasing in value. Refer back to the beginning of this section of the turorial: the more likely an event is to occur, the more expensive the option. This is the extrinsic, or time value. So, the price of the option in our example can be thought of as the following: In real life options almost always trade at some level above their intrinsic value, because the probability of an event occurring is never absolutely zero, even if it is highly unlikely. If you are wondering, we just picked the numbers for this example out of the air to demonstrate how options work. A brief word on options pricing. As we’ve seen, the relative price of an option has to do with the chances that an event will happen. But in order to put an absolute price on an option, a pricing model must be used. The most well-known model is the Black-Scholes-Merton​ model, which was derived in the 1970’s, and for which the Nobel prize in economics was awarded. Since then other models have emerged such as binomial and trinomial tree models, which are also commonly used. The NASDAQ Options Trading Guide. Equity options today are hailed as one of the most successful financial products to be introduced in modern times. Options have proven to be superior and prudent investment tools offering you, the investor, flexibility, diversification and control in protecting your portfolio or in generating additional investment income.

We hope you'll find this to be a helpful guide for learning how to trade options. Understanding Options. Options are financial instruments that can be used effectively under almost every market condition and for almost every investment goal. Among a few of the many ways, options can help you: Protect your investments against a decline in market prices Increase your income on current or new investments Buy an equity at a lower price Benefit from an equity price’s rise or fall without owning the equity or selling it outright. Benefits of Trading Options: Orderly, Efficient and Liquid Markets. Standardized option contracts allow for orderly, efficient and liquid option markets. Options are an extremely versatile investment tool. Because of their unique riskreward structure, options can be used in many combinations with other option contracts andor other financial instruments to seek profits or protection. An equity option allows investors to fix the price for a specific period of time at which an investor can purchase or sell 100 shares of an equity for a premium (price), which is only a percentage of what one would pay to own the equity outright. This allows option investors to leverage their investment power while increasing their potential reward from an equity’s price movements. Limited Risk for Buyer. Unlike other investments where the risks may have no boundaries, options trading offers a defined risk to buyers. An option buyer absolutely cannot lose more than the price of the option, the premium. Because the right to buy or sell the underlying security at a specific price expires on a given date, the option will expire worthless if the conditions for profitable exercise or sale of the option contract are not met by the expiration date.

An uncovered option seller (sometimes referred to as the uncovered writer of an option), on the other hand, may face unlimited risk. This options trading guide provides an overview of characteristics of equity options and how these investments work in the following segments: Enter a company name or symbol below to view its options chain sheet: Edit Favorites. Enter up to 25 symbols separated by commas or spaces in the text box below. These symbols will be available during your session for use on applicable pages. Customize your NASDAQ. com experience. Select the background color of your choice: Select a default target page for your quote search: Please confirm your selection: You have selected to change your default setting for the Quote Search. This will now be your default target page unless you change your configuration again, or you delete your cookies. Are you sure you want to change your settings? Please disable your ad blocker (or update your settings to ensure that javascript and cookies are enabled), so that we can continue to provide you with the first-rate market news and data you've come to expect from us. How to trade in option market example in india Enriching Investors Since 1998. Profitable Trading Solutions for the Intelligent Investor. Beginners Guide to Options. What is an option?

An option is a contract giving the buyer the right, but not the obligation, to buy or sell an underlying asset (a stock or index) at a specific price on or before a certain date. An option is a derivative. That is, its value is derived from something else. In the case of a stock option, its value is based on the underlying stock (equity). In the case of an index option, its value is based on the underlying index (equity). · Listed Options are securities, just like stocks. · Options trade like stocks, with buyers making bids and sellers making offers. · Options are actively traded in a listed market, just like stocks. They can be bought and sold just like any other security. · Options are derivatives, unlike stocks (i. e, options derive their value from something else, the underlying security). · Options have expiration dates, while stocks do not. · There is not a fixed number of options, as there are with stock shares available. · Stockowners have a share of the company, with voting and dividend rights.

Options convey no such rights. Some people remain puzzled by options. The truth is that most people have been using options for some time, because option-ality is built into everything from mortgages to auto insurance. In the listed options world, however, their existence is much more clear. Types Of Expiration. There are two different types of options with respect to expiration. There is a European style option and an American style option. The European style option cannot be exercised until the expiration date. Once an investor has purchased the option, it must be held until expiration. An American style option can be exercised at any time after it is purchased. Today, most stock options which are traded are American style options. And many index options are American style.

However, there are many index options which are European style options. An investor should be aware of this when considering the purchase of an index option. An option Premium is the price of the option. It is the price you pay to purchase the option. For example, an XYZ May 30 Call (thus it is an option to buy Company XYZ stock) may have an option premium of Rs.2. The Strike (or Exercise) Price is the price at which the underlying security (in this case, XYZ) can be bought or sold as specified in the option contract. The Expiration Date is the day on which the option is no longer valid and ceases to exist. The expiration date for all listed stock options in the U. S. is the third Friday of the month (except when it falls on a holiday, in which case it is on Thursday). People who buy options have a Right, and that is the right to Exercise. When an option holder chooses to exercise an option, a process begins to find a writer who is short the same kind of option (i. e., class, strike price and option type). Once found, that writer may be Assigned. There are two types of options - call and put. A call gives the buyer the right, but not the obligation, to buy the underlying instrument. A put gives the buyer the right, but not the obligation, to sell the underlying instrument. The predetermined price upon which the buyer and the seller of an option have agreed is the strike price, also called the exercise price or the striking price.

Each option on a underlying instrument shall have multiple strike prices. Call option - underlying instrument price is higher than the strike price. Put option - underlying instrument price is lower than the strike price. Call option - underlying instrument price is lower than the strike price. Put option - underlying instrument price is higher than the strike price. The underlying price is equivalent to the strike price. Options have finite lives. The expiration day of the option is the last day that the option owner can exercise the option. American options can be exercised any time before the expiration date at the owner's discretion. A class of options is all the puts and calls on a particular underlying instrument. The something that an option gives a person the right to buy or sell is the underlying instrument. In case of index options, the underlying shall be an index like the Sensitive index (Sensex) or S&P CNX NIFTY or individual stocks. An option can be liquidated in three ways A closing buy or sell, abandonment and exercising.

Buying and selling of options are the most common methods of liquidation. An option gives the right to buy or sell a underlying instrument at a set price. Options prices are set by the negotiations between buyers and sellers. Prices of options are influenced mainly by the expectations of future prices of the buyers and sellers and the relationship of the option's price with the price of the instrument. The time value of an option is the amount that the premium exceeds the intrinsic value. Time value = Option premium - intrinsic value. Long Term Investing. Multiply your capital by investing. long term trends. Multi Bagger Stocks. Create wealth for yourself. quickly identifying changes in trends, riding the trend.

booking profits at the end of the trend. Capture brief price swings. fast moving trending stocks. intra-day price volatility of the most active stocks in both. BULLISH & BEARISH Markets. generate a steady stream of daily income. Futures Day Trading. maximum profits everyday. highly liquid futures contract. • Use of this website andor products & services offered by us indicates your acceptance of our disclaimer. • Disclaimer: Futures, option & stock trading is a high risk activity.

Any action you choose to take in the markets is totally your own responsibility. TradersEdgeIndia. com will not be liable for any, direct or indirect, consequential or incidental damages or loss arising out of the use of this information. This information is neither an offer to sell nor solicitation to buy any of the securities mentioned herein. The writers may or may not be trading in the securities mentioned. • All names or products mentioned are trademarks or registered trademarks of their respective owners. How to trade in option market example in india StrategyBuilder &ndash Users can build their own strategies by searching options and then combining selected options. BingoBrowser &ndash Users can search for individual stockindex options based on parameters specified. NIFTY Tips &ndash This package is designed for NIFTY short term positional traders. NIFTY report with targets and stop-loss is uploaded by Sunday 2:00 PM. Can be used by traders interested in NIFTY Options, Futures or Options Strategies. Options Tutorial &ndash This package can be used by traders who want to learn options trading.

Content includes lots of examples from Indian market context and includes concepts which are generally not included in popular text books. Complex topics are explained in easy manner. Intraday Trading System &ndash This package is designed for intraday traders. BuySell signals are generated on the screen during market hours. This is algo based trading system which uses statistical analytical techniques to analyze realtime demand and supply situation of the stock and identifies buysellexit opportunities. Another feature of this system is that it has inbuilt trailing stop loss management so that you don't lose out the profit you deserve. No need to download any software. A premium service from trader to trader. For more information refer tools sections or get yourself registered with us. You can only trade options on a fixed number of underlyers (stocks , Index etc). This list is maintained by exchanges and updated from time to time. In NSE website nseindia. com you can get the list under FnO section. There is a trading size defined by exchanges called &lsquolot&rsquo. You can trade in multiple of lots.

For example one lot of NIFTY holds 50 contracts. At a minimum you need to trade 1 lot. Number of lots should be in whole numbers like 2, 3 4 and so on but not fractions. So if you have traded 3 lots of NIFTY you actually hold 3 * 50 (No of lots * Nifty lot size) = 150 contracts. An option is a contract to buysell a stock (underlyer). Contract defines a fixed price at which stocks could be traded. This is called strike price. Contract has a maturity date which is the date till the contract is valid. The seller (called option writer) sells the contract to Buyer. Buyer pays the price of the contract called premium to seller. Buyer has the right, but not the obligation to buysell the stock(underlyer) at a fixed price (strike price). The contract also obligates the seller or writer to meet the terms of delivery if the contract right is exercised by the contract buyer. If you have not fully understood the concept of Options please don&rsquot give up. Continue to read the FAQ section many of your doubles will get cleared after reading subsequent sections. It is the fixed price at which owner (buyer) of the CALL option can buy the underlying asset from option seller, no matter whatever is the current price of the underlying asset.

Example, If strike price of Reliance CALL option is 1300 that means buyer of this option can buy Reliance stock at 1300 even if the current market price of the stock is higher (say 1500). In case of Put options, strike price is the price at which owner (buyer) of the PUT option can sell the underlying asset to the option seller, no matter whatever is the current price of the underlying asset. Example, if strike price of Reliance PUT option is 1300 that means buyer of this option can sell Reliance stock at 1300 even if the current market price of the stock is lower (say 1100). If you are bullish. You may consider BUY-ing CALL options You may consider SELL-ing PUT options (remember that selling naked option is a risky method and mostly used by expert traders) If you are bearish. You may consider BUY-ing PUT options You may consider SELL-ing CALL option. People buy CALL option when they are bullish i. e. they anticipate that price of the underlying stock will move up. Let&rsquos understand using an example. Suppose, today&rsquos date is 1-MAY-2008 and you buy a RELIANCE CALL option (strike=2500, maturity June 2008) @ Rs. 50 per contract when RELIANCE stock was getting traded at 2400. Let&rsquos see what happens after options expiration. Case I : Reliance stock price greater than the strike price. Reliance stock trading at 2600 on expiry day cut-off time.

Net profit = (current price &ndash strike price) - premium = (2600 &ndash 2500) -50= Rs. 50 per contract. Case II : Reliance stock price less than strike price (2500) on expiry day cut-off time. Net loss = Premium paid = Rs. 50 per contract. So when you buy a CALL option you have unlimited profit potential but limited risk or downside. People buy PUT option when they are bearish i. e they anticipate that price of the underlying stock will go down. Let&rsquos understand using an example. Suppose, today&rsquos date is 1-MAY-2008 and you buy a Reliance PUT option (strike=2500, maturity June 2008) @ Rs. 50 per contract when RELIANCE stock was TRADING at 2600. Let&rsquos see what happens after options expiration. Case I : Reliance stock price is less than the strike price. Reliance stock trading at 2400 on expiry day cut-off time.

Net Profit = (Strike Price &ndash Current Price) &ndash premium = 2500 &ndash 2400 &ndash 50 = 50. Net loss = Premium paid = Rs 50 per contract. So, when you buy a PUT option you have unlimited profit potential but limited risk or downside. This is a bearish method. It has unlimited loss and limited profit potential. Selling options is not recommended for beginner level traders. Let&rsquos understand it using an example. Suppose you want to SELL NIFTY call option (strike=5000 expiration June 2008) on 1-MAY-2008 at 50 Rs per contract and NIFTY was trading at 4900 at that time. When you get a buyer for this contract you get paid @ Rs. 50 per contract and are credited to your account. Let&rsquos see what happens after options expiration. Case I : NIFTY price <= strike price on expiry day cut-off time. Net Profit = 50 (Premium credited to your account when the trade was executed) Case II : NIFTY price > strike price on expiry day cut-off time.

Net = STRIKE price &ndash Nifty cut-off PRICE + PREMIUM. Example : If NIFTY cut-off price = 5025  Net = 5000 &ndash 5025 + 50 = Rs. 25 per contract(Profit) If NIFTY cut-off price = 5100  Net = 5000 &ndash 5100 + 50 = Rs. -50 per contract (Loss) This is a bullish method. It has unlimited loss and limited profit potential. Selling options is not recommended for beginner level traders. Let&rsquos understand it using an example. Support you SELL a NIFTY PUT option (strike=5000, expiration June 2008) on 1-MAY-2008 at 50 Rs per contract when NIFTY was trading at 5050. When you get a buyer for this contract you get paid @ Rs. 50 per contract and are credited to your account. Let&rsquos see what happens after options expiration. Case I : NIFTY price >= strike price on expiry day cut-off time. Net Profit = 50 (Premium credited to your account when the trade was executed) Case II : NIFTY price < strike price on expiry day cut-off time. Loss : STRIKE &ndash Nifty cut-off price - PREMIUM. Example : If NIFTY cut-off price = 4950, Loss = 5000 &ndash 4900 - 50 = 50 (LOSS) If Nifty cut-off price = 4975, Loss = 5000 &ndash 4975 - 50 = -25 (PROFIT) A person who Sells options is a writer. Writer sells to option buyer. Yes, any investor can sell option though his broker.

That&rsquos not correct. An option writer can close the SELL option transaction if heshe wants by squaring off. OwnerBuyer of the option need not worry about the opposite party as there will always be equal number of buyers and sellers available all the time for a given contract. Employee stock options are not tradable in exchanges unlike standardized options. Employee stock option terms are not standard for example company X gives employee A an option to own 100 stocks of the company @ 50 Rs. The same company gives employee B an option to own 2000 stocks of the company @ 35 Rs. Exchange traded options have standardized terms i. e lot size and strike price of a given contract is same for all investors. The main difference between options and futures is described below: Options contract gives the buyer the right, but not the obligation to buy (or sell) the underlying asset (stock, Index etc) at a specified price at any time during the life of the contract. On the other hand futures contract gives the buyer the obligation to buy underlying asset (index, stock etc) at a specified price at any time during the life of the contract. Each trade comprises two transactions, opening transaction and closing transaction. When you go long i. e BUY call (or put) option as opening transaction it is called as &ldquoBuy to open&rdquo. You will close this position by taking opposite position i. e. by selling the same amount of call (or put) option. Closing transaction in this case would be called as &ldquoSell to close&rdquo. Each trade comprises two transactions, opening transaction and closing transaction. When your opening transaction is SELL short call (or put) option it is known as &ldquoSell to open&rdquo. You will close this position by taking opposite position i. e. by buying the same amount of call (or put) option.

Closing transaction in this case would be called as &ldquoBuy to close&rdquo. If you own(bought) an American style option, you can exercise your right to buy (in case of call options) or right to sell (in case of put options) underlying asset anytime between the purchase date and expiry date. If you own(bought) an European style option, you can exercise your right to buy (in case of call options) or right to sell (in case of put options) underlying asset only on the expiry date. The underlying asset covered by index options is not shares in a company, but rather, an underlying Rupee value equal to the index level multiplied by Lot size. The amount of cash received at upon exercise or expiration depends on the settlement value of the index in comparison to the strike price of the index option. In India Index options have EUROPEAN exercise style and Stock options are AMERICAN exercise style. For more details refer question on difference between EUROPEAN & AMERICAL exercise styles. For questions regarding option exercise & exercise styles please refer OPTION EXERCISE section. Refer nseindia. com.

Under F&O section you can see contract information. If Option type is CE means CALL European style option, CA means CALL American style option, PE means PUT European style option, PA means PUT American style option. Yes. In NSE Index options are of European style whereas stock options are of American style. A call option is in-the-money if its strike price is below the current market price of the underlier (stock, Index etc) . For example, if you bought a 4000 strike NIFTY CALL OPTION and NIFTY is trading at 4200 the call option is in-the-money. A Put option is in the money when its strike price is above the current market price of the underlier (stock, Index etc.) . For example, if you bought a 5000 NIFTY PUT OPTION and NIFTY is trading at 4900 the put option is in-the-money. A call option is out-of-money when its strike price is above the current market price of the underlier (stock) . For example, if you bought a 5000 NIFTY CALL OPTION and NIFTY is trading at 4900 the call option is out of money. A Put option is out-of-money when its strike price is below the current market price of the underlier (stock) . For example, if you bought a 5000 NIFTY PUT OPTION and NIFTY is trading at 5100 the put option is in-the-money. An option is at-the-money if the strike price of the option equals (or nearly equals) the market price of the underlying security(stock).

Intrinsic value can be defined as the amount by which the strike price of an option is in-the-money . Some people view it as the value that any given option would have if it were exercised today. For Call options, Intrinsic value = Current Stock price &ndash Strike Price. For Put Options, Intrinsic value = Strike Price - Current Stock price. Note intrinsic value cannot have negative value so minimum intrinsic value is 0 for an option. Time Value = Option Price - Intrinsic Value. Lets take an example: If stock XYZ is trading at Rs 105 and the XYZ 100 call option is trading at Rs 7, Intrinsic value = 105 &ndash 100 = 5. Time Value = 7 &ndash 5 = 2. So, we would say that this option has time value = Rs 2. Different people view it in different manner. Generalizing it may not be a good idea. Many people interpret open interest as described below: Rise or fall in the open interest may be interpreted as an indicator of the future expectations of the market. A rising open interest number indicates that the present trend is likely to continue. If the open interest number is stagnant, then it may suggest that the market is in a cautious mode. If Open interest starts declining, then the market suggests a trend reversal mood.

In a rising market, continuous decline of open interest indicates an expectation of downward movement. Similarly, in a falling market, the decline of open interest indicates that the market expects an upward trend. Volume is the number of contracts of a particular option contract that have traded on a given day, similar to it meaning the number of shares traded on a particular stock on a given day. Open interest is the number of option contracts for a particular stock at a specific strike price and a specific expiration date that were open at the close of trading on the prior trading day. While some traders look at this information as an indication of liquidity of a particular option or option chain, a more reliable indicator may be the tightness of the bid ask spread. A common misconception is that open interest is the same thing as volume of options and futures trades. This is not correct, as demonstrated in the following example. C buys 5 option and D sells 5 option contracts. A sells his 1 option and D buys 1 option contract. E buys 5 options from C who sells 5 options contracts.

-On January 1, A buys an option, which leaves an open interest and also creates trading volume of 1. -On January 2, C and D create trading volume of 5 and there are also five more options left open. -On January 3, A takes an offsetting position, open interest is reduced by 1 and trading volume is 1. -On January 4, E simply replaces C and open interest does not change, trading volume increases by 5. PCR is a very popular indicator to measure the prevailing level of bullishness or bearishness in the market. Remember Put contract is bought by investors who are bearish and Call contracts are bought by people who are bullish. PCR is calculated as: PCR = No of traded Put options no of traded call options. As this ratio increases it means that investors are putting more money into put options rather than call options. There are different ways you can interpret this information to gauge market directions. Although options are derived from stocks or indexes but they are traded as independent securities in the markets. The price movement pattern and extent could be different than the underlying stockIndex. Delta value is used interpret the relationship between price movement of an option and its underlyer stockIndex. Like the stock trading price it is purely driven by Demand (buyers) and Supply (sellers). You can compute the fair value of options using Binomial or Black Scholes formulas. We do provide theoretical value of options in our web-site using Black-scholes model. Exercising a stock CALL option means buying the stock at the price set by the option (strike price), regardless of the stock's price at the time you exercise the option.

Exercising a stock PUT option means selling the stock at the price set by the option (strike price), regardless of the stock's price at the time you exercise the option. Let&rsquos understand it using an example: Mr. Gupta bought 2500-RELIANCE-CALL option contract. The stock is currently trading at Rs. 3000. If Mr. Gupta decides to &lsquoexercise&rsquo his right he will get the stocks at the rate of 2500 even though the stock is being traded at 3000. You square off options position when you want to close your existing position. Square off can be done by taking the exactly opposite position for e. g. if you have initially bought 1 lot of CALL (or PUT) option you can square off by selling 1 lot of CALL (or PUT) option with same strike and expiry. Similarly, if you have initially sold 1 lot of CALL (or PUT) option you can square off by buying 1 lot of CALL (or PUT) option. You may want to exercise your option when you want to take delivery of underlying stock or Index. You may want to exercise if you want to take the delivery of underlying stock and you have longmedium term interest in the stock. If you want to book profit or cut your losses, you may want to close out your position by squaring off. If the option is of American style then it can be exercised any day (when the market is open) before its expiration. In case of European options it can be only exercised on the expiration day. Yes, you can close out your position by squaring off which in short means taking the reverse position. You can sell the underlying stock as soon as you give instructions to your broker to exercise.

We suggest you also double check with your broker if there are any deviations and special rules apply. It all depends on your outlook of stock and your riskreward appetite. If you believe that the stock has made its move to large extent and there is not much scope of further movement in your anticipated direction then it you may want close out the position by squaring off. On the other hand if you believe that there is lot more steam left and the stock will go a long way, you can continue to hold your position. When the holder (buyer) of options exercise the option writer(seller) is said to be assigned the obligation to deliver the terms of option contract. If it is a CALL option the writer(seller) needs to deliver the obligated quantity of the underlying security at the strike price. In case of PUT option the writer(seller) needs to buy the obligated quantity of the underlying security at the strike price. Assignment is done on a random basis. The clearing house picks short positions that ae eligible to be assigned and then allocates the exercised positions to any one or more short positions. All in the money options whether American or European style are automatically exercised by the clearing house. No, once an order is accepted by clearing house it cannot be ordinarily revoked. There is no way to know if you could get assigned.

If you have sold an option there is always a possibility of getting assigned on any business day before expiration (in case the option is American style) to fulfill your obligation to receive (and pay for) or deliver (and get paid for) shares of underlyer stock . There are some general rules that you should keep in your mind: 1. Only small portion of options actually get exercised. 2. Majority of options get exercised when they get closer to expiration. Option exercise statistics are published in NSE website nseindia. com. I you continue to hold your option sell position you cannot eliminate the posibility of being assigned. You can close your position any time by squaring off your position i. e taking the exact opposite position. No, you have closed out your position and there is no way you can get assigned. All in the money options are exercised automatically during the expiration day. For details please contact your broker. SEBI regulation says that if the value of the declared dividend is more than 10% of the spot price of the underlyer stock on the dividend announcement day then the strike price of the stock options are refuced by the dividend amount. If the decalred dividend is less than 10% then there is no adjustment of for the dividend by the exchange. In this case market adjusts the price of the options considering the dividend announcement.

All active contracts will continue to exist until the last day (as declared). After that no more contracts on this stock will available for trading. If you are holding such an option your position will be exercised and settled on last day. It is always advisable to check with your broker regarding such announcements. &lsquoBuy Call&rsquo is capital gain method which involves uncapped profit potential and limited loss, where as &ldquoSell Call&rdquo is an income generation method which involves limited profit and unlimited loss potential. Selling options are only recommended for experienced investors. &lsquoBuy Put&rsquo is capital gain method which involves uncapped profit potential and limited loss, where as &ldquoSell Put&rdquo is an income generation method which involves limited profit and unlimited loss potential. Selling options are only recommended for experienced investors. No, you keep the premium but you still need to deliver the underlying stocks to the options holder. Options spreads are the basic building blocks of many options trading strategies. A spread position is entered by buying and selling equal number of options of the same class on the same underlying security but with different strike prices or expiration dates. Refer our StrategyFinder tool to see real tradable strategies which also includes spreads.

If you do it from the same trading account it will offset each other. If you do it from different accounts then you will have a flat position from economic perspective. There is no visible advantage in doing so. Margin is the amount of cash you need to deposit with your broker as a collateral if you want to write an uncovered (naked) option. You also need to maintain margin to cover your daily position valuation and reasonably foreseeable intra-day price changes. When you short sell an option there is unlimited risk involved if the stock moves in opposite of your expected market direction. There is always a possibility that the seller will not be able to fulfil his obligation to deliver the terms of the contract due to lack of funds. If the options price has increased significantly and the seller wants to close out his position by buying out the option there is possibility that he may not have sufficient funds in his account. This kind of situations will prevent markets from functioning efficiently as the counter party wont be able to get his payment. To avoid these kinds of circumstances the concept of margins were introduced in all markets across the world. Volatility is a measure of the rate and magnitude of the change of prices (whether up or down) of the underlying. To put it simply you can view volatility as the speed at which price of underlying can move in either direction. If volatility is high, the premium on the option will be relatively high, and vice versa.

You can find out the applicable margin from your broker. Many online brokers like hdfcsec. com , icicidirect. com etc. do provide tools to calculate margin requirements. No, you will not get margin benefits in this case. Yes, you will get benefits in this case. Yes, you will get margin benefits in this case. However, the benefit will be removed three days prior to expiry if the near month contract. Delta can be defined as amount by which an option&rsquos price will change for corresponding 1 point change in price of the underlying stock or index. Long Call options have positive deltas, whereas Long put options have negative delta whereas Short Call options have negative delta, and Short put options have positive delta. Let understand using couple of examples. Delta of NIFTY Mar-2009 3000 CALL is 0.50. Theoretically, this means that if NIFTY moves up by 1 point, this option&rsquos price will go up by 0.5 point.

Similarly, if NIFTY moves down by 1 point, this options price will go down by 0.5 point Delta of NIFTY Mar-2009 2800 PUT is -0.75. Theoretically, this means that if NIFTY moves up by 1 point, this option&rsquos price will go down by 0.75 point. Similarly, if NIFTY moves down by 1 point, this options price will go up by 0.75 point. Note that DELTA values are dynamic and changes almost everyday. If Delta is viewed as the &lsquospeed&rsquo of price movement of option relative to underlying then option Gamma can be viewed as the acceleration. Basically, Gamma measures the amount by which delta changes for a 1 point change in the stock price. For example, if Gamma of an option is 0.5, that means theoretically that with 1 point price movement of underlying the delta will move 0.5. Long calls and long puts have positive gamma whereas short calls and short puts have negative gamma. Vega can be interpreted as the amount by which the price of an option will change with 1% change in implied volatility of the underlying. One common scenario when option Vega changes is when there is a large movement in underlying price. Long calls and long puts both have positive vega where as short calls and short puts will always have negative Vega. Option theta can be interpreted as change in the price of the option with one day decrease in the remaining life of the option. To put is simply it is a measure of time decay. Note that longer the life of an option, the higher will be the premium and vice versa. With each passing day the value of option decreases (considering all factors equal).

When you want to buy an option you probably want to know what is the fair value of the option is and what should be the fair price of an option, whether the option is under-valued, over valued or rightly valued. You can get answers to these questions by calculating the theoretical value of an option. There are many mathematical models and formulas available which can be used. These are mathematical models that can be used to calculate the theoretical value and greeks of options. If you consider option Greeks in taking decisions to buy or sell options you are basically increasing your probability to make a profit in your trades. Disclaimer: OptionBingo does not make any recommendations for investments. All contents herein are provided for illustrative, educational and informational purposes only and are not intended as recommendations to buy or sell. Any information provided herein shall not be construed as professional advice of any nature. Trading involves risks and it is advised that a certified financial analyst ought to be consulted before making any decisions. Copyright © 2009 OPTION BINGO CONSULTING PRIVATE LIMITED. All Rights Reserved. Chapter 2.6: Understanding How Call Options Work.

In the derivatives market, you may want to Buy shares or Sell them at a specific price in the future. On this basis, there are two types of options available in the derivatives markets – Call options and the Put options. Call options are those contracts that give the buyer the right, but not the obligation to buy the underlying shares or index in the futures. They are exactly opposite of Put options, which give you the right to sell in the future. Let's take a look at these two options, one at a time. In this section, we will look at Call options. What are Call Options: When you purchase a 'Call option', you purchase the right to buy a certain amount of shares or an index, at a predetermined price, on or before a specific date in the future expiry date. The predetermined price is called the strike or exercise price, while the date until which you can exercise the Option is called the expiry date. In exchange for availing this facility, you have to pay an option premium to the sellerwriter of the option. This is because the writer of the call option assumes the risk of loss due to a rise in the market price beyond the strike price on or before the expiry date of your contract.

The seller is obligated to sell you shares at the strike price even though it means making a loss. The premium payable is a small amount that is also market-driven. Here are some key features of the call option: Specifics: To buy a ‘call’ option, you have to place a buy order with your broker specifying the strike price and the expiry date. You will also have to specify how much you are ready to pay for the call option. Fixed Price: The strike price for a call option is the fixed amount at which you agree to buy the underlying assets in the future. It is also known as the exercise price. Option Premium: When you buy the call option, you must pay the option writer a premium. This is first paid to the exchange, which then passes it on to the option seller. Margins: You sell call options by paying an initial margin, and not the entire sum. However, once you have paid the margin, you also have to maintain a minimum amount in your trading account or with your broker. Fix the strike price -- amount at which you will buy in future Chose the expiry date Select option price. Pay option premium to broker Broker transfers to exchange Exchange sends the amoun to option seller.

Initial margin Exposure margin Premium marginassignment margin. Stock call options Index call options. Buyer of option pays you amount through brokers and the exchange Helps reduce you loss or increase profit. Features of Call Options. Premium: Stock and Index Options: Depending on the underlying asset, there are two kinds of call options – Index options and Stock options. Option can only be exercised on the expiry date. While most of the traits are similar . Seller’s Premium: You can also sell off the call option to another buyer before the expiry date. When you do this, you receive a premium . This often has a bearing on your net profits and losses. What are Call Options: As a trader, you would choose to purchase an index call option if you expect the price movement of the index to rise in the near future, rather than that of a particular share. Indices on which you can trade include the CNX Nifty 50, CNX IT and Bank Nifty on the NSE and the 30-share Sensex on the BSE. Let us understand with an example: Suppose the Nifty is quoting around 6,000 points today.

If you are bullish about the market and foresee this index reaching the 6,100 mark within the next one month, you may buy a one month Nifty Call option at 6,100. Let's say that this call is available at a premium of Rs 30 per share. Since the current contract or lot size of the Nifty is 50 units, you will have to pay a total premium of Rs 3,000 to purchase two lots of call option on the index. If the index remains below 6,100 points for the whole of the next month until the contract expires, you would certainly not want to exercise your option and purchase at 6,100 levels. And you have no obligation to purchase it either. You could simply ignore the contract. All you have lost, then, is your premium of Rs 3,000. If, on the other hand, the index does cross 6,100 points as you expected, you have the right to buy at 6,100 levels. Naturally, you would want to exercise your call option. That said, remember that you will start making profits only once the Nifty crosses 6,130 levels, since you must add the cost incurred due to payment of the premium to the cost of the index. This is called your breakeven point – a point where you make no profits and no losses.

When the index is anywhere between 6,100 and 6,130 points, you merely begin to recover your premium cost. So, it makes sense to exercise your option at these levels, only if you do not expect the index to rise further, or the contract reaches its expiry date at these levels. Now, let's look at how the writer (Seller) of this call option is fairing. As long as the index does not cross 6,100 , he benefits from the option premium he received from you. index is between 6,100 and 6,130, he is losing some of the premium that you have paid him. Once the index is above 6,130 , his losses are equal in proportion to your gains and both depend upon how much the index rises. In a nutshell, the option writer has taken on the risk of a rise in the index for a sum of Rs 30 per share. Further, while your losses are limited to the premium that you pay and your profit potential is unlimited, the writer's profits are limited to the premium and his losses could be unlimited. What is a Stock Call Option: In the Indian market, options cannot be sold or purchased on any and every stock. SEBI has permitted options trading on only certain stocks that meet its stringent criteria. These stocks are chosen from amongst the top 500 stocks keeping in mind factors like the average daily market capitalization and average daily traded value in the previous six months. Let us understand a call option on a stock like Reliance Industries.

Suppose the annual general meeting (AGM) of RIL is due to be held shortly and you believe that an important announcement will be made at the AGM. While the share is currently quoting at Rs 950, you feel that this announcement will drive the price upwards, beyond Rs 950. However, you are reluctant to purchase Reliance in the cash market as it involves too large an investment, and you would rather not purchase it in the futures market as futures leave you open to an unlimited risk. Yet, you do not want to lose the opportunity to benefit from this rise in price due to the announcement and you are ready to stake a small sum of money to rid yourself of the uncertainty. A call option is ideal for you. Depending on the availability in the options market, you may be able to buy a call option of Reliance at a strike price of 970 at a time when the spot price is Rs 950. And that call option was quoting Rs. 10, You end up paying a premium of Rs 10 per share or Rs 6,000 (Rs 10 x 600 units). You start making profits once the price of Reliance in the cash market crosses Rs 980 per share (i. e., your strike price of Rs 970 + premium paid of Rs 10). Now let's take a look at how your investment performs under various scenarios. Illustration of Stock call option. If the AGM does not result in any spectacular announcements and the share price remains static at Rs 950 or drifts lower to Rs 930 because market players are disappointed, you could allow the call option to lapse. In this case, your maximum loss would be the premium paid of Rs 10 per share, amounting to a total of Rs 6,000.

However, things could have been worse if you had purchased the same shares in the cash market or in the futures segment. On the other hand, if the company makes an important announcement, it would result in a good amount of buying and the share price may move to Rs 1,000. You would stand to gain Rs 20 per share, i. e., Rs 1,000 less Rs 980 (970 strike + 10 premium), which was your cost per share including the premium of Rs 10. As in the case of the index call option, the writer of this option would stand to gain only when you lose and vice versa, and to the same extent as your gainloss. When do you buy a Call Option: Timing is of great essence in the stock market. Same applies to the derivatives market too, especially since you have multiple options. So when do you buy a call option? To maximize profits, you buy at lows and sell at highs. A call option helps you fix the buying price. This indicates you are expecting a possible rise in the price of the underlying assets. So, you would rather protect yourself by paying a small premium than make losses by shelling a greater amount in the future.

You thus anticipate a rise in the stock markets, i. e., when market conditions are bullish. Timing is of great essence in the stock market. Same applies to the derivatives market too, especially since you have multiple options. So when do you buy a call option? To maximize profits, you buy at lows and sell at highs. A call option helps you fix the buying price. This indicates you are expecting a possible rise in the price of the underlying assets. So, you would rather protect yourself by paying a small premium than make losses by shelling a greater amount in the future. You thus anticipate a rise in the stock markets, i. e., when market conditions are bullish. What are the paymentsmargins involved in buying and selling call options: As we read earlier, the buyer of an option has to pay the seller a small amount as premium. Seller of call option has to pay margin money to create position. In addition to this, you have to maintain a minimum amount in your account to meet exchange requirements.

Margin requirements are often measured as a percentage of the total value of your open positions. Let us look at the margin payments when you are buyer and a seller: When you buy an options contract, you pay only the premium for the option and not the full price of the contract. The exchange transfers this premium to the broker of the option seller, who in turn passes it on to his client. Selling options: Remember, while the buyer of an option has a liability that is limited to the premium he must pay, the seller has a limited gain. However, his potential losses are unlimited. Therefore, the seller of an option has to deposit a margin with the exchange as security in case of a huge loss due to an adverse movement in the option’s price. The margins are levied on the contract value and the amount (in percentage terms) that the seller has to deposit is dictated by the exchange. It is largely dependent on the volatility in the price of the option. Higher the volatility, greater is the margin requirement. As a result, this amount typically ranges from 15% to as high as 60% in times of extreme volatility.

So, the seller of a call option of Reliance at a strike price of 970, who receives a premium of Rs 10 per share would have to deposit a margin of Rs 1,16,400. This is assuming a margin of 20% of the total value (Rs 970 x 600), even though the value of his outstanding position is Rs 5,82,000. How to settle a Call Option: When you sell or purchase an options, you can either exit your position before the expiry date, through an offsetting trade in the market, or hold your position open until the option expires. Subsequently, the clearing house settles the trade. Such options are called European style options. Let us look at how to settle a call option depending on whether you are a buyer or a seller. There are two ways to settle – squaring off and physical settlement. If you decide to square off your position before the expiry of the contract, you will have to sell the same number of call options that you have purchased, of the same underlying stock and maturity date and strike price. For example, if you have purchased two XYZ stock’s call options with a lot size 500 and a strike price of Rs 100, which expire at the end of March, you will have to sell the above two options of XYZ Ltd., in order to square off your position. When you square off your position by selling your options in the market, as the seller of an option, you will earn a premium. The difference between the premium at which you bought the options and the premium at which you sold them will be your profit or loss. Some also choose to buy a put option of the same underlying asset and expiry date to nullify their call options.

The downside to this option is that you have to pay a premium to the put option writer. Selling your call option is a better option as you will at least be paid a premium by the buyer. If you have sold call options and want to square off your position, you will have to buy back the same number of call options that you have written. These must be identical in terms of the underlying scrip and maturity date and strike price to the ones that you have sold. In this section, we understood the basics of Options contracts. In the next part, we go into details about Call options and Put options. Click here. Snapshot of profitloss Reflects performance of your portfolio Helps compute taxes. Investment Knowledge Bank. Trading Tools & Research Reports. Account Types & Value Added Services. 1800 209 9191 1800 222 299 1800 209 9292. Alternate Number: 3030 5757. (8.00 AM TO 6.00PM) To dial from Mobile phone add city STD code.

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