It is a kind of security that can be buy or sell
at a predefined price within a predetermined time, in exchange for a
non-refundable forthright deposit. An options contract offers the buyer
the privilege to buy, not the commitment to buy at the predetermined
price. Options are a kind of derivative product.
The right to sell a security is known as a ‘Put Option’, and the
right to buy is known as the ‘Call Option’. The usage of the options is
• Leverage: Options offer you profiting from some changes in offer prices without putting down the maximum of the share.
• Hedging: Similarly they can be used to protect yourself from changes
in the price of a share and giving you a chance to buy or sell the
shares at a pre-decided price.
Generally as future contracts reduces the risks for buyers by setting
a pre-decided future price for an underlying asset, Option contracts do
the same and then, without the commitment to buy that exists in a
future contract. The seller of an option contract is known as the
‘options writer’. There is no physical exchange of reports or documents
in options contract.
IMPORTANT TERMS IN OPTIONS CONTRACTS:
It is also known as “exercise price”. The price at which a particular
derivative contract can be exercised. Strike price is used to portray
stock and index options, in which strike prices are settled in the
contract. For call options, the strike price is the place the where the
security can be purchased, while for put options the strike price is the
price at which shares can be sold.
STRIKE PRICE INTERVALS: These are the diverse in strike prices at
which an options contract can be exchanged. These are controlled by the
exchange on which the assets are traded. There are regularly no less
than 11 strike prices declare for each kind of option in a given month –
5 prices over the spot price, 5 prices beneath the spot price and one
price proportional to the spot price.
For option contracts the following strike parameters are applicable on all individual securities in NSE Derivative segment:
The Strike price would be:
Closing Price Strike Price
Interval Number of Strikes Provided
In the price-
On the price- Out of the price Number of additional strikes which
may be enabled in the day in
Less than or equal to Rs.50 2.5 5-1-5 5
> Rs.50 to = Rs.100 5 5-1-5 5
> Rs.100 to = Rs.250 10 5-1-5 5
> Rs.250 to = Rs.500 20 5-1-5 5
> Rs.500 to = Rs.1000 20 10-1-10 10
> Rs.1000 50 10-1-10 10
STRIKE PRICE INTERVALS FOR NIFTY INDEX*
The quantity of contracts provided in options on index depends on the
range in earlier day’s end closing value of the underlying index and
applicable according to the accompanying table:
Index Level Strike Interval Scheme of Strike to be introduced
upto 2000 50 4-1-4
>2001 upto 4000 100 6-1-6
>4001 upto 6000 100 6-1-6
>6000 100 7-1-7
A future date is on or before which the options contract can be
expired. Options contracts have three different durations as we
• Near-month (1 month)
• Middle-Month (2 months)
• Far-Month (3 months)
*Please note that long terms options are available for Nifty index.
Futures & Options contracts typically expire on the last Thursday;
if it is holiday then it will take the previous business day as the
AMERICAN AND EUROPEAN OPTIONS:
The expressions in terms of “American” and “European” refers to the sort
of underlying asset in a options contract and when it can be
executed/expires. ‘American options’ are Options that can be executed
whenever at the time before their close date. ‘European options’ are
Options that must be executed on the expiration date.
Indian market follows only the European market.
Lot size is a fixed number of units of the underlying asset that
frame a portion of a single F&O contract. The standard lot size is
distinctive for every stock and is chosen by the exchange on which the
stock is traded.
E.g. Reliance Industries options contracts have a great lot size of 250 shares for each contract.
Open Interest refers to the aggregate number of extraordinary
positions on a specific options contract over all members in the market
at any given purpose of time. Open Interest becomes the nil past of the
expired date for a specific contract.
For example: In the event that trader A buys 100 Nifty options from
trader B where, both of them A and B are entering the in the market
surprisingly for the very first time, the open interest would be 100
futures or two contract. The following day, Trader A offers his/her
contract to Trader C. This does not change the open interest, as a
decrease in A’s open position is balanced by an increment in C’s open
position for this specific asset. Now, if A buys 100 more Nifty Futures
from another trader D, the open interest for the Nifty Futures contract
would get to be 200 futures or 4 contracts.
TYPES OF OPTION:
As we discussed earlier, options are two types call option and put option.
A call option, basically named a “call”, is a financial contract
between two gatherings, the buyer and the seller of this sort of option.
The buyer of the call option has the privilege, however not the
commitment, to buy a number of a specific product or financial related
instrument (the underlying) from the seller of the option at a certain
time say, the close date at a certain price (the strike price). The
seller is committed to sell the product (commodity) or financial related
instrument to the buyer if the buyer wants to buy. The buyer pays an
money (premium) for this right.
The Put Option gives the holder the privilege to sell a specific
asset at the strike cost at whatever time before it expires for a
premium paid in advance. Since you can sell a stock at any given purpose
of time, if the spot price of a stock falls amid the contract period,
the holder must protected from this fall in price. This clarifies why
put options turn out to be more important when the price of the basic
stock falls. Also, if the price of the stock rises amid the contract
period, the seller just loses the premium pay and does not endure lost
the whole price of the asset. Put options are curtailed as “P” in market
EXAMPLES FOR THE OPTIONS CONTRACTS:
There is a contract in which, Rajesh has the rights to buy one lot of
100 Infosys shares at Rs 3000 for each share at whatever time in the
middle of now and the month of May. He paid a premium of Rs 250 for
every share. He therefore pays an aggregate amount of Rs 25,000 to
appreciate this privilege to share.
Assume the share price of Infosys ascends over Rs 3,000 to Rs 3200,
Rajesh can consider practicing the option and buying at Rs 3,000 for
every share. He would be sparing Rs 200 for each share; this can be
viewed as a tentative profit. Notwithstanding, despite everything he
makes a notional net loss of Rs 50 for every share once you mull over
the premium sum. Consequently, Rajesh may decide to really exercise the
option once the share value crosses over more than Rs 3,250. Else, he
can decide to let the option expire without being worked out. Rajesh
trusts that the shares of Company X are presently overrated and wagers
on them falling in the following couple of months. Since he needs to
secure his position, he takes a put option on the shares of Company X.
Month Price Premium
February (Current month) Rs 1040 Spot NA
May Rs 1050 Put Rs 10
May Rs 1070 Put Rs 30
Rajesh buys 1000 shares of Company X Put at a strike price of 1070
and pays Rs 30 for each share as premium. His aggregate premium paid is
Rs 30,000. In the event that the spot price for Company X falls
underneath the ‘Put option’ Rajesh brought Rs 1020; Rajesh can protect
his cost by deciding to share the put option. He will make Rs 50 for
each share (Rs 1070 short Rs 1020) on the exchange, making a net profit
of Rs 20,000.
Then again, if the spot price for Company X rises higher than the Put
Option, say Rs 1080; he would be at a loss on the off chance that he
chose to exercise the put option at Rs 1070. In this way, he will pick,
for this situation, to not exercise the put option. Simultaneously, he
just loses Rs 30,000 – the premium amount; this is much lower than if he
had exercised his option.