Option trading india
On Expiration date, either the option is exercised or it expires worthless Exercise Date - is the date on which the option is actually exercised. He enjoys the right to buy or sell the underlying asset at a specified price on or before specified time. His profits are limited to the premium received from the buyer while his downside is unlimited Option Class: All listed options of a particular type i. When the holder of an option exercises his right to buy sell, a randomly selected option seller is assigned the obligation to honor the underlying contract, and this process is termed as Assignment What are European and American Style of options? An American style option is the one which can be exercised by the buyer on or before the expiration date, i. In this case the investor loses the premium Rspaid which shall be the profit earned by the seller of the call option What are Put Options? In this case the investor loses the premium paid i. Please see table How are options different from futures? This is true for both puts and calls A call option is said to be in-the-money when the strike price of the option is less than the underlying asset price. And with the current price ata profit can be made by selling Sensex at this higher price On the other hand, a call option is out-of-the-money when the strike price is greater than the underlying asset price. Using the earlier example of Sensex call option, if the Sensex falls tothe call option no longer has positive exercise value. The call holder will not exercise the option to buy Sensex at when the current price is at Please see table A put option is in-the-money when the strike price of the option is greater than the spot price of the underlying asset. For example, a Sensex put at strike of is in-the-money when the Sensex is at When this is the case, the put option has value because the put holder can sell the Sensex atan amount greater than the current Sensex of Likewise, a put option is out-of-the-money when the strike price is less than the spot price of underlying asset. A call option position that is covered by an opposite position in the underlying instrument for example shares, commodities etcis called a covered call Writing covered calls involves writing call options when the shares that might have to be delivered if option holder exercises his right to buyare already owned E. It cannot be negative. For a call option, the strike price must be less than the price of the underlying asset for the call to have an intrinsic value greater than 0. For a put option, the strike price must be greater than the underlying asset price for it to have intrinsic value Explain Time Value with reference to Options Time value is the amount option buyers are willing to pay for the possibility that the option may become profitable prior to expiration due to favorable change in the price of the underlying. An option loses its time value as its expiration date nears. At expiration an option is worth only its intrinsic value. Time value cannot be negative What are the factors that affect the value of an option premium? Options Premium is not fixed by the Exchange. The price of an Option depends on certain factors like price and volatility of the underlying, time to expiry etc. The option Greeks are the tools that measure the sensitivity of the option price to the above mentioned factors They are often used by professional traders for trading and managing the risk of large positions in options and stocks. An option calculator is a tool to calculate the price of an Option on the basis of various influencing factors like the price of the underlying and its volatility, time to expiry, risk free interest rate etc It also helps the user to understand how a change in any one of the factors or more, will affect the option price Who are option likely players in the Options Market? Developmental institutions, Mutual Funds, FIs, FIIs, Brokers, Retail Participants are the likely players in the Options Market Why do I invest in Options? What do options offer me? Besides offering flexibility to the buyer in form of right to buy or sell, the major advantage of options is their versatility. Hence, by paying a relatively small premium compared to the market value of the stockan investor knows that no matter how far the stock drops, it can be sold at the strike price of the Put anytime until the Put expires E. Thus, by paying premium of Rs 200,his position is insured in the underlying stock How can I use options? If you anticipate a certain directional movement in the price of a stock, the right to buy or sell that stock at a predetermined price, for a specific duration of time can offer an attractive investment opportunity The decision as to what type of option to buy is dependent on whether your outlook for the respective security is positive bullish or negative bearish If your outlook is positive, buying a call option creates the opportunity to share in the upside potential of a stock without having to risk more than a fraction of its market value premium paid Conversely, if you anticipate downward movement, buying a put option will enable you to protect against downside risk without limiting profit potential Purchasing options offer you the ability to position yourself accordingly with your market expectations in a manner such that you can both profit and protect with limited risk Once I have bought an option and paid the premium for it, how does it get settled? Option is a contract which has a market value like any other tradable commodity. The risk of an Options Writer is unlimited where his gains are limited to the Premiums earned. When a physical delivery uncovered call is exercised upon, the writer will have to purchase the underlying asset and his loss will be the excess of the purchase price over the exercise price of the call reduced by the premium received for writing the call The writer of a put option bears a risk of loss if the value of the underlying asset declines below the exercise price. The writer of a put bears the risk of a decline in the price of the underlying asset potentially to zero How can an option option take care of his risk? In the Indian Derivatives market, Sebi has not created any particular category of options writers. Any market participant can write options. However, margin requirements are stringent for options writers What are Stock Index Options? The Stock Index Options are options where the underlying asset is a Stock Index for e. As opposed to options on Individual stocks, index options give an investor the right to buy or sell the value of an index which represents group of stocks What are the uses of Index Options? Index options enable investors to gain exposure to a broad market, with one trading decision and frequently with one transaction. To obtain the same level of diversification using individual stocks or individual equity options, numerous decisions and trades would be necessary Since, broad exposure can be gained with one trade, transaction cost is also reduced by using Index Options As a percentage of the underlying value, premiums of index options are usually lower than those of equity options as equity india are more volatile than the Index Who would use index options? Index Options are effective enough to appeal to a broad spectrum of users, from conservative investors to more aggressive stock market traders Individual investors might wish to capitalize on market opinions bullish, bearish or neutral by acting on their views of the broad market or one of its many sectors The more sophisticated market professionals might find the variety of index option contracts excellent tools for enhancing market timing decisions and adjusting asset mixes for asset allocation To a market professional, managing risks associated with large equity positions may mean using index options to either reduce risk or increase market exposure What are Options on individual stocks? Options contracts where the underlying asset is an equity stock, are termed as Options on stocks. They are mostly American style options cash settled or settled by physical delivery Prices are normally quoted in terms of the premium per share, although each contract is invariably for a larger number of shares, e. Options can offer an investor the flexibility one needs for countless investment situations. An investor option create hedging position or an entirely speculative one, through various strategies that reflect his tolerance for risk Investors of equity stock options will enjoy more leverage than their counterparts who invest in the underlying stock market itself in form of greater exposure by paying a small amount as premium Investors can also use options in specific stocks to hedge their holding positions in the underlying i. Companies do not have any say in selection of underlying equity for options Whether the holders of equity options contracts have all the rights that the owners of equity shares have Holder of the equity options contracts do not have any of the rights that owners of equity shares have - such as voting rights and the right to receive bonus, dividend etc. India obtain these rights a Call option holder must exercise his contract and take delivery of the underlying equity shares What are Leaps long term equity anticipation securities? Long term equity anticipation securities Leaps are long-dated put and call options on common stocks or ADRs These long-term options provide the holder the right to purchase, in case of a call, or sell, in case of a put, a specified number of stock shares at a pre-determined price up to the expiration date of the option, which can be three years in the future What are india Options? Derivatives with more complicated payoffs than the standard European or American calls and puts are referred to as Exotic Options. Over-The-Counter options are those dealt directly between counter-parties and are completely flexible and customized. There is some standardization for ease of trading in the busiest markets, but the precise details of each transaction are freely negotiable between buyer and seller Where can I trade in Options and Futures contracts Like stocks, options and futures contracts are also traded on any exchange. In Bombay Stock Exchange, stocks are traded on BSE On Line Trading BOLT system and options and futures are traded on Derivatives Trading and Settlement System DTSS What is the underlying in case of Options being introduced by BSE? The underlying for the index options is the BSE Sensex, which is the benchmark index of Indian Capital markets, comprising 30 scrips What are the contract specifications of Sensex Options? The Sensex options would be European style of options i. The expiration day for Sensex option is the last Thursday of Contract month If it is a holiday, the immediately preceding business day will trading the expiration day There will be three contract month series Near, middle and far available for trading at any point of time. Specific Portfolio Analysis of Risk SPAN is a worldwide acknowledged risk management system developed by Chicago Mercantile Exchange CME. It is a portfolio-based margin calculating system adopted by all major Derivatives Exchanges Objective of SPAN SPAN identifies overall risk in a complete portfolio of futures and options at the same time recognizing the unique exposures associated with both inter-month and inter-commodity risk relationships It determines the largest loss that a portfolio might suffer with in the period specified by the exchange i. BSE has licensed SPAN from CME for calculating margin requirements at the Exchange level At the same time members can also calculate margin requirements of their clients by using PC SPAN What is PC-SPAN? A portfolio based margining model SPANwould be adopted which will take an integrated view of the risk involved in the portfolio of each individual client comprising of his positions in all the derivatives contract traded on the Derivatives Segment The Initial Margin would be based on worst-case loss of the portfolio of a client to cover 99 per cent VaR over two days horizon. On Exercise of an Option by an Option Holder, the trading software will assign the exercised option to the option writer on random basis based on a specified algorithm What trading an investor need to do to trade in options? An investor has to register himself with a broker who is a member of the BSE Derivatives Segment If he wants to buy an option, he can place the order for buying a Sensex Call or Put option with the broker. He can close out his position by a buying the option by paying requisite premium. The initial margin which he had paid on the first position will be refunded If he waits till expiry, and the option is exercised, he will have to pay the difference trading the Strike price and the options settlement price, in cash. If the option is not exercised, the investor will not have to pay anything What steps will be taken by the exchange to create awareness about options amongst masses? The exchange is conducting free of cost futures and options awareness programs for member brokers and their clients. This information is neither an offer to sell nor solicitation to buy any of the securities mentioned herein.
Processes are then mapped to specific hazards or threats, with the manager looking for gaps, overlaps, and conflicts between processes.
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