Derivatives

Hello Punnu, here's my two paisa worth about options.
I started trading in options only recently although I kinda knew about it. Here's some important rules of thumb I've learned:

(1) Option is a contract to buy (Call when you think Long) or sell (Put when you think Short) the underlying at a particular Strike price. The lot size (and expiry date) is the same as the Futures contract. e.g. RPL 170 Call could be bought at Rs. 10 when RPL (spot) is being quoted at 165. You expect RPL to cross 170 before expiry. The RPL lot size is 1675, and margin for Futures contract is Rs. 60,000 (aprx). You can buy/sell at any time before expiry.** To buy one Futures contract you'd need to set aside margin of Rs. 60,000. To buy one 170 Call you'd need to pay just 1675x10=16,750. Since RPL's current price is Rs. 165, ideally 170 Call should cost the difference (170-165=) Rs. 5 but since most people are betting on that trend they end up paying a premium of (10-5=) Rs. 5. But then you pay a little premium also for a Futures contract. If RPL crosses 170, the option is called "in the money" and say, is quoted at Rs. 17. You can now sell it and pocket your profit of (17-10=7) multiplied by the lot size of 1675 giving you 1675x7=....... Conversely, if RPL goes down to 160 levels, your option may be quoted at Rs. 3 in which case you'll incurred a loss of (10-3=7) times the lot size. Vice versa for the Puts. This is just the theory.

(2) Option writing is selling a Call or a Put which is not advisable for us (unless of course you know what you're doing) as it requires the same margin as the Futures contract. If you think Short, just buy a Put instead of selling a Call. In the above example, you could buy 160 Put for RPL, and hope it goes down from CMP of 165.

(3) Actually very few stocks have active options. Currently the only stock options really active are for RELIANCE and RPL. Which means that others are "illiquid" and best to stay away from. In fact, it is really best to stay away from individual stock options. Better to trade in the top five Nifty options. You can find info on this at NSE website (nseindia.com)

(4) Finally, brokerage for Option trading is quite high. For a Nifty option, this works out to almost 5 point spread on a buy-sell transaction. In other words, you don't make money until your Option price advanes by at least Rs. 5. You may want to check your contracts and confirm with your brokers. NSE has imposed certain guidelines by which they have to operate.

(5) Hedging with Futures and Options requires some more understanding of Risk Management about which I am rather ignorant. Maybe other more knowledgeable traders can help us out here.

Hope this helps. I am keen to hear from traders who are more adept at this and do it on a regular basis and make money.
---------

** If you don't settle your options/futures contract before the market stops on the expiry date, NSE will settle it for you at the closing price of that day. Do it only if you are already in the money and the price keeps going up till the end to extract max juice out of it.

__________________

To view links or images in signatures your post count must be 2 or greater. You currently have 0 posts.
Paresh
If people put you on the SPOT, ask about FUTURE, and give you no OPTION;
just tell'em "the LONG & SHORT of it is How to Make Money!"
To view links or images in signatures your post count must be 2 or greater. You currently have 0 posts.