How nifty options trading works

If at the expiry date, Nifty is trading at 4350, then Mr. It is the price at which the stock is trading in the cash markets. The lot size of Nifty futures is 100. For the purpose of this chapter, we would restrict the scope to Equity derivatives only. The lot size and margin money percentage vary for different scrips and contracts. We took the example of Nifty, which is an index. The strike price of the contract is 4100 and at the expiry, the Nifty is at 3850. The strike price of the contract is 4100 and at the expiry, the Nifty is at 4350.

He however has incurred a premium of Rs. The option writer or seller is the other party to such a contract who earns the premium. Now, had the Nifty risen to 4250, then Mr. Nifty Put option with a strike price of 4100 at a premium of Rs. The underlying asset can be equity, commodities or any other asset. On NSE, the last Thursday of every month is the expiry date. If at the expiry date, Nifty is trading at 3850, then Mr. His Call option would not exercise and Mr. Similarly seller of Nifty futures contract would stand to lose Rs. Nifty is trading at the level of 4000. His Put option would not exercise and Mr. Are you a wealth creator or destroyer? Derivatives were introduced in the Indian stock market to enable investors to hedge their investments against adverse volatile price movements. However they are now commonly being used for taking speculative positions.

Broadly, Futures and Options are the derivative instruments that are traded on the two main exchanges, BSE and the NSE. Now, had the Nifty fallen to 3950, then Mr. Last Thursday of the relevant month on NSE. You can take positions in various stocks which are listed for Futures trade. In our example, if the Nifty is trading at 4300 on the last Thursday of the month and the position is not squared off then the purchaser of the Nifty futures contract at 4000 would be a gainer by Rs. So he stands gainer by Rs. Nifty Call option with a strike price of 4100 at a premium of Rs. You can buy or sell a lot of Nifty Fututres. Specified Price at which the underlying may be purchased or sold when the option is exercised. This would mean you lost the opportunity to make profits. Suppose the stock falls to Rs 930, you could think of exercising the put option.

However, if the stock price actually rises and not falls as you had expected, you can ignore the option. This is called assignment margin. In addition to these two, additional margins are collected. For put index options, you cannot physically settle, as the index is not tangible. You would thus earn a profit of Rs 10 per share once you have deducted the premium costs. There are three common ways to settle put options contracts.

Remember, stock options can be exercised before the expiry date. This is because, shares, like indexes, cannot have negative values. Margin requirements typically rise during period of higher volatility. This could lead to a fall in the share prices from the current Rs 950 per share. This means, you will actually sell the underlying stocks as specified in the options contract agreement. This is called squaring off. Put options on stocks also work the same way as call options on stocks. American options are more flexible; they allow you to settle the trade before the expiry date of the contract. In the case of Stock options, you can buy an opposing contract.

You will thus choose to exercise your option and sell the index. Suppose the contract lot is 600 shares. European options can only be exercised on the day of the expiry. That said, remember to take into consideration your premium costs. This amount the seller has to deposit is dictated by the exchange. If you decide to square off your position before the expiry of the contract, you will have to buy the same number of call options of the same underlying stock and maturity date. Rs 10 per share. If not, jump at the opportunity and exercise the option right away. However, in this case, the option buyer is bearish about the price of a stock and hopes to profit from a fall in its price.

You losses will be adjusted against the margin that you have provided to the exchange and the balance margin will be credited to your account with the broker. For this reason, you could wait until the share price falls to at least Rs 920. Similarly, in the Options market, you cannot have call options without having put options. Thus, put options are used when market conditions are bearish. Suppose you hold ABC shares, and you expect that its quarterly results are likely to underperform analyst forecasts. In this way, a put option is exactly opposite of a call option.

The maximum profit is the share price minus the premium. So, you would rather protect yourself by paying a small premium than make losses. They thus protect you against the decline of the price of a stock below a specified price. This means, if you hold a contract to sell stocks, you purchase a contract to buy the very same stocks. This is because prices can rise to any heights theoretically, and as a put option writer, you have to buy at whatever price has been specified. Or, you can exercise your options on or before the expiration date. In any market, there cannot be a buyer without there being a seller. If you have sold put options and want to square off your position, you will have to buy back the same number of put options that you have written.

Thus, these two cancel each other. They can be value at 0 at worst. You can also hold your position open until the option expires. This way, you will earn a premium on the contracts as the seller. The simple rule to maximize profits is that you buy at lows and sell at highs. You will need to recover that cost too.

This indicates you are expecting a possible decline in the price of the underlying assets. However, your maximum loss of money will be restricted to the premium paid. Therefore, the seller of a put option has to deposit a higher margin with the exchange as security in case of an adverse movement in the price of the options sold. So, to settle index options, you can either exit your position through an offsetting trade in the market. It could happen that the stock does fall, but gains back right before expiry. These differ for buyers and sellers, who are at the opposite ends of the spectrum. As a seller or writer of a put option, your potential loss of money is unlimited.

You can also exercise your option anytime on or before the expiry date of the contract. So you need to monitor the stock movement carefully. You can also settle by selling the two put options contracts you hold in order to square off your position. Just like the call option, the margins are levied on the put contract value in percentage terms. If you have purchased two XYZ put options with a lot size 500, a strike price of Rs 100, and expiry month of August, you will have to buy two XYZ call options contracts with an expiry month of August. Your account will be then credited or debited for the amount. For this reason, you would chose to not exercise your option. Thus, the maximum loss of money an investor faces is the premium amount. The difference between the premium at which you bought the put option and the premium at which you sold them will be your profit or loss of money.

You make a profit from the difference in prices and premiums. Thus, index options are European options, while stock options are a kind of American options. This will be based on the difference between the strike price and the closing market price of the stock or index on the day of exercise. Whatever is the difference in strike prices could be your profit or loss of money. If there is an indication that the share could fall further to Rs 910 or 900 levels, wait until it does so. However, they still share some similar traits. Whether you are a buyer or a seller, you have to pay an initial margin as well as an exposure margin. Nifty Put when Nifty is at 3800?

This is more of an omission, 5400 in the above example would be called the strike price of the option. For example, nifty is presently at 5447. Extrinsic Value by OptionTradingpedia. So, if I then sell this option, I can sell it for 120. DO SIPs REALLY WORK? The basic idea is to bet on the price appreciation of the underlying which in this case is nifty. The premium for this option is Rs. In that example, Rs 57 is not the time value but the extrinsic value of the stock.

This would not be called exercising the option but would rather be called selling the option. What purpose do futures and options serve apart from speculation? So imagine I buy 10 contracts of nifty 5400 call options which expire in June 2011. For the following example, in order to simplify things, I will not take into consideration commissions, slippage and taxes. For example if the underlying raises by 20 points tomorrow then the option premium would raise by approximately Rs. The lot size is constant at 50. If I made any mistake, please correct it. Do they really tend to increase price stability or? Two corrections to the above post. The time value decays slowly with the passage of time at the rate of the options theta. In such a case, if I think nifty would appreciate in the comming days, I would buy a nifty call option of say 5400 or lower. Dividends of the underlying stock. The basic idea is a bet that the underlying would fall in value.

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AHMEDABAD, GUJARAT, India Renowned Technical Analyst and Stock Market Advisor of INDIA having experience of more than 26 years provide Advisory Services for NSE BSE NIFTY SENSEX FUTURE STOCKS. If we do not sell Nifty Put Option we have bought till lasts day also then our trade will be automatically squared off at the settlement price of Nifty on last day of expiry decided by the exchange. We can square up the Option position anytime after buying just like Future. We can take the position in Nifty Option in the expected direction bullish or bearish. This is the maximum loss of money we can have even if Nifty falls to any level beyond 3000. No Profit No loss of money. January and can book profit or loss of money. What trades we can do in Call and Put Option of Nifty and what will be our profit and loss of money position is as stated below.

What are the points we have to keep in mind while trading Nifty Option, how to calculate the profit and loss of money. We cannot lose more then the premium paid to buy the Option under any circumstances and it is known to us before we trade. If we are bullish then we can buy Nifty Call Option and if bearish then we can buy Nifty Put Option. We wonder how to trade in Nifty Option and earn profit with limited loss of money and unlimited profit. INRs and last date of expiry is on nth January. Business Magazines like The Economic Revolution for Market views.

What is the advantage of buying Option compared to Future. What trade we can execute and what would be our position in terms of profit and loss of money are explained below with examples. Maximum loss of money is fixed and predefined. If we do not sell Nifty Call Option we have bought till lasts day also then our trade will be automatically squared off at the settlement price of Nifty on last day of expiry decided by the exchange. Buy Nifty Put Option Strike Price 2800. This is the maximum loss of money we can have even if Nifty rises to any level beyond 2800. What is options trading in commodities? Learn winning binary options method, find the best brokers, robots, signals and much more.

Read this guide before you start trading binary options. In commodities, where prices are so volatile, options trading is like a deposit on the futures contract. Microsoft and wanted to do a covered call by selling 10 of the March 27. Keep in mind that trading volume is relative and needs to be compared to the average daily volume of the stock in question. If you buy 10 of the Microsoft March 27. Open interest is a concept all option traders need to understand. When options have large open interest, it means they have a large number of buyers and sellers, and an active secondary market will increase the odds of getting option orders filled at good prices. That purchase will add 10 to the open interest figure. Things get a little more complicated if the options you trade are not created by the transaction, but instead the other side is taken by someone doing a closing transaction. Open interest can help you determine whether there is unusually high or low volume for any particular option.

When you buy or sell an option, the transaction needs to be entered as either an opening or a closing transaction. Since it is an opening transaction, it would add 10 to the open interest. When the volume exceeds the existing open interest on a given day, this suggests that trading in that option was exceptionally high that day. Unlike stock trading, in which there is a fixed number of shares to be traded, option trading can involve the creation of a new option contract when a trade is placed. The answer is that you have no way to know for sure. Price movements in the options market result from the decisions of millions of traders. Indicators and reports that show you what other market participants are doing can be a valuable addition to your trading system.

Selling an option can also add to the open interest. You may be wondering if that number refers to options bought or sold. The volume, or market breadth, is measured in shares and tells you how meaningful the price movement in the market is. One way to use open interest is to look at it relative to the volume of contracts traded. But there are a number of useful statistics besides price movements that tell you what those other market participants are doing. In fact, they may indicate that a reversal is likely in the near term. Trading does not occur in a vacuum. If you later wanted to repurchase the options, you would enter a transaction to buy to close. Here we take a closer look at two factors you should consider when trading options: daily trading volume and open interest.

If there is no open interest for an option, there is no secondary market for that option. So, all other things being equal, the bigger the open interest, the easier it will be to trade that option at a reasonable spread between the bid and ask. Daily trading volume and open interest can be used to find trading ideas you might otherwise overlook. These indicators are also useful for making sure that the options you trade are liquid, allowing you not difficult to enter and exit a trade, as well as ensure you get the best possible price. For example, if you are buying 10 of the Microsoft March 27. Open interest also gives you key information regarding the liquidity of an option. But large percentage increases in price accompanied by small trading volumes are less likely to indicate a market direction. Open interest would then decrease by 10. If the Nifty rises, a call buyer makes money. The futures and options traders sold Nifty options across 7300 to 8000 strikes, whose premiums or prices have since fallen, making these options worthless for those who purchased them. However, if markets do not move much, an option trader sells and pockets the premium.

For instance, the 8000 Nifty most active call option premium has declined to Rs 10 a piece on Thursday from Rs 44 on July 30. Over the same period, the Nifty 7800 call has declined by almost half its value toRs 65 over. He gains only if Nifty breaches the BEP. The market between end July and Thursday has moved up just 70 points. Nifty put option of 7600 level or strike at the end of July for a premium of Rs 40. However, since Nifty is nowhere near this level, the buyer forfeits the premium. Option writers who had written contracts in the beginning of August series have made big money. MUMBAI: In a lacklustre market, savvy derivatives traders have pocketed tidy profits by selling Nifty options a fortnight ago as premiums have since then fallen sharply. The BEP is 7921. Same is the case with the buyer of the 7800 call option. Similarly, when one expects markets to fall he buys a put option.

Nifty shares, he can simply buy a call option which allows him to take exposure to the index at a fraction of the cost of a Nifty basket. If it falls, a put buyer gains at the expense of the seller. At the end of July price was Rs 121.