European style options trading
Futures and Options trading in India FAQs: Futures and Options trading in India WITH the exit of badla from the coming month, the stockmarket will see the introduction of options and futures in a big way. For investors who have difficulty in understanding the terminologies associated with options and futures as well as its modes of working, here's some lucid explanation.
An option is a contract, which gives the buyer holder the right, but not the obligation, to buy or sell specified quantity of the underlying assets, at a specific strike price on or before a specified time expiration date.
Expiration date - The date on which the option expires is known as Expiration Date. 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 upside potential is unlimited while losses are limited to the Premium paid by him to the option writer.
His profits are limited to the premium received from the buyer while his downside is unlimited.
European Option
All listed options of a particular type i. An option series consists of all the options of a given class with the same expiration date and strike price. BSX Stands for BSE Sensex underlying indexC is for Call OptionMay is expiry date and strike Price is What is 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. What are Call Options? The seller one who is short call however, has the obligation to sell the underlying asset if the buyer of the call option decides to exercise his option to buy. An investor buys One European call option on Infosys at the strike price of Rs.
If the market price of Infosys on the day of expiry is more than Rs. The investor will earn profits once the share price crosses Rs.
Suppose stock price is Rs. In another scenario, if at the time of expiry stock price falls below Rs. 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? The seller of the put option one who is short Put however, has the obligation to buy the underlying asset at the strike price if the buyer decides to exercise his option to sell.
An investor buys one European Put option on Reliance at the strike price of Rs. If the market price of Reliance, on the day of expiry is less than Rs. The investor's Break even point is Rs. In this case the investor loses the premium paid i. Please see table How are options different from futures? The significant differences in Futures and Options are as under: In case of options the buyer enjoys the right and not the obligation, to buy or sell the underlying asset.
Futures Contracts have symmetric risk profile for both buyers as well as sellers, whereas options have asymmetric risk profile. In case of Options, for a buyer or holder of the optionthe downside is limited to the premium option price he has paid while the profits may be unlimited. For a seller or writer of an option, however, the downside is unlimited while profits are limited to the premium he has received from the buyer.
The futures contracts prices are affected mainly by the prices of the underlying asset. Prices of options are however, affected by prices of the underlying asset, time remaining for expiry of the contract and volatility of the underlying asset.
It costs nothing to enter into a futures contract whereas there is a cost of entering into an options contract, termed as Premium. Explain In the Money, At the Money and Out of the money Options. An option is said to be 'at-the-money', when the option's strike price is equal to the underlying asset price. 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.
For example, a Sensex call option with strike of is 'in-the-money', when the spot Sensex is at as the call option has value. The call holder has the right to buy a Sensex atno matter how much the spot market price has risen. 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.
European Style Options by efulejeqih.web.fc2.com
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.
In the above example, the buyer of Sensex put option won't exercise the option when the spot is at The put no longer has positive exercise value. Options are said to be deep in-the-money or deep out-of-the-money if the exercise price is at significant variance with the underlying asset price. What are Covered and Naked Calls? 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. A writer writes a call on Reliance and at the same time holds shares of Reliance so that if the call is exercised by the buyer, he can deliver the stock. Covered calls are far less risky than naked calls where there is no opposite position in the underlyingsince the worst that can happen is that the investor is required to sell shares already owned at below their market value.
What is the Intrinsic Value of an option? The intrinsic value of an option is defined as the amount by which an option is in-the-money, or the immediate exercise value of the option when the underlying position is marked-to-market.
For a call option: 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?
There are two types of factors that affect the value of the option premium: What are different pricing models for options? The theoretical option pricing models are used by option traders for calculating the fair value of an option on the basis of the earlier mentioned influencing factors. The two most popular option pricing models are: Black Scholes Model which assumes that percentage change in the price of underlying follows a normal distribution.
Binomial Model which assumes that percentage change in price of the underlying follows a binomial distribution. Options Premium is not fixed by the Exchange. If insta forex zero spread price of the underlying stock is held constant, the intrinsic value portion of an option premium will remain constant as well.
Therefore, any change in the price of the option will be multiple time frame forex strategy due to a change in the option's time value. The time value component of the option premium can change in response to a change in the volatility of the underlying, the time to expiry, interest rate fluctuations, dividend payments and to the immediate effect of supply and demand for both the underlying and its option.
Explain the Option Greeks? The price of an Option depends on certain factors falcon forex corporation 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.
These Neopets best money making games Greeks are: What is an Option Calculator? An option maths quest 9 for victoria homework book answers is a tool to calculate the price of an Option on the basis of various influencing factors like the price of the underlying monthly gainers stock market 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 the likely players in the Options Market?
Option Styles - efulejeqih.web.fc2.com
Developmental institutions, Mutual Funds, FIs, FIIs, Brokers, Retail Participants are plain vanilla european call option likely players in the Options Market. Binomial option tree example 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. They can be as conservative gamestop system trade in values as speculative as one's investment strategy dictates. Some of the benefits of Options are as under: High leverage as by investing small amount of capital in form of premiumone can take exposure in the underlying asset of much greater value.
Pre-known maximum risk for an option buyer Large profit potential and limited risk for option buyer One can protect his equity portfolio from a decline in the market by way of buying a protective put wherein one buys puts against an existing stock position. This option position can supply the insurance needed to overcome the uncertainty of the marketplace. 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 stock options vs stock warrants price of the Put anyoption maximum trade size until the Put expires.
Thus, by paying premium of Rs ,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 call forwarding settings samsung galaxy s3 mini 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.
Once an option is bought there are following alternatives that an option holder has: You can exercise the option on the expiration day in case of European Option or; on or before the expiration day in case of an American option. In case the option is 'Out of Money' at the time of expiry, it will expire worthless.
What are european style options trading risks involved for an options buyer? What are the risks for an Option writer? 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 westpac nz foreign exchange rates price over the exercise price of the call reduced by the premium received for writing the call.
The writer of buying binary options 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 interactive brokers forex account minimum take care of his risk?
Option writing is a specialized job which is suitable only for the knowledgeable investor who understands the risks, has the financial capacity and has sufficient liquid assets to meet applicable margin requirements. Who can write options in Indian derivatives market? 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 forex broker finance which represents group of stocks. What are the uses binary option video tutorials 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 options are more volatile than the Index.
Who would best time to buy energy stocks 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 birkenstock where to buy kl 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. How will introduction of options in specific stocks benefit an investor? Options can offer an investor the flexibility one needs for countless investment situations.
An investor can 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. Thus they will insure their portfolio of equity stocks by paying premium. ESOPs Employees' stock options have become a popular compensation tool with more and more companies offering the same to their employees. ESOPs are subject to lock in periods, which could reduce capital gains in falling markets - Derivatives can help arrest that loss along with tax savings. The equity options traded on exchange are not issued by the companies underlying them.
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.
To 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 exotic Options? Derivatives with more complicated payoffs than the standard European or American calls and puts are referred to as Exotic Options.
Some of the examples of exotic options are as under: A simple example would be an option which pays off if price of an Infosys share ends up above the strike price of say Rs. What are Over-The-Counter 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 30 Sensex, which is the benchmark index of Indian Capital markets, comprising 30 scrips.
What are the contract specifications of Sensex Options? BSE's first index options is based on BSE 30 Sensex. The Sensex options would be European style of options i. They will be premium style i. The Premium and Options Settlement Value difference between Strike and Spot price at the time of expirywill be quoted in Sensex points The contract multiplier for Sensex options is INR 50 which means that monetary value of the Premium and Settlement value will be calculated by multiplying the Sensex Points by There will be at-least 5 strikes 2 In the Money, 1 Near the money, 2 Out of the moneyavailable at any point of time.
The expiration day for Sensex option is the last Thursday of Contract month. If it is a holiday, the immediately preceding business day will be the expiration day. There will be three contract month series Near, middle and far available for trading at any point of time. The settlement value will be the closing value of the Sensex on the expiry day.
The tick size for Sensex option is 0. This means the minimum price fluctuation in the value of the option premium can be 0. In Rupee terms this translates to minimum price fluctuation of Rs 5. 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. PC-SPAN is an easy to use program for PC's which calculates SPAN margin requirements at the members' end. How PC SPAN works: Each business day the exchange generates risk parameter file parameters set by the exchange which can be down loaded by the member. What will be the new margining system in the case of Options and futures? 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. The Portfolio will be marked to market on a daily basis. How will the assignment of options takes place? 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 does 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. The Premium has to be paid up-front in cash. He can either hold on to the contract till its expiry or square up his position by entering into a reverse trade.
If he closes out his position, he will receive Premium in cash, the next day. If the investor holds the position till expiry day and decides to exercise the contract, he will receive the difference between Option Settlement price and the Strike price in cash. If he does not exercise his option, it will expire worthless. Initial margin based on his position will have to be paid up-front adjusted from the collateral deposited with his broker and he will receive the premium in cash, the next day.
Everyday his position will be marked to market and variance margin will have to be paid. 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 in 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 will be conducted across the country to reach investors at large. Any action you choose to take in the markets is totally your own responsibility.
American call optionsThis 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.
Enriching Investors Since Profitable Trading Solutions for the Intelligent Investor. Beginners Guide - Futures. Beginners Guide - Options. Trend is Your Friend. NSE IT Sector Index. Futures and Options trading in India. Multiply your capital by investing in the long term trends of Multi Bagger Stocks. Create wealth for yourself by quickly identifying changes in trends, riding the trend and booking profits at the end of the trend.
Extract maximum profits everyday by taking advantage of intra-day volatility in highly liquid futures contract.