What are Options

Options are of two basic types

Call Option
and
Put Option

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 Call Option

• A call option gives the holder the right to buy an underlying

asset by a certain date for a certain price.

• The seller is under an obligation to fulfill the contract and is

paid a price of this which is called "the call option premium
or call option price".

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 Put Option

• A put option, on the other hand gives the holder the right to
sell an underlying asset by a certain date for a certain price.

• The buyer is under an obligation to fulfill the contract and is

paid a price for this, which is called "the put option premium
or put option price".

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 Options undertakings
• Stocks

• Foreign Currencies

• Stock Indices

• Commodities

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 Terminology

• The price at which the underlying asset would be bought in

the future at a particular date is the "Strike Price" or the
"Exercise Price".

• The date on the options contract is called the "Exercise

date", "Expiration Date" or the "Date of Maturity".

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 Types of Options
European Options
• European options can be exercised only on expiry.
Index options are European.

American Options
• Buyer of an American Option has the right to exercise at any
point of time on or before expiry. Stock options are
American.
• Option type identifies whether it is a call or a put option.,
CA-Call American, PA - Put American.
• In case of Index Options they are identified with CE -Call
European, PE – Put European.

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 Snapshot Trade Tiger

Expiry Strike
date price

CE: Call European PE: Put European CA: Call American PA: Put American

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 Trading Parameters

Contract size
• The value of the option contracts on individual securities may
not be less than Rs. 2 lakhs at the time of introduction for
the first time at any exchange.
• The permitted lot size for futures contracts & options
contracts shall be the same for a given underlying or such lot
size as may be stipulated by the Exchange from time to time.

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 Trading cycle
• Options contracts have a maximum of 3-month trading cycle-
the near month (one), the next month (two) and the far
month (three).
• On expiry of the near month contract, new contracts are
introduced at new strike prices for both call and put options,
on the trading day following the expiry of the near month
contract. The new contracts are introduced for three
months.
• New contracts with new strike prices for existing expiration
date are introduced for trading on the next working day
based on the previous day's underlying close values, as and
when required.
• In order to decide upon the at-the-money strike price, the
underlying closing value is rounded off to the nearest strike
price interval.
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 Price steps
The price step in respect of the options contracts is Re.0.05.
Price of Underlying Strike Price interval (Rs.)
Less than or equal to Rs. 50 2.5
> Rs.50 to less than or equal to Rs. 250 5
> Rs.250 to less than or equal to Rs. 500 10
> Rs.500 to less than or equal to Rs. 1000 20
> Rs.1000 to less than or equal to Rs. 2500 30
> Rs.2500 50

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 Options Classifications

Options are often classified as

• In the money: These result in a positive cash flow towards

the investor

• At the money: These result in a zero-cash flow to the

investor

• Out of money: These result in a negative cash flow for the

investor

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 Snapshot Trade Tiger

In the money Out of the money

At the money

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 Example (1)
• Assumption: Bullish on the market over the short term Possible Action by
you: Buy Nifty calls
Current Nifty is 4380. You buy one contract (lot size 50) of Nifty near month
calls for Rs.20 each. The strike price is 4400. The premium paid by you :
(Rs.20 * 50) Rs.1000.
Given these, your break-even Nifty level is 4420 (4400+20). If at expiration
Nifty advances to 4474, then
Nifty expiration level 4474
Less Strike Price 4400
Option value 74.00 (4474-4400)
Less Purchase price 20.00
Profit per Nifty 54.00
Profit on the contract Rs. 2,700 (Rs. 54* 50)

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 Example (2)
• Assumption: Bearish on the market over the short term Possible Action by
you: Buy Nifty puts
Current Nifty is 4380. You buy one contract (lot size 50) of Nifty near month
puts for Rs.17 each. The strike price is 4340. The premium paid by you will
be Rs.850 (17*50).
Given these, your breakeven Nifty level is 4323 (i.e. strike price less the
premium). If at expiration Nifty declines to 4286, then
Put Strike Price 4340
Nifty expiration level 4286
Option value 54 (4340-4286)
Less Purchase price 17
Profit per Nifty 37
Profit on the contract Rs.1850 (Rs.37* 50)

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 Pay off from Call Buying (Rs.)
Example of Trading in call option
Spot Price Strike Price Premium Payoff Net Profit
57 60 2 0 -2
58 60 2 0 -2
59 60 2 0 -2
60 60 2 0 -2
61 60 2 1 -1
62 60 2 2 0
63 60 2 3 1
64 60 2 4 2
65 60 2 5 3
66 60 2 6 4

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 Pay off from Put Buying (Rs.)
Example of Trading in Put Option
Spot Price Strike Price Premium Payoff Net Profit
55 60 2 5 3
56 60 2 4 2
57 60 2 3 1
58 60 2 2 0
59 60 2 1 -1
60 60 2 0 -2
61 60 2 0 -2
62 60 2 0 -2
63 60 2 0 -2
64 60 2 0 -2

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 Exercising Options
• Exercising the Call Option: when the spot/cash price is higher
than the strike price (plus cost), then buyer of Call could
exercise his “right to buy” at the strike price.

• Exercising the Put Option: when the spot/cash price (less cost)
is lower than the strike price, then buyer of Put could exercise
his “right to sell” at the strike price.

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Sharekhan
Advisory Products

Smart Trades Portfolio

Derivatives Portfolio

18
 Smart Trades Portfolio
 This is a model portfolio run by Sharekhan Advisory Team.

 Delivery-based calls generated on market pulse.

 Ideal for a short term investor looking for aggressive returns

with medium risk appetite.

 To be followed in a disciplined manner.

Portfolio Returns 51.10% (Net of Costs)

Sensex performance 25.60%
Portfolio period 1st April 2007-31st March 2008

Portfolio Returns -10.4% (Net of Costs)

Sensex performance -5.50%
Portfolio period 1st April 2008-9th Sept 2008

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Smart Trades Portfolio-Reporting

Open Positions of
model trading
portfolio

Any sell action

done in the day

Back 20
 Derivatives Portfolio
Portfolio Rules
Call for Segment Only Derivative Segment calls
20-25 % of corpus as Margin
Min Investment per call (Quantity also specified)
Time frame of call Max : 1 month Min : 1 day
Monitoring Derivative Team

Portfolio Performance
Returns (Absolute) 73.22% (Costs**)
Returns (Relative) 78.80%
Nifty Returns -5.61%
Portfolio period 1st April 2008 - 09th Sept 2008
** Costs Net of Brokeage & doesn’t not considers other charges

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Derivatives Portfolio

Open Positions of
Derivatives
portfolio

Any sell action

done in the day

Back 22
Thank You

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