|
Saturday, 04 May 2024, 1:51 AM Welcome Guest | Free Registration | |
|||||||
|
ABOUT OPTION TRADING NIFTY OPTION Trading is a very handy instrument for any investor. Before beginning with the actual work it's of course wiser to first learn the basics of option trading.  Options are actively traded in a listed market, just like stocks. They can be bought and sold just like any other security. An option is a contract giving the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date. An option, just like a stock or bond, is a security. It is also a binding contract with strictly defined terms and properties. In case of index options, the underlying shall be an index like the Sensitive index (Sensex) or S&P CNX NIFTY. Transactions generally require less capital than equivalent stock transactions. You can start working in Market as low as Rs. 10,000 investment only. Q.2 How many types of OPTIONS? There are two types of options calls and puts: A. CALL A call gives the holder the right to buy an asset at a certain price within a specific period of time. Calls are similar to having a long position on a stock. Buyers of calls hope that the stock will increase substantially before the option expires. B. PUT A put gives the holder the right to sell an asset at a certain price within a specific period of time. Puts are very similar to having a short position on a stock. Buyers of puts hope that the price of the stock will fall before the option expires. People who buy options are called holders they are said to have long positions. People who sell options are called writers they are said to have short positions. Q.3 What is the underlying price or strike price? The underlying price is equivalent to the strike price. The price at which an underlying stock can be purchased or sold is called the strike price. This is the price a stock price must go above (for calls) or go below (for puts) before a position can be exercised for a profit. All of this must occur before the expiration date. For call options, the option is said to be in-the-money if the share price is above the strike price. A put option is in-the-money when the share price is below the strike price. The amount by which an option is in-the-money is referred to as intrinsic value. Q.4 What is the option premium? The total cost (the price) of an option is called the premium or option premium. This price is determined by factors including the stock price, strike price, time remaining until expiration (time value), and implied volatility. Because of all these factors, determining the premium of an option is complicated and beyond the scope of this tutorial. Q. 5 Why trade in Options? There are two main reasons why an investor would use options: to speculate and to hedge. SPECULATE : In this way, Call options are like security deposits. If, for example, you wanted to rent a certain property, and left a security deposit for it, the money would be used to insure that you could, in fact, rent that property at the price agreed upon when you returned. If you never returned, you would give up your security deposit, but you would have no other liability. Call options usually increase in value as the value of the underlying instrument increases. If you decide not to use the option to buy the stock, and you are not obligated to, your only cost is the option premium. HEDGE : In this way, Put options are like insurance policies. If you buy a new car, and then buy auto insurance on the car, you pay a premium and are, hence, protected if the asset is damaged in an accident. If this happens, you can use your policy to regain the insured value of the car. In this way, the put option gains in value as the value of the underlying instrument decreases. If all goes well and the insurance is not needed, the insurance company keeps your premium in return for taking on the risk. With a Put option, you can "insure" a stock by fixing a selling price. If something happens which causes the stock price to fall, and thus, "damages" your asset, you can exercise your option and sell it at its "insured" price level. If the price of your stock goes up, and there is no "damage," then you do not need to use the insurance, and, once again, your only cost is the premium. This is the primary function of listed options, to allow investors ways to manage risk. Q.6 What is the Expiration Date? The Expiration Date is the day on which the option is no longer valid and ceases to exist. The expiration date in the Indian context is the Fourth Thursday of the month (except when it falls on a holiday, in which case it is on the previous day). For example, the XYZ JUN 30 Call option will expire on the Fourth Thursday of May. Q. 7 What is Exercising Options? People who buy options have a Right, and that is the right to Exercise. For a Call exercise, Call holders may buy stock at the strike price (from the Call seller). For a Put exercise, Put holders may sell stock at the strike price (to the Put seller). Neither Call holders nor Put holders are obligated to buy or sell; they simply have the rights to do so, and may choose to Exercise or not to Exercise based upon their own logic. Q. 8 What is Assignment of Options? When an option holder chooses to exercise an option, a process begins to find a writer who is short the same kind of option (i.e., class, strike price and option type). Once found, that writer may be Assigned. This means that when buyers exercise, sellers may be chosen to make good on their obligations. For a Call assignment, Call writers are required to sell stock at the strike price to the Call holder. For a Put assignment, Put writers are required to buy stock at the strike price from the Put holder. |
||||||
| Copyright NIFTY PROFIT © 2024 All Rights Reserved | |||||||
