Options Bread and Butter

Hello friends,

                    I am back again.This time we will clear some air over what is Options?How it is traded? How much money I need to get on the boat?

                    One thing i would like my reader to understand is that I cant clarify doubts related to options here and I am not gonna waste time on that here.Explaining options requires a week.So I request my friends to go through the simple options trading guide on one of the best site nseindia.com.

                    But still i want my reader who have idea but still want to clear air over OPTIONS to understand this few bread and butter to enter the CASINO.

                    First of all ask me question why NIFTY Options only? I would answer it in simple words.NIFTY is a best traded,one of the highly traded commodity in the world.Yess I am saying in the world because its a stable instrument.It comprises of 50 best companies in INDIA.It is safe instrument and safe by means it is not so volatile to wipe traders out but not even so DULL to keep investors away.

NIFTY has good liquidity,means at any point of time in current expiry month contract u put 50000 lots Order and it will get an execute.Thats the strength of nifty.NIFTY is now traded on Singapore exchange and US exchanges also giving trader on the globe ample time to hedge,speculate their position.Its the index which follows the fundamentals and technical indicators like a simple Mathematics equation.

Back to main Topic,

   

Options is a Derivative and as per definition of derivative,derivative is the one which derives its value from underlying.Options has 2 segments in its core -PUTS and CALLS.

Its simple when a person feels markets will go down he buys PUT OPTION.

and when he feels markets will go up he buys CALL OPTION.

Now as option is of NIFTY and like i said it follows its underlying and as underlying of NIFTY PUT CALL OPTION is NIFTY itself so we just have to focus of NIFTY alone.yes nifty alone.No need to worry about P/E ratio,profits of individual companies,their dividends,their board meetings nothing.

So now options are buyed and sold just like equities only difference is that u have to decide which month contract to buy.

Options expire at the end of month.Expiry of Options is on last Thursdays of that month.

Now their is a glitch as with equities you have a waiting period,means if today my equity is not on my side i can hold indefinite time ,literally indefinite but with OPTIONS we have to decide everything in that month only.That's why i say its a CASINO. your winning or loosing is decided in that month only. if u don't get out u will loose all ur money.

Now ONE MORE MOST important thing "TIME PREMIUM".One who will understand this will be real player in options.You need to have idea about why is this particular value to this particular option on this particular day.I after 2 years experience can tell what will be value of that options at what level nifty.But as a fresher its difficult.TO this i will give u a simple example buy gold ornament today and sell it tomorrow dealer will surely not give u same price as u bot he will reduce a value ,similarly in options more the number of days u take to square off more time premium will be eaten so eventually ur money is undergoing vapours unless market is moving up or down on ur side daily.SO the same gold u sell after month will undergo massive price reduction if prices of gold stay around ur buy price.

Options is like an insurance.There are two side of insurance buyer side.Buyer side pays premium for the risk and if risk materialize the is earning multiple times.He is not at loss.His loss is limited to premium paid.

Tomorrow if risk does not come he not loosing big.

Seller side is insurance seller,he is undertaking risk for you.why He sees profit on his side.But for him to take this risk market is asking him a lot of premium.Just like futures so options selling is like Futures.

Option buyer wants the price of option to rise and option seller wants the price of option to go towards zero.

So selling an option is called writing option,he is simply risk taker.

Maths: Suppose I buy a nifty call of 5600 current month i am paying around say 50 rs so total amount is 50rs * lot size 50=2500.Option buyers maximum loss is rs 2500 and profit is unlimited.
Option seller earns premium of 2500 and he gives margin of around 25k to broker.Suppose at the end of expiry nifty crosses 5600 ,seller is in loss buyer in profit.
But if nifty does not cross the 5600 ,value of that 50 rs will end to 5 paise,but buyer has lost only 2500.

Value used by exchange to decide on expiry is simple.Your strike price minus current value of nifty.So in above example.Suppose nifty ends on 5650 value is 5650-5600(strike)=50.

One thing a buyer of options should worry is that whether his strike is approaching or he is lagging behind.For a buyer of option nifty crossing his strike is very important.and opposite of that seller crossing of that strike should not happen.

Last and most important thing what are options available on OPTIONS.

1. Buying a CALL means trader is bullish.
2. Buying a PUT means trader is bearish.
3. Selling a CALL means trader is bearish.
4. Selling a PUT means trader is bullish.

Buying a option leads to just a speculation.Selling is to be done when a trader feels that markets will not rise of fall beyond that point.When a trader plays puts and calls in a way it takes position on both sides he is on hedge,

PHEW a long one. But trader should understand this thing.

bye