Options Trading in India
Options Trading for beginners
An Option represents the right to buy or sell a security in given time for a specified price or strike price.
Options Trading
You can start Option Trading but how lets go understand some important terminology of option as like What is Strike price?What is Premium?What is Spot price?What is Expiry date? etc all thing I will tell you in this session.
Options are two type-
a.)Calls
b.)Puts
What is Calls and Puts?
A Calls Options contract gives right to buyer for buy a security in given time for a specified price or strike price.A Puts Options contract gives right to seller for sell a security in given time for a specified price or strike price.
Calls options are three type-
a.)In the Money-An In the Money option that would lead positive cash flow to the holder.In the Money option Spot price is greater than Strike price.(Spot price > Strike price)
b.)At the Money-An At the Money option that would lead zero cash flow to the holder.In the Money option Spot price is equal to Strike price.(Spot price = Strike price)
c.)Out the Money-An Out the Money option that would lead negative cash flow to the holder.In the Money option Spot price is less than Strike price.(Spot price < Strike price)
Spot price current market price and Strike price is fixed price at which option contract can be bought and sell.
Options Trading Example
How to trade in options,Lets understand with this examples
Suppose that Mohini and Rohini are two investor-
1.)Mohini thinks if the market goes up,she will buy the call.
2.)Rohini feels that if the market goes down,she will buy the pot.
Case.1
First let's study Mohini's case and also understand option trade strategy of the Call options.In this example,I will explain Call option.What trading option premium will Mohini have to pay, how much chance she has to gain or how much chance of loss.
Lets some Figure with description-
|
Instrument Type |
Option Index |
|
Underlying Asset Option Type |
Nifty Call Option |
|
Expiry Date |
30 April 2020 |
|
Strike Price |
9900 |
|
Open Price |
108.05 |
|
High Price |
130 |
|
Low Price |
90 |
|
Close Price |
110.20 |
Expiry Date-The options contracts that expire on this date, it always happens on the last Thursday of every month. If there is a holiday on the last thursday, then the expiry will be on Wednesday itself.
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Strike Price-Underlying Asset price per share in option is 9900.
How much money or trading option premium will Mohini have to pay to buy the call
Premium= Call Price x Lot Size (Nifty lot size is 75 per unit for option contract)
= 110.20 x 75
= 8265 rs
Mohini will pay 8265 rs for buy the call.
Profit or Loss-An one point increase will give Mohini a gain of 75 and one point fall is 75.
Suppose Mohini bought options contract on April 23 and paid a premium of 8265 rs.
The options contract will end on April 30, now Mohini has six trading sessions. Let's understand its profit and loss with six trading session price.
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Profit |
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Limited Loss |
Unlimited Profit |
Mohini has predicted that the market will go up, but the market can also go down, we will speculate on both aspects.
If the market goes down
|
DATE |
CALL CLOSE PRICE |
|
23 APRIL 2020 |
91.80 |
|
24 APRIL 2020 |
77.0 |
|
27 APRIL 2020 |
50.25 |
|
28 APRIL 2020 |
38.75 |
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29 APRIL 2020 |
12 |
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30 APRIL 2020 |
00 |
The maximum loss will be 8265.When Mohini buy the call, it has limited loss which is equal to her trading option premium.
If the market goes up
|
DATE |
CALL CLOSE PRICE |
|
23 APRIL 2020 |
120.35 |
|
24 APRIL 2020 |
125.70 |
|
27 APRIL 2020 |
140.0 |
|
28 APRIL 2020 |
190.0 |
|
29 APRIL 2020 |
240.0 |
|
30 APRIL 2020 |
290.0 |
If Mohini goes to the market as per her estimate then she benefits. We evaluate her profit from the closing price of the expiry day.
Profit-If the rate of call of a siren rises to 290 by expiry.
=290 x 75
=21750 rs
She invested 8265 rs that mean pure profit is (21750-8265=13485).
it will be the maximum profit. This is an example of call options. Sometimes good news in the market increases the market and the investor benefits greatly.
Case.2
Rohini feels that if the market goes down, she will buy the put.Because he knows that when the market goes down, her put option will increase and she will gain, but if the market goes up, the put option will go down, then she will suffer loss. Let's understand this from example.
Let's study Rohini's case and also understand option trade strategy of the put option,How do puts option work.What premium will Rohini have to pay, how much chance she has to gain or how much chance of loss.
Lets some Figure with discription-
|
Instrument type |
Option Index |
|
Underlying Asset Option Type |
Nifty Put Option |
|
Expiry Date |
30 April 2020 |
|
Strike Price |
9900 |
|
Open Price |
89.0 |
|
High Price |
107.0 |
|
Low Price |
81.0 |
|
Close Price |
87.35 |
We have taken the example of the same with the strike price and expiry date for put option.
How much money or premium will Rohini have to pay to buy the Put Option
Premium= Put Price x Lot Size (Nifty lot size is 75 per unit for option contract)
= 87.35 x 75
= 6551.25 rs
Rohini will pay trading option premium 6551.25 rs for buy the put option.
Profit or Loss-An one point increase will give Rohini a gain of 75 and one point fall is 75.
Suppose Rohini bought Put contract on April 23 and paid a premium of 6551.25 rs.
The contract will end on April 30, now Rohini has six trading sessions. Let's understand its profit and loss with some examples.
When you buy the put option
|
Loss |
Profit |
|
Limited Loss |
Maximum Profit |
The maximum loss in the put option in the case of buy.It will be equal to the premium paid means in this case Rohini maximum loss will be 6551.25 rs because If the market goes up then the put option will go down
The maximum profit in the put option,if Nifty can fall only till zero.it will be maximum profit of Rohini because If the market goes down then the put option will go up.
Rohini has predicted that the market will go down, but the market can also go upside ,we will speculate on both aspects.
If the market goes up.Then the price of the put option will fall.
|
DATE |
PUT CLOSE PRICE |
|
23 APRIL 2020 |
85.0 |
|
24 APRIL 2020 |
70.25 |
|
27 APRIL 2020 |
59.25 |
|
28 APRIL 2020 |
32.35 |
|
29 APRIL 2020 |
9.25 |
|
30 APRIL 2020 |
00 |
The maximum loss will be 6551.25 rs.When you buy the Put Option, it has limited loss which is equal to trading options premium.
If the market goes down.Then the price of the put option will increase
|
DATE |
PUT CLOSE PRICE |
|
23 APRIL 2020 |
92.75 |
|
24 APRIL 2020 |
135.35 |
|
27 APRIL 2020 |
190.35 |
|
28 APRIL 2020 |
225.0 |
|
29 APRIL 2020 |
240.25 |
|
30 APRIL 2020 |
255.25 |
Profit-If the price of Put Option a rises to 255.25 by expiry.
=255.25 x 75
=19143.75 rs
She invested 6551.25 rs that mean pure profit is (19143.75-6551.25=12592.5 rs).
It will be the maximum profit. This is an example. If the assumption is correct then good profit can also be made in the Put option. This principle is useful when the market gets bad news, then the market falls below and the Put option price goes up.
In this lesson, I have told buy call strategy and buy put strategy. How can you have loss and profit in call or put option, this options buying strategy is also called long call and long put.
Sell Options Contracts
Short Call Or Sell Call
If any one sold that call option,the maximum gain for the short call option will be equal to the premium received,then maximum loss for the short call or sell call position is unlimited.
|
Loss |
Profit |
|
Unlimited Loss |
Equal to premium |
If we takes previous example
When Mohini purchased call ,she has maximum loss is 8265 rs and profit is unlimited.Similarly,if maximum profit for buy a call is unlimited,then maximum loss for the short call position has to be unlimited,whenever the long call option is making losses,the short call option will make profit and vice- versa.
Short Put Or Sell Put
If any one sold that put option,the maximum profit for the short put has to be equal to premium received.and loss in maximum in short put or sell put position.
|
Loss |
Profit |
|
Maximum Loss |
Equal to premium |
If we takes previous example
When Rohini purchased Put ,she has maximum loss is 6551.25 rs and profit is maximum,if Nifty can fall only till zero.Similarly maximum profit for short put will be 6551.25 rs and loss will be maximum and vice-versa.
Hope you understand this article Options Trading in India,It will be helpful for beginners in options trading.If there is any question related to this article, then you can ask and comment.
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