No Option for 'Options'

My friend Payal asked me few Qs about Derivative Options, I promised her that I will answer her Qs because I don’t have any other ‘Option’.

For a while forget Derivative Options

Let’s understand what option is ..

Option gives you a chance to exercise it , It a chance but No Compulsion 

Always remember, Option will be always executed if and only if it is beneficial to the executor

When it comes to Derivative Options, The Value is derived by something it can be index or company stock .

The Option doesn’t have its own value as value is derived (backed) by something.

This gives birth to an important concept Equity Derivatives -

Equity Derivatives are in 4 types

1.       Futures

2.      Options

3.      Swaps

4.      Forward

We can actually write series of articles on each one of the above , but let’s restrict our self to Options

You can take 4 positions in Equity Options

A.     Call Option

1.       Buy Call Option – Buying at Lower Price & Selling at Higher Price ( Bull Market Strategy)

2.      Sell (Short )Call Option – Selling at Higher Price & then Buying at Lower Price ( Bear Market Strategy )

B.     Put Option

1.       Buy Put Option – Buying at Higher Price & Selling at Lower Price ( Bear Market Strategy)

2.      Sell (Short )Put Option – Selling at Lower Price & then Buying at Higher Price ( Bull Market Strategy )

(Leaving behind theatrical aspect , In my opinion – When you start studying actual market,you learn more ;because theory doesn’t work much there )

Let’s get into Nifty Option Chart

Just Google Nifty Option Chart – You will get something like this – (Use NSE old website )

Interpretation

Red Highlight – Option chain of Index ( Currently we are studying Nifty 50 , others like Nifty IT ,Bank Nifty are also available ) , You can go for Individual Stock Futures (the option is next to the circle)

Green Highlight – Current Nifty Level

Blue Highlight – Expiry date of the option contract (Always Thursday, If it is holiday – then previous day)

This Website 2-3 Mins late in data updating, but the best for studying

In the middle you will see Price Range in range of 50 , It is price at which you can buy / sell Option

Let’s focus on Call Side -

Steps

1.Currently Nifty is at 8660 , hence price range less than 8660 is Highlighted is Yellow range also called as – In the Money  ; This is level which has been already achieved by Index at particular point of time.

2.Look at last column of the table , It indicates Open Interest (OI)-Volume; Check the Highest value on the either side

Highest values gives trend idea – Highest in Call Side – Bullish Market , Highest in Put Side – Bearish Market

3. Check the Second Last column – Change in OI (Highest value states that investors changed perspective about Market )

4. Now If we have made our mind to buy Call Option at 9500 (outcome of above steps) , LTP column tells us price (premium) of each unit viz 54 . Nifty lot is of 75 units (multiple of 75 units – Minimum 75 units ) Hence ,54*75= 4050 for Buying one lot.

5. Now once price reaches close to 9500 the premium will increase say Rs.80 , If you are not greedy and think I should stop here ; You can exit – Profit = (80-54)*75 = 1950 . 48% huh!!!

You don’t have to wait to reach Nifty at 9500

6.If Nifty is going afar from 9500 , You will hit stop loss say at 45 – Loss = (54-45)*75 = 675 .

7 If Nifty crosses 9500 level You will get Bumper Profit!!!

Same Logic applies to Put Option

Some Common Doubts –

1 Nifty lot of 75 units is not like other equity stock ( Once you buy Stock X – 1,2,3… Units will get added to the portfolio ) . The Orders will show only Nifty or Stock Lots

2 You just have to pay premium , very less investment

3 The more you learn about Options - The more you will learn Equity market 

4 When the option is near to expiry ,Price viz not achievable (Out of the money) is negligible or close to zeo. 

##Special Tip

Even if you want to invest / trade in Cash Equity ( Normal ) There are 190-200 securities trade in Futures & Options , these are best securities to trade in Cash Equity to earn good money.

Prathamesh 

(30 March 2020)