Hi,
Iam recently initiated into the stock market and made some profits and losses. Iam now interested in FNO (or Options to be exact) as a hedging strategy for the stock transactions. I have studied a lot of material on the net and made up this quick example to clarify my doubts. Some of this is specific to icicidirect (the only trading account that i have)
Suppose I buy 400 shares of Aban @ 966 (current market price)
I want to hedge my purchase with a Put option
1) Lot size for Aban is 400. Can I buy a Put option of 400 lot-size If I only had 200 of the underlying?
2) I only want to limit my losses if my stock goes down. So I assume the best option contract is one near my buy price? In this example i can see an option OPT-ABALLO-30-Jul-2009-960-PA @51.50 for a strike price of 960 (close to my buy price). Is this the best option for me or should I be looking at a higher strike price?
3) I submit a buy for this option with quantity 400 and limit price 30.0. My premium should be calculated as 400 x 30 = 12000 INR. Is this right? when I tried earlier for another stock I saw a difference in the premium compared to what i had given as the limit price for the option
4) I assume that icicidirect will only debit this 12,000 for paying to the seller of the contract (plus brokerage etc, of course)? This 12000 is my only liability and whether the contract is in or outof the money at expiry, icicidirect will not be able to debit anything else?
5) Suppose the stock price comes down to 600 INR near expiry of contract. I assume the right thing for me to do is excercise the option? If i click on excercise will icicidirect debit the 400 shares from my demat and give to seller of Put (and then credit my cash account with the 400 x 966 strike price)
OR
Do I have to sell my stock at 600 in the cash market(making a loss) and then square off my Put contract @ FNO market price (which should be high since stock has come down) and thus get my hedge done?
6) Lastly, if i only had 200 shares of underlying, can I excercise my Put option partly (only 200 out of 400 lot) and then square off the remaining 200?
7) In the reverse case, suppose The stock went up to 1200. I can sell the stock in Cash market and do not need to bother about the Put option, right? if the Put option is still trading at some small value, can I square off the Put by selling off the option (to reduce the premium loss that i paid for this insurance)?
Thanks,
vishwas
Iam recently initiated into the stock market and made some profits and losses. Iam now interested in FNO (or Options to be exact) as a hedging strategy for the stock transactions. I have studied a lot of material on the net and made up this quick example to clarify my doubts. Some of this is specific to icicidirect (the only trading account that i have)
Suppose I buy 400 shares of Aban @ 966 (current market price)
I want to hedge my purchase with a Put option
1) Lot size for Aban is 400. Can I buy a Put option of 400 lot-size If I only had 200 of the underlying?
2) I only want to limit my losses if my stock goes down. So I assume the best option contract is one near my buy price? In this example i can see an option OPT-ABALLO-30-Jul-2009-960-PA @51.50 for a strike price of 960 (close to my buy price). Is this the best option for me or should I be looking at a higher strike price?
3) I submit a buy for this option with quantity 400 and limit price 30.0. My premium should be calculated as 400 x 30 = 12000 INR. Is this right? when I tried earlier for another stock I saw a difference in the premium compared to what i had given as the limit price for the option
4) I assume that icicidirect will only debit this 12,000 for paying to the seller of the contract (plus brokerage etc, of course)? This 12000 is my only liability and whether the contract is in or outof the money at expiry, icicidirect will not be able to debit anything else?
5) Suppose the stock price comes down to 600 INR near expiry of contract. I assume the right thing for me to do is excercise the option? If i click on excercise will icicidirect debit the 400 shares from my demat and give to seller of Put (and then credit my cash account with the 400 x 966 strike price)
OR
Do I have to sell my stock at 600 in the cash market(making a loss) and then square off my Put contract @ FNO market price (which should be high since stock has come down) and thus get my hedge done?
6) Lastly, if i only had 200 shares of underlying, can I excercise my Put option partly (only 200 out of 400 lot) and then square off the remaining 200?
7) In the reverse case, suppose The stock went up to 1200. I can sell the stock in Cash market and do not need to bother about the Put option, right? if the Put option is still trading at some small value, can I square off the Put by selling off the option (to reduce the premium loss that i paid for this insurance)?
Thanks,
vishwas