Derivatives ?

Hi all !!

Can somebody explain to me Derivative trading and related stuff in lay man's terms ?

I just got a msg today from a friend ...

" Sell 110 May put on12-05-2005 at premium ranging from Rs0.90-1.00,
one lot (2150) "

Can somebody explain to me what it means ??

I am absolutely new to this market... want to get to know things.. really fast !!

Thought i could use the expert advice of the seniors out here...

Like traderji / Nksagar .. and the likes !!

I would be really grateful !!

hi rajshah
may be this link will throw you some light.hope it is useful
http://content.icicidirect.com/derivatives/derivatives.asp

Thanks for the link beda !!
I will chk it out !

this is also very good, I think you should check this out too.

http://www.sharekhan.com/articles/DerivativesDigest.pdf

Please note the followings about the derivatives:
I. There are two tyes of derivatives Option and Futures.
2. Your query relates to options.
3. There is a lot size. The size in yr query is 2150 this means this is about ARVIND MILLS.
4. There is two type of instruments PUT and CALL.
5. Your query is about PUT.
6. There are two actions BUY oe SELL.
7. Your query is about selling a PUT.
8. A PERSON BUYING A PUT IS BEARISH ON THE SCRIP & SELLING THE SCRIP IS BULLISH.
9 BUY SELLING A PUT YOU WILL EARN 2150*(0.90-1)=1935-2135RS ON 27.5.5 IF THE SCRIP RATE IS BELOW OPTION RATE.

Hope the abpove will suffice you. In case of any doubt mail me.

R K AGARWAL
rkagr@rediff*********

Derivatives in general...my info comes from my experience as a stock option trader excusively, but should help.

I never ever SHORT Calls or Puts, with the exception of credit spreads (read more on that elsewhere). I do buy straight Calls and Puts because the only risk is the premium I pay to own the "right, but not the obligation" to either buy "X shares" or sell "X shares" at a predetermined price (strike price) on or before a given day (expiration date).

Options can be either ATM (At-the-money where Strike price = Mkt price of instrument) or ITM (In-the-money where Strike price is > Mkt price for Puts and < Mkt price for Calls) or OTM (Out-of-the-money where the strike price is < Mkt for Puts and > Mkt for Calls).

Options also lose time value (theta) as they progressively get closer to expiration date, losing a great majority at an exponential rate the last 90 - 60 - 30 days. I always exit an option 31 days prior to expiration or whenever the trend ends, whichever occurs first.

I always purchase ATM or NTM (near the money) options with an expiration date of 6+ months, but not LEAPS.

As I mentioned, there are inumerable ways to use options with different spreads for different purposes, but I find that following the larger macro price trends with ATM 6+month options creates a preferred risk:reward ratio for "ME". Your risk tolerance will be different and you will need to adjust accordingly.

The problem with options is time, direction, and volatility. It is possible to get 2 of 3 correct and still lose. But don't think for 1 moment that the option must be held by expiration date!!! In all instances, I always exit my options well before expiration, almost always for profitable gains. But that has to do with the fact that i remove as much of the time decay factor as possible, plus I follow macro price trends rather than scant daily swings. I choose ATM because in the event that a GAP occurs (cannot be predicted/avoided), my option will lose far lass value than the OTM.

Please, I implore you and others...paper trade for 1 year before committing funds. paper trade to establish risk:reward tolerance, strategies, and to create a criteria for why you enter/exit. You must develop a roadmap or recipe. Sometimes the eggs break, but at least your decisions will be based on math, probability, and objective criteria, NOT raw emotions (greed/panic).

No luck in investing - it's calculated. Do your homework!

In my view, the most important thing first is to develop a correct view of the market before you decide on whether to buy puts/calls. There are different opttion strategies for bullish, bearish, volatilie and ranging markets and further different for mildly bullish/mildly bearish markets. Many people consider futures also more profitable. Best would be to get hold of a good technical analysis cum derivatives book and write now the best book by an Indian author is

http://www.traderji.com/showthread.p...Ashwini+Gujral

There are other good books on derivatives alone like the one by R. Mahajan but the book above covers the entire spectrum of covered call writing and futures arbitrage too.

Selling either a Call or Put means unlimited risk. Buying a Call or Put means risk limited to the premium you pay. I have not traded extensively in options on NSe, but majority of options I have bought have expired. Attached document is an Introduction to options.

Masterchief: Do we have six months options available in Indian Stock market?

Mtayal,

Good question...I honestly do not know. To be honest, I found this site and joined before I realized it deals almost exclusively in Indian (India) commodities and options.

I reside in the US and trade exclusively in stock options, but getting my feet wet in US Commodities with paper trades. I'm inthe right store, just the wrong aisle, but enjoying the comments and participation. All of my comments stem from strategy, methodology, and US equity derivatives, but the concepts are very similar.

Hope that helped...
MasterChief

Thanks for ur replies folks !!

Especially... rkagar !! The way u xplained the query helped a lot !!