Options Trading Doubts - Basics

#1
Though I have gone through few articles on basics, i got an ICICI Direct basics on Options. Would like some clarification on certain things i cannot understand. Please note that the following is taken from ICICI Direct Option Tuturial

Example of a Call Option CE

Assuming that currently Nifty is at 1310. The following are Nifty options traded at following quotes.

Option contract Strike price Call premium

Jan Nifty 1345 Rs 5000

A trader is of the opinion that the index will go up to 1400 in Jan 2002 but does not want to take the risk of prices going down. Therefore, he buys 10 options of Jan contracts at 1345. He pays a premium for buying calls (the right to buy the contract) for 500*10= Rs 5,000/-.

In Jan 2002 the Nifty index goes up to 1365. He sells the options or exercises the option and takes the difference in spot index price which is (1365-1345) * 200 (market lot) = 4000 per contract. Total profit = 40,000/- (4,000*10).
He had paid Rs 5,000/- premium for buying the call option. So he earns by buying call option is Rs 35,000/- (40,000-5000).

If the index falls below 1345 the trader will not exercise his right and will opt to forego his premium of Rs 5,000. So, in the event the index falls further his loss is limited to the premium he paid upfront, but the profit potential is unlimited.

Call Options-Long & Short Positions
When you expect prices to rise, then you take a long position by buying calls. You are bullish.
When you expect prices to fall, then you take a short position by selling calls. You are bearish.

My queries/clarifications requred are:

1. In the above from where does the 500 arrive. I cannot make head nor tail of it. Could seniors clarify?
2. In the above from where does the 200 (market lot) arrive, market lot of Nifty is 50 i presume. Should it not be (1365-1345) * 50 (market lot). Could seniors clarify?
3. Also what does CE stand for and what does PE stand for
4. In ICICIDirect, I find the Options available as follows:
NIFTY
SYMBOL EXPIRY STRIKE PRICE LOT SIZE LAST TRADED PRICE
OPTIDX 30-Sep-201 5,700.00 50 9.65
In the above is 9.65 the premium and if I purchase 1 lot i.e. 50 is the calculated like 50 x 9.65 = 482.50 is the premium, Could seniors please clarify whether I am correct in assuming that 482.50 will be premium for 1 Lot of 50.

Regards,
 

Capricorn

Well-Known Member
#2
Though I have gone through few articles on basics, i got an ICICI Direct basics on Options. Would like some clarification on certain things i cannot understand. Please note that the following is taken from ICICI Direct Option Tuturial

Example of a Call Option CE

Assuming that currently Nifty is at 1310. The following are Nifty options traded at following quotes.

Option contract Strike price Call premium

Jan Nifty 1345 Rs 5000

A trader is of the opinion that the index will go up to 1400 in Jan 2002 but does not want to take the risk of prices going down. Therefore, he buys 10 options of Jan contracts at 1345. He pays a premium for buying calls (the right to buy the contract) for 500*10= Rs 5,000/-.

In Jan 2002 the Nifty index goes up to 1365. He sells the options or exercises the option and takes the difference in spot index price which is (1365-1345) * 200 (market lot) = 4000 per contract. Total profit = 40,000/- (4,000*10).
He had paid Rs 5,000/- premium for buying the call option. So he earns by buying call option is Rs 35,000/- (40,000-5000).

If the index falls below 1345 the trader will not exercise his right and will opt to forego his premium of Rs 5,000. So, in the event the index falls further his loss is limited to the premium he paid upfront, but the profit potential is unlimited.

Call Options-Long & Short Positions
When you expect prices to rise, then you take a long position by buying calls. You are bullish.
When you expect prices to fall, then you take a short position by selling calls. You are bearish.

My queries/clarifications requred are:

1. In the above from where does the 500 arrive. I cannot make head nor tail of it. Could seniors clarify?
2. In the above from where does the 200 (market lot) arrive, market lot of Nifty is 50 i presume. Should it not be (1365-1345) * 50 (market lot). Could seniors clarify?
3. Also what does CE stand for and what does PE stand for
4. In ICICIDirect, I find the Options available as follows:
NIFTY
SYMBOL EXPIRY STRIKE PRICE LOT SIZE LAST TRADED PRICE
OPTIDX 30-Sep-201 5,700.00 50 9.65
In the above is 9.65 the premium and if I purchase 1 lot i.e. 50 is the calculated like 50 x 9.65 = 482.50 is the premium, Could seniors please clarify whether I am correct in assuming that 482.50 will be premium for 1 Lot of 50.

Regards,
Rs 500 seems to be the premium / lot so Rs 5000 for 10 lots mentioned.

The lot size was 200 when the tutorial was written. Check when NIfty was at 1400 levels.

Nothing wrong with your final calculation.

Take plenty of time to read around and understand derivatives.
 
#3
Some more clarification also

1. Also what does CE stand for and what does PE stand for
2. In ICICIDirect, I find the Options available as follows:
NIFTY
SYMBOL /EXPIRY STRIKE /PRICE /LOT SIZE /LAST TRADED PRICE

OPTIDX /30-Sep-2010 /5,700.00 /50 /9.65

In the above is 9.65 the premium and if I purchase 1 lot i.e. 50 is the calculated like 50 x 9.65 = 482.50 is the premium, Could seniors please clarify whether I am correct in assuming that 482.50 will be premium for 1 Lot of 50.
 
#4
Some more clarification also

1. Also what does CE stand for and what does PE stand for
2. In ICICIDirect, I find the Options available as follows:
NIFTY
SYMBOL /EXPIRY STRIKE /PRICE /LOT SIZE /LAST TRADED PRICE

OPTIDX /30-Sep-2010 /5,700.00 /50 /9.65

In the above is 9.65 the premium and if I purchase 1 lot i.e. 50 is the calculated like 50 x 9.65 = 482.50 is the premium, Could seniors please clarify whether I am correct in assuming that 482.50 will be premium for 1 Lot of 50.
1. CE/PE stands for type of option viz. Call Option or Put Option

2. If you 'buy' (i.e. go long) an option, then premium will indeed be 482.50.
If you're 'selling' (i.e. going short) an option, then you would need to maintain a margin calculated as

12%*50*[Strike Price + Option Price]


I recommend that you understand the nature of options and as an amateur, never sell options. Pick up a good book -John C. Hull is my favourite, but I've heard Ashwani Gujral's book isn't bad either.
 
#6
Thanks for the info provided.

I have gone through the step by step document, i came to know that if I buy Nifty Option, i cannot sell it anytime i like, it will have to be exercised on the last thursday of expiry, is it so, please advise.
 

rkkarnani

Well-Known Member
#7
Thanks for the info provided.

I have gone through the step by step document, i came to know that if I buy Nifty Option, i cannot sell it anytime i like, it will have to be exercised on the last thursday of expiry, is it so, please advise.
Nifty can be "SOLD" at any time but can be "exercised" only on the Derivative closing day : last Thursday of the Month.

BTW, did you get this notion in "Step by Step Learning" that you cannot SELL Nifty option at any time!!!? If so the Document needs to be rectified!!!
 
#8
Nifty can be "SOLD" at any time but can be "exercised" only on the Derivative closing day : last Thursday of the Month.

BTW, did you get this notion in "Step by Step Learning" that you cannot SELL Nifty option at any time!!!? If so the Document needs to be rectified!!!

rkkarnani,
Thanks, i have got confused on this "exercise", if I buy Nifty Option, it means i can sell any day, what does "exercise" mean.


Question: Can I also exercise before the expiry date?
Answer: In case of stock Options (31 stocks currently), you can exercise your Option on any trading day. You will receive the difference (if you are holding a Call Option) between the closing price and your strike price. Such Options which can be exercised at any time are called American style Options.

In case of index Options (2 indices currently), you can exercise only on the last day. These are called European style Options.
 
#9
Friends please help me with my query. Today I observed that during 12:30 to 1 market remains flat but...
- nifty pe 5200 increases in value
- nifty pe 5500 decreases in value
- nifty pe 5400 remains same.

why is it so? if nifty remains same shudnt the pe also remain same? if nifty rises shudnt all pe decrease in value?

 

Capricorn

Well-Known Member
#10
Friends please help me with my query. Today I observed that during 12:30 to 1 market remains flat but...
- nifty pe 5200 increases in value
- nifty pe 5500 decreases in value
- nifty pe 5400 remains same.

why is it so? if nifty remains same shudnt the pe also remain same? if nifty rises shudnt all pe decrease in value?

Read up on IV..
 

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