Nifty options basic knowledge

[quantumguy]

Dear forum members,

I have some questions regarding Nifty Options and I'm listing them here.

(1) When I buy a Nifty Call option i.e. Nifty29SEP2011CE4600 with a premium of 267, the amount I pay is 13350 Rs. If I don't exercise my right to buy on the 20th September 2011, I simply loose the premium. But what happens if I exercise? I pay the full money (230000 Rs for 50 units of nifty) but what do I get in return?

(2) Nifty is just an index and not an equity. So ultimately, what am I buying here?

(3) The same question applies to a Put option. I buy a put option NIFTY29SEP2011PE5000 with a premium of 310, I pay 15500 initially. If the contract is exercised what do I sell?


Friends, I may be slow initially but I pickup very fast.

quantumguy

 

[sumeetsj]

All options in Indian futures market are cash settled.
So even if u exercise the option(if its in the money when u do it),
it will be settled in cash

 

[DanPickUp]

(2) Nifty is just an index and not an equity. So ultimately, what am I buying here?

You buy an index. As simple and as abstract as that. Hope and fear.

In trading, we do not produce any thing. It is the most simple and direct form of losing money or making money by investing money.

 

[meenamarthandam]

Hi quantumguy,

Indian index options are european nature. It is not possible you to execise before the expiry date. It can be execise on the expiry day. Where as stock options can be execise at any point (American nature). Before expiry, you can sell/buy options to collect only the premium differences.

This will help you to understand the options.

Meena.

 

[sumeetsj]

Hi quantumguy,

Indian index options are european nature. It is not possible you to execise before the expiry date. It can be execise on the expiry day. Where as stock options can be execise at any point (American nature). Before expiry, you can sell/buy options to collect only the premium differences.

This will help you to understand the options.

Meena.

perfectly said

:thumb:

 

[taruj]

Dear forum members,

I have some questions regarding Nifty Options and I'm listing them here.

(1) When I buy a Nifty Call option i.e. Nifty29SEP2011CE4600 with a premium of 267, the amount I pay is 13350 Rs. If I don't exercise my right to buy on the 20th September 2011, I simply loose the premium. But what happens if I exercise? I pay the full money (230000 Rs for 50 units of nifty) but what do I get in return?

(2) Nifty is just an index and not an equity. So ultimately, what am I buying here?

(3) The same question applies to a Put option. I buy a put option NIFTY29SEP2011PE5000 with a premium of 310, I pay 15500 initially. If the contract is exercised what do I sell?


Friends, I may be slow initially but I pickup very fast.

quantumguy

HI,
(1) When I buy a Nifty Call option i.e. ... in return?
When you are buying a Call Option (of a Stock or Index in your case Nifty) your view (outlook) is that on Expiry Nifty would be atleast 4600 (Strike Price) + 267 (Premium that you paid). Hence if in fact Nifty closes above 4867and you 'Exercise' the option you MAKE MONEY. Let say on September Expiry Nifty is trading at 4900 You get to make Rs. 33 (4900 - (4600+267)). Ofcourse you could simply play on the premium i.e. if on Monday Nifty trades substantially heigher you will see that the premium will be probably 300. You can then square off you position and still make Rs 33. My honest opinion is that please read some more before you start playing with options. 'They are called WASTING ASSETS due to the Theta Action [TIME DECAY]'.

A question for you Dear Quantum - Why Not SELL this call??

(2) Nifty is just an index ... buying here?
Nifty is the wheighted average index of NSE. What you are buying or selling is an opinion that is saying I think all (or most) of the stocks which are a part of Nifty will go up. Since I can't buy all the stocks I will buy an Index (an indicator) of those stocks. And when the indicator (or Index) is high, I will MAKE MONEY.

I will try to answer all the questions but you have to read a Bit.

Rgds,
Taruj (DBONG) Bhattacharya

 

[Nitinji]

Sold nifty put oct11 4400 strike. How to hedge

 

[quantumguy]

HI,
(1) When I buy a Nifty Call option i.e. ... in return?
When you are buying a Call Option (of a Stock or Index in your case Nifty) your view (outlook) is that on Expiry Nifty would be atleast 4600 (Strike Price) + 267 (Premium that you paid). Hence if in fact Nifty closes above 4867and you 'Exercise' the option you MAKE MONEY. Let say on September Expiry Nifty is trading at 4900 You get to make Rs. 33 (4900 - (4600+267)). Ofcourse you could simply play on the premium i.e. if on Monday Nifty trades substantially heigher you will see that the premium will be probably 300. You can then square off you position and still make Rs 33. My honest opinion is that please read some more before you start playing with options. 'They are called WASTING ASSETS due to the Theta Action [TIME DECAY]'.

A question for you Dear Quantum - Why Not SELL this call??

(2) Nifty is just an index ... buying here?
Nifty is the wheighted average index of NSE. What you are buying or selling is an opinion that is saying I think all (or most) of the stocks which are a part of Nifty will go up. Since I can't buy all the stocks I will buy an Index (an indicator) of those stocks. And when the indicator (or Index) is high, I will MAKE MONEY.

I will try to answer all the questions but you have to read a Bit.

Rgds,
Taruj (DBONG) Bhattacharya

Hi Taruj,

Thanks a lot for the satisfactory reply.
You asked a question that why don't I sell the SEP4600 option? If I sell this option (a put option), it makes a profitable trade when the index goes down below (4600-premium). It this correct?

Yes. I want to read something useful but don't know where to start. May be you and other experienced members can suggest me something. Also now a days I am more occupied with my PhD thesis and defense preparation, so could not look into this matter.

cheers,

QG

 

[quantumguy]

Hi Meena,

Thank a lot.
Yes, I learned that the Indian options are of European nature. And the profit / loss is in terms of premium paid or received.

cheers,

QG

 

[sln1941]

If I sell a call option CE5000 and sell a put option PE 5000 will the risk be nill ( except brokerage) Can somebody explain ?