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Options trading account basics india


Options Basics: How Options Work. Options contracts are essentially the price probabilities of future events. The more likely something is to occur, the more expensive an option would be that profits from that event. This is the key to understanding the relative value of options. Let’s take as a generic example a call option on International Business Machines Corp. (IBM) with a strike price of $200 IBM is currently trading at $175 and expires in 3 months. Remember, the call option gives you the right , but not the obligation , to purchase shares of IBM at $200 at any point in the next 3 months. If the price of IBM rises above $200, then you “win.” It doesn’t matter that we don’t know the price of this option for the moment – what we can say for sure, though, is that the same option that expires not in 3 months but in 1 month will cost less because the chances of anything occurring within a shorter interval is smaller. Likewise, the same option that expires in a year will cost more. This is also why options experience time decay: the same option will be worth less tomorrow than today if the price of the stock doesn’t move. Returning to our 3-month expiration, another factor that will increase the likelihood that you’ll “win” is if the price of IBM stock rises closer to $200 – the closer the price of the stock to the strike, the more likely the event will happen. Thus, as the price of the underlying asset rises, the price of the call option premium will also rise.


Alternatively, as the price goes down – and the gap between the strike price and the underlying asset prices widens – the option will cost less. Along a similar line, if the price of IBM stock stays at $175, the call with a $190 strike price will be worth more than the $200 strike call – since, again, the chances of the $190 event happening is greater than $200. There is one other factor that can increase the odds that the event we want to happen will occur – if the volatility of the underlying asset increases. Something that has greater price swings – both up and down – will increase the chances of an event happening. Therefore, the greater the volatility, the greater the price of the option. Options trading and volatility are intrinsically linked to each other in this way. With this in mind, let’s consider a hypothetical example. Let's say that on May 1, the stock price of Cory's Tequila Co. (CTQ) is $67 and the premium (cost) is $3.15 for a July 70 Call, which indicates that the expiration is the third Friday of July and the strike price is $70. The total price of the contract is $3.15 x 100 = $315. In reality, you'd also have to take commissions into account, but we'll ignore them for this example. On most U. S. exchanges, a stock option contract is the option to buy or sell 100 shares that's why you must multiply the contract by 100 to get the total price. The strike price of $70 means that the stock price must rise above $70 before the call option is worth anything furthermore, because the contract is $3.15 per share, the break-even price would be $73.15. Three weeks later the stock price is $78. The options contract has increased along with the stock price and is now worth $8.25 x 100 = $825.


Subtract what you paid for the contract, and your profit is ($8.25 - $3.15) x 100 = $510. You almost doubled our money in just three weeks! You could sell your options, which is called "closing your position," and take your profits – unless, of course, you think the stock price will continue to rise. For the sake of this example, let's say we let it ride. By the expiration date, the price of CTQ drops down to $62. Because this is less than our $70 strike price and there is no time left, the option contract is worthless. We are now down by the original premium cost of $315. To recap, here is what happened to our option investment: So far we've talked about options as the right to buy or sell (exercise) the underlying good. This is true, but in reality, a majority of options are not actually exercised. In our example, you could make money by exercising at $70 and then selling the stock back in the market at $78 for a profit of $8 a share. You could also keep the stock, knowing you were able to buy it at a discount to the present value.


However, the majority of the time holders choose to take their profits by trading out (closing out) their position. This means that holders sell their options in the market, and writers buy their positions back to close. According to the CBOE​, only about 10% of options are exercised, 60% are traded (closed) out, and 30% expire worthless. At this point it is worth explaining more about the pricing of options. In our example the premium (price) of the option went from $3.15 to $8.25. These fluctuations can be explained by intrinsic value and extrinsic value, also known as time value. An option's premium is the combination of its intrinsic value and its time value. Intrinsic value is the amount in-the-money, which, for a call option, means that the price of the stock equals the strike price. Time value represents the possibility of the option increasing in value. Refer back to the beginning of this section of the turorial: the more likely an event is to occur, the more expensive the option. This is the extrinsic, or time value.


So, the price of the option in our example can be thought of as the following: In real life options almost always trade at some level above their intrinsic value, because the probability of an event occurring is never absolutely zero, even if it is highly unlikely. If you are wondering, we just picked the numbers for this example out of the air to demonstrate how options work. A brief word on options pricing. As we’ve seen, the relative price of an option has to do with the chances that an event will happen. But in order to put an absolute price on an option, a pricing model must be used. The most well-known model is the Black-Scholes-Merton​ model, which was derived in the 1970’s, and for which the Nobel prize in economics was awarded. Since then other models have emerged such as binomial and trinomial tree models, which are also commonly used. Options Basics Tutorial. Nowadays, many investors' portfolios include investments such as mutual funds, stocks and bonds. But the variety of securities you have at your disposal does not end there. Another type of security, known as options, presents a world of opportunity to sophisticated investors who understand both the practical uses and inherent risks associated with this asset class.


The power of options lies in their versatility, and their ability to interact with traditional assets such as individual stocks. They enable you to adapt or adjust your position according to many market situations that may arise. For example, options can be used as an effective hedge against a declining stock market to limit downside losses. Options can be put to use for speculative purposes or to be exceedingly conservative, as you want. Using options is therefore best described as part of a larger method of investing. This functional versatility, however, does not come without its costs. Options are complex securities and can be extremely risky if used improperly. This is why, when trading options with a broker, you'll often come across a disclaimer like the following: Options involve risks and are not suitable for everyone. Option trading can be speculative in nature and carry substantial risk of loss. Only invest with risk capital.


Options belong to the larger group of securities known as derivatives. This word has come to be associated with excessive risk taking and having the ability crash economies. That perception, however, is broadly overblown. All “derivative” means is that its price is dependent on, or derived from the price of something else. Put this way, wine is a derivative of grapes ketchup is a derivative of tomatoes. Options are derivatives of financial securities – their value depends on the price of some other asset. That is all derivative means, and there are many different types of securities that fall under the name derivatives, including futures, forwards, swaps (of which there are many types), and mortgage backed securities. In the 2008 crisis, it was mortgage backed securities and a particular type of swap that caused trouble. Options were largely blameless. (See also: 10 Options Strategies To Know .) Properly knowing how options work, and how to use them appropriately can give you a real advantage in the market.


If the speculative nature of options doesn't fit your style, no problem – you can use options without speculating. Even if you decide never to use options, however, it is important to understand how companies that you are investing in use them. Whether it is to hedge the risk of foreign-exchange transactions or to give employees ownership in the form of stock options, most multi-nationals today use options in some form or another. This tutorial will introduce you to the fundamentals of options. Keep in mind that most options traders have many years of experience, so don't expect to be an expert immediately after reading this tutorial. If you aren't familiar with how the stock market works, you might want to check out the Stock Basics tutorial first. The NASDAQ Options Trading Guide. Equity options today are hailed as one of the most successful financial products to be introduced in modern times. Options have proven to be superior and prudent investment tools offering you, the investor, flexibility, diversification and control in protecting your portfolio or in generating additional investment income. We hope you'll find this to be a helpful guide for learning how to trade options.


Understanding Options. Options are financial instruments that can be used effectively under almost every market condition and for almost every investment goal. Among a few of the many ways, options can help you: Protect your investments against a decline in market prices Increase your income on current or new investments Buy an equity at a lower price Benefit from an equity price’s rise or fall without owning the equity or selling it outright. Benefits of Trading Options: Orderly, Efficient and Liquid Markets. Standardized option contracts allow for orderly, efficient and liquid option markets. Options are an extremely versatile investment tool. Because of their unique riskreward structure, options can be used in many combinations with other option contracts andor other financial instruments to seek profits or protection. An equity option allows investors to fix the price for a specific period of time at which an investor can purchase or sell 100 shares of an equity for a premium (price), which is only a percentage of what one would pay to own the equity outright. This allows option investors to leverage their investment power while increasing their potential reward from an equity’s price movements. Limited Risk for Buyer.


Unlike other investments where the risks may have no boundaries, options trading offers a defined risk to buyers. An option buyer absolutely cannot lose more than the price of the option, the premium. Because the right to buy or sell the underlying security at a specific price expires on a given date, the option will expire worthless if the conditions for profitable exercise or sale of the option contract are not met by the expiration date. An uncovered option seller (sometimes referred to as the uncovered writer of an option), on the other hand, may face unlimited risk. This options trading guide provides an overview of characteristics of equity options and how these investments work in the following segments: Enter a company name or symbol below to view its options chain sheet: Edit Favorites. Enter up to 25 symbols separated by commas or spaces in the text box below. These symbols will be available during your session for use on applicable pages. Customize your NASDAQ. com experience. Select the background color of your choice: Select a default target page for your quote search: Please confirm your selection: You have selected to change your default setting for the Quote Search.


This will now be your default target page unless you change your configuration again, or you delete your cookies. Are you sure you want to change your settings? Please disable your ad blocker (or update your settings to ensure that javascript and cookies are enabled), so that we can continue to provide you with the first-rate market news and data you've come to expect from us. Section 3 : A: A derivative is a financial instrument whose value depends on the values of other underlying variables. As the name suggests it derives its value from an underlying asset. For Ex-a derivative, may be created for a share, or any material object. The most common underlying assets include stocks, bonds, commodities etc. A: Anil buys a futures contract in the scrip "Satyam Computers". He will make a profit of Rs.500 if the price of Satyam Computers rises by Rs 500. If the price remains unchanged Anil will receive nothing. If the stock price of Satyam Computers falls by Rs 800 he will lose Rs 800. Options trading account basics india Enriching Investors Since 1998. Profitable Trading Solutions for the Intelligent Investor. Beginners Guide to Options.


What is an option? An option is a contract giving the buyer the right, but not the obligation, to buy or sell an underlying asset (a stock or index) at a specific price on or before a certain date. An option is a derivative. That is, its value is derived from something else. In the case of a stock option, its value is based on the underlying stock (equity). In the case of an index option, its value is based on the underlying index (equity). · Listed Options are securities, just like stocks. · Options trade like stocks, with buyers making bids and sellers making offers. · Options are actively traded in a listed market, just like stocks. They can be bought and sold just like any other security. · Options are derivatives, unlike stocks (i. e, options derive their value from something else, the underlying security).


· Options have expiration dates, while stocks do not. · There is not a fixed number of options, as there are with stock shares available. · Stockowners have a share of the company, with voting and dividend rights. Options convey no such rights. Some people remain puzzled by options. The truth is that most people have been using options for some time, because option-ality is built into everything from mortgages to auto insurance. In the listed options world, however, their existence is much more clear. Types Of Expiration. There are two different types of options with respect to expiration. There is a European style option and an American style option.


The European style option cannot be exercised until the expiration date. Once an investor has purchased the option, it must be held until expiration. An American style option can be exercised at any time after it is purchased. Today, most stock options which are traded are American style options. And many index options are American style. However, there are many index options which are European style options. An investor should be aware of this when considering the purchase of an index option. An option Premium is the price of the option. It is the price you pay to purchase the option. For example, an XYZ May 30 Call (thus it is an option to buy Company XYZ stock) may have an option premium of Rs.2. The Strike (or Exercise) Price is the price at which the underlying security (in this case, XYZ) can be bought or sold as specified in the option contract. The Expiration Date is the day on which the option is no longer valid and ceases to exist.


The expiration date for all listed stock options in the U. S. is the third Friday of the month (except when it falls on a holiday, in which case it is on Thursday). People who buy options have a Right, and that is the right to Exercise. When an option holder chooses to exercise an option, a process begins to find a writer who is short the same kind of option (i. e., class, strike price and option type). Once found, that writer may be Assigned. There are two types of options - call and put. A call gives the buyer the right, but not the obligation, to buy the underlying instrument. A put gives the buyer the right, but not the obligation, to sell the underlying instrument. The predetermined price upon which the buyer and the seller of an option have agreed is the strike price, also called the exercise price or the striking price. Each option on a underlying instrument shall have multiple strike prices. Call option - underlying instrument price is higher than the strike price. Put option - underlying instrument price is lower than the strike price. Call option - underlying instrument price is lower than the strike price. Put option - underlying instrument price is higher than the strike price. The underlying price is equivalent to the strike price.


Options have finite lives. The expiration day of the option is the last day that the option owner can exercise the option. American options can be exercised any time before the expiration date at the owner's discretion. A class of options is all the puts and calls on a particular underlying instrument. The something that an option gives a person the right to buy or sell is the underlying instrument. In case of index options, the underlying shall be an index like the Sensitive index (Sensex) or S&P CNX NIFTY or individual stocks. An option can be liquidated in three ways A closing buy or sell, abandonment and exercising. Buying and selling of options are the most common methods of liquidation. An option gives the right to buy or sell a underlying instrument at a set price. Options prices are set by the negotiations between buyers and sellers. Prices of options are influenced mainly by the expectations of future prices of the buyers and sellers and the relationship of the option's price with the price of the instrument. The time value of an option is the amount that the premium exceeds the intrinsic value.


Time value = Option premium - intrinsic value. Long Term Investing. Multiply your capital by investing. long term trends. Multi Bagger Stocks. Create wealth for yourself. quickly identifying changes in trends, riding the trend. booking profits at the end of the trend. Capture brief price swings. fast moving trending stocks. intra-day price volatility of the most active stocks in both. BULLISH & BEARISH Markets. generate a steady stream of daily income.


Futures Day Trading. maximum profits everyday. highly liquid futures contract. • Use of this website andor products & services offered by us indicates your acceptance of our disclaimer. • Disclaimer: Futures, option & stock trading is a high risk activity. Any action you choose to take in the markets is totally your own responsibility. TradersEdgeIndia. com will not be liable for any, direct or indirect, consequential or incidental damages or loss arising out of the use of this information. This information is neither an offer to sell nor solicitation to buy any of the securities mentioned herein. The writers may or may not be trading in the securities mentioned. • All names or products mentioned are trademarks or registered trademarks of their respective owners. Basics of a trading account in India. This might seem like common knowledge but it is important to note that you cannot trade in the stock markets without a trading account.


It goes back to the basic rule of stock exchanges—in order to be a trader, where stock brokers enter the picture. Stock broking firms like Upstox offer trading account services to its clients. Since stock brokers are already registered members of the stock exchanges (Upstox is registered with BSE, NSE and MCX). —Intermediary Account. An account meant for trading can be considered as an intermediary account connecting your bank account and demat account. In order to purchase shares, you have to transfer funds from your bank account to your trading account. Once you purchase your shares, they are kept in your demat account until the time that you are ready to sell them. Once you are ready to sell those shares, the shares are shifted from your Demat Account back into your Trading account. Thus, your this account of yours can hold both cash and securities. —Different financial instruments. A trading account opens up the opportunity to invest in various kinds of instruments. You can purchase common stocks, trade in the derivatives market such as on Futures and Options etcetera. You can also trade on Equities, Commodities, Currencies, F&O as well with the help of an account exclusively meant for trading, with Upstox.


RKSV Securities: NSE CM: INB231394231 | NSE F&O: INF231394231 | NSE CDS: INE231394231 | CDSL: IN-DP-CDSL - 00282534 | NSDL: IN-DP-NSDL-11496819 | BSE CM: INB011394237 | BSE F&O: INF 011394237 | CDSL: IN-DP-CDSL - 00283831 | NSDL: IN-DP-NSDL-11497282 | RKSV Commodities MCX Member Code: 46510 | FMC Regn. No. MCX: MCXTMCORP2034 | Registered Address: RKSV, 807 New Delhi House, New Delhi 110001. Corporate Office: Sunshine Tower, 30th Floor, Senapati Bapat Marg, Dadar (W), Mumbai - 400 013. For any complaints, email at complaints@upstox. com and complaints. mcx@upstox. com | Please ensure you carefully read the Risk Disclosure Document as prescribed by SEBI. Made with love in India | Copyright © 2017, Upstox. We're proud to announce that RKSV has taken a giant leap forward and is now Upstox. Options method Trading Training Program for Indian Market. Options method Trading Training is personal coaching programme for individuals who wish to learn and excel Option trading using correct Option Strategies based on market volatility and applicable in our Indian market (NIFTY, BANKNIFTY and NSE Stock Options). Two full days workshop ( 16+ hours ) Post workshop, you can opt for additional 4 hour online session to clarify any doubts and trade setups Workshop is conducted on Weekends only (Saturday and Sunday) In case of urgency can accommodate weekdays. Options method Trading Training Highlights: You will get latest version of OptionsOracle NSE Plugin (as part of Options method Premium Tool) , and will learn how to effectively use it You will get method Decision Maker - VIX, it is windows based application that analysis INDIA VIX and recommends best method for current market conditions.


You will get method Decision Maker - HV-IV, it is windows based application that analysis volatility for scrip (Index or stocks) and recommends best method for current market conditions. You will get method Trade Manager, it is Windows based custom tool to validate Option method parameters (Options Greeks, etc.) and to manage Option method trade Options method Trading training is customized for Indian market (Nifty, BankNifty and Stock Option Strategies) Options method Trading training is for positional trades Options method Trading training is conducted on Weekends Options method Trading training is conducted either Online or Onsite at businesslearning center in Mumbai Post Options method Trading workshop, you will get Option method trade ideas for three months (2 trade setups per month) You will get support for three months to clarify any doubt and validate your Option method trade setup. Option Terminologies Option Premium Option Writing Historical Volatility and Implied Volatility ITM, ATM, OTM (In the money, At the money, Out of the money) Option Greeks (Delta, Theta, Vega, Gamma and Rho) 2. Option Analysis and Trading Tools. Effectively using OptionsOracle Using tool "method Decision Maker" to identify method for current volatility Using tool "method Trade Manager" to manage trade When to be buyer of options and when to be seller (writer) of options? 3. Option Strategies (Neutral) Mastering Non-Directional Option Strategies. Directional Option Strategies - Bullish Directional Option Strategies - Bearing. 5. Adjusting Option Trades. Importance of adjustment When to initiate adjustment How to adjust strategies to protect current profit? How to adjust strategies to minimize loss in case trade is going against us? 6. Risk Management. Position sizing for strategies Money management Avoiding common mistakes.


Latest version of OptionsOracle NSE Plugin (The free Option method Tool) method Decision Maker: Recommends Option strategies based on market volatility method Trade Manager: To manage Option method trade life cycle) Options Morphing: Guides new method if volatility level changes. Once we receive payment, you will receive PDF for module 1 (Options Basics) . You can read before attending workshop. Although all modules will be covered in detail in workshop. Day before workshop, you will receive presentation in PDF format for all modules. English and Hindi (Study material is in English) Early Registration Benefits: Once registration is done, we will share tools that you can install and have look & feel of tools. This avoids last moment installation and activation of tools. You get enough time to practice tools and get used to it. Once registration is done, you will get study material for module 1 (Options Basics pdf) that you can read and get ready for workshop. If requested, we can share planned trades with you and can provide feedback on your current trade if any. Each week, we try to plan one method trade. You will get early bird discount.


Note: You will be added to WhatsApp group only after completion of workshop. Training fee includes Premium tools FREE worth Rs 5110. Once full payment is received, you will receive tools including module 1 PDF guide, so that you can get prepared for workshop. Options method Trading Workshop Schedule: Register in advance to get tools immediately to explore. Register in advance to get tools immediately to explore. Next available slot: December 23 & 24 (Saturday & Sunday) First come first serve basis. If there is urgent requirement for Options method Trading training, you can discuss with me. Name: Santosh Kumar Karmraj Pasi. Account Number: 000405015336. Account Type: Current Account. Branch: Nariman Point, Mumbai - 400021. IFSC Code: ICIC0000004.


Please contact me by CallSMSWhatsApp on +91.98202.00550. Options method Trading Training, education, learn options trading, options trading training in Mumbai in India, Weekend Workshop, Course. Learn how to trade advanced Option Strategies by Santosh Kumar Pasi. Options method Trading Training, education, learn options trading, options trading training in Mumbai in India, Weekend Workshop, Course. Learn how to trade advanced Option Strategies by Santosh Kumar Pasi. Santosh Kumar Pasi, Options Trader and Trainer: Options method Trading Training Program for Indian Market. Is your training designed for On - line, off site training for out station ? Pl mail :pkmohanty02@yahoo. com. Yes Pravatji, participant who are not able to attend workshop onsite, then can attend online mode. Address of Mumbai workshop? Address of Mumbai workshop? It is near Bandra Kurla Complex, Bandra.


Once enrollment is done, I share exact details to participants. Is the course fee same for online and class room participants? Yes both are same. It is same course but provided by two mediums. in your poster(above) max profit max loss is written. pl correct it. Thank you for notifying. I was told 99% loss proof trading possible in options. Do you teach any such method? All trades will have some risk. There is no holy grail trading system with 99% safely. For 99% safely, Bank deposits like FD, RD and normal instruments are recommended. Options trades are higher risk and higher awarding ones. With strategies you can limit or minimize risk and increase probability of success.


Do you recording also so that one attending online can revise? Dear Subhashji, No we don't record. For online class, it is live not recording base. What's the venue in bangalore. Any cancelation policy incas people could not in last moment. sir any hyderabad class soon? Can you please look into it. The data is pulling only for nifty and banknifty . For Other companies I am not able to pull data. Please contact me. I can confirm it is smoothly working for all. if i pay full fee in advance and i donot attend the workshop due to some serious reason, can i get opportunity to attend in next workshop? You can attend in future workshop. Nice information thanks for sharing it. it will be helpful for people searching this kind of information.. Chapter 2.5: What is Options Trading? An ‘Option’ is a type of security that can be bought or sold at a specified price within a specified period of time, in exchange for a non-refundable upfront deposit.


An options contract offers the buyer the right to buy, not the obligation to buy at the specified price or date. Options are a type of derivative product. The right to sell a security is called a ‘Put Option’, while the right to buy is called the ‘Call Option’. Leverage: Options help you profit from changes in share prices without putting down the full price of the share. You get control over the shares without buying them outright. Hedging : They can also be used to protect yourself from fluctuations in the price of a share and letting you buy or sell the shares at a pre-determined price for a specified period of time. Though they have their advantages, trading in options is more complex than trading in regular shares. It calls for a good understanding of trading and investment practices as well as constant monitoring of market fluctuations to protect against losses. Just as futures contracts minimize risks for buyers by setting a pre-determined future price for an underlying asset, options contracts do the same however, without the obligation to buy that exists in a futures contract. The seller of an options contract is called the ‘options writer’. Unlike the buyer in an options contract, the seller has no rights and must sell the assets at the agreed price if the buyer chooses to execute the options contract on or before the agreed date, in exchange for an upfront payment from the buyer. There is no physical exchange of documents at the time of entering into an options contract. The transactions are merely recorded in the stock exchange through which they are routed.


When you are trading in the derivatives segment, you will come across many terms that may seem alien. Here are some Options-related jargons you should know about. Premium: The upfront payment made by the buyer to the seller to enjoy the privileges of an option contract. Strike Price Exercise Price: The pre-decided price at which the asset can be bought or sold. Strike Price Intervals: These are the different strike prices at which an options contract can be traded. These are determined by the exchange on which the assets are traded. There are typically at least 11 strike prices declared for every type of option in a given month - 5 prices above the spot price, 5prices below the spot price and one price equivalent to the spot price. Following strike parameter is currently applicable for options contracts on all individual securities in NSE Derivative segment: The strike price interval would be: At the money - Out of the money. may be enabled intraday in. Strike Price Intervals for Nifty Index. The number of contracts provided in options on index is based on the range in previous day’s closing value of the underlying index and applicable as per the following table: A future date on or before which the options contract can be executed. Options contracts have three different durations you can pick from: Near month (1 month) Middle Month (2 months) Far Month (3 months) *Please note that long terms options are available for Nifty index. Futures & Options contracts typically expire on the last Thursday of the respective months, post which they are considered void.


American and European Options: Please note that in Indian market only European type of options are available for trading. E. g. options contracts for Reliance Industries have a lot size of 250 shares per contract. Let us understand with an example: If trader A buys 100 Nifty options from trader B where, both traders A and B are entering the market for the first time, the open interest would be 100 futures or two contract. The next day, Trader A sells her contract to Trader C. This does not change the open interest, as a reduction in A’s open position is offset by an increase in C’s open position for this particular asset. Now, if trader A buys 100 more Nifty Futures from another trader D, the open interest in the Nifty Futures contract would become 200 futures or 4contracts. As described earlier, options are of two types, the ‘Call Option’ and the ‘Put Option’. Similarly, if the price of the stock rises during the contract period, the seller only loses the premium amount and does not suffer a loss of the entire price of the asset. Put options are abbreviated as ‘P’ in online quotes. Understanding Options contracts with examples: This means, under this contract, Rajesh has the rights to buy one lot of 100 Infosys shares at Rs 3000 per share any time between now and the month of May. He paid a premium of Rs 250 per share. He thus pays a total amount of Rs 25,000 to enjoy this right to sell.


Now, suppose the share price of Infosys rises over Rs 3,000 to Rs 3200, Rajesh can consider exercising the option and buying at Rs 3,000 per share. He would be saving Rs 200 per share this can be considered a tentative profit. However, he still makes a notional net loss of Rs 50 per share once you take the premium amount into consideration. For this reason, Rajesh may choose to actually exercise the option once the share price crosses Rs 3,250 levels. Otherwise, he can choose to let the option expire without being exercised. Rajesh believes that the shares of Company X are currently overpriced and bets on them falling in the next few months. Since he wants to secure his position, he takes a put option on the shares of Company X. Here are the quotes for Stock X: Rajesh buys 1000 shares of Company X Put at a strike price of 1070 and pays. Rs 30 per share as premium. His total premium paid is Rs 30,000. If the spot price for Company X falls below the Put option Rajesh bought, say to Rs 1020 Rajesh can safeguard his money by choosing to sell the put option.


He will make Rs 50 per share (Rs 1070 minus Rs 1020) on the trade, making a net profit of Rs 20,000 (Rs 50 x 1000 shares – Rs 30,000 paid as premium). Alternately, if the spot price for Company X rises higher than the Put option, say Rs 1080 he would be at a loss if he decided to exercise the put option at Rs 1070. So, he will choose, in this case, to not exercise the put option. In the process, he only loses Rs 30,000 – the premium amount this is much lower than if he had exercised his option. How are Options contracts priced? We saw that options can be bought for an underlying asset at a fraction of the actual price of the asset in the spot market by paying an upfront premium. The amount paid as a premium to the seller is the price of entering an options contract. To understand how this premium amount is arrived at, we first need to understand some basic terms like In-The-Money, Out-Of-The-Money and At-The-Money. Let’s take a look as you may be faced with any one of these scenarios while trading in options: In-the-money: You will profit by exercising the option. Out-of-the-money: You will make no money by exercising the option. At-the-money: A no-profit, no-loss scenario if you choose to exercise the option. A Call Option is ‘In-the-money’ when the spot price of the asset is higher than the strike price. Conversely, a Put Option is ‘In-the-money’ when the spot price of the asset is lower than the strike price. How is Premium Pricing arrived at : The price of an Option Premium is controlled by two factors – intrinsic value and time value of the option.


Intrinsic Value is the difference between the cash market spot price and the strike price of an option. It can either be positive (if you are in-the-money) or zero (if you are either at-the-money or out-of-the-money). An asset cannot have negative Intrinsic Value. Time Value basically puts a premium on the time left to exercise an options contract. This means if the time left between the current date and the expiration date of Contract A is longer than that of Contract B, Contract A has higher Time Value. This is because contracts with longer expiration periods give the holder more flexibility on when to exercise their option. This longer time window lowers the risk for the contract holder and prevents them from landing in a tight spot. At the beginning of a contract period, the time value of the contract is high. If the option remains in-the-money, the option price for it will be high. If the option goes out-of-money or stays at-the-money this affects its intrinsic value, which becomes zero. In such a case, only the time value of the contract is considered and the option price goes down. As the expiration date of the contract approaches, the time value of the contract falls, negatively affecting the option price. In this section, we understood the basics of Options contracts. In the next part, we go into details about Call options and Put options.


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