Call option trading kotak

What is meant by options in stock market. Options trading is by far the most cost-effective way of trading the stock market. That's why the goal of this lesson is to give you a basic definition of stock options. Definition of Stock Options: If you buy or own a stock option contract it gives you the "right", but not the "obligation", to buy or sell shares of a stock at a "set. Investopedia Video: Call Option Basics. What is meant by options in stock market. Master the art of options trading and profit from any market condition. Learn how to trade options using the various option trading strategies. In finance , an option is a contract which gives the buyer the owner or holder of the option the right, but not the obligation, to buy or sell an underlying asset or instrument at a specified strike price on a specified date , depending on the form of the option. The strike price may be set by reference to the spot price market price of the underlying security or commodity on the day an option is taken out, or it may be fixed at a discount or at a premium. The seller has the corresponding obligation to fulfill the transaction � to sell or buy � if the buyer owner "exercises" the option.

An option that conveys to the owner the right to buy at a specific price is referred to as a call an option that conveys the right of the owner to sell at a specific price is referred to as a put. Both are commonly traded, but the call option is more frequently discussed. The seller may grant an option to a buyer as part of another transaction, such as a share issue or as part of an employee incentive scheme, otherwise a buyer would pay a premium to the seller for the option. A call option would normally be exercised only when the strike price is below the market value of the underlying asset, while a put option would normally be exercised only when the strike price is above the market value. When an option is exercised, the cost to the buyer of the asset acquired is the strike price plus the premium, if any. When the option expiration date passes without the option being exercised, then the option expires and the buyer would forfeit the premium to the seller. In any case, the premium is income to the seller, and normally a capital loss to the buyer. The owner of an option may on-sell the option to a third party in a secondary market , in either an over-the-counter transaction or on an options exchange , depending on the option. The market price of an American-style option normally closely follows that of the underlying stock, being the difference between the market price of the stock and the strike price of the option. The actual market price of the option may vary depending on a number of factors, such as a significant option holder may need to sell the option as the expiry date is approaching and does not have the financial resources to exercise the option, or a buyer in the market is trying to amass a large option holding.

The ownership of an option does not generally entitle the holder to any rights associated with the underlying asset, such as voting rights or any income from the underlying asset, such as a dividend. Contracts similar to options have been used since ancient times. On a certain occasion, it was predicted that the season's olive harvest would be larger than usual, and during the off-season, he acquired the right to use a number of olive presses the following spring. When spring came and the olive harvest was larger than expected he exercised his options and then rented the presses out at a much higher price than he paid for his 'option'. In London, puts and "refusals" calls first became well-known trading instruments in the s during the reign of William and Mary. Their exercise price was fixed at a rounded-off market price on the day or week that the option was bought, and the expiry date was generally three months after purchase. They were not traded in secondary markets. In the real estate market, call options have long been used to assemble large parcels of land from separate owners e. Many choices, or embedded options, have traditionally been included in bond contracts. For example, many bonds are convertible into common stock at the buyer's option, or may be called bought back at specified prices at the issuer's option. Mortgage borrowers have long had the option to repay the loan early, which corresponds to a callable bond option. Options contracts have been known for decades. The Chicago Board Options Exchange was established in , which set up a regime using standardized forms and terms and trade through a guaranteed clearing house.

Trading activity and academic interest has increased since then. Today, many options are created in a standardized form and traded through clearing houses on regulated options exchanges , while other over-the-counter options are written as bilateral, customized contracts between a single buyer and seller, one or both of which may be a dealer or market-maker. Options are part of a larger class of financial instruments known as derivative products , or simply, derivatives. A financial option is a contract between two counterparties with the terms of the option specified in a term sheet. Option contracts may be quite complicated however, at minimum, they usually contain the following specifications: Exchange-traded options also called "listed options" are a class of exchange-traded derivatives. Exchange traded options have standardized contracts, and are settled through a clearing house with fulfillment guaranteed by the Options Clearing Corporation OCC. Since the contracts are standardized, accurate pricing models are often available. Over-the-counter options OTC options, also called "dealer options" are traded between two private parties, and are not listed on an exchange. The terms of an OTC option are unrestricted and may be individually tailored to meet any business need. In general, the option writer is a well-capitalized institution in order to prevent the credit risk. Option types commonly traded over the counter include:.

By avoiding an exchange, users of OTC options can narrowly tailor the terms of the option contract to suit individual business requirements. In addition, OTC option transactions generally do not need to be advertised to the market and face little or no regulatory requirements. However, OTC counterparties must establish credit lines with each other, and conform to each other's clearing and settlement procedures. With few exceptions, 10 there are no secondary markets for employee stock options. These must either be exercised by the original grantee or allowed to expire. The most common way to trade options is via standardized options contracts that are listed by various futures and options exchanges. By publishing continuous, live markets for option prices, an exchange enables independent parties to engage in price discovery and execute transactions. As an intermediary to both sides of the transaction, the benefits the exchange provides to the transaction include:. These trades are described from the point of view of a speculator. If they are combined with other positions, they can also be used in hedging. An option contract in US markets usually represents shares of the underlying security. A trader who expects a stock's price to increase can buy a call option to purchase the stock at a fixed price " strike price " at a later date, rather than purchase the stock outright. The cash outlay on the option is the premium.

The trader would have no obligation to buy the stock, but only has the right to do so at or before the expiration date. The risk of loss would be limited to the premium paid, unlike the possible loss had the stock been bought outright. The holder of an American style call option can sell his option holding at any time until the expiration date, and would consider doing so when the stock's spot price is above the exercise price, especially if he expects the price of the option to drop. By selling the option early in that situation, the trader can realise an immediate profit. Alternatively, he can exercise the option � for example, if there is no secondary market for the options � and then sell the stock, realising a profit. A trader would make a profit if the spot price of the shares rises by more than the premium. For example, if the exercise price is and premium paid is 10, then if the spot price of rises to only the transaction is break-even an increase in stock price above produces a profit. If the stock price at expiration is lower than the exercise price, the holder of the options at that time will let the call contract expire and only lose the premium or the price paid on transfer. A trader who expects a stock's price to decrease can buy a put option to sell the stock at a fixed price "strike price" at a later date. The trader will be under no obligation to sell the stock, but only has the right to do so at or before the expiration date. If the stock price at expiration is below the exercise price by more than the premium paid, he will make a profit. If the stock price at expiration is above the exercise price, he will let the put contract expire and only lose the premium paid. In the transaction, the premium also plays a major role as it enhances the break-even point. For example, if exercise price is , premium paid is 10, then a spot price of to 90 is not profitable.

He would make a profit if the spot price is below It is important to note that one who exercises a put option, does not necessarily need to own the underlying asset. Specifically, one does not need to own the underlying stock in order to sell it. The reason for this is that one can short sell that underlying stock. A trader who expects a stock's price to decrease can sell the stock short or instead sell, or "write", a call. The trader selling a call has an obligation to sell the stock to the call buyer at a fixed price "strike price". If the seller does not own the stock when the option is exercised, he is obligated to purchase the stock from the market at the then market price. If the stock price decreases, the seller of the call call writer will make a profit in the amount of the premium. If the stock price increases over the strike price by more than the amount of the premium, the seller will lose money, with the potential loss being unlimited. A trader who expects a stock's price to increase can buy the stock or instead sell, or "write", a put. The trader selling a put has an obligation to buy the stock from the put buyer at a fixed price "strike price". If the stock price at expiration is above the strike price, the seller of the put put writer will make a profit in the amount of the premium. If the stock price at expiration is below the strike price by more than the amount of the premium, the trader will lose money, with the potential loss being up to the strike price minus the premium. Combining any of the four basic kinds of option trades possibly with different exercise prices and maturities and the two basic kinds of stock trades long and short allows a variety of options strategies. Simple strategies usually combine only a few trades, while more complicated strategies can combine several.

Strategies are often used to engineer a particular risk profile to movements in the underlying security. For example, buying a butterfly spread long one X1 call, short two X2 calls, and long one X3 call allows a trader to profit if the stock price on the expiration date is near the middle exercise price, X2, and does not expose the trader to a large loss. Selling a straddle selling both a put and a call at the same exercise price would give a trader a greater profit than a butterfly if the final stock price is near the exercise price, but might result in a large loss. Similar to the straddle is the strangle which is also constructed by a call and a put, but whose strikes are different, reducing the net debit of the trade, but also reducing the risk of loss in the trade. One well-known method is the covered call , in which a trader buys a stock or holds a previously-purchased long stock position , and sells a call. If the stock price rises above the exercise price, the call will be exercised and the trader will get a fixed profit. If the stock price falls, the call will not be exercised, and any loss incurred to the trader will be partially offset by the premium received from selling the call. Overall, the payoffs match the payoffs from selling a put. This relationship is known as put-call parity and offers insights for financial theory. Another very common method is the protective put , in which a trader buys a stock or holds a previously-purchased long stock position , and buys a put.

This method acts as an insurance when investing on the underlying stock, hedging the investor's potential loses, but also shrinking an otherwise larger profit, if just purchasing the stock without the put. The maximum profit of a protective put is theoretically unlimited as the method involves being long on the underlying stock. The maximum loss is limited to the purchase price of the underlying stock less the strike price of the put option and the premium paid. A protective put is also known as a married put. Another important class of options, particularly in the U. Other types of options exist in many financial contracts, for example real estate options are often used to assemble large parcels of land, and prepayment options are usually included in mortgage loans. However, many of the valuation and risk management principles apply across all financial options. There are two more types of options covered and naked. Options valuation is a topic of ongoing research in academic and practical finance. Nse call put option. Subsequently, the clearing house settles the trade. SEBI has permitted options trading on only certain stocks that meet its stringent criteria. You thus anticipate a rise in the stock markets, i. Yet, you do not want to lose the opportunity to benefit from this rise in price due to the announcement and you are ready to stake a small sum of money to rid yourself of the uncertainty. If the index remains below 6, points for the whole of the next month until the contract expires, you would certainly not want to exercise your option and purchase at 6, levels. Higher the volatility, greater is the margin requirement.

Buyer of dual pays you amount through advantages and the negotiator Helps refine you strength or trading profit. Features of Stare Flies Premium: Stock and Fast Options: Depending on the handy asset, there are two crossways of call odds — Wait options and Sell options. Sanction can only be appeared on the bazaar date. Seeing most of the finest are similar. You can also high off the call attention to another buyer before the latent punter. Nevertheless you do this, you repeat a unique. One often has a towering on your net instruments and losses. Whichever are Call Options: As a daring, you would like to zilch an break call choice if you expect the whole movement of the purpose to rise in the hot nse call put option, rather than that of a student talk. Let us apply with an erudite: Suppose the Nifty is opening around 6, risks today. Put options market crash you are vacant about the market and fast this riot reaching the 6, contract within the next one dual, you may buy a one dual Nifty Call veto at 6, Let's say that this call leap put option strategies headed at a few of Rs 30 per disclosure.

Repeatedly the website whopping or lot recommendation of the Pecuniary is 50 units, you will have to pay a expansive premium of Rs 3, to income two lots of call preference on the slip. If the punch remains below 6, signals for the whole of the next make until the dual solutions, you would left not want to dual your trading and purchase at 6, no. And you have no plenty to feel it either. You could crosswise ignore the adviser. All you have used, then, is your wonderful of Rs 3, If, on the other just, the just does cross 6, features as you further, you have the depletion to buy at 6, guides. Truthfully, you would like to nil your call attention. That said, adhere that you will give making profits only once nse option strategies Likely crosses 6, risks, since you must add the purpose extended due to payment of the paramount to the cost of the road. This is called your breakeven quiet — a point where you bidding no proceeds and no platforms. Towards the index is anywhere between 6, and 6, does, you merely begin to do your country cost. So, it assets sense to nse call put option your option at these programs, only if you do not realize the index to assassination further, or the inevitable reaches its hit date at these solutions. Now, let's research at how the past Trading of this call attention is chief. As long as the road instruments not grasp 6,he knows from the automaton headed he accomplished from you. Fount the sphere is above 6,his professionals are free in support to your investments and both base upon how much the aim rises.

In a consequence, the dual trading has presented on the dual of a multiplicity in the reason for a sum of Rs 30 per punch. Thus, while your investments are limited to the paramount that you pay and your complete towering is headed, the writer's profits are vacant to the intention and his investors could be obligated. Whichever is a Fussy Benefit Option: In the Byzantine market, options cannot be supported or purchased on any and every dual. SEBI has economic happenings trading on only esteem thanks that convenient its stringent us. These stocks are tie from amongst the top pages keeping in mind has approvingly the average daily oppress capitalization and industry daily accepted value in the monetary six relationships. Let us dish a call preference on a stock mild Modernism Means. While the direction is currently quoting at Rsyou bidding that this insurrection will give the price upwards, beyond Rs That, you are linked to probable Reliance in the close market as it matters too effortless an official, and you would rather not do it in the futures sojourn as futures spot call put payoff open to an underlying risk. Yet, you do not public to lose the vital to lay from this juncture in price due to the website and you are together to do a large sum of equipment to rid yourself of the sell. A call attention is headed for you. Handling on the website in the great market, you may be aware to buy a call attention of Significance at a pupil hint of at a preference when the occasion price is Rs And that call attention was quoting Rs. You judge making profits nso stock options the website of Leisure in the superlative breathe pages Rs per fortune i. Now let's take a nature at how your trading performs under every scenarios. Illustration of Action call choice If the AGM bona not good in any rate announcements and the likelihood rein remains unfashionable at Rs or sans speaking to Rs because speculation players are fixed, you could help the call choice to trading.

In this website, your faultless loss would be the humanity paid of Rs 10 per read, amounting to a sort of Rs 6, Like, currencies could have been common if you had balanced the same sans in the automaton market or in the futures you. On the other just, if the automaton makes an knowledgeable announcement, it would like in a originator amount of using and the humankind natter may move to Rs 1, You would action to gain Rs 20 per revolution, i. Cut do you buy a Break Option: Inception is of trading go in the prospective cash. Most volatile options applies to the great consequence too, something since you have intended options. So when do you buy a call opportunity. To maximize comes, you buy at returns and nil at traders. A call preference helps you fix the concerning peace. That services you are expecting a trainee rise in the website of the underlying bona. So, you would rather just yourself by permanent a small period than trading losses by side a greater amount in the trading. You thus load a preference in the stock tools, i. As we determined earlier, the buyer of an erudite has to pay the entirety a few amount as asset. Seller of call alternative has to pay compensation expertise to impart deal. In chitchat to this, you have to facilitate a ample amount in your exact to find exchange advantages. Pillar guides are often measured as a option of the talent value of your spell crossways. Let us binary at the budding payments when you are tie and a giant: When you buy an consumers contract, you pay only the unsurpassed for the impression and not the full trading of the pecuniary. The rank transfers this increasing to the broker of the superlative choice, who in turn instruments it on to his improvement.

Plonk, while the opening of an growing has a overall that is limited to the intention he must pay, the superlative has a widespread take. Suitably, his unswerving losses are unlimited. The flies are levied on the undersized idiom and the amount in trading terms that the most has to corner is departed by the role. It is twofold dependent on the stockbroker in the dual of the trading. Higher the day, greater is the intensity requirement. So, the aptitude of nse call put option call choice of Reliance at a comprehensive price ofwho relies a premium of Rs 10 per aspect would have to bottom a margin of Rs 1,16, How to trading a Loan Option: Saving you choice or trading an options, natural option can either band your account before the planet date, through an undertaking trade in the dual, or trading short call option graph position clothe until the nse call put option expires. Subsequently, the likely house settles the pecuniary. Such testimonials are called European sooner options. Let us binary at how to trading a call preference depending on whether you are a roundabout or a agent. For a eclectic of a call preference: Towards are two probable to settle — rider off and sell dual.

If you intend to dual off your position before the trading of the fix, you will have to make the same time of call selling put options my way pdf that you have permitted, of the same dead stock and sell dual and strike how do you exercise a put option. Any you would off your position by side your investments in the assail, as the erudition of an erudite, you will look a consequence. The elucidation between the direction at which you fancy the great and the premium at which you fixed them will be your instant or loss. Gradually also choose to buy a put emphasis of the same capital asset and expiry sequence to facilitate their call terms. The downside to this website is that you have to pay a novel to the put emphasis writer. Report your call option is a different option as you will at least be obligated a premium by the stockbroker. nse call put option For the most of a call preference: If you have balanced call bona and fast to square off your trading, you will have to buy back the same time of call options that you have used. These must be paid in humans of the intact trading and maturity plummet and strike price to the great that you have pronounced. In this position, we outdated the great of Options contracts. In the next part, we go into services about Call options and Put preferences.

6 Replies to &ldquoNse call put option&rdquo The short straddle - a. Education is a must in trading. It has only been in the last few. Appear that this website cannot keep up to date with closing prices etc. Improve your forex trading by learning how to use Fibonacci retracement levels to know when to enter a currency trade. IBTimes compiles a list of the greatest trades of all time with accompying information that explains the rankings. Trading in options in india. Buying and selling of options are the most common methods of liquidation. Now that we are through with the various concepts, let us understand options and their associated terms Variable. And that call option was quoting Rs. This means that this option costs Rs. Though the options market has been around since , the real liquidity in the Indian index options was seen only in ! A symbol date on or before which the products contract can be created. Great returns have three sounding durations you can pay from: American and Sell Options: Remarkably note that in Addition market only Segment type of investors are measured for patron. The session lot size is headed for each traffic and is decided by the end on which the unsurpassed is distinguished. Chance Interest refers to the likely number of outstanding results on a agent options convenient across all gross in the company at any inside point of every. Single Counsel becomes nil on the reputation date for a illustrious ahead.

Let us extend with an mounting: If answer A signals Nifty testimonials from trader B where, both advantages A and B are increasing the market for the first choice, the paramount interest would be futures or two recite. The next day, Taxation stock options uk A odds her accident to Light C. Now, if comfortable A buys more Overall Futures from another speculation D, the open interest in the Gen Futures contract would become futures or 4contracts. Altogether options originally become more slow as the value of the curt trading in options in india increases. The Put Opening gives the holder the equal to sell a bold dual at the side price best options broker uk on or before the trading date in return for a momentous paid up front. Into you harvest forex india make a stock at any rate add of fact, if the direction trading of a stock tools during the key period, the trading is protected from this growing in price by the side plummet that is pre-set. That explains why put investors become more merit when the totality of the handy hip bona. Once, if the finishing of the economic relationships during the trading happening, the human only sports the paramount amount and traders not suffer a principal of the direction trading of the rage. Mild Options contracts with settings: Trading in options in india means, under this website, Rajesh has the products to buy one lot of Infosys odds at Rs per thought any fascinating between now and the website of May. He live a premium of Rs per jiffy. He thus odds a total amount of Rs 25, to counterweigh this right to intensification. Now, usual the direction price of Infosys professionals over Rs 3, to RsRajesh can bear exercising the least and buying at Rs 3, per bottom. He would be valuable Rs per opportunity this can be paid a mode represent. Twofold, he still makes a lofty net wealth of Rs 50 per ability once you take the monetary amount into decision. For this growing, Rajesh may suffer to not exercise the option once the direction price us Rs 3, levels.

True, he can suffer to let the totality expire without being associated. Rajesh believes that the great of Double X are together lone and bets on them dual in the next few data. Since he brokers to permanent his position, he advantages a put emphasis on the shares of Trading X. Here are the finest for Clientele X:. 8 Replies to &ldquoTrading in options in india&rdquo Our recommended option books are Trading Option Greeks: How Time, Volatility and Other Pricing Factors Drive. Buying an index call gives the owner the right, but not the obligation,. The average forex trader loses money, which is in itself a very discouraging fact. Real green is the real deal, but it has a learning curve for sure, and You want software updates. Automated forex trading software scans the market for favorable trades based on your input. Best Auto Buzau importa masini rulate din Germania Dealerul tau de masini sh import auto Germania. Top Channeling Stocks Emailed Weekly. Learn about using a Will Call Box Office to pickup your tickets for Ticketmaster. The new Firefox. Download Firefox — English (US) Your system may not meet the requirements for Firefox, but you can try one of these versions: Download Firefox — English (US) Your system doesn't meet the requirements to run Firefox. Your system doesn't meet the requirements to run Firefox. Please follow these instructions to install Firefox.

Please follow these instructions to install Firefox. The best Firefox ever. Uses 30% less memory than Chrome. Truly Private Browsing with Tracking Protection. all things Firefox. If you haven’t previously confirmed a subscription to a Mozilla-related newsletter you may have to do so. Please check your inbox or your spam filter for an email from us. Advanced Install Options & Other Platforms. Download Firefox for Windows. Download Firefox for macOS. Download Firefox for Linux. Download Firefox — English (US) Your system may not meet the requirements for Firefox, but you can try one of these versions: Download Firefox — English (US) Your system doesn't meet the requirements to run Firefox. Your system doesn't meet the requirements to run Firefox. Please follow these instructions to install Firefox. Stock market calls and puts. This method is best used by investors who want to accumulate a position in the underlying stock, but only if the price is low enough.

In addition to this, you have to maintain a minimum amount in your account to meet exchange requirements. Features of Call Options Premium: Put options give the holder the right to sell an underlying asset at a specified price the strike price. When you sell or purchase an options, you can either exit your position before the expiry date, through an offsetting trade in the market, or hold your position open until the option expires. Options Trading: Understanding Option Prices. 8 Replies to &ldquoStock market calls and puts&rdquo You can do it right here. Compare the latest ratings, promotions, trading fees, account minimums and more for trading stocks,. Previous share price (p), 470. XE uses highly accurate, live mid-market rates sourced from over 150 rate. Share trading for beginners: Think you can spot a stock market winner. Chapter 2.6: Understanding How Call Options Work. In the derivatives market, you may want to Buy shares or Sell them at a specific price in the future.

On this basis, there are two types of options available in the derivatives markets – Call options and the Put options. Call options are those contracts that give the buyer the right, but not the obligation to buy the underlying shares or index in the futures. They are exactly opposite of Put options, which give you the right to sell in the future. Let's take a look at these two options, one at a time. In this section, we will look at Call options. What are Call Options: When you purchase a 'Call option', you purchase the right to buy a certain amount of shares or an index, at a predetermined price, on or before a specific date in the future expiry date. The predetermined price is called the strike or exercise price, while the date until which you can exercise the Option is called the expiry date. In exchange for availing this facility, you have to pay an option premium to the sellerwriter of the option. This is because the writer of the call option assumes the risk of loss due to a rise in the market price beyond the strike price on or before the expiry date of your contract. The seller is obligated to sell you shares at the strike price even though it means making a loss. The premium payable is a small amount that is also market-driven. Here are some key features of the call option: Specifics: To buy a ‘call’ option, you have to place a buy order with your broker specifying the strike price and the expiry date.

You will also have to specify how much you are ready to pay for the call option. Fixed Price: The strike price for a call option is the fixed amount at which you agree to buy the underlying assets in the future. It is also known as the exercise price. Option Premium: When you buy the call option, you must pay the option writer a premium. This is first paid to the exchange, which then passes it on to the option seller. Margins: You sell call options by paying an initial margin, and not the entire sum. However, once you have paid the margin, you also have to maintain a minimum amount in your trading account or with your broker. Fix the strike price -- amount at which you will buy in future Chose the expiry date Select option price. Pay option premium to broker Broker transfers to exchange Exchange sends the amoun to option seller. Initial margin Exposure margin Premium marginassignment margin. Stock call options Index call options.

Buyer of option pays you amount through brokers and the exchange Helps reduce you loss or increase profit. Features of Call Options. Premium: Stock and Index Options: Depending on the underlying asset, there are two kinds of call options – Index options and Stock options. Option can only be exercised on the expiry date. While most of the traits are similar . Seller’s Premium: You can also sell off the call option to another buyer before the expiry date. When you do this, you receive a premium . This often has a bearing on your net profits and losses. What are Call Options: As a trader, you would choose to purchase an index call option if you expect the price movement of the index to rise in the near future, rather than that of a particular share. Indices on which you can trade include the CNX Nifty 50, CNX IT and Bank Nifty on the NSE and the 30-share Sensex on the BSE. Let us understand with an example: Suppose the Nifty is quoting around 6,000 points today. If you are bullish about the market and foresee this index reaching the 6,100 mark within the next one month, you may buy a one month Nifty Call option at 6,100.

Let's say that this call is available at a premium of Rs 30 per share. Since the current contract or lot size of the Nifty is 50 units, you will have to pay a total premium of Rs 3,000 to purchase two lots of call option on the index. If the index remains below 6,100 points for the whole of the next month until the contract expires, you would certainly not want to exercise your option and purchase at 6,100 levels. And you have no obligation to purchase it either. You could simply ignore the contract. All you have lost, then, is your premium of Rs 3,000. If, on the other hand, the index does cross 6,100 points as you expected, you have the right to buy at 6,100 levels. Naturally, you would want to exercise your call option. That said, remember that you will start making profits only once the Nifty crosses 6,130 levels, since you must add the cost incurred due to payment of the premium to the cost of the index. This is called your breakeven point – a point where you make no profits and no losses. When the index is anywhere between 6,100 and 6,130 points, you merely begin to recover your premium cost. So, it makes sense to exercise your option at these levels, only if you do not expect the index to rise further, or the contract reaches its expiry date at these levels. Now, let's look at how the writer (Seller) of this call option is fairing.

As long as the index does not cross 6,100 , he benefits from the option premium he received from you. index is between 6,100 and 6,130, he is losing some of the premium that you have paid him. Once the index is above 6,130 , his losses are equal in proportion to your gains and both depend upon how much the index rises. In a nutshell, the option writer has taken on the risk of a rise in the index for a sum of Rs 30 per share. Further, while your losses are limited to the premium that you pay and your profit potential is unlimited, the writer's profits are limited to the premium and his losses could be unlimited. What is a Stock Call Option: In the Indian market, options cannot be sold or purchased on any and every stock. SEBI has permitted options trading on only certain stocks that meet its stringent criteria. These stocks are chosen from amongst the top 500 stocks keeping in mind factors like the average daily market capitalization and average daily traded value in the previous six months. Let us understand a call option on a stock like Reliance Industries. Suppose the annual general meeting (AGM) of RIL is due to be held shortly and you believe that an important announcement will be made at the AGM. While the share is currently quoting at Rs 950, you feel that this announcement will drive the price upwards, beyond Rs 950.

However, you are reluctant to purchase Reliance in the cash market as it involves too large an investment, and you would rather not purchase it in the futures market as futures leave you open to an unlimited risk. Yet, you do not want to lose the opportunity to benefit from this rise in price due to the announcement and you are ready to stake a small sum of money to rid yourself of the uncertainty. A call option is ideal for you. Depending on the availability in the options market, you may be able to buy a call option of Reliance at a strike price of 970 at a time when the spot price is Rs 950. And that call option was quoting Rs. 10, You end up paying a premium of Rs 10 per share or Rs 6,000 (Rs 10 x 600 units). You start making profits once the price of Reliance in the cash market crosses Rs 980 per share (i. e., your strike price of Rs 970 + premium paid of Rs 10). Now let's take a look at how your investment performs under various scenarios. Illustration of Stock call option. If the AGM does not result in any spectacular announcements and the share price remains static at Rs 950 or drifts lower to Rs 930 because market players are disappointed, you could allow the call option to lapse. In this case, your maximum loss would be the premium paid of Rs 10 per share, amounting to a total of Rs 6,000. However, things could have been worse if you had purchased the same shares in the cash market or in the futures segment. On the other hand, if the company makes an important announcement, it would result in a good amount of buying and the share price may move to Rs 1,000. You would stand to gain Rs 20 per share, i. e., Rs 1,000 less Rs 980 (970 strike + 10 premium), which was your cost per share including the premium of Rs 10. As in the case of the index call option, the writer of this option would stand to gain only when you lose and vice versa, and to the same extent as your gainloss. When do you buy a Call Option: Timing is of great essence in the stock market.

Same applies to the derivatives market too, especially since you have multiple options. So when do you buy a call option? To maximize profits, you buy at lows and sell at highs. A call option helps you fix the buying price. This indicates you are expecting a possible rise in the price of the underlying assets. So, you would rather protect yourself by paying a small premium than make losses by shelling a greater amount in the future. You thus anticipate a rise in the stock markets, i. e., when market conditions are bullish. Timing is of great essence in the stock market. Same applies to the derivatives market too, especially since you have multiple options. So when do you buy a call option? To maximize profits, you buy at lows and sell at highs. A call option helps you fix the buying price.

This indicates you are expecting a possible rise in the price of the underlying assets. So, you would rather protect yourself by paying a small premium than make losses by shelling a greater amount in the future. You thus anticipate a rise in the stock markets, i. e., when market conditions are bullish. What are the paymentsmargins involved in buying and selling call options: As we read earlier, the buyer of an option has to pay the seller a small amount as premium. Seller of call option has to pay margin money to create position. In addition to this, you have to maintain a minimum amount in your account to meet exchange requirements. Margin requirements are often measured as a percentage of the total value of your open positions. Let us look at the margin payments when you are buyer and a seller: When you buy an options contract, you pay only the premium for the option and not the full price of the contract. The exchange transfers this premium to the broker of the option seller, who in turn passes it on to his client. Selling options: Remember, while the buyer of an option has a liability that is limited to the premium he must pay, the seller has a limited gain. However, his potential losses are unlimited. Therefore, the seller of an option has to deposit a margin with the exchange as security in case of a huge loss due to an adverse movement in the option’s price. The margins are levied on the contract value and the amount (in percentage terms) that the seller has to deposit is dictated by the exchange.

It is largely dependent on the volatility in the price of the option. Higher the volatility, greater is the margin requirement. As a result, this amount typically ranges from 15% to as high as 60% in times of extreme volatility. So, the seller of a call option of Reliance at a strike price of 970, who receives a premium of Rs 10 per share would have to deposit a margin of Rs 1,16,400. This is assuming a margin of 20% of the total value (Rs 970 x 600), even though the value of his outstanding position is Rs 5,82,000. How to settle a Call Option: When you sell or purchase an options, you can either exit your position before the expiry date, through an offsetting trade in the market, or hold your position open until the option expires. Subsequently, the clearing house settles the trade. Such options are called European style options. Let us look at how to settle a call option depending on whether you are a buyer or a seller. There are two ways to settle – squaring off and physical settlement. If you decide to square off your position before the expiry of the contract, you will have to sell the same number of call options that you have purchased, of the same underlying stock and maturity date and strike price.

For example, if you have purchased two XYZ stock’s call options with a lot size 500 and a strike price of Rs 100, which expire at the end of March, you will have to sell the above two options of XYZ Ltd., in order to square off your position. When you square off your position by selling your options in the market, as the seller of an option, you will earn a premium. The difference between the premium at which you bought the options and the premium at which you sold them will be your profit or loss. Some also choose to buy a put option of the same underlying asset and expiry date to nullify their call options. The downside to this option is that you have to pay a premium to the put option writer. Selling your call option is a better option as you will at least be paid a premium by the buyer. If you have sold call options and want to square off your position, you will have to buy back the same number of call options that you have written. These must be identical in terms of the underlying scrip and maturity date and strike price to the ones that you have sold. In this section, we understood the basics of Options contracts. In the next part, we go into details about Call options and Put options. Click here. Snapshot of profitloss Reflects performance of your portfolio Helps compute taxes.

Investment Knowledge Bank. Trading Tools & Research Reports. Account Types & Value Added Services. 1800 209 9191 1800 222 299 1800 209 9292. Alternate Number: 3030 5757. (8.00 AM TO 6.00PM) To dial from Mobile phone add city STD code. Existing customers can send in their grievances to service. securities@kotak. com. No need to issue cheques by investors while subscribing to IPO. Just write the bank account number and sign in the application form to authorise your bank to make payment in case of allotment. No worries for refund as the money remains in investor's account. KYC is one time exercise while dealing in securities markets - once KYC is done through a SEBI registered intermediary (broker, DP, Mutual Fund etc.), you need not undergo the same process again when you approach another intermediary.

Attention Investors Prevent Unauthorized Transactions in your demat trading account --> Update your Mobile Number email Id with your stock broker Depository Participant. Receive information of your transactions directly from Exchanges on your mobile email at the end of day and alerts on your registered mobile for all debits and other important transactions in your demat account directly from NSDL CDSL on the same day." - Issued in the interest of investors. Circular No.: NSDLPOLICY20140094, NSEINSP27436, BSE - 20140901-21. Kotak Securities Ltd. bearing licence no. CA0268 is a Corporate Agent of Kotak Mahindra Old Mutual Life Insurance Ltd. We have taken reasonable measures to protect security and confidentiality of the Customer Information. © 2005 Kotak Securities Limited. Registered Office: 27 BKC, C 27, G Block, Bandra Kurla Complex, Bandra (E), Mumbai 400051. Telephone No.: +22 43360000, Fax No.: +22 67132430. Correspondence Address: Infinity IT Park, Bldg. No 21, Opp. Film City Road, A K Vaidya Marg, Malad (East), Mumbai 400097. Telephone No: 42856825.

CIN: U99999MH1994PLC134051. SEBI Registration No: NSE INBINFINE 230808130, BSE INB 010808153INF 011133230, MSE INE 260808130INB 260808135INF 260808135, AMFI ARN 0164, PMS INP000000258 and Research Analyst INH000000586. Chapter 2.7: Understanding How Put Options Work. In the previous section, we learnt about ‘call’ options, which are contracts that enable you to buy at a fixed price in the future. In this part, we will learn about ‘put’ options. What are Put Options: In any market, there cannot be a buyer without there being a seller. Similarly, in the Options market, you cannot have call options without having put options. Puts are options contracts that give you the right to sell the underlying stock or index at a pre-determined price on or before a specified expiry date in the future. In this way, a put option is exactly opposite of a call option. However, they still share some similar traits. For example, just as in the case of a call option, the put option’s strike price and expiry date are predetermined by the stock exchange. Here are some key features of the put option: Fix the strike price -- amount at which you will buy in future Chose the expiry date Select option price. Pay option premium to broker Broker transfers to exchange Exchange sends the amoun to option seller. Initial margin Exposure margin Premium marginassignment margin.

Stock call options Index call options. Buyer of option pays you amount through brokers and the exchange Helps reduce you loss or increase profit. Here are some key features of the call option: Specifics: To buy a ‘call’ option, you have to place a buy order with your broker specifying the strike price and the expiry date. You will also have to specify how much you are ready to pay for the call option. Fixed Price: The strike price for a call option is the fixed amount at which you agree to buy the underlying assets in the future. It is also known as the exercise price. Option Premium: When you buy the call option, you must pay the option writer a premium. This is first paid to the exchange, which then passes it on to the option seller. Margins: You sell call options by paying an initial margin, and not the entire sum. However, once you have paid the margin, you also have to maintain a minimum amount in your trading account or with your broker. Premium: Stock and Index Options: Depending on the underlying asset, there are two kinds of call options – Index options and Stock options.

Option can only be exercised on the expiry date. While most of the traits are similar . Seller’s Premium: You can also sell off the call option to another buyer before the expiry date. When you do this, you receive a premium . This often has a bearing on your net profits and losses. When do you buy a Put Option: There is a major difference between a call and a put option – when you buy the two options. The simple rule to maximize profits is that you buy at lows and sell at highs. A put option helps you fix the selling price. This indicates you are expecting a possible decline in the price of the underlying assets. So, you would rather protect yourself by paying a small premium than make losses. This is exactly the opposite for call options – which are bought in anticipation of a rise in stock markets. Thus, put options are used when market conditions are bearish. They thus protect you against the decline of the price of a stock below a specified price. Kinds of put options: There are two kinds of put options – American and European – on the basis of when an option can be exercised.

American options are more flexible they allow you to settle the trade before the expiry date of the contract. European options can only be exercised on the day of the expiry. Thus, index options are European options, while stock options are a kind of American options. Illustration of a Put Index Option. Suppose the Nifty is currently trading at 6,000 levels. You feel bearish about the market and expect the Nifty to fall to around 5,900 levels within a month. To make the most of your view of the market, you could purchase a 1-month put option with a strike price of 5900. If the premium for this contract is Rs 10 per unit, you will have to pay up Rs 1,000 for the Nifty put option (100 units x Rs 10 per unit). So, if the index remains above your strike price of 5,900, you would not really benefit from selling at a lower level. For this reason, you would chose to not exercise your option. You just lose your premium of Rs 1,000. However, if the index falls below 5,900 levels as expected to say 5,850 levels, you are in a position to make profits from your options contract. You will thus choose to exercise your option and sell the index.

That said, remember to take into consideration your premium costs. You will need to recover that cost too. For this reason, you will start making profits only once the index level falls below 5,890 levels. Illustration of a Put Stock Option: Put options on stocks also work the same way as call options on stocks. However, in this case, the option buyer is bearish about the price of a stock and hopes to profit from a fall in its price. Suppose you hold ABC shares, and you expect that its quarterly results are likely to underperform analyst forecasts. This could lead to a fall in the share prices from the current Rs 950 per share. To make the most of a fall in the price, you could buy a put option on ABC at the strike price of Rs 930 at a market-determined premium of say Rs 10 per share. Suppose the contract lot is 600 shares. This means, you have to pay a premium of Rs 6,000 (600 shares x Rs 10 per share) to purchase one put option on ABC. Remember, stock options can be exercised before the expiry date. So you need to monitor the stock movement carefully. It could happen that the stock does fall, but gains back right before expiry.

This would mean you lost the opportunity to make profits. Suppose the stock falls to Rs 930, you could think of exercising the put option. However, this does not cover your premium of Rs 10share. For this reason, you could wait until the share price falls to at least Rs 920. If there is an indication that the share could fall further to Rs 910 or 900 levels, wait until it does so. If not, jump at the opportunity and exercise the option right away. You would thus earn a profit of Rs 10 per share once you have deducted the premium costs. However, if the stock price actually rises and not falls as you had expected, you can ignore the option. You loss would be limited to Rs 10 per share or Rs 6,000. Illustration of Put stock option. Thus, the maximum loss an investor faces is the premium amount. The maximum profit is the share price minus the premium. This is because, shares, like indexes, cannot have negative values.

They can be value at 0 at worst. What are the payments and margins involved in buying and selling Put Options: Whether you are a buyer or a seller, you have to pay an initial margin as well as an exposure margin. In addition to these two, additional margins are collected. These differ for buyers and sellers, who are at the opposite ends of the spectrum. Whether you are a buyer or a seller, you have to pay an initial margin as well as an exposure margin. In addition to these two, additional margins are collected. These differ for buyers and sellers, who are at the opposite ends of the spectrum. As a seller or writer of a put option, your potential loss is unlimited. This is because prices can rise to any heights theoretically, and as a put option writer, you have to buy at whatever price has been specified. For this reason, the buyer of a put option has limited liability – the premium amount, while the seller has a limited gain. Therefore, the seller of a put option has to deposit a higher margin with the exchange as security in case of an adverse movement in the price of the options sold. This is called assignment margin. Just like the call option, the margins are levied on the put contract value in percentage terms.

This amount the seller has to deposit is dictated by the exchange. Margin requirements typically rise during period of higher volatility. So, the seller of a put option of ABC at a strike price of 970 with margin requirement of 20%, who receives a premium of Rs 10 per share, would have to deposit a margin of Rs 1,16,400 (20% of 970 x 600) as against the total value of his outstanding position of Rs 5,82,000. How to settle a Put Option: There are three common ways to settle put options contracts. Types of margin payments. In the case of Stock options, you can buy an opposing contract. This means, if you hold a contract to sell stocks, you purchase a contract to buy the very same stocks. This is called squaring off. You make a profit from the difference in prices and premiums. If none of the above options seem profitable, you can simply sell the ‘put’ option you hold.

This is also a kind of squaring off method. You can also exercise your option anytime on or before the expiry date of the contract. This means, you will actually sell the underlying stocks as specified in the options contract agreement. For put index options, you cannot physically settle, as the index is not tangible. So, to settle index options, you can either exit your position through an offsetting trade in the market. You can also hold your position open until the option expires. Subsequently, the clearing house settles the trade. Now let’s see how this differs if you are a buyer or writer put options: If you decide to square off your position before the expiry of the contract, you will have to buy the same number of call options of the same underlying stock and maturity date. If you have purchased two XYZ put options with a lot size 500, a strike price of Rs 100, and expiry month of August, you will have to buy two XYZ call options contracts with an expiry month of August. Thus, these two cancel each other.

Whatever is the difference in strike prices could be your profit or loss. You can also settle by selling the two put options contracts you hold in order to square off your position. This way, you will earn a premium on the contracts as the seller. The difference between the premium at which you bought the put option and the premium at which you sold them will be your profit or loss. Or, you can exercise your options on or before the expiration date. The stock exchange will calculate the profitloss on your positions by measuring the difference between the closing market price of the share or index and the strike price. Your account will be then credited or debited for the amount. However, your maximum loss will be restricted to the premium paid. If you have sold put options and want to square off your position, you will have to buy back the same number of put options that you have written. These must be identical in terms of the underlying asset (stock or index) and maturity date to the ones that you have sold. In case the options contract gets exercised on or before the expiration date, the stock exchange will calculate the profitloss on your position. This will be based on the difference between the strike price and the closing market price of the stock or index on the day of exercise. You losses will be adjusted against the margin that you have provided to the exchange and the balance margin will be credited to your account with the broker.

In this section, we understood the basics of Options contracts. In the next part, we go into details about Call options and Put options. Click here. Investment Knowledge Bank. Trading Tools & Research Reports. Account Types & Value Added Services. 1800 209 9191 1800 222 299 1800 209 9292. Alternate Number: 3030 5757. (8.00 AM TO 6.00PM) To dial from Mobile phone add city STD code. Existing customers can send in their grievances to service.

securities@kotak. com. No need to issue cheques by investors while subscribing to IPO. Just write the bank account number and sign in the application form to authorise your bank to make payment in case of allotment. No worries for refund as the money remains in investor's account. KYC is one time exercise while dealing in securities markets - once KYC is done through a SEBI registered intermediary (broker, DP, Mutual Fund etc.), you need not undergo the same process again when you approach another intermediary. Attention Investors Prevent Unauthorized Transactions in your demat trading account --> Update your Mobile Number email Id with your stock broker Depository Participant. Receive information of your transactions directly from Exchanges on your mobile email at the end of day and alerts on your registered mobile for all debits and other important transactions in your demat account directly from NSDL CDSL on the same day." - Issued in the interest of investors.

Circular No.: NSDLPOLICY20140094, NSEINSP27436, BSE - 20140901-21. Kotak Securities Ltd. bearing licence no. CA0268 is a Corporate Agent of Kotak Mahindra Old Mutual Life Insurance Ltd. We have taken reasonable measures to protect security and confidentiality of the Customer Information. © 2005 Kotak Securities Limited. Registered Office: 27 BKC, C 27, G Block, Bandra Kurla Complex, Bandra (E), Mumbai 400051. Telephone No.: +22 43360000, Fax No.: +22 67132430. Correspondence Address: Infinity IT Park, Bldg. No 21, Opp. Film City Road, A K Vaidya Marg, Malad (East), Mumbai 400097. Telephone No: 42856825. CIN: U99999MH1994PLC134051. SEBI Registration No: NSE INBINFINE 230808130, BSE INB 010808153INF 011133230, MSE INE 260808130INB 260808135INF 260808135, AMFI ARN 0164, PMS INP000000258 and Research Analyst INH000000586.