options contract on indian derivative market
Post on 20-Oct-2014
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This PPT is helpful for the student who is doing MBA in finance extreme. it is just small help from my side in future also i will be uploading these type of PPT'S. Thank You Ritesh SethiTRANSCRIPT
contract terminology and specifications for stock and index options
By – Ritesh Sethi
Options Contracts
An option gives the holder the right, but not the obligation, to buy or sell a given quantity of an asset on (or perhaps before) a given date, at prices agreed upon today.
Calls versus Puts
Call options gives the holder the right, but not the obligation, to buy a given quantity of some asset at some time in the future, at prices agreed upon today. When exercising a call option, you “call in” the asset.
Put options gives the holder the right, but not the obligation, to sell a given quantity of an asset at some time in the future, at prices agreed upon today. When exercising a put, you “put” the asset to someone.
Options Contracts:Terminology Exercising the Option
The act of buying or selling the underlying asset through the option contract.
Strike Price or Exercise Price
Refers to the fixed price in the option contract at which the holder can buy or sell the underlying asset.
Expiry
The maturity date of the option is referred to as the expiration date, or the expiry.
European versus American options
European options can be exercised only at expiry.
American options can be exercised at any time up to expiry.
Options Contracts:Terminology
In-the-Money
The exercise price is less than the spot price of the underlying asset.
At-the-Money
The exercise price is equal to the spot price of the underlying asset.
Out-of-the-Money
The exercise price is more than the spot price of the underlying asset.
Intrinsic Value
The difference between the exercise price of the option and the spot price of the underlying asset.
Speculative Value
The difference between the option premium and the intrinsic value of the option.
Specifications of stock options
Expiry
10:59 CST on the Saturday immediately following the third Friday of the month.
The last trading day is the third Friday.
Holder of the option has until 4:30 of that Friday to exercise.
His broker has until 10:59 the next day to notify the exchange
Expiry Cycles:
January
January, April, July, October
February
February, May, August, November
March
March, June, September, December
When one option expires, trading in another begins.
Specifications of stock options
Contract specification for index options
Contract specifications for stock options
Contract specification for index options
On NSE’s index options market, there are one-month, two-month and three-month expiry contracts with minimum nine different strikes available for trading.
Hence, if there are three serial month contracts available and the scheme of strikes is 6-1-6, then there are minimum 3 x 13 x 2 (call and put options) i.e. 78 options contracts available on an index.
Underlying index CNX Nifty
Exchange of trading National Stock Exchange of India Limited
Security descriptor OPTIDX
Contract size Permitted lot size shall be 50 (minimum value Rs. 2 lakh)
Price steps Re. 0.05
Price bands A contract specific price range based on its delta value and is computed and updated on a daily basis.
Trading cycle The options contracts will have a maximum of three month trading cycle - the near month (one), the next month (two) and the far month (three). New contract will be introduced on the next trading day following the expiry of near month contract. Also, long term options have 3 quarterly and 5 half yearly expiries
Expiry day The last Thursday of the expiry month or the previous trading day if the last Thursday is a trading holiday.
Settlement basis Cash settlement on T+1 basis.
Style of option European.
Strike price interval Depending on the index level
Final settlement price Closing value of the index on the last trading day.
Contract specifications for stock options
Trading in stock options commenced on the NSE from July 2001. Currently these contracts are European style and are settled in cash.
The expiration cycle for stock options is the same as for index futures and index options.
A new contract is introduced on the trading day following the expiry of the near month contract. NSE provides a minimum of eleven strike prices for every option type (i.e. call and put) during the trading month.
Underlying Individual securities
Exchange of trading National Stock Exchange of India Limited
Security descriptor OPTSTK
Style of option European
Strike price interval As specified by the exchange
Contract size As specified by the exchange (minimum value of Rs.2 lakh)
Price steps Re. 0.05
Price bands Not applicable
Trading cycle The options contracts will have a maximum of three month trading cycle - the near month (one), the next month (two) and the far month (three). New contract will be introduced on the next trading day following the expiry of near month contract.
Expiry day The last Thursday of the expiry month or the previous trading day if the last Thursday is a trading holiday.
Settlement basis Daily settlement on T+1 basis and final option exercise settlement on T+1 basis
Daily settlement price Premium value (net)
Final settlement price Closing price of underlying on exercise day or expiry day
Example
Index Buy Jan Call 4200 Sell Jan 3800 Call Cash Flow Profit & Loss (Rs.)
3700 0 0 0 +1003750 0 0 0 +1003800 0 0 0 +1003850 0 -50 -50 +503900 0 -100 -100 03950 0 -150 -150 -504000 0 -200 -200 -1004050 0 -250 -250 -1504100 0 -300 -300 -2004150 0 -350 -350 -2504200 0 -400 -400 -300
4250 +50 -450 -400 -3004300 +100 -500 -400 -300
Illustration 5.4: Expiration day cash flows for a Bear spread using two-month callsThe table shows possible expiration day profit for a bear spread created by selling one market lot of calls at a strike of 3800 and buying a market lot of calls at a strike of 4200. The maximum profit obtained from setting up the spread is the difference between the premium received for the call sold (Rs. 150) and the premium paid for the call bought (Rs.50) which is Rs. 100.In this case the maximum loss obtained is limited to Rs.300. Beyond an index level of 4200, any profits made on the long call position will be canceled by losses made on the short call position, effectively limiting the profit on the combination.
