Skip to main content

Introduction to Options

There are two fruits, say banana and apple, in a basket. If you were given an OPTION to take one of the fruit, which one will you take?
Notice the word OPTION in the above sentence. You are given a choice between two fruits.

Say, now a security is at Rs.5000/-. You think it will go to Rs.5500/- in a month.
If you have Rs.20000/- for trading, you can buy only 4 now and sell it after a month. If you opt for OPTIONS, you can buy at a lesser price and gain more. For Rs.20000, you could get an option for buying 80 (approx.) securities (each Rs.5000/-).

CASE I:
-----------
After a month, if the security price is Rs.5500/-,
You would gain => (5500 - 5000) * 80 = 40000.
But you have already given 20000 to get the option.

So, your profit would be Rs. 20000/- => 100% return in just a month :-)


CASE II:
------------
After a month, if the security price is Rs.4000/-
you have already spent Rs.20000/- on getting the option.

Total Loss: Rs. 20000/-
(Already spent on getting option. You will not execute this one.)

You will be given an option to execute it. You will execute only in the case of CASE I and not CASE II.

If you are executing the options, you will end up paying brokerages for buying and selling the securities.

Coming to the JARGONS of Options.
------------------------------------------

(1) CALL - Right to buy.
(2) PUT - Right to sell.

If you think, the security is going to go down, you can BUY PUT.
If you think, the security is going to go up, you can BUY CALL.

Let me tell you, the OPTIONS are always riskier. Most of them will be illiquid.
One of the highly liquid instrument is NIFTY Options.

When you BUY CALL, to get out of options before the date of expiry, what should you do?
If your answer was BUY PUT, Please don't try trading options. You should WRITE/SELL CALL.

Brokerages on Options:
------------------------------

Buying/Selling an option - Rs. 100/- or 1% (whichever is higher)
While exercising an option - Intra-day brokerage charges. (vary depending on the customer and brokerage houses.)

The real advantage of OPTIONS, you can gain more from less money. Even 100% Return on Investment is easily possible (Beware, the reverse is also possible :-P)
There is a cap on the downside but there is no cap on the upside.
Labels:

Comments

Post a Comment

Popular posts from this blog

Nokia E51 WLAN Settings

Nokia E51 is a smart phone with almost all the features available in it. It looks really slim and comes in three colors. It has loads of features and highlight of them all is the connection through the Internet through WLAN. You can get a Internet connection from the service provider and ask for the wi-fi router. With the wi-fi router, you can connect to the Internet through various other devices like Laptop, Nokia E51 etc., You will be provided with the password for the WLAN connection and only if you enter the password correctly you will be connected to the Internet through that WLAN. As you may expect, this password will be asked only when you connect to Internet through this WLAN for the very first time. In Laptop/Computer, you have Network settings to identify and modify the settings if wrongly entered. But this is somewhat tricky in case of Nokia E51! In Nokia E51, You have the option of Browse WLAN right at the home page for you. If you have customized for something different, u
10 comments
Read more

Igate delisting - Is it worth the bet? - Part II

I said it is worth the bet in my previous post . For delisting, the owner should atleast have 90% of the company's share. This is not the case with Igate which has only 80.1% currently. But it can continue with delisting process as it is approved by the shareholders. The floor price for the delisting process is set at Rs. 288.90/- , which is the 26 day average of high and low price. The current market price is Rs. 374/-. As I said before, there is no ceiling price and one can bid at whatever price he likes! The price will be decided after the Reverse book building process and it is decided by the price quoted by majority of the people much similar to IPO book building. The management then decided to carry on or cancel the de-listing process at will after the exit price is known. If the exit price is approved, then that price will be the price at which the management buy back all the shares. If the price you quoted is greater than exit price then yours will not be bought by the comp
5 comments
Read more

What does customer experience mean?

Customer experience is the experience of the customer from the period they came to know about the existence of the product until they finish using the product. For a hotel like Saravana Bhavan, the customer experience is from the point they came to know about its existence (the day they started) until they are associated with that particular customer (probably, forever for Saravana Bhavan but it depends on each of the customer). For a typical brokerage firm, it is all about how easy it is to open the account and the experience until the customer closes the account. For BSNL or Samsung, it is from when the customer gets to know about their products (the point when they want to buy it) until the time they stopped using it. Customer service is also part of it. Its all about the customer service, once the customer has become the owner of the product. Most of the times, I have seen, the Customer Experience is great until one procure the product or service and after that, because of t
2 comments
Read more