Knowledge on F&O

WHEN WE SAY BUY NF AT 4300 .. we mean BUY NIFTY FUTURES (lot size 50) at

4300 .... if nifty moves to 4310 and we sell ... we make Rs 10 x 50 = Rs

500 profit

OK - OPTIONS.. lets go back to the old example of copper buyer and the

copper dealer

copper buyer needs 1000 K copper in Nov... he wants to safeguard himself

from inflation... Copper dealer asks for 30% to be paid as advance if he

wants to get a copper futures contract ....

30% of 1 lakh is Rs 30,000 .. lets say copper buyer doesnt even have that

much money to pay

but copper buyer is sure that the price of copper will go up ... but the

copper dealer thinks the copper buyer is a fool since prices of copper

will actually fall

So he says to copper buyer ... Dont pay me Rs 30000 advance... just pay

me Rs 2 per KG or Rs 2000... I promise you that I will deliver you copper

@ 100 per KG in Nov .... do you think the copper buyer should give that

Rs 2000 to the dealer ????

By the way ... the copper dealer says this Rs 2000 is not adjustable ..

so you will still need to pay Rs 1 lakh in Nov if you want to buy .. no

matter whether the prices are still Rs 100 per KG or Rs 150 per KG ...

.... kind of 'insurance' premium

Absolutely .... if copper is below 100 .. there is no point going to the

dealer and buy at 100 per KG .. he goes to open market ... he just loses

that Rs 2000 he paid to the dealer

But if copper is 110 per KG .. will he go to the dealer or not?

at 110 copper ... though he paid Rs 2 per KG as premium.. he still saved

Rs 8 per KG by doing that contract .. right???

great - we have just seen an example of an 'OPTION' contract .. here the

copper buyer has paid Rs 2 premium to dealer to GET A RIGHT TO BUY AT 100

per KG in NOV ... BUT HE DOES NOT HAVE THE OBLIGATION TO BUY AT 100 if

markets are below 100 ... YEAH???

If he was a speculator .. he is risking Rs 2 per KG hoping copper prices

will go above 102 so that he makes a profit ... RIGHT?? becuase till 101,

102 he will not make any profit

Anil - yes Risk is small in options than futures

The copper buyer here is the OPTIONS BUYER

The copper dealer here is the OPTION SELLER OR WRITER

Options are of two types.... Call option ... below was an example of CALL

option ... the copper buyer bought the CALL option of strike price 100

per KG for premium Rs 2 per KG ... CLEAR???

the second type is PUT option .. which is bought when a speculator think

markets would fall

ok one more thing ... the copper dealer asked for Rs 2 per KG to promise

to sell at 100 per KG which was the Current market price of copper....

Now he can also give a choice to the copper buyer .. hey .. if you agree

to buy copper at 105 instead of 100 .. you can just pay me Rs 1 per KG

and not Rs 2 per KG ...

So the copper buyer is getting option to buy at 100 for premium 2 rs ..

and another option to buy at 105 for premium 1 Rs

both are call options

the contract at Rs 100 per KG is 'AT THE MONEY' since copper current

price is also 100

The contract of 105 is called 'OUT OF MONEY' since CMP is 100 whereas you

are promising to buy at 105

the more OUT OF MONEY an option is .. THE PREMIUM PAID GETS SMALLER

Lets come back to stock markets ....

RIL is trading at 1000 right now ... I think RIL share prices will shoot

up .... should i be buying a Call option or PUT option?

we discussed that if I think markets will go up I will buy a CALL .. and

if i think markets will come down I will but a PUT

so RIL at 1000 .. I will buy a 1000 strike price CA

CA stands for Call american .. CE stand for Call European

All Index options (Nifty, Bank Nifty for eg) have european options ..

hence 4200 CE, 4300 CE, 4200 PE etc

All stock options have American options .. like RIL 2000 CA, 1900 PA etc

IN INDIAN CONTEXT THERE IS NO DIFFERENCE BETWEEN AN AMERICAN CONTRACT AND

EUROPEAN CONTRACT >> YOU CAN JUST IGNORE IT

what does exit 4300 ce now at 6.75 mean

.. we had bought Nifty 4300 CE or call option at Rs 35 .. It was trading

at 6.75 when i said sell it off

BUY NF NOW 4250 SL 4240

BUY NF 4250 SL 4240 means we buy at 4250 ... stop loss is 4240 so we exit

if 4240 comes .. which means Rs 10 x 50 = Rs 500 loss per lot.. that was

our risk

But we booked NF at 4267 .. so we made a profit of Rs 17 x 50 = Rs 850

per lot .. we took a risk of Rs 500 per lot and made a profit of Rs 850

per lot

PUT ok ... lets say Nifty is at 4400 right now ... I believe markets

would fall to 4200 in coming days

4400 put is at 100 right now .. I buy it at 100 ... my total risk is 100

points only or Rs 100 x 50 = Rs 5000

if markets dont fall at all entire month ..i lose my Rs 5000 ... but if

markets fall to 4200 or 4100... I can make Rs 15000 profit