NSE India Option Chain: Nifty Option Chain

A call option gives buyer of the option the right (but not puts the obligation) to buy an asset or security at a pre-determined price at a given date in future. For example, X buys from Y the call option to buy 1 share of Reliance for Rs 100 at the end of 1 month from now. At the end of 1 month, the market price of Reliance is Rs 110. So it is profitable for X to exercise the call option. So he will exercise the call option and buy 1 share of Reliance from Y for Rs 100. On the other hand, suppose the market price of the share of Reliance at the end of 1 month is Rs 90. Now it is not profitable for X to exercise the call option and buy the share of Reliance for Rs 100 from Y. He can buy the share from the market at a cheaper price of Rs 90. So he will not exercise the call option. He will let it go expired.

For buying this call option, X will have to pay a price to the option seller, Y. This price is known as option premium. For example, for buying the call option on the share of Reliance, in the above example, X may pay a premium of Rs 2 to Y.

A buyer of the put option gets the right (but not the obligation) to sell an asset or security to the seller of the option at a predetermined price at a given date in future. For example, X buys from Y a put option to sell 1 share of Reliance for Rs 100 , 1 month from now. At the end of 1 month, the market price of 1 share of Reliance is Rs 90. So it is profitable for X to exercise the put option and sell the share of Reliance to Y for Rs 100. So X will exercise the put option. He will sell the share of Reliance to Y for Rs 100. On the other hand, suppose at the end of 1 month the market price of Reliance share is Rs. 110. Now it is not profitable for X to exercise the option. He can sell the share of Reliance at a higher price in the market for Rs 110. So X will not exercise the put option. He will let the option expire.

For buying this put option, X will have to pay a price to the option seller, Y. This price is known as option premium. For example, for buying the put option on the share of Reliance, in the above example, X may pay a premium of Rs 2 to Y.

A European option is one that can be exercised only on the day of its exercise. It cannot be exercised on any day before the exercise date. An American option, on the other hand, can be exercised on any day up to the exercise date. So if the exercise date of the option is 31^st December, and the option is European, then the option can be exercised only on 31^st December. But if the option is American then it can be exercised on any day up to 31^st December.

A futures is a contract between two parties to exchange an asset or security on a future date at a predetermined price. A futures is a contract. Therefore, both the parties are obliged to fulfill their obligations under the contract. Suppose X enters into a futures contract with Y for buying 1 share of Reliance for Rs 100 , 1 month from now. At the end of 1 month, X will have to buy 1 share of Reliance from Y for Rs 100. And Y will have to sell 1 share of Reliance to X for Rs 100. It does not matter whether it is profitable for 1 of the parties to do so or not.

A forward contract is same as a futures contract, except for one difference. A futures contract is listed and traded on a stock exchange. A forward contract is entered into privately between two parties. There is no involvement of an exchange in a forward contract.

Credit risk or default risk is there in a forward contract. But it is not there in a futures contract. Credit risk is the risk of one of the parties not fulfilling its contractual obligations. In a futures contract if the other party defaults, the exchange fulfills the contractual obligation of the defaulting party.

5% stock rule means that more than 5% of one’s portfolio of investments should not be in one asset or security. The rule is meant to avoid concentration of risk and achieve diversification.

Options are complicated to understand. One should trade in options only when one clearly understands them. If you are selling or writing an option, then there are margin requirements. The advantage of options is that you can take exposure to a stock or asset with much lesser investment through options. If you are buying an option then there is no margin requirement. Buying an option does not put any obligation or risk on you. But selling an option puts the obligation on you to deliver in case the buying party decides to exercise the option.

A covered option strategy is one where you own the asset on which you are selling the call option. So if you are selling or writing a call option on the stock of Reliance, then you already own the stock of Reliance at the time of selling the option.

A naked option strategy is one where you sell call option on an asset without owning that asset. For example, you write or sell a call option on the stock of Reliance without owning the stock.

A strangle strategy is one where you have a call option position and put option position in the same asset for the same exercise date but with different strike prices. For example, you have bought a call option on the stock of Reliance with exercise date of December 31^st and strike price of Rs 100. You have also bought a put option on the stock of Reliance with exercise date of December 31^st and exercise price of Rs 110. This is a strangle. This strategy is used when there is expectation that there may be significant movement in the price of the asset.

A straddle strategy in options is one where you buy (or sell) a call and put option on the same asset with the same strike prices and exercise dates. You buy a call option on 1 share of Reliance with exercise price of Rs 100 and exercise date of 31^st December. You also buy a put option on 1 share of Reliance with exercise price of Rs 100 and exercise date of 31^st December. This is an example of a strangle.

An in-the-money option is one which is currently profitable for the holder of the option, if exercised. So, an in-the-money option has positive value. An in-the-money call option is one where the market price of the underlying asset is more than the strike price of the option. An in-the-money put option is one where the market price of the asset is less than the strike price of the put option.

An out-of-the-money option is one, which is currently loss-making for the holder of the option, if exercised. So an out-of-the-money option has negative value. An out-of-the-money call option is where the market price of the underlying asset is less than the strike price of the option. An out-of-the-money put option is where the market price of the asset is more than the strike price of the put option.

An at-the-money option is one which has 0 value currently. A call option is at-the-money when the market price of the underlying asset is same as the strike or exercise price of the option. A put option is at-the-money when the market price of the underlying asset is same as the strike price of the option.