Part 2: Trading in F&O - the high risk and high reward equation!

Basics of Options trading:

1.       Trading cycle and Lot size remains same in options.

2.       The major difference in margin required and intrinsic time value.

3.       The Purchasing a futures contract requires an up front margin and normally involves a larger outflow of cash than in the case of Options, which require only the payment of premium.

4.       A futures contract carries unlimited profit and loss potential whereas the buyer of a Call or Put Option's loss is limited but the profit potential is unlimited.

5.       Futures are a favourite with speculators and arbitrageurs whereas Options are widely used by hedger.

Examples:

NIFTY 30Oct2014 CE 8000.00

34.65

Here, We are considering Nifty CALL option of October month of Strike price 8000. The spot being at 7991.35 (27^th Oct 2014). The Value of this CALL option of 8000 is trading at 34.65. So at 50 Lot size (fixed) the cost to purchase is 50X Rs.34.65 = Rs.1,732.5 (Brokerages + Taxes extra)

NIFTY 30Oct2014 PE 7700.00

1.65

Here, We are considering Nifty  PUT option of October month of Strike price 7700. The spot being at 7991.35 (27^th Oct 2014). The Value of this PUT option of 7700 is trading at 01.65. So at 50 Lot size (fixed) the cost to purchase is 50 X Rs.1.65 = Rs.82.5 (Brokerages + Taxes extra)

JSWSTEEL 30Oct2014 CE 1300.00

2.35

Here, We are considering JSWSTEEL CALL option of October month of Strike price 1300. The spot being at 1233 (27^th Oct 2014). The Value of this CALL option of 1300 is trading at 2.35. So at 250 Lot size (fixed) the cost to purchase is 250 X Rs.2.35 = Rs.587 (Brokerages + Taxes extra)

JSWSTEEL 30Oct2014 PE 1200.00

7.25

Here, We are considering JSWSTEEL  PUT option of October month of Strike price 1200. The spot being at 1233 (27^th Oct 2014). The Value of this PUT option of 1200 is trading at 7.25 So at 250 Lot size (fixed) the cost to purchase is 250 X Rs.1.65 = Rs.1812 (Brokerages + Taxes extra)

6.       You may observe that, owning a options trade costs very less compared to a futures trade.

7.       The max risk is your capital will become zero! While profit is unlimited!

8.       The percentage gain in options trade can be 0.1% to 1000% or even 10,000% in a day!

 Example on 27^th Oct, Put option of DLF of 100 strike price 

DLF 30Oct2014 PE 100.00

1.25 up by 0.55 (+78.57%)

9.       The brokerages on options trade is fixed per lot. Usually Rs.50.

10.   Thus, when you a buy a Nifty Call or Put option, your break even point (after which your profit starts) is Cost Rs.50 divided by lot size viz 50 = Rs.1. So If you buy an option at Rs.20, then as soon as it becomes Rs.21 and above, your profit starts J

11.   Thus, for higher lot size of stocks your break even point is closer. Example for JSWSTEEl, your break even point (after which your profit starts) is Cost Rs.50 divided by lot size viz 250 = Rs.0.2. So If you buy an option at Rs.20, then as soon as it becomes Rs.20.20 and above, your profit starts J

12.    The major risk in options trading is time decay!! It means when the expiry date comes closer (last Thursday of month) the value of Option (call & put both) reduce. This reduction in value is seen every day around 12pm and in last week its highly significant.

13.   Hence it is wise to sell off the Options trade position in a day or two.

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