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Basic Option Jargons

BASIC OPTION JARGONS Decoding the basic jargons Call Option’ concepts such as – It makes sense to be a buyer of a call option when you expect the underlying price to increase If the underlying price remains flat or goes down then the buyer of the call option loses money The money the buyer of the call option would lose is equivalent to the premium (agreement fees) the buyer pays to the seller/writer of the call option. In the next chapter i.e. Call Option (Part 2), we will attempt to understand the call option in a bit more detail. However before we proceed further let us decode a few basic option jargons. Discussing these jargons at this stage will not only strengthen our learning, but will also make the forthcoming discussion on the options easier to comprehend. Here are a few jargons that we will look into – Strike Price Underlying Price Exercising of an option contract Option Expiry Option Premium Option Settlement Do remember, since we have only
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The Call Option

 The Call Option Let us now attempt to extrapolate the same example in the stock market context with an intention to understand the ‘Call Option’. Do note, I will deliberately skip the nitty-gritty of an option trade at this stage. The idea is to understand the bare bone structure of the call option contract. Assume a stock is trading at Rs.67/- today. You are given a right today to buy the same one month later, at say Rs. 75/-, but only if the share price on that day is more than Rs. 75, would you buy it?. Obviously you would, as this means to say that after 1 month even if the share is trading at 85, you can still get to buy it at Rs.75! In order to get this right you are required to pay a small amount today, say Rs.5.0/-. If the share price moves above Rs. 75, you can exercise your right and buy the shares at Rs. 75/-. If the share price stays at or below Rs. 75/- you do not exercise your right and you do not need to buy the shares. All you lose is Rs. 5/- in this case. An

OPTION TRADING

A Special Agreement There are two types of options – The Call option and the Put option. You can be a buyer or seller of these options. Based on what you choose to do, the P&L profile changes. Of course we will get into the P&L profile at a much later stage. For now, let us understand what “The Call Option” means. In fact the best way to understand the call option is to first deal with a tangible real world example, once we understand this example we will extrapolate the same to stock markets. So let’s get started. Consider this situation; there are two good friends, Ajay and Venu. Ajay is actively evaluating an opportunity to buy 1 acre of land that Venu owns. The land is valued at Rs.500,000/-. Ajay has been informed that in the next 6 months, a new highway project is likely to be sanctioned near the land that Venu owns. If the highway indeed comes up, the valuation of the land is bound to increase and therefore Ajay would benefit from the investment he would mak
CALL OPTIONS BASICS Breaking the Ice The options market makes up for a significant part of the derivative market, particularly in India. I would not be exaggerating if I were to say that nearly 80% of the derivatives traded are options and the rest is attributable to the futures market. Internationally, the option market has been around for a while now, here is a quick background on the same – Custom options were available as Over the Counter (OTC) since the 1920’s. These options were mainly on commodities Options on equities began trading on the Chicago Board Options Exchange (CBOE) in 1972 Options on currencies and bonds began in late 1970s. These were again OTC trades Exchange-traded options on currencies began on Philadelphia Stock Exchange in 1982 Interest rate options began trading on the CME in 1985 Clearly the international markets have evolved a great deal since the OTC days. However in India from the time of inception, the options market was facilita

2 Must Read Books For Stock Market Investors.

2 Must Read Books For Stock Market Investors. It’r really important to know the basics about the stocks before entering the market as lack of knowledge in this field almost always leads to a huge financial loss. Further, loss of capital also leads to a decline in the morale of the investor. Therefore, today I am going to give you the names of 10 must read books for the stock market investors. So, be with me for the next few minutes while i give you a brief introduction and review about the 10 must read books for stock market investors. Here it goes: 2 Must Read Books For Stock Market Investors: This book is ranked 1 in my list of 10 must read books for stock market investors.  Peter Lynch,  the Author of the book, is one of the most successful fund manager with  an average annual return of 30%  on his portfolio for a period of 13 years. A great record for a mutual fund manager. This classic book explains all the important basics that a beginner should know befo

SILVER

SILVER CURRENCY AND COMMODITY TRADING The Bullion Twins let us get straight to work and discuss Silver. Precious metals such as Gold, Silver, and Platinum are collectively referred to as ‘Bullion’. There is a common perception that the market price of gold and silver makes similar moves. If this is true, then it gives raise to many trading opportunities such a ‘pair trading’. We will discuss pair trading in detail, perhaps in a different module altogether. However, let us go ahead and investigate if Gold and Silver move in tandem. I did run a correlation check on Gold and Silver using 30 minutes intraday data for the last 3 months (note this is over a 1000 data points) and here are the results – The correlation on an intraday basis is  0.7 , which is quite remarkable. I’m guessing the correlation on end of day basis would be even better. So what does this mean? Well, the correlation suggests that the two metals make similar moves on an intraday basis. If yo

Gold (Part 2)

GOLD PART 2 CURRENCY  TRADING.  The London fix In the previous chapter we discussed the various Gold contracts that are available on MCX. I’d like to begin this chapter by discussing how the prices of Gold in the spot market are arrived at internationally and in India.  However, I have to mention this – this method to ‘fix’ gold prices is merely symbolic and holds very little relevance to trading gold futures at MCX. I’m discussing this simply because it is an interesting thing to know. J Internationally, the price of Gold is fixed in London on a daily basis, twice a day in two different sessions. The morning session at 10:30 AM is referred to as ‘AM Fix’ and the evening session at 3:00 PM is called the ‘PM Fix’. The prices are fixed by the gold dealers from London’s biggest bullion desk. The whole process is facilitated by Nathan Mayer Rothschild & Sons. There are about 10-11 participating banks, which include names like JP Morgan, Standard Chartered, Scotia