Dispersion Trading On NSE Stocks

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As with any of the previous modules in Varsity, we will again make the same old assumption that you are new to options and therefore know nothing about options. For this reason we will start from scratch and slowly ramp up as we proceed. Let us start with running through some basic background information. The options market makes up for a significant india stock option strategies of the derivative market, particularly in India.

India stock option strategies, the option market has been around for a while now, here is a quick background on the same —.

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 facilitated by the exchanges. The badla system no longer exists, it has become obsolete.

Here is a quick recap of the history of the Indian derivative markets —. Though the options market has been around sincethe real liquidity in the Indian index options was seen only in !

I remember trading options around that time, the spreads were high and getting fills was a big deal. However inthe Ambani brothers formally split up and their respective companies were listed as separate entities, thereby unlocking the value to the shareholders.

In my opinion this particular corporate event triggered vibrancy in the Indian markets, creating some serious liquidity. However if you were to compare the liquidity in Indian stock options with the international markets, we still have a long way to catch up. There are two types india stock option strategies options — The India stock option strategies option and the Put option. You can be a buyer or seller of these options. In fact the best way to understand the call india stock option strategies is to first deal with a tangible real world example, once we understand this example we will extrapolate the same to stock markets.

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. 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 india stock option strategies indeed india stock option strategies up, the valuation of the land is bound to increase and therefore Ajay india stock option strategies benefit from the investment he would make today.

So what should Ajay do? Clearly this situation has put Ajay in a dilemma as he is uncertain whether to buy the land from Venu or not. While Ajay is muddled in this thought, Venu is quite clear about selling the land if Ajay is willing to buy. Ajay wants to play it safe, he thinks through the whole situation and finally proposes a special structured arrangement to Venu, which Ajay believes is a win-win for both of them, the details of the arrangement is as follows —.

So what do you think about this special agreement? Who do you think is smarter here — Is it Ajay for proposing such a tricky agreement or Venu for accepting such an agreement? Well, the answer to these questions is not easy to answer, unless you analyze the details of the agreement thoroughly.

I would suggest you read through the example carefully it also forms the basis to understand options — Ajay has plotted an extremely clever deal here! In fact this deal has many faces to it. Now, after initiating this agreement both Ajay and Venu have to wait for the next 6 months to figure out what would actually happen.

However irrespective of what happens to the highway, there are only three possible outcomes —. Remember as per the agreement, Ajay has the right to call off the deal at the end of 6 months.

Now, india stock option strategies the increase in the land price, do you think Ajay will call off the deal? This india stock option strategies Ajay now enjoys the right to buy a piece of land at Rs. Clearly Ajay is making a steal deal here. Venu is obligated to sell him india stock option strategies land at a lesser value, simply because he had accepted Rs. Another way to look at this is — For an initial cash india stock option strategies of Rs.

Venu even though very clearly knows that the value of the land is much higher in the open market, is forced to sell it at a much lower price to Ajay. The profit that Ajay makes Rs. It turns out that the highway project was just a rumor, and nothing really is expected to come out of the whole thing.

People are disappointed and hence there is a sudden rush to sell out the land. As a result, the price of the land goes down to Rs. So what do you think Ajay will do now? Clearly it does not make sense to buy the land, hence he would walk away from the deal.

Here is the math that explains why it does not make sense to buy the land —. Remember the sale price is fixed at Rs. Hence if Ajay has to buy the land he has to shell out Rs. Which means he is in effect paying Rs. Clearly this would not make sense to Ajay, since he has the right to call of the deal, he would simply walk away from it and would not buy the land.

However do note, as per the agreement Ajay has to let go of Rs. For whatever reasons after 6 months the price stays at Rs. What do you think India stock option strategies will do? Well, he will obviously walk away from the deal and would not buy the land. Why you may ask, well here is the math —. Clearly it does not make sense to buy a piece of land at Rs. Do note, since Ajay has already committed 1lk, he could still buy the land, but ends up paying Rs 1lk extra in this process.

For this reason Ajay will call off the deal and in the process let go of the agreement fee of Rs. I hope you have understood this transaction clearly, and if you have then it is good news as through the example you already know how the call options work!

But let us not hurry to extrapolate this to the stock markets; we will spend some more time with the Ajay-Venu transaction. I would suggest you be absolutely thorough with this example. If not, please go through it again to understand the dynamics involved. Also, please remember this example, as we will revisit the same on a few occasions in the subsequent chapters.

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. You are given a right today to buy the same one month later, at say Rs. 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.

India stock option strategies order to get this right you are required to pay a small amount today, say Rs. If the share price moves above Rs. If the share price stays at or below Rs. All you lose is Rs. After you get into this agreement, there are only three possibilities that can occur. Case 1 — If the stock price goes up, then it would make sense in exercising your right and buy the stock at Rs.

Case 2 — If the stock price goes down to say Rs. Case 3 — Likewise if the stock stays flat at Rs. This is simple right? If you have understood this, you have essentially understood india stock option strategies core logic of a call option. What remains unexplained is the finer points, all of which we will learn soon.

At this stage what you really need to understand is this — For reasons we have discussed so far whenever you expect the price of a stock or any asset for that matter to increase, it always makes sense to buy a call option!

Now that we are through with the various concepts, let us understand options and their associated terms. Hi Sir, Options is like greek and latin to me. Thanks for the analogies. No, all derivative contracts are routed via the exchanges. You cannot enter into an OTC arrangement, even if you do, it would not be regulated hence quite dangerous. What benefit would Ajay get by calling off the deal before the expiry of 6 months? He will instead wait for the whole 6 months for any chance of the highway project.

My first question Karthik is india stock option strategies The dropdown value on the NSE website does not contain all months expiries — after 18th May india stock option strategies have 25th June followed by india stock option strategies Sept and then 31st Dec What happened to the other months?

For to only June and Dec contracts are available. What india stock option strategies to the remaining? Saurabh, glad you noticed it! For all stocks options the expiry is india stock option strategies similar to futures. Hence we have current month, mid month, and far month contracts. However for Nifty there are several different expiry options.

Leaps are good if you have a super long term view on markets. However the problem with leaps in India is that they are not liquid, there are hardly any trading activity here.

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J Bus Fin Aff 3: This is an open-access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited. Options are considered risky for investors and speculators due to fluctuation in the direction of price movements. An investor has to face the risk of profits where it may be extremely high or loss, here investors fail in choosing profitable options.

The study is made to minimize the risk of investors by using straps option combination strategy in choosing profitable investment strategy and to know how the option combination strategy would be profitable when market moves up or down. The study has considered the securities of both increasing and decreasing prices, so that it would be possible to give suggestions for investors that how in both cases they can make profits. Spreads involve taking positions in call or put options only.

Combinations represent option trading strategies which involve taking position in both calls and puts on the same stock. Important combination strategies include straddles, strips, straps, and strangle. A strap consists of a long position two calls, one put with the same strike price and expiration date. In a strap the investor is also betting there will be a big stock price move. However, in that case an increase in stock price is considered to be more likely. In options market when an investor sign a contract, on the expiration date if the option signed is a call option, he will exercise the contract if the current market price of the underlying asset is more than the strike price of the contract and he will make profits and if the current market price of the underlying asset is less than the strike price then he will not exercise the contract and he will make losses.

Similarly on the expiration date if the option signed is a put option, he will exercise the contract if the current market price of the underlying asset is less than the strike price of the contract and he will make profits and if the current market price of the underlying asset is more than the strike price then he will exercise the contract and he will incur losses.

So in both the cases the profit and losses are unlimited and this is the high risk factor for any investor and he cannot forecast whether he will make profits or loss. This enables the investor to incur the minimum loss that is what the premium he paid for the contract and his profits will be the maximum always and also the profit will keep on increasing as the underlying asset value increases since the combination has two call options.

Figure 1 shows the illustration of profits in case of straps option combination. Here we can see that the profit decreases in the beginning for lower values of underlying assets but it always has a limited value and once it reaches that level and the asset value keep increasing the profit also increases but do not have any limited value and thus investor can make unlimited profits [ 1 ].

The study on the topic is made at Reliance Securities Limited. The company has allowed the study to fulfil its marketing and advertising objectives. The topic of the study is been allowed as they can use this study to give their investors an idea about how to trade in options markets, how to use options combinations and also to suggest them to take positions based on the market situations.

This study may be used by the company to give reference for its investor and also give suggestions for its investors in option combinations trading. In this study the stock index options are considered. In India the stock index options are the European options.

A European option contract may be exercised only on the contract expiration date if the option is exercised by the holder. The expiration date and the exercise date must, therefore be the same. In India expect stock options rests of the options are American type of options. The time period of the options contracts assumed for the study is three months and the option will be exercised on the last day [ 2 ].

And the benefit illustration for the investor is made by assuming the future market price of the securities on the expiration date and the price of the options are taken on the day when the contract is signed that is the first day of three month time period.

It says that the loss for the investor in long straps option strategy is limited and the profit is unlimited [ 3 ]. It says that the profit for the investor in short straps option strategy is limited 88 and the loss is unlimited [ 4 ]. It says that the loss for the investor in long straps option strategy is limited and the profit is unlimited [ 5 ]. It says that the profit for the investor in short straps option strategy is limited 69 and the loss is unlimited.

It says that the loss for the investor in long straps option strategy is limited and the profit is unlimited [ 6 ]. It says that the profit for the investor in short straps option strategy is limited 84 and the loss is unlimited. From the study it is found that an investor can manage his profit and losses in option combinations by taking appropriate position in the market. Investing in stock options market is always associated with a risk factor which may be low or high and has got no exact predictions that would work out.

This makes the investor to stay away from investing in options. The study made shown that it is easier to make profits in options market. The only thing that the investor should be aware of is that which position he should take based on the market conditions. From the study made we can say that it is the long position in the market which gives the investor always profits and if losses are there it will be always the minimum [ 7 ].

And investor need not to be worried about the increasing or decreasing prices of stock, as we came to know from the study in both cases the investor would make the profit in long position.

Though the study concentrates on four industrial sectors, it can be suggested or referred for any other sectors also and thus the study is useful for the speculators and also organizational investors for reference for investing in option combinations [ 8 ]. Home Publications Conferences Register Contact.

Research Article Open Access. Benefit illustrations of Straps. Net payoff of long straps for Yes bank. Net payoff of short straps for Yes bank. S 0 possible prices E exercise price P net premium Short call payoff Short put payoff Net payoff Net payoff of long straps for Tata motors. Net payoff of short straps for Tata motors. Net payoff of long straps for Infosys. Net payoff of short straps for Infosys.

S0 possible prices E exercise price P net premium Short call payoff Short put payoff Net payoff Select your language of interest to view the total content in your interested language. Can't read the image?