Understanding of Nifty chain option

What is an option?

An option is a financial derivative that represents a contract sold by one party (the option writer) to another party (the option holder). The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (exercise date).

What are the types of “options” that are available for trading?

Call Option

Call options give the option to buy at certain price, so the buyer would want the stock to go up. Conversely, the option writer needs to provide the underlying shares in the event that the stock’s market price exceeds the strike due to the contractual obligation. An option writer who sells a call option believes that the underlying stock’s price will drop relative to the option’s strike price during the life of the option, as that is how he will reap maximum profit.

Put Option

Put options give the option to sell at a certain price, so the buyer would want the stock to go down. The opposite is true for put option writers. For example, a put option buyer is bearish on the underlying stock and believes its market price will fall below the specified strike price on or before a specified date. On the other hand, an option writer who shorts a put option believes the underlying stock’s price will increase about a specified price on or before the expiration date.

Why own an Option?

1. Speculation: Options are a way to take a short term speculative position given that they can’t be held for very long.

2. Going Short: You can’t borrow and short sell shares in India, so along with selling Futures, buying a Put Option or selling a Call Option (without owning it first) is a way to go short a share or index.

3. Leverage your position: Buying a Call Option is the same as buying a share in the sense that you profit from both the trades. Options can leverage your positions which means that you can gain or lose a lot more with the same amount of money using Options than you can by taking cash positions. This is akin to trading on the margin, and has the same effect.

Hedging is another popular reason given for owning Options but it might not be applicable when talking about small investors, especially with a product that expires in a short time. But theoretically, hedging is also one reason to own Options.

There are several techniques that the shareholders use for trading these call/put options. These techniques are derived out of experience in share trading and help them to save themselves from heavy losses.

Some of the NIFTY Option chain that are traded in the market are as follows:

1. BANK NIFTY

2. CNX IT

3. NIFTY MIDCAP 50

S&P CNX NIFTY