An option gives a person the right but not the obligation to buy or sell something. An option is a contract between two parties wherein the buyer receives a privilege for which he pays a fee (premium) and the seller accepts an obligation for which he receives a fee. The premium is the price negotiated and set when the option is bought or sold. A person who buys an option is said to be long in the option. A person who sells (or writes) an option is said to be short in the option.
NSE became the first exchange to launch trading in options on individual securities. Trading in options on individual securities commenced from July 2, 2001. Option contracts are
European style and cash settled and are available on
216 securities stipulated by the Securities & Exchange Board of India (SEBI). (Selection criteria for securities)
The security descriptor for the options contracts is:
Market type : N
Instrument Type : OPTSTK
Underlying : Symbol of underlying security
Expiry date : Date of contract expiry
Option Type : CE / PE
Strike Price: Strike price for the contract
Instrument type represents the instrument i.e. Options on individual securities.
Underlying symbol denotes the underlying security in the Capital Market (equities) segment of the Exchange
Expiry date identifies the date of expiry of the contract
Option type identifies whether it is a call or a put option., CE - Call European, PE - Put
Option contracts are available on 210 securities stipulated by the Securities & ExchangeBoard of India (SEBI). These securities are traded in the Capital Market segment of the Exchange.
Options contracts have a maximum of 3-month trading cycle - the near month (one), the next month (two) and the far month (three). On expiry of the near month contract, new contracts are introduced at new strike prices for both call and put options, on the trading day following the expiry of the near month contract. The new contracts are introduced for three month duration.
Options contracts expire on the last Thursday of the expiry month. If the last Thursday is a trading holiday, the contracts expire on the previous trading day.
Following strike parameter is currently applicable for options contracts on all individual securities:
The strike price interval would be:
|Underlying Closing Price
||Strike Price Interval
||No. of Strikes Provided In the money- At the money- Out of the money
||No. of additional strikes which may be enabled intraday in either direction
|Less than or equal to Rs.50
|> Rs.50 to ≤ Rs.100
|> Rs.100 to ≤ Rs.250
|> Rs.250 to ≤ Rs.500
|> Rs.500 to ≤ Rs.1000
The Exchange, at its discretion, may enable additional strikes as mentioned in the above table in the direction of the price movement, intraday, if required. The additional strikes may be enabled during the day at regular intervals and message for the same shall be broadcast to all trading terminals.
New contracts with new strike prices for existing expiration date are introduced for trading on the next working day based on the previous day’s underlying close values, as and when required. In order to decide upon the at-the-money strike price, the underlying closing value is rounded off to the nearest strike price interval.
The in-the-money strike price and the out-of-the-money strike price are based on the at-the-money strike price interval.
The value of the option contracts on individual securities may not be less than Rs. 2 lakhs at the time of introduction for the first time at any exchange. The permitted lot size for futures contracts & options contracts shall be the same for a given underlying or such lot size as may be stipulated by the Exchange from time to time.
The price step in respect of the options contracts is Re.0.05.
Base price of the options contracts, on introduction of new contracts, would be the theoretical value of the options contract arrived at based on Black-Scholes model of calculation of options premiums.
The options price for a Call, computed as per the following Black Scholes formula:
C = S * N (d1) - X * e- rt * N (d2)
and the price for a Put is :
P = X * e- rt * N (-d2) - S * N (-d1)
d1 = [ln (S / X) + (r + σ2 / 2) * t] / σ * sqrt(t)
d2 = [ln (S / X) + (r - σ2 / 2) * t] / σ * sqrt(t)
= d1 - σ * sqrt(t)
C = price of a call option
P = price of a put option
S = price of the underlying asset
X = Strike price of the option
r = rate of interest
t = time to expiration
σ = volatility of the underlying
N represents a standard normal distribution with mean = 0 and standard deviation = 1
ln represents the natural logarithm of a number. Natural logarithms are based on the constant e (2.71828182845904).
Rate of interest may be the relevant MIBOR rate or such other rate as may be specified.
The base price of the contracts on subsequent trading days, will be the daily close price of the options contracts. The closing price shall be calculated as follows:
- If the contract is traded in the last half an hour, the closing price shall be the last half an hour weighted average price.
- If the contract is not traded in the last half an hour, but traded during any time of the day, then the closing price will be the last traded price (LTP) of the contract.
If the contract is not traded for the day, the base price of the contract for the next trading day shall be the theoretical price of the options contract arrived at based on Black-Scholes model of calculation of options premiums.
Orders which may come to the exchange as a quantity freeze shall be based on the notional value of the contract of around Rs.5 crores. Quantity freeze is calculated for each underlying on the last trading day of each calendar month and is applicable through the next calendar month. In respect of orders which have come under quantity freeze, members would be required to confirm to the Exchange that there is no inadvertent error in the order entry and that the order is genuine. On such confirmation, the Exchange may approve such order. However, in exceptional cases, the Exchange may, at its discretion, not allow the orders that have come under quantity freeze for execution for any reason whatsoever including non-availability of turnover / exposure limits.
· Regular lot order
· Stop loss order
· Immediate or cancel
· Spread order
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Last updated on May 25, 2012.