Understanding Basic Options
Before understanding Nifty options, first we need to understand what an option instrument is.
Just like derivatives futures, options too is an derivative product where the buyer holds a right to execute option of either buying or selling of shares or another underlying at a certain pre-determined price (also known as the strike price) during a pre-determined time period.
The 2 types of Options are Call Options i.e. the Right to Buy and Put Options i.e. the Right to Sell.
A Call option gives buyer an option to “BUY” underlying asset at an agreed upon price with a expiry date on this contract. Likewise Put gives buyer an option to “SELL” at agree upon price with a expiry date on this contract. Hence, Call buyer would want prices of the underlying to go up and put buyers would like to see prices of underlying falling.
Meaning of Nifty Options
Nifty Options is a derivative instrument wherein the underlying asset is Nifty; like Nifty50 futures it also has lot size 75, different strikes and multiple expiry periods. It is a derivative like Futures but unlike Futures your profit/loss will not be linear depending on the up move/down move in NSE NIFTY.
The trader in options pay only the option premium of the actual value of the underlying asset i.e. you need not pay the value of 75*NIFTY50 future to buy the options lot. The premium/ option price is determined using options calculator comprising of complex mathematical models and is usually nominal compared to actual Nifty value. You can check option prices here – Nifty Options Live.
Types of Options styles – American Options and European Options
American and European are most common option styles. In American Option, Buyer gets an option to exercise at any time up to the expiration date. In European options, Option can be exercise only on the expiration date itself.
Due the simplicity of its expiry, European options are easier to price and analyze than American options, and properties such as price of an American option are frequently derived from those of its European counterparts. Till 2010, in India all options were of American style but while options were/are very popular with investors because of the limited downside (only in case of buying) in 2011 NSE decided to shift from American style to European options.
Like stocks prices the Option prices too can be put to technical/quant analysis to arrive at different options trading strategies based on trader’s individual philosophy and risk appetite.
Trading in Nifty Options – Quick Facts
Lot size of Nifty Options – 75 (Subject to revision from time to time)
Margins – To calculate margin requirements for trading nifty options, check out SAMCO’s nifty options margin calculator.
Buying Options (100% Premium has to be paid, no separate margin collected)
Selling Options (A total margin comprising of SPAN + Exposure Margins usually similar to NIFTY Futures Margins is applicable)
Brokerage and Transaction Charges – The Brokerage applicable on Nifty Options with SAMCO is on a per order basis irrespective of the number of lots in a particular order. Calculate the brokerage and transaction expenses for trading nifty options at SAMCO’s nifty options brokerage calculator.
Underlying – NIFTY 50 Index