Option trading on Nifty index

Sunday, August 29, 2010

options are financial instrument which offer the highest return on investment but require a lot of understanding to operate otherwise can cause huge loss to the investors. In technical term :

option is a contract between two parties 
to buy/sell a certain asset 
at certain specified price 
at certain specified date 
after paying a amount

 Asset  becomes  underlying in option technical terms. similarly
specified price = Strike price ,
specified date= Expiry date and
amount is called premium in option vocabulary.

For example  Mr. Singh and Mr. Modi  entered into a contract in which Mr. Singh agreed to buy 100 tones of wheat from Mr. Modi on 15 may at price of Rs.15000 per tones and paid an advance of 50000 for this booking.

Strike price is Rs.15000/tones
Underlying =100 tones of wheat
Expiry date is 15 may.

If Mr. Singh choose not to buy it from Mr. Modi ,he will loose his initial amount paid, such a situation can arise when  the market price of wheat fall to say Rs.12000/tonne. In this situation Mr. Modi keeps the money in his pocket (this is the money paid to him as risk premium)

In the next article i will write more formally on options. keep visiting and do give your feedback about what you need which i can cover in my postings.

::: Be informed, Be cautious and most importantly, Be wise in trading


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