An Option is a contract which gives the right, but not an obligation, to buy or sell the underlying at a stated date and at a stated price.
Parties involved :
While a buyer of an option pays the premium and buys the right to exercise his option, the writer of an option is the one who receives the option premium and therefore obliged to sell/buy the asset if the buyer exercises it on him.
Options are of two types - Calls and Puts options :
1. ‘Calls’ give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date.
2. ‘Puts’ give the buyer the right but not the obligation to sell a given quantity of the underlying asset, at a given price on or before a given future date.
Option premium : The premium is the price for acquiring the right to buy or sell. It is price paid by the option buyer to the option seller for acquiring the right to buy or sell.
Who decides the premium amount ?
It is calculated using a complex formula called the Black-Scholes formula.
http://en.wikipedia.org/wiki/Black-Scholes
It considers both intrinsic value and time value of a stock.
Time period : The options calendar always ends on the last Thursday of a month and you can buy/sell options for 'x' no. of months.
Strike price : It is the price of the underlying asset at which the same can be bought or sold if the options buyer excercises his right to buy/sell on or before the time period expiration.
Explaining the options concept with a simple example:
Let's say you have an item 'X' of worth Rs.10, I now give you Re.1 to gain control of 'X' for 1 month. This Re.1 is for you to keep, you never have to return it. Within this 1 month, I can do whatever I want with 'X', including selling it. On the expiry day, I would have the OPTION to give you back 'X', or Rs.10, this is what we were agreed upon. Within this 1 month, if I have sold the cup for Rs.12, on the expiry day, I'd have to give you Rs.10 and I'd keep Rs.2, subtracting that Re.1 I've given to you earlier, I've made 100% in 1 month.
2008-03-09
Trading in Options
2008-03-05
BSE sensex
30 companies making up the index are :
1. Associated Cement Companys Ltd.
2. Bajaj Auto Ltd.
3. Bharat Heavy Electricals Ltd.
4. Bharti Tele Ventures Ltd.
5. Cipla Ltd.
6. Dr Reddy’s Laboratories Ltd. (NYSE: RDY)
7. Grasim Industries Ltd.
8. Gujarat Ambuja Cements Ltd.
9. HDFC
10. HDFC Bank Ltd. (NYSE: HDB)
11. Hero Honda Motors Ltd.
12. Hindalco Industries Ltd.
13. Hindustan Lever Ltd.
14. ICICI Bank Ltd. (NYSE: IBN)
15. Infosys Technologies Ltd. (NASDAQ: INFY)
16. ITC Ltd.
17. Larsen & Toubro
18. Maruti Udyog Ltd.
19. National Thermal Power Corp. Ltd.
20. ONGC Ltd.
21. Ranbaxy Laboratories Ltd.
22. Reliance Energy Ltd.
23. Reliance Industries Ltd.
24. Satyam Computer Services Ltd. (NYSE: SAY)
25. State Bank of India
26. Tata Consultancy Services Limited
27. Tata Motors Ltd. (NYSE: TTM)
28. Tata Power Co. Ltd.
29. Tata Steel Ltd.
30. Wipro Ltd. (NYSE: WIT)
2008-03-04
Secondary markets
Secondary market refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on the Stock Exchange. Majority of the trading is done in the secondary market. Secondary market comprises of equity markets and the debt markets.
In equity markets, one can buy/sell shares of company through a stock broker.These shares can be equity shares, rights issue, bonus shares, etc..Now a days all shares are dematerialised and all trading is screen based. An investor needs to pay the broker a small brokerage for each transaction conducted by the client. This brokerage shouldn't exceed 2.5%.
Next coming to the factors influencing the price of a share are:
(1) stock specific: The stock-specific factor is related to people’s expectations about the company, its future earnings capacity, financial health and management, level of technology and marketing skills.
(1) stock specific: The stock-specific factor is related to people’s expectations about the company, its future earnings capacity, financial health and management, level of technology and marketing skills.
(2) market specific: The market specific factor is influenced by the investor’s sentiment towards the stock market as a whole. This factor depends on the environment rather than the performance of any particular company. Events favourable to an economy, political or regulatory environment like high economic growth, friendly budget, stable government etc. can fuel euphoria in the investors, resulting in a boom in the market. On the other hand, unfavourable events like war, economic crisis, communal riots, minority government etc. depress the market irrespective of certain companies performing well. However, the effect of market-specific factor is generally short-term. Despite ups and downs, price of a stock in the long run gets stabilized based on the stock- specific factors.
Other terminologies :
1. Contract Note
It is a confirmation of trades done on a particular day on behalf of the client by a trading member.It imposes a legally enforceable relationship between the client and the trading member with respect to purchase/sale and settlement of trades.
This contract note generally consists of :
- Name, address and SEBI Registration number of the Member broker
- Name of partner/proprietor/Authorised Signatory
- Contract number, date of issue of contract note, settlement number and time period for settlement.
- Order number and order time corresponding to the trades.
- Trade number and Trade time.
- Brokerage and Purchase/Sale rate.
- Signature of the Stock broker/Authorized Signatory.
2. Portfolio
A Portfolio is a combination of different investment assets mixed and matched for the purpose of achieving an investor's goal(s). For most investors a portfolio has come to signify an investment in financial instruments like shares, debentures, fixed deposits, mutual fund units. Its important to have a diversified portofolio so that risk is spread out across the portfolio and losses are limited.
3. Equity Shares
An equity share, commonly referred to as ordinary share, represents the form of fractional ownership in a business venture.
4. Rights Issue/ Rights Shares
The issue of new securities to existing shareholders at a ratio to those already held, at a price. For e.g. a 2:3 rights issue at Rs. 125, would entitle a shareholder to receive 2 shares for every 3 shares held at a price of Rs. 125 per share.
5. Bonus Shares
Shares issued by the companies to their shareholders free of cost based on the number of shares the shareholder owns.
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