Podcast
Questions and Answers
The seller of a put option gains if the price of the underlying asset:
The seller of a put option gains if the price of the underlying asset:
- Does not change
- Increases (correct)
- Both Increases and Does Not Change
- Decreases
On the National Stock Exchange, the opening day of the April futures series is the:
On the National Stock Exchange, the opening day of the April futures series is the:
- Last Friday of April month
- Last Friday of February month
- Last Friday of March month (correct)
- Last Friday of January month
What action is taken when a client defaults on payment in respect to Daily Settlement?
What action is taken when a client defaults on payment in respect to Daily Settlement?
- The contract is closed out (correct)
- The client can give a bank guarantee within 2 working days
- The client is given 2 days to clear the payments
- The broker pays and the client refunds in 7 working days
If all things remain constant throughout the contract period, the option price will always:
If all things remain constant throughout the contract period, the option price will always:
Impact cost in a market is typically low when:
Impact cost in a market is typically low when:
Operational risks include losses due to:
Operational risks include losses due to:
According to the J.R.Verma Committee recommendations, volatility should be calculated based on:
According to the J.R.Verma Committee recommendations, volatility should be calculated based on:
When a trader sells a lower strike price CALL option and buys a higher strike price CALL option, this strategy is called:
When a trader sells a lower strike price CALL option and buys a higher strike price CALL option, this strategy is called:
What is the intrinsic value of an Out of the Money option?
What is the intrinsic value of an Out of the Money option?
What is Rho in options trading?
What is Rho in options trading?
What characterizes an Over the Counter Option?
What characterizes an Over the Counter Option?
What is required of an option seller due to the potential risk involved?
What is required of an option seller due to the potential risk involved?
What does a covered call strategy entail?
What does a covered call strategy entail?
If a trader engages in buying a put option with a higher strike price and selling a put option with a lower strike price, what is this strategy called?
If a trader engages in buying a put option with a higher strike price and selling a put option with a lower strike price, what is this strategy called?
What is it called when a trader buys both a call and a put option with the same strike price and expiry?
What is it called when a trader buys both a call and a put option with the same strike price and expiry?
Margins in trading are collected on what basis?
Margins in trading are collected on what basis?
What is the characteristic of an 'In the Money' option?
What is the characteristic of an 'In the Money' option?
What is the outcome for a seller of a Call option?
What is the outcome for a seller of a Call option?
A naked PUT option seller is considered to be what in the market?
A naked PUT option seller is considered to be what in the market?
How is the profit or loss calculated when selling a PUT option?
How is the profit or loss calculated when selling a PUT option?
What does the term 'Delta' measure in options trading?
What does the term 'Delta' measure in options trading?
What happens to the Mark to Market margin when you are long in futures and the price increases?
What happens to the Mark to Market margin when you are long in futures and the price increases?
Which tax applies to equity transactions on a recognized stock exchange?
Which tax applies to equity transactions on a recognized stock exchange?
What value is considered as the intrinsic value of an 'In the Money' option?
What value is considered as the intrinsic value of an 'In the Money' option?
What should Kailash do to protect himself from losing more than Rs. 4000 on his long position of Reliance Industries shares?
What should Kailash do to protect himself from losing more than Rs. 4000 on his long position of Reliance Industries shares?
What is the intrinsic value of a CALL option when it is considered In the Money?
What is the intrinsic value of a CALL option when it is considered In the Money?
What is the correct classification of a contract where a farmer sells sugarcane to a factory for future delivery?
What is the correct classification of a contract where a farmer sells sugarcane to a factory for future delivery?
How did the investor achieve a profit of Rs. 25000 after taking a short position on Nifty?
How did the investor achieve a profit of Rs. 25000 after taking a short position on Nifty?
At what price does exercise settlement for option contracts take place?
At what price does exercise settlement for option contracts take place?
Will Mr. Mohit have to pay Securities Transaction Tax (STT) if he buys 3 Call options at a premium?
Will Mr. Mohit have to pay Securities Transaction Tax (STT) if he buys 3 Call options at a premium?
Which strike price options can protect an investor’s portfolio valued at Rs. 5 lacs, with a desired protection against a fall of more than 10%?
Which strike price options can protect an investor’s portfolio valued at Rs. 5 lacs, with a desired protection against a fall of more than 10%?
What classification does a Nifty 5950 call option with a spot value of 5880 and a premium of Rs 12 fall under?
What classification does a Nifty 5950 call option with a spot value of 5880 and a premium of Rs 12 fall under?
What does a naked call option imply about the writer's position?
What does a naked call option imply about the writer's position?
Which entity is responsible for deciding the daily settlement prices of equity derivatives?
Which entity is responsible for deciding the daily settlement prices of equity derivatives?
What is the nature of the ASK price in relation to the bid price?
What is the nature of the ASK price in relation to the bid price?
What does a Bull Spread strategy involve?
What does a Bull Spread strategy involve?
How does the maximum possible loss for an option buyer relate to potential profits?
How does the maximum possible loss for an option buyer relate to potential profits?
Which document must be provided to a person opening a Trading Account?
Which document must be provided to a person opening a Trading Account?
In a futures contract, how can you close a long or short position?
In a futures contract, how can you close a long or short position?
What should a client registration form contain?
What should a client registration form contain?
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Study Notes
Put Options
- The seller of a put option profits when the price of the underlying asset increases or remains unchanged.
- Maximum loss for a put option buyer is the premium paid.
Futures and Options Trading
- The opening day for the April series of index futures on the National Stock Exchange is the last Friday of March.
- If a client defaults on daily settlement payments, contracts are closed out.
- Margin collection for trading is done on a daily basis.
Option Pricing and Value
- An out-of-the-money option has zero intrinsic value.
- Rho measures option price sensitivity to changes in risk-free interest rates.
- The intrinsic value of a call option equals the difference between market price and exercise price when in the money.
Risk Management and Strategies
- A bullish spread involves buying a lower strike call option and selling a higher strike call option.
- A protective put strategy is used to safeguard against potential losses in stocks the trader owns.
Option Characteristics
- The time value of options is higher for at-the-money options.
- Over-the-counter options are private contracts that are not standardized.
- The maximum loss for option sellers can be unlimited, hence they need to pay margins.
Miscellaneous Financial Concepts
- Tick size is determined by regulations set by exchanges.
- The ASK price is always greater than the bid price in trading scenarios.
Tax and Regulations
- Securities Transaction Tax applies to equity transactions done on recognized stock exchanges.
- Clients must receive a risk disclosure document when opening a trading account.
Investor Protections
- To limit potential losses, investors can set stop-loss orders based on their risk tolerance levels.
- The daily settlement prices for equity derivatives are determined by the clearing corporation.
Market Mechanics
- Volume in futures markets is enhanced by the presence of speculators, creating liquidity.
- Short selling in futures requires strategic timing to realize profits.
Limiting Losses in Trading
- An investor wanting to protect a portfolio can find put options at varying strike prices to mitigate risk during market downturns.
Summary of Options
- The maximum possible loss for the option buyer equals the premium paid.
- The ability to close long or short positions through a reverse trade is a fundamental feature of futures contracts.
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