How to trade in options icicidirect

Author: Propeller113 Date: 14.06.2017

Quick Lesson on Option Trading. Before viewing the definition of Options Trading, lets take an example to understand the same: Lets take the same car example. I am interested in buying a car worth 2 lac after a month and I expect the car price to increase in this one month.

I approach a dealer and ask him to deliver me a car after a month at an agreed value of Rs. Till here this seems to be similar like a Future trade. But in Options trading, I would like to have a option of backing out in case if I am on a loss making side. So here, I approach the dealer and ask him to deliver me the car after one month for Rs.

Price of the car as expected increases to Rs. As, I am on the profit side, I would approach the dealer and ask for the delivery of the car at the agreed rate of Rs. I can then sell the car in the Open market and thereby stand to gain a net profit of Rs. In this case the seller would have to bear a net loss of Rs. Price of the car decreases to Rs. As mentioned earlier, if I am on the loss making side, I should have the choice of stepping back.

So in such a case, I would not approach the dealer at all and I stand to loose Rs. On the other hand the seller would stand to gain Rs. From the above example, we can infer that a person who pays the token amount purchases a contract and has the right to back out in case if he is on a loss making side.

Similarly a person who receives the token amount sells a right and has an obligation to fulfill the buyers demand. Similarly the risk profile is also different for the buyer and the seller: Taking the same above example, whenever a person has an intention to buy a commodity by paying a premium amount right now and settling the same on a later on date is known as a Call option.

Call option has two parties, one a buyer of a Call option and other a seller of a Call option. In the above example Mr.

X is a buyer of a Call option, who has a right and the dealer over here is a seller of the Call option who has an obligation. The buyer of a Call option would pay the premium amount while entering into the contract and the seller of the Call Option would always receive the premium amount while entering into the contract. It also conveys that the loss of a buyer is limited whereas the loss of the seller is unlimited.

To understand Put Option, lets take another example, where MR. X is interested in selling a car Maruti , the current MRP is Rs. X believes that some 15 days down the line, budgets coming up and the price of the car would decrease.

Not wanting to take any chances, he goes to a dealer and asks him to take delivery of the car after 1 month for Rs.

Dealer knowing the market too well agrees for that but demands Rs. So now they enter into a contract whereby Mr. X would pay the dealer Rs. After 15 days, budget is out and lets take in two instances having impact on the price of the car: Now in such a case, the buyer is in profit of Rs. So in this case, his profit is Rs. In this case, the buyer ideally would not prefer to go to the dealer and sell the car as he is getting a good amount in the Open market. In such a case, he would loose the premium amount or the advance amount of Rs.

In the above example we saw that the seller of the car, Mr. X has a right to go force the dealer to take the delivery of the car in case if the price of the car decreases, but in case if it goes up he has a choice of stepping back.

Such a transaction where Mr. X, who pays the premium amount has an intention to sell a commodity is known as Put Option. Put option also has two parties, one a buyer of a PUT option and another a seller of a Put option.

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Buyer of a put option is intending to sell a commodity Mr. X in the above example is the buyer of a Put option by paying a premium amount. In case if the price of the commodity goes down, he will make profit by forcing the seller The dealer in the above example is the seller of the Put option of the Put option to take the delivery of the commodity.

Over here also the buyer, who pays the premium amount has limited loss, and the seller who gains premium has unlimited loss. The price at which option is exercisable. In the above example, Rs. Spot price is the price of the commodity in the open market. It is an option which can be exercised anytime on or before the expiry date. Taking the same car example, lets say we enter into a one month contract on 01 st of August and if we find the rate of the car profitable on 10 th of August, American option would allow us to go to the seller of the option and exercise our right at any point of time on or before the expiry period.

All Stock Options are American in nature. It is an option which can be exercised only on the expiry date. Taking the same car example, lets say we enter into a one month contract on 01 st of August and if we find the rate of the car profitable on 10 th of August, European option would not allow us to go to the seller of the option and exercise our right at any point of time before the expiry period.

We can go to the seller only on the expiry date. All Index Options are European in nature. In the money, At the money and Out of the money contract are always with respect to the buyer of an option. Lets take an example where the current market price is Rs. Out of the money. Lets say, you are the buyer of a call option at a of Rs. In this case you have bought some commodity at an amount which is more then the current market price, so you are in a loss currently.

All those contracts wherein you are in a loss comparing the same with the current market price are known as Out of the Money contracts. In this case you have bought some commodity at an amount which is equivalent to the current market price, so you are in a no loss, no profit position currently.

All those contracts wherein your and the market price are equivalent are known as At the Money contracts. In this case you have bought some commodity at an amount which is less then the current market price, so you are in a profit position currently. All those contracts wherein you are in a profit comparing it with the current market price are known as In the Money contracts. Exchange states that at all points of time there should be atleast two In the money, two Out of the money and one At the money contracts available for every expiry period.

So based on the market movement, there can be many contracts available for all underlying. Closure of a position: There are basically two ways of closing an Open position, they are: Exercise option would be available only to the buyer of an option contract. You can place an Exercise request anytime during the day uptill 4 PM and based on the closing price of the underlying in the Cask market, the exchange would consider your request only if your contract is In the Money contract.

So lets say that in case if you bought a call option at a of Rs. Now if you place the exercise request, exchange would compare your and the Spot Price and as you are In the Money, you would get the difference of Rs. All At the money and out of the money contracts would not be considered while exercising.

Also, one has to careful about placing an Exercise request as the same is based on the closing price of that underlying in Cash market. So lets say if you find the rate of your contract at Rs. All Stock options can be exercised anytime on or before the Expiry as they are American in nature, but Index Option can be exercised only on the expiry date as it is European in nature.

Square off can be done in case of all open option contracts. Square off would ensure that you get your desired rates and is always traded in terms of Premium amount.

An example where you sold a call option, you received Rs. SOMC stands for Short Option Margin Charges. It is basically the minimum margin to be charged in case if one is buying an Out of the Money contract.

how to trade in options icicidirect

Lets say that the Current market price of an underlying is Rs. The seller is in profit by Rs. Therefore while blocking the margin amount, the seller would be given a benefit of Rs. High Price range shown in Get Quotes is the upper range above which we cannot quote our order.

In case if you place a rate which is higher then the High price range, your order will be Rejected by the exchange. Low Price range shown in Get Quotes is the lower range below which we cannot quote our order. In case if you place a rate which is lower then the Low price range, your order will be Rejected by the exchange. It would not change on intra-day basis. Assignment of all options is done randomly by the exchange and as a customer one has to abide by the same.

For trading in Options, just follow the below mentioned steps: To trade in Derivatives, you need to log in in the same way as we normally go across for equity trading. This section would be activated only after you sign in the Derivative agreement and mail it our Corporate office. Lets now go about placing an order in Options. Allocation takes place in the same way as equity market allocation. Lets say, from your Net Withdrawal Balance, you are now interested in allocating Rs.

The allocated amount would now be reflected in the next screen which is "LIMITS". Allocated amount would be the amount from which you can currently trade. To know the list of all available underlying, click on "Stock List". Stock List would display the list of 31 current available underlying along with the Initial and Minimum margin percentage. SOMC refers to Short Option Margin Charges.

Lets take an example wherein you buy a TATPOW Call option at Rs. So you are buying an Out of the Money Contract. Whenever a buyer of an Option goes in for an Out of the money contract, the system would give the benefit of the same to the seller and would block the margin accordingly. Now to place an order, you can either click on the underlying or click on the "Place Order" link.

Similar to Futures order, you would have to mention the stock code and select product as "Options". Lets say we select the underlying as INFTEC and the option type as "Call". Click on "Submit" to step further. After clicking on Submit, the system would display you the contract details for INFTEC, Call option.

You got to be very careful in selecting the contract. Look for the expiry period first and then for the for that expiry period.

It would display the Last traded Price in terms of Premium amount for that contract. Lets say we are interested in buying INFTEC Call Option expiring 31 st Oct and Get Quotes would display the Last Traded Price, Day Open, Day High, Day Low, Previous days closing as also the Bid and offer details available at that date and time.

After knowing the latest price, we just need to click on the "Buy" option in the Contract Details page. All these quotes are in terms of Premium amount. The buy screen would be very much similar to the buy screen we saw in the Futures section. So placing an Options order is similar to placing a Futures order except for selection of a contract. After selecting the type of Order, you just go to click on "Submit".

Like equity market, we can know the status of the order through the Order Book. To know the current status of your executed order, you can click on Open Position. It would also display the LTP Last traded price of that contract as on that date and time. The "Action" screen would display the actions as: This would be available only to the seller of an option as buyers in Option trading are not margined.

You can always add more margin through this link in case if you expect the market to go against you.

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It would safeguard your position against the system square off. This link would assist you in squaring off your open position. It is always advisable to square off any position always through the Square off link. This link would be available to the buyer of an option and you can exercise your buy option through this link. All exercise requests once placed can be viewed in the "Exercise Book".

Exercise book would display all the exercise requests placed by you.

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Exercise option can be placed anytime. The same can also me modified or cancelled anytime before 4 PM on a trading day. Assignment book like Exercise book would display all the requests assigned to a seller by the exchange.

ICICIdirect would also intimate you via mail, in case if you are assigned any requests. We have seen that in Futures and Options, there are many contracts available at any given point of time, but lets say that you are interested only in few of them.

You can always select the same as your favorites through the Place Order screen. In order to select any particular derivative contract as your favorite, you just got to go to the Place order screen, select the Product type and in the Contract details page, select the link as "Add to favorites". Once the contract is added to your favorite list, you can view all the same in "My Favorites".

You can also know the liquidity in any contract through the Volume and Open Interest figures mentioned. Cost to carry is basically the interest factor. Lets refer to the same example: The current rate of the car is 3 lakh, so what should be the rate you would have to pay if you decide to settle this contract after one month. It would be more then the current rate as the dealer would ask for the interest that he could have earned if you had paid for the car now.

Lets say if that amounts to 3. The cost-of-carry model where the price of the contract is defined as: However, one has to remember that the components of holding cost vary with contracts on different assets. Open interest would provide you with the details of open interest in the market. Open interest is basically the number of open positions in the market in terms of share quantity.

Volume is the quantity of shares traded on that particular day. It is related to that particular trading day only. The "View" link would give you details about that particular position. Similarly all the information related to day end debits and credits can be viewed through Cash Projection. Cash projection screen would give you the details on a daily basis and the same is also available on a historical basis.

Further clicking on the "View" link, would provide you with the transactions done on that particular day and the amount for the same. Quick Lesson on Option Trading Before viewing the definition of Options Trading, lets take an example to understand the same: After one month there can be two scenarios: Buyer of an Option. Intends to buy an asset. Intends to sell an asset. Seller of an Option. Buyer of a Call. Seller of a Call. Buyer of a Put. Seller of a Put. You must have Internet Explorer 5.

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