How to peg your downside risk by purchasing put options Leave a comment

A bond is a fixed-income debt instrument that represents an agreement between the issuer and the investor; where the investor loans out the principal money to the issuer who stays indebted to the investor. The issuer is obligated to repay the principal amount to the investor after a specified period on the maturity date. On Exercise of an Option by an Option Holder, the trading software will assign the exercised option to the option writer on random basis based on a specified algorithm. In the Indian Derivatives market, SEBI has not created any particular category of options writers. However, the margin requirements are stringent for options writers.

To obtain these rights a Call option holder must exercise his contract and take delivery of the underlying equity shares. Index options enable investors to gain exposure to a broad market, with one trading decision and frequently with one transaction. To obtain the same level of diversification using individual stocks or individual equity options, numerous decisions and trades would be necessary.

You are advised to read the respective offer documents carefully for more details on risk factors, terms and conditions before making any investment decision in any scheme or products or securities or loan product. You can use execution platform/services with any third party as deem fit and proper, and there is no compulsion to use the execution services through this Website. In another scenario, if at the time of expiry stock price falls below Rs. 3500 say suppose it touches Rs. 3000, the buyer of the call option will choose not to exercise his option.

put options explained

If Nike share price stays above $123, which has a 79% probability base on its Delta, we just keep the premium of the options and repeat by selling another put options to collect more premium. The nearer your strike price is to the current stock price, and the more volatile the stock, the higher the premium you will get. But that also means there’s a higher chance of the options getting executed. This strategy is also used by Warren Buffett and is useful for investors who want to get paid while waiting to buy a stock at a predetermined price.

Types of Futures

The total loss related to this approach is restricted to the net premium paid, and the maximum profit is infinite. When purchasing a call option, the contract’s buyer has the right to purchase the underlying asset at a later time for a fixed sum known as the exercise price or strike price. A put option allows the buyer to Terminal Value sell the underlying asset at a future date and price. Options sellers have to pay margins just like any other derivatives trader. When you sell a call option, there is an initial margin that you will have to pay. Moreover, you will also have to pay MTM margins and any other volatility-related margins from time to time.

However, no margin money is required to be paid to the stock exchange for the same. On the other hand, selling a put requires the seller to deposit margin money with the stock exchange, in lieu of which he gets to pocket the premium on the put. The main reason was for the purpose of being a hedge, reducing risk at a decent enough cost. Here, you may think of options as representing an insurance policy.

As a result, one counterpart stands to profit, and the other party bears the loss. Receive information of your transactions directly from Exchange on your mobile/email at the end of the day…. It has been observed that certain fraudsters have been sending investors bulk messages on the pretext of providing investment tips and luring the investors to invest in bogus entities by promising huge profits. Investors are advised not to act on the basis of such SMS tips without adequate due diligence.

Long & Short Butterfly

To gain from this strategy, the range in which the stock/index moves has to large. As per the margin requirements, the seller of PE requires a huge margin as the loss can be unlimited. On the other hand, the buyer of CE only requires to pay the premium while buying the options contract which is the maximum loss incurred by the buyer. While selling PE you become the writer of the option and are obligated to execute the option on demand of the buyer for the premium received. When buying a CE you receive the choice to execute the options contract for the premium that you pay.

Curated newsletters on markets, personal finance, policy & politics, start-ups, technology, and more. Unlock 30+ premium stories daily hand-picked by our editors, across devices on browser and app. With your cash freed up, you can repeat the whole cycle again by selling a new cash-secured put. By the end of the month when the options expire, one of the two scenarios will happen. The first step is to sell a cash-secured put as mentioned above.

  • The Call is currently quoting at Rs.24, of which Rs.15 is explained by the intrinsic value of call option ( ).
  • Aditya Birla Capital Limited is the holding company of all financial services businesses.
  • Pay 20% or “var + elm” whichever is higher as upfront margin of the transaction value to trade in cash market segment.
  • When you purchase a call option, you pay a premium, and this is the maximum you can lose on a call option.
  • One of the major components of the Indian debt market is the bond market.

Covered calls are far less risky than naked calls , since the worst that can happen is that the investor is required to sell shares already owned at below their market value. The reason that investors use call and put options is largely because of speculation. This is mainly a wager on the direction of future prices of stocks.


However, when you trade options, you’re dealing with a derivative instrument that gives you the right to buy or sell an underlying asset at pre-determined prices. Investors use options trading for various purposes such as earning extra income on their stock positions, earning extra income while waiting for their desired stock to drop to a certain price, and many more. While it can bring about huge profits, unprecedented losses can also happen if you do not know what you are doing.

put options explained

The call holder will not exercise the option to buy S&P BSE SENSEX® at 3900 when the current price is at 3700 and allow his “option” right to lapse. Futures are contracts which have to be settled once you enter into it. If you enter a futures contract, you are obligated to buy or sell the underlying asset at a pre-specified price on or prior to a certain date. The primary purpose of derivatives is to hedge against the price movements of the underlying assets.. Derivatives have an expiry date on which the contract expires.

How options work

So, let’s understand what options trading is, the call options and the put options, as well as the entire process flow for each. Options trading can be complicated, but it doesn’t have to be. Learn the basics of options trading and how to use strategies to maximize your profits in this comprehensive guide. The modus operandi observed is that once a client pays amount to them, huge profits are shown in his account online inducing more investment. However, they stop responding when client demands return of amount invested and profit earned.

This is known as a `protective’ put strategy.Leveraging in put optionsOne of the main attractions of trading in options is the chance of leveraging. This is because you can get options contracts at a fraction of the price of the underlying. You only have to pay the premium to enter into an options contract, which will be much lower than the cost of the underlying. And unlike futures, where you have no choice but to go through with the contract, in options you have the choice of not exercising it.

It also helps the user to understand how a change in any one of the factors or more, will affect the option price. The option calculator is available at the Option Calculator Section. Time value is the amount option buyers are willing to pay for the possibility that the option may become profitable prior to expiration due to favorable change in the price of the underlying. In India, options on “S&P BSE SENSEX®” are European style, whereas options on individual are stocks American style.

How To Calculate Marginal Cost

As an investor with a call option, it becomes necessary to buy the option at a price lower than the strike price for it to be profitable. However, investors with a put option can profit if the underlying asset’s price remains unchanged or even if it drops slightly. This ensures that a trader with a put option is more likely to profit than a call option’s trader. Put options, on the other hand, allow the buyer to sell the underlying asset at the strike price by the specified date.

Futures contract is where the buyer and seller of the contract agree to transact in the underlying asset on a future date at a price determined in advance. A put option means a contract that gives the holder the privilege, but not the commitment, to sell a particular underlying security at a specific price and within a specific time period. In case of selling a put, the seller does not hold any right, but will be obliged to buy the underlying at the strike price, if the buyer of the put were to exercise his right upon expiry.

You might have even heard of Singapore investors dabbling in Options Trading and how these savvy investors are using it to maximise their returns. There are no charges or fees to be paid by you for use of this Website. However, you are responsible for all telephone access fees and/or internet service fees that may be assessed by your telephone and/or internet service provider. You further agree to pay additional charges, if any levied by Third Party Service Provider, for the facilities provided by them through the Website . Your right to use the facilities is personal to you; therefore, you agree not to resell or make any commercial use of the facilities.

The sellers will charge an additional fee to option purchasers for taking the other side of the deal. One of the options strategies is the iron condor, which has four strike prices, two puts , and two calls . The maximum profit is realised when the underlying asset closes between the middle strike prices at expiry. By selling this put option, you will receive a premium of $100 per contract.

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