FAQ's>>OPTIONS ON INDEX AND INDIVIDUAL STOCKS

What is Stock Index option ?
It is a financial derivative product where the underlying asset is the stock index of a particular stock exchange. This financial derivative product enables one to buy or sell call option or put option (to be exercised at a future date) on the underlying asset(i.e., Stock Index) at a premium decided by the market forces today. On NSE, Nifty options are in operation for trading as Stock Index Options. On BSE, such Stock Index Options are named as Sensex Options. A Stock Index Option gives an investor the right to buy or sell the value of an index which represents a group of stocks. Such Index Options are quoted with ‘Strike Price' and ‘Premium' per option in Rupees along with paise.

What is Stock Option ?
It is a financial derivative product enabling one to buy or sell call or put option (to be exercised at a future date) on the underlying individual stock (equity) at a premium decided by the market forces today. On NSE, up to 19th April,2005 stock options were available on 53 individual stocks. The stock option list was expanded to include 34 more stocks beginning April 20, 2005. Another 21 stocks were included in the list with effect from May 12,2005. Further on May 27, 2005 the stock option list was expanded to 118 by permitting 10 more stocks to trade. Prices for options on individual stocks are quoted in terms of premium per share in Rupees (including paise, if any) along with the ‘Strike Price' although each contract is invariably for a larger number of shares (i.e., for market lot of shares).

What are the Important Terminologies in Options ?
Important terminologies used in option trading are as follows :

Option Premium : Premium is the price paid by the buyer to the seller to acquire the right to buy or sell.

Strike Price or Exercise Price : The strike or exercise price of an option is the specified/pre-determined price of the underlyingasset at which the same can be bought or sold if the option buyerexercises his right to buy/sell on or before the expiration day.

Expiration Date : The date on which the option expires is knownas Expiration Date. On expiration date, either the option isexercised or it expires worthless.

Exercise Date : This is the date on which the option is actuallyexercised. In case of European Options the exercise date is same asthe expiration date while in case of American Options, the optionscontract may be exercised any day between the purchase of thecontract and its expiration date. In India, options on "Sensex" isEuropean, whereas options on stocks is American. European andAmerican style of options have been explained later on.

Open Interest : The total number of options contracts outstandingin the market at any given point of time.

Option Holder : An option holder is one who buys an optionwhich can be a call or a put option. He enjoys the right to buy orsell the underlying asset at a specified price on or before specifiedtime. His upside potential is unlimited while losses are limitedto the premium paid by him to the option writer.

Option seller/writer : This is one who is obligated to buy (in caseof Put Option) or to sell (in case of Call Option), the underlyingasset in case the buyer of the option decides to exercise his option.His profits are limited to the premium received from the buyerwhile his downside is unlimited.

Option Series : An option series consists of all the options of agiven class with the same expiration date and strike price. Forexample, BSXC 6300 July is an option series which includes allSensex Call options that are traded with Strike Price of 6300 &Expiry in July (i.e., on last Thursday of July).[Here BSX Stands for BSE Sensex (underlying index), C is for CallOption, July is expiry month & strike price is 6300]

What is Assignment ?
When a holder of an option exercises his right to buy/sell, a randomly selected option seller is assigned the obligation to honour the underlying contract, and this process is termed as Assignment.

What is European & American Style of options ?
An American style of option is the one which can be exercised by the buyer till the expiration date, i.e., anytime between the day of purchase of the option and the day of its expiry. The European style of option is the one which can be exercised by the buyer on the expiration day only and not anytime before that.

What are Call Options ?
A call option gives the holder (buyer/one who is long Call), the right to buy specified quantity of the underlying asset at the strike price on or before expiration date in case of American style of option. The seller (one who is short Call) however, has the obligation to sell the underlying asset if the buyer of the call option decides to exercise his option to buy.