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AN option gives a person the right but not the obligation to buy or sell something. An option is a contract between two parties wherein the buyer receives a privilege for which he pays a fee (premium) and the seller accepts an obligation for which he receives a fee. The premium is the price negotiated and set when the option is bought or sold. A person who buys an option is said to be long in the option. A person who sells (or writes) an option is said to be short in the option.

NSE became the first exchange to launch trading in options on individual securities. Trading in options on individual securities commenced from July 2, 2001. Option contracts are American style and cash settled and are available on 41 securities stipulated by the Securities & Exchange Board of India (SEBI). (Selection criteria for securities)

Security descriptor: The security descriptor for the options contracts is: Market type: NInstrument Type: OPTSTK Underlying: Symbol of underlying security Expiry date: Date of contract expiry Option Type: CA / PAStrike Price: Strike price for the contract

*Instrument type represents the instrument i.e. Options on individual securities.

Underlying symbol denotes the underlying security in the Capital Market (equities) segment of the Exchange* Expiry date identifies the date of expiry of the contract * Option type identifies whether it is a call or a put option, CA - Call American, PA - Put American. Underlying Instrument: Option contracts are available on 41 securities stipulated by the Securities & Exchange Board of India (SEBI). These securities are traded in the Capital Market segment of the Exchange. Trading cycle: Options contracts have a maximum of 3-month trading cycle - the near-month (one), the next month (two) and the far-month (three). On expiry of the near-month contract, new contracts are introduced at new strike prices for both call and put options, on the trading day following the expiry of the near-month contract. The new contracts are introduced for three month duration. Expiry day: Options contracts expire on the last Thursday of the expiry month. If the last Thursday is a trading holiday, the contracts expire on the previous trading day.

Strike Price Intervals: The Exchange provides a minimum of five strike prices for every option type (i.e. call & put) during the trading month. At any time, there are two contracts in-the-money (ITM), two contracts out-of-the-money (OTM) and one contract at-the-money (ATM).

New contracts with new strike prices for existing expiration date are introduced for trading on the next working day based on the previous day's underlying close values, as and when required. In order to decide upon the at-the-money strike price, the underlying closing value is rounded off to the nearest strike price interval. The in-the-money strike price and the out-of-the-money strike price are based on the at-the-money strike price interval.

Contract size: The value of the option contracts on individual securities may not be less than Rs 2 lakhs at the time of introduction. The permitted lot size for the options contracts on individual securities would be in multiples of 100 and fractions if any, shall be rounded off to the next higher multiple of 100. Price steps: The price step in respect of the options contracts is Re 0.05. Base Prices: Base price of the options contracts, on introduction of new contracts, would be the theoretical value of the options contract arrived at based on Black-Scholes model of calculation of options premiums.

The base price of the contracts on subsequent trading days, will be the daily close price of the options contracts. The closing price shall be calculated as follows: If the contract is traded in the last half an hour, the closing price shall be the last half an hour weighted average price.

If the contract is not traded in the last half an hour, but traded during any time of the day, then the closing price will be the last traded price (LTP) of the contract.

If the contract is not traded for the day, the base price of the contract for the next trading day shall be the theoretical price of the options contract arrived at based on the Black-Scholes model of calculation of options premiums. Price bands: There are no day minimum/maximum price ranges applicable for options contracts. However, in order to prevent erroneous order entry, operating ranges and day minimum/maximum ranges for options contracts are kept at 99 per cent of the base price. In view of this, members will not be able to place orders at prices which are beyond 99 per cent of the base price. Members desiring to place orders in option contracts beyond the day min-max range would be required to send a request to the Exchange. The base prices for option contracts may be modified, at the discretion of the Exchange, based on the request received from trading members.

Quantity freeze: Orders which may come to the exchange as a quantity freeze shall be the lesser of the following:* 1% of the marketwide position limit stipulated for options on individual securitiesor* Notional value of the contract of around Rs 5 crores. In respect of orders which have come under quantity freeze, the members would be required to confirm to the Exchange that there is no inadvertent error in the order entry and that the order is genuine. On such confirmation, the Exchange may approve such order.

Source: www.nseindia.co.in

If you have any queries relating to the futures/options markets and strategies that can be used in these markets, please mail them to Futures & Options, Kasturi & sons, 859-860, Anna Salai, Chennai 600 002 or email them to vaidy@thehindu.co.in with a mention of futures/options in the subject line of the mail.

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