TRAINING MATERIAL

OPTIONS TRADING
 Disclaimer
Registered Office: Sharekhan Limited, 10th Floor, Beta Building, LodhaiThink Techno Campus, Off. JVLR, Opp.
Kanjurmarg Railway Station, Kanjurmarg (East), Mumbai - 400042, Maharashtra.
Tel: 022 – 61150000. Sharekhan Ltd.: SEBI Regn. Nos.: BSE / NSE / MSEI (CASH / F&O / CD) / MCX – Commodity:
INZ000171337; DP: NSDL/CDSL-IN-DP-365-2018; PMS: INP000005786; Mutual Fund: ARN 20669; Research Analyst:
INH000006183; MCX Member id – 56125
For any complaints email at igc@sharekhan.com
• Compliance Officer: Mr. Joby John Meledan; email id: compliance@sharekhan.com; Tel: 022-61150000.
Disclaimer:
Investments in securities are subject to market risk. You are requested to read and understand the Risk Disclosure
document, Offer Documents, Information Memoranda, terms and conditions, policies and procedures, and Rights and
obligations carefully before investing. Please verify all scheme related information before investing. You should be
aware that past performance is not necessarily a guide to future performance and value of investments can go down as
well. In the training there may be references to securities, those references do not constitute a recommendation to
buy, sell or hold such securities. The user assumes the entire risk of any use made of this information. For any reference
of any security in the training, you should make such investigations as it deems necessary to arrive at an independent
evaluation of an investment in securities of companies and may consult your own advisors to determine the merits and
risks of such an investment. The investments discussed or views expressed may not be suitable for all investors and
there may be other / better alternatives to the investment avenues recommended by Sharekhan. This material is for
private circulation only and only intended for direct recipients of this material from authorized sources of Sharekhan
Limited. This material should not be reproduced, copied, circulated or distributed to any other person without approval
of Sharekhan Limited. Sharekhan Limited shall not be responsible for any unauthorized circulation, reproduction or
distribution of this material or contents thereof to any unintended recipient. The charts, graphs and figures displayed
are exemplary and not real. Securities quoted are exemplary and not recommendatory.
What we have learnt
• Important Basic Terminologies in options

•Important Advance Terminologies in options

•Myths Busted

•Options writing

•Option Strategies

•Recap
Training Material

Options
 What are Options?
Option are contracts that give the owner the right, but not the
obligation, to buy or sell an asset.
 Full Right, No Obligation – Options are nothing else but a
RIGHT to buy or sell the underlying asset at a pre decided
date & price

 Options are very similar to Insurance

Types of Options

 CALL Option: Right to BUY

 PUT Option: Right to SELL

Options Trading
Training Material

Important Basic terminologies

Strike Price: Strike price is nothing else but the pre decided PRICE at which a buyer has
a right to Buy or Sell that instrument. The strike price is mentioned in the name of the Option
along with the expiry date.
Expiry of Contract : Options contract has a stipulated time period. Every contract
expires on the last Thursday of every month( Nifty & Banknifty Options Contracts have
weekly and monthly expiry). If the last Thursday is a holiday then expiry falls on the
preceding day, i.e. last Wednesday. At a time one can trade in 3 months’ contracts namely:
Near Month
Next Month
Far Month

Contract Value : Contract Value is the value arrived at by multiplying the strike price of
the option by the lot size.

Options Trading
Training Material

Important Basic terminologies

 Lot Size : Every options contract has a predefined contract size which is referred to as a lot
size. The number of units per lot is different for different stocks. Nifty has a lot size of 75 units
which means a Nifty option contract cannot have less than 75 units. We can buy contracts in
multiples of lot size.
 Option Premium : Option premium is the price paid to acquire the option. It consists
of two components - Intrinsic Value & Time Value
 Intrinsic Value : Intrinsic value refers to the amount by which option is in the
money.
 Time Value : The time value of an option is the difference between its premium and
its intrinsic value. ATM & OTM options will have only time value because the intrinsic
value of such option is zero.
NOTE: Time Value of an option becomes ZERO at the time of expiry.

Options Trading
Training Material

Moneyness of Options
In The Money (ITM): A call option is said to be ITM, when spot price is
higher than the strike price. And, a put option is said to be ITM, when spot
price is lower than the strike price.

AT the money (ATM): For both call and put ATM options, strike price is
equal to spot price.

Out of the money( OTM): A call option is said to be OTM, when spot price
is lower than the strike price. And, a put option is said to be OTM, when spot
price is higher than the strike price.

Options Trading
Training Material

Moneyness of Options

Strike Price

• 11800
ITM • 11900 OTM
ATM • 12000 ATM
• 12100
OTM • 12200 ITM
Options Trading
Training Material

Important Advanced terminologies

Open Interest
Definition: The number of contracts or commitments
outstanding in futures and options trading on an official exchange at
any one time.

Options Trading
Training Material

Important Advanced terminologies

Open Interest
How to interpret it

Open Future price

Interest Security Inference expectation
Increase Increase Long Build Up Likely to move Higher
Increase Decrease Short Build Up Likely to move Lower
Decrease Increase Short Covering Likely to move Higher
Decrease Decrease Long Closure Likely to move Lower

Options Trading
Training Material

Important Advanced terminologies

Implied Volatility
What is Volatility– % fluctuation in the price of the stock

What is Implied Volatility(IV) It is the estimated volatility of a security's price. In

general, implied volatility increases when the market is bearish and decreases when the
market is bullish. This is due to the common belief that bearish markets are more risky than
bullish markets. .

Taking an Options Trade–

Take a view on the underlying.

Using the options calculator on Trade Tiger for finding out the Implied Volatility
Convert your view in to an options trade

Options Trading
Training Material

Important Advanced terminologies

Implied Volatility
Price Expectation Volatility will Increase Volatility will Decrease

Price will fall Buy Put Sell Call

Price will Rise Buy Call Sell Put

Note: In case of no view on Volatility:

Price will fall: Short sell futures
Price will rise: Buy futures

Options Trading
Training Material

Important Advanced terminologies

Option Greeks
• shows percentage change in option premium with 1 unit
DELTA change in price of underlying asset.

• measures the rate at which options will reduce everyday

THETA towards expiry

• reflects the change in the delta in response to a 1 point

GAMMA movement of the underlying stock price

• expresses the change in the price of the option for every

VEGA 1% change in underlying volatility

RHO • measure of sensitivity of portfolio to interest rates

Options Trading
Training Material

Important Advanced terminologies

PCR Put-Call Ratio
• The put-call ratio measures how many put options are
being traded relative to call options.

PCR = Total Puts / Total Calls

Options Trading
Training Material

Myths about trading options

Options are very risky – Every one of us believes that option trading is very risky
because you may also lose your entire capital in a trade. However this can be taken care off
with a Trading Guideline.

 Money Management – Money Management is important for a Successful Option

Trader
1. Don’t Trade Options like a lottery ticket
2. You can win by staying in the game –
oCommonly followed Money Management Guidelines –
Guideline 1 – Don’t lose more than 5% of your capital in a single trade
Guideline 2 – Have a risk reward of greater than 1 for every trade.
3. Why to do it – Options being a leveraged instrument, Money Management is a
key to success. It is very important so that we can stay in the game for longer
time rather losing our entire capital in our first trade itself if it turns out to be
a wrong trade.

Options Trading
Training Material

Myths about trading options

Options are very complex – They are complex if we make them complex. One can
trade options in a smart manner by knowing few basic things about it and by applying them
in a proper manner.

Time is a big concern – Though Option contracts are time bound, with the following
Trading Guideline you can overcome this misconception.

Trade in Options, don’t invest in them – Ideally one should not hold any option
contract for more than 2-3 days else it becomes an investment.

Many Options expire useless – When at the end of the contract at the time of expiry,
if there is no Intrinsic value for an option then it is called as useless. However, intrinsic
value is the relation between price and the strike price, so by following the third Trading
Guideline one can overcome this misconception.

Select the right Strike Price -Points like selecting a strike price closer to the
SPOT, selecting a near month contract, etc can be followed.

Options Trading
Training Material

Options Writing

Short Selling of Option

When to Buy & When to Short Sell (Write) an OPTION

Instrument Action Instrument Action

CALL Buy PUT Buy

PUT Short Sell CALL Short Sell

Options Trading
Training Material

Options Writing
Options Buying Vs Options Selling(Writing)
NIFTY 11000CE, PREMIUM- RS. 90, LOT SIZE-75

Buyer Seller
PAYS PREMIUM- RS 6750 RECEIVES PREMIUM- RS. 6750

MAX LOSS- RS. 6750 MAX PROFIT- RS. 6750

PROFIT- UNLIMITED LOSS- UNLIMITED

MARGIN REQUIRED = FUTURE INITIAL

MARGIN REQUIRED- RS.6750
MARGIN

Options Trading
Training Material

Option Strategies

Hedging View Specific Neutral

Strategies Strategies Strategies
COVERED CALL STRAP STRADDLE
COVERED PUT STRIP STRANGLE
PROTECTIVE PUT

Options Trading
Training Material

Option Strategies
Hedging Strategies
Covered Call
What is it – Write a Call Option as against the shares that
you already own

When to initiate?
1. Write OTM Call option when you do not expect the spot price to stay below that strike
price

2. Write an ITM Call option when you expect the price to fall

To generate extra income from existing holdings in the cash market , without selling it

When trader is slightly bullish on the underlying

Options Trading
Training Material

Option Strategies
Hedging Strategies
Covered Put
What is it – Write a Put Option as against the shares that
you already have short sold

When to initiate?
1. Write OTM Put option when you do not expect the spot price to go above that
strike price
2. Write an ITM Put option when you expect the price to go up

When trader is slightly bearish on the underlying

Options Trading
Training Material

Option Strategies
Hedging Strategies
Protective Put
What is it – Buy a Put Option as against the shares that
you already own

When to initiate?
To Hedge(safeguard) your long position in equity by buying a put option.

When trader is slightly bearish on the underlying

Bought shares and intends to hold them for some time, then he would like to
hedge his position from a expected fall in the near future, without selling it,
thereby safeguarding his position.

Options Trading
Training Material

Option Strategies
View Specific Strategies

STRAP (Bullish)

What is it – Buy 2 ATM Calls and Buy 1 ATM Put

When to initiate?
A steady rise or a sharp fall

Near a crucial support area

Expecting move of more than 1.5%

Options Trading
Training Material

Option Strategies
View Specific Strategies

STRIP (Bearish)

What is it – Buy 2 ATM Puts and Buy 1 ATM Call

When to initiate?
A steady fall or a sharp rise

Near a crucial resistance area

Expecting move of more than 1.5%

Options Trading
Training Material

Option Strategies
Neutral Strategies
Long Straddle
What is it – Buy 1 Call and Buy 1 Put of same Strike Price
and same expiry

When to initiate?
Don’t know which way market will move, but expect a big move in either direction.

Combined premium is maximum loss and occurs at strike price i.e. if market stagnates.

Breakeven occurs at: Strike price minus total premium cost (put starts to payoff) . Strike
price plus premium cost (call starts to payoff) ‰

Maximum profit is unlimited in either direction

Options Trading
Training Material

Option Strategies
Neutral Strategies
Long Strangle
What is it – Buy 1 OTM Call and Buy 1 OTM Put of different
Strike Prices

When to initiate?
Don’t know which way market will move, but expect a big move in either direction.

Combined premium is maximum loss and occurs at strike price i.e. if market stagnates.

Breakeven occurs at: Strike price minus total premium cost (put starts to payoff) . Strike
price plus premium cost (call starts to payoff) ‰

Maximum profit is unlimited in either direction

Options Trading
Training Material

Strategies work better

Why Strategies are better

A safe position

Better win / Loss Ratio

Options Trading
Training Material

Trading guidelines revisited

Trade in Options, don’t invest in them

Money Management is important for a successful trader

Picking the right strike price

ITM options should be squared off on the expiry

Options Trading
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Options Trading
Thank You
&
All the Best!
 Disclaimer
Registered Office: Sharekhan Limited, 10th Floor, Beta Building, LodhaiThink Techno Campus, Off. JVLR, Opp.
Kanjurmarg Railway Station, Kanjurmarg (East), Mumbai - 400042, Maharashtra.
Tel: 022 – 61150000. Sharekhan Ltd.: SEBI Regn. Nos.: BSE / NSE / MSEI (CASH / F&O / CD) / MCX – Commodity:
INZ000171337; DP: NSDL/CDSL-IN-DP-365-2018; PMS: INP000005786; Mutual Fund: ARN 20669; Research Analyst:
INH000006183; MCX Member id – 56125
For any complaints email at igc@sharekhan.com
• Compliance Officer: Mr. Joby John Meledan; email id: compliance@sharekhan.com; Tel: 022-61150000.
Disclaimer:
Investments in securities are subject to market risk. You are requested to read and understand the Risk Disclosure
document, Offer Documents, Information Memoranda, terms and conditions, policies and procedures, and Rights and
obligations carefully before investing. Please verify all scheme related information before investing. You should be
aware that past performance is not necessarily a guide to future performance and value of investments can go down as
well. In the training there may be references to securities, those references do not constitute a recommendation to
buy, sell or hold such securities. The user assumes the entire risk of any use made of this information. For any reference
of any security in the training, you should make such investigations as it deems necessary to arrive at an independent
evaluation of an investment in securities of companies and may consult your own advisors to determine the merits and
risks of such an investment. The investments discussed or views expressed may not be suitable for all investors and
there may be other / better alternatives to the investment avenues recommended by Sharekhan. This material is for
private circulation only and only intended for direct recipients of this material from authorized sources of Sharekhan
Limited. This material should not be reproduced, copied, circulated or distributed to any other person without approval
of Sharekhan Limited. Sharekhan Limited shall not be responsible for any unauthorized circulation, reproduction or
distribution of this material or contents thereof to any unintended recipient. The charts, graphs and figures displayed
are exemplary and not real. Securities quoted are exemplary and not recommendatory.