Derivatives-

Derivatives is a contract or product whose

value derived from value of some other asset
known as underlying

Ex.of undelying asset – nifty,banknifty

,reliance this are security market asset
Factors influencing growth of derivatives
market-

1)Increased fluctuations in underlying asset prices in financial

markets
2)Understanding of market participents on sophisticated risk
management tools to manage risk
3)Frequnt innovation in derivatives market
Evoluation of indian derivatives market -

1) As a initial step towards introduction of derivatives trading in india

,sebi set 24 member comitee under chairmanship of dr.L.C.Gupta on
nov 1996 to develop appropriate regulatory framework of derivatives
trading in india
2) The exchange traded derivatives started in india in june 2000 with SEBI
permitting BSE and NSE to introduce equity derivative segment

3) Trading in index options started in june 2001

4) Trading in options on individual stocks started in july 2001

5) Future contract on individual stocks started in November 2001

Products in derivatives market-

1)Forwards

2)Futures

3)Options

4)swaps
 Market participants-

1)Hedgers – they face risk associated with the price of underlying asset and
use deivatives to reduce their risk.

2)traders- they try to predict the future movement in prices of underlying

asset and based on this view they take positons in derivatives contract

3) Arbitrageurs – arbitrage is a deal that produces profit by exploiting

price difference between in a product in two different markets.
 Futures –

Futures contract were innovated to overcome the limitations of forwards

A futures contract is a agreement made through an organised exchange

to buy or sell a fixed amount of commodity or financial asset on a future
date at agreed price

As a trader who buys futures contract ,takes a long positions and the
one,who sells futures takes short positions
 Features of futures -

1) Contract between two parties through exchange

2) Centralised trading platform

3) Price discovery through advance bidding system

 OPTIONS-

As seen in earlier section, forward/futures contract is a commitement to buy or

sell the underlying asset and has a linear payoff ,which indicates unlimited
losses and profits .

Some traders desired to on uptrend and also want restrict the losses

Accordingly,options emerged as a financial instrument ,which restrict the losses

with a provision of unlimited profits on buy or sell of underlying asset
 OPTIONS -

Options are contract which provide the holder the right to sell or buy a specified
quantity of an underlying asset at a fixed price on or before the expiration of the
option date

Options provides a right and not a obligation to buy or sell

Basic option terminology -

There are several terms in option trading

Ex. NIFTY 15200 CE 27 May now trading at 130

1)Instrument type- option index

2)Underlying asset – nifty
3)Expiry date – 27 may 21
4)Strick price – 15000
 Why we use options -

Flexibility –it provides multiple view ( any one buy options according to his
investment and risk taking capacity)

Incomparable risk /reward – it provides very high profit potential with pre
known risk

Low investment

High profit making chances

FUNDAMENTAL PARAMETERS OF OPTIONS
PRICE -

1) SPOT PRICE OF UNDERLYING ASSET

2)STRIKE PRICE OF THE OPTION

3) VOLATILITY OF THE UNDERLYING ASSET PRICE

4) TIME OF EXPIRATION
 OPTIONS BUYING FORMULAS ACCORDING TO
ENVISION TECHNICAL STRATEGY -

FOR NIFTY AND BANKNIFTY –

IF THIS UNDERLYING ASSET NEAR 5 MIN SUPPORT OR RESISTANCE USE ITM OPTIONS VERY HIGH VOLATILE AND
RISKY

ONLY FOR RISKY TRADER

 FORMULAS FOR INDEX OPTION SELECTION -
TIME FORMULA FOR STRICK FORMULA FOR STRICK
FRAME PRICE CALL PRICE PUT EXPIRY
5 MIN CHOOSE ITM OR ATM OPTION CHOOSE ITM OR ATM OPTION
LATEST EXPIRY

15 MIN CMP+1% CMP-1%

LATEST EXPIRY

1 HR CMP+2% CMP-2%
LATEST EXPIRY+1

4 HR CMP+3% CMP-3%
LASTEST EXPIRY +1

1 DAY CMP +3% CMP -3%

LATEST EXPIRY +2

1 WEEK CMP+3% CMP-3%

LATEST EXPIRY +2

1 MONTH CMP + 3% CMP -3%

LATEST EXPRY +2
 HOW TO SELECT STOCK OPTION ACCORDING TO
ENVISION STRATEGY-

AVOID TRADE IN 5 MIN SUPPORT AND RESISTANCE

BEST TIMEFRAME FOR STOCK OPTION 1 HR , 4 HR , 1 DAY

If stock near 1 day or 4 hr support or resistance starting of month

select OTM OPTIONS ( RISK REWARD ALMOST 1: 5)
 FORMULA FOR
TIME FORMULA FOR STRICK
STRICK PRICE EXPIRY
FRAME PRICE PUT
CALL

15 MIN CMP+5% CMP-5%

LATEST EXPIRY

1 HR CMP+5% CMP-5%
LATEST EXPIRY

LASTEST EXPIRY
4 HR CMP+7% CMP-7%
(IF expiry near 10 days
select next expiry)

LATEST EXPIRY
1 DAY CMP +7% CMP -7%
(IF expiry near 10 days
select next expiry)

LATEST EXPIRY
1 WEEK CMP+10% CMP-10%
(IF expiry near 10 days select next
expiry)

1 MONTH CMP + 10% CMP -10% LATEST EXPIRY (IF expiry near 10
days select next expiry)
 OPTIONS SUMMERY-

CALL BUYER PUT BUYER

1)PAYS PREMIUM 1)PAYS PREMIUM

2) PROFIT FROM RISING PRICE 2) PROFIT FROM FALLING PRICE

3)LIMITED LOSS 3)LIMITED LOSS

4)POTENTIALLY UNLIMITED GAIN 4)POTENTIALLY UNLIMITED GAIN

 IMPORTANT TIPS FOR OPTIONS TRADING –

1) DON’T TRADE IN OPTION WITHOUT KNOWLEDGE AND UNDERSTANDING OF OPTIONS AS WELL AS

TECHNICAL ANALYSIS

2) AVOID ILIQUID STOCK OPTIONS

3) AVOID DEEP OTM OPTIONS

4) ALWAYS REMEMBER EXPIRY DATE

5) BE AWARE OF TIME DECAY