REVISION : HOW TO ANALYZE FUTURE MARKET?

CLASS OUTLINE
How to anlayze Future Market?
What is Open Interest?
How Open Interest works in future Market?
TOPIC : WHAT IS OPTION MARKET?

CLASS OUTLINE

TYPES OF DERIVATIVE MARKET

OPTION MARKET
STRUCTURE OF OPTION MARKET
 OPTION MARKET
What is an Option?
Options are financial derivatives that give buyers the right,
but not the obligation, to buy or sell an underlying asset at
an agreed-upon price and date.
Options trading can be used for both hedging and
speculation, with strategies ranging from simple to
complex.
Although there are many opportunities to profit with
options, investors should carefully weigh the risks.
 STRUCTURE OF OPTION MARKET
Structure of Option Market:
Spot Price:
Spot Price in options trading is the current price of the
underlying asset (index, stock, or any other asset).
Example: Nifty Index CMP 21500.
Strike Price:
Strike price is the price at which the underlying instrument
of a particular option can be purchased or sold. Example:
Nifty 21700 or 21300.
 STRUCTURE OF OPTION MARKET
Structure of Option Market:

Option Premium:
An option premium is the current market price of an
option contract (Contract of 21700 strike price). Example:
70rs premium price of 21700 strike price contract.
 STRUCTURE OF OPTION MARKET
Structure of Option Market:
Lot Size:
The number of shares of the underlying in an Option
contract is called Lot size. Example: Nifty Index 50 shares
or Reliance 250 shares = 1 lot of option contract
standardized by Stock exchanges.
Contract Size or Value:
✖️
Lot Size Strike price
✖️
(50 21700 = 10,85,000/-) is contract value.
 STRUCTURE OF OPTION MARKET
Expiry of Option Contracts:
The expiration time of an options contract or other derivative
is the exact date and time when it is rendered null and void.
Expiry of option in Index available in NIFTY, BANKNIFTY,
FINNIFTY, SENSEX, BANKEX, MIDCAPNIFTY, and approximately
200 stocks options.
Index option available in weekly/monthly expiry till 3 months
(Option available for 3 years also). Stock option available for
monthly expiry till 3 months.
 STRUCTURE OF OPTION MARKET
Margin Required in Option Trading
📌Option Buying
Lot size ✖️ Premium = Margin to pay
50 ✖️ 70 = Rs 3500/-
Explanation:
Pay Rs 3500 for buying an option where your loss
could be Maximum Rs 3500/- and profit could be
unlimited.
 STRUCTURE OF OPTION MARKET
Margin Required in Option Trading
📌 Option Selling Factors:
SPAN Margin
Exposure Margin
Value at Rise (VaR) Margin
Extreme Loss Margin
Explanation:
Factors affecting option selling margin include SPAN Margin,
Exposure Margin, VaR Margin, and Extreme Loss
Margin.
 STRUCTURE OF OPTION MARKET

SPAN Margin
The SPAN margin is the most basic and primary in an F&O
trade. It measures the maximum loss that the portfolio can
incur under different outcomes.
The SPAN margin is revised six times a day, so the margin value
changes depending on when you use the calculator.
 STRUCTURE OF OPTION MARKET

Exposure Margin
The exposure margin is an additional
margin collected to protect the broker's
liability in an adverse market.
 STRUCTURE OF OPTION MARKET

Value at Rise (VaR) Margin

The Value at Risk (VaR) margin measures the
probability of a loss in an asset's value based on
the statistical analysis of its historical price
movements and volatility.
 STRUCTURE OF OPTION MARKET

Extreme Loss Margin

The extreme loss margin is calculated to factor in the losses
that might occur beyond the VaR margins.
It is deemed to be the highest of the following two values: 5% of
the value of the asset's position or 1.5 times the standard
deviation of the daily logarithmic returns of the asset's price
over the last six months.
 STRUCTURE OF OPTION MARKET
Simplified Option Selling Margin Calculation
Formula: Future Contract margin - option buying margin +
extreme loss margin
Explanation: This formula simplifies the calculation of option
selling margin by considering the future contract margin,
subtracting option buying margin, and adding the extreme
loss margin.
 STRUCTURE OF OPTION MARKET
Mark to Market Loss
📌Option Buying
No Mark to market loss payment required for option buying
because you already paid the full loss to the exchange.
📌Option Selling
Mark to market loss payment required for option selling because
your profit is limited and loss is unlimited.
Explanation: Understand the implications of Mark to Market Loss
in option buying and selling scenarios.
 STRUCTURE OF OPTION MARKET
Expiry Physical Settlement
📌 Option Buying
No physical settlement required.
📌 Option Selling in stock option only
5 days physical settlement process.
Explanation: Explore the differences in physical settlement
requirements for option buying and selling, specifically in
stock options.
 STRUCTURE OF OPTION MARKET
5 Days Settlement Process
Process:
10% of contract value on Friday
25% of contract value on Monday
45% of contract value on Tuesday
70% of contract value on Wednesday
100% of contract value on Thursday
Explanation: Understand the stepwise 5-day settlement process
before the last day of the expiry of contracts, including the percentage
of the contract value settled on each day.
NEXT SESSION : OPTION MARKET - TOOLS,
CALCULATOR AND OPTION CHAIN
CLASS OUTLINE

TOOLS OF OPTION MARKET

OPTION CALCULATOR
OPTION CHAIN