Futures & Options

Basics
Yashodhan Shevade
Member Business Club
yshevade@iitk.ac.in

March 23, 2015

General Term

Contract Size: SEBI has specified minimum

contract value of Rs. 200,000.00

Lot Size: Different exchanges follows different lot

size. Within exchange, different lot size for
different underlying

Contract for three different months in existence

Expiry Date: Date on which F/O contract ceases to

exist

Futures- Definitions

Future Contract: Legally binding agreement to buy

or sell a financial instrument sometime in future.
Future contracts are standarised in terms of
quality, quantity and delivery time

Long In Futures: Right as well as obligation to buy

the underlying at the future date

Short In Futures: Right as well as obligation to sell

underlying at future date

Futures-Settlement

Cash Settled : Contract is squared off on the

expiry date at settlement price.

Delivery Settled: Underlying changes hands on

the expiry date of contract.

All future contracts are cash settled in India

Settlement Price: Closing price on underlying in

cash market on contract expiry date

Futures-Risk

Both long and short position carries unlimited risk

Both positions are margined

Mark to Market on daily basis at closing price of a

particular contract

Difference is paid/recovered on T+1 basis

Option-Definitions

Option Contract: Confers right to the holder/buyer of

option to buy/sell a specified assets at a specific
price on or before a specific date. Seller/Writer has
an obligation to fulfil the contract if buyer/holder
exercised his option

Premium: The money the buyer pays to seller/writer

for granting an option contract

Strike Price: The price at which option is exercisable

Spot Price: Price of underlying in the cash market.

Options-Positions

Long Call: Holder has an option (but not

obligation) to buy underlying at the strike price

Long Put: Holder has an option (but not obligation)

to sell underlying at the strike price

Short Call : Seller/Writer has an obligation (not an

option) to sell the underlying at the strike price

Short Put : Seller/Writer has an obligation (not an

option) to buy the underlying at the strike price

Options-Exercisability

American Options: It is exercisable anytime on or

before the expiry date.

European Options: It is exercisable only on the

expiry date on contract note.

Indian Scenario:
Index Options-European cash settled
Stock Options-American cash settled

Options- Spot & Strike price

Relationship

In The Money
Call Option : CMP>SP ; ITM amount = CMP-SP
Put Option : CMP < SP ; ITM amount = SP-CMP

Out of The Money

Call Option : CMP < SP; OOM amount = SP-CMP
Put Option : CMP>SP ; OOM amount = CMP-SP

At The Money
Call & Put Option : SP = CMP ; ATM amount = 0

OptionsRisk
Long Call
Maximum loss : Premium
Maximum Gain : Unlimited
Long Put
Maximum loss : Premium
Maximum Gain : Unlimited
Short Call
Maximum loss : Unlimited
Maximum Gain : Premium
Short Put
Maximum loss : Unlimited (to the extent of zero)
Maximum Gain : Premium

Options-Margin

Long positions are not margined since carries no

risk

All short positions are margined because of its

inherent risk profile

Benefit of out of money amount is given

In the money contracts are penalised by In The

Money Amount

Options-Exercise

Only in the money options are allowed to be

exercised
Buyer/Holder receives the difference
Call Option: Spot price-Strike price
Put Option: Strike price-Spot price
Writer/Seller pays the difference
Call Option : Spot price-Strike price
Put option: Strike price-Spot price
All at the money and out of the money contract
expires worthless
Assigned to seller/writer who is out of the money

Thank you