P.Krishnaveni/SNSCT/Derivatives Management UNIT 3 OPTIONS P.Krishnaveni/SNSCT/Derivatives Management

P.Krishnaveni/SNSCT/Derivatives Management Introduction Exchange traded equity options, are “physical delivery” options. This means that there is a physical delivery of the underlying stock to or from your brokerage account if the option is exercised P.Krishnaveni/SNSCT/Derivatives Management

P.Krishnaveni/SNSCT/Derivatives Management Recap P.Krishnaveni/SNSCT/Derivatives Management

P.Krishnaveni/SNSCT/Derivatives Management Exchange traded The owner of an equity option can exercise the contract at any time prior to the exercise deadline set by the investors brokerage firm Generally, this deadline occurs on the option’s last day of trading P.Krishnaveni/SNSCT/Derivatives Management

Contract specifications Every financial option is a contract between the two counterparties with the terms of the option specified in a term sheet. Option contracts may be quite complicated t They usually contain the following specifications: whether the option holder has the right to buy (a call option) or the right to sell (a put option) the quantity and class of the underlying asset(s) (e.g., 100 shares of XYZ Co. B stock) The strike price, also known as the exercise price, which is the price at which the underlying transaction will occur upon exercise. The expiration date, or expiry, which is the last date the option can be exercised The settlement terms, for instance whether the writer must deliver the actual asset on exercise, or may simply tender the equivalent cash amount the terms by which the option is quoted in the market to convert the quoted price into the actual premium – the total amount paid by the holder to the writer P.Krishnaveni/SNSCT/Derivatives Management

P.Krishnaveni/SNSCT/Derivatives Management Bank Nifty Options Contract Specifications Ticker Symbol BANKNIFTY Contract Size 40 units. Tick Size 0.05 Trading Hours As in equity derivative segment No. of strikes/strike intervals Index Level Strike Interval No of Strikes ≤ 2000 50 8/1/2008 > 2000 upto ≤ 3000 100 6/1/2006 > 3000 upto ≤ 4000 > 4000 upto ≤ 6000 12/1/2012 > 6000 16-1-16 Expiry Date BANKNIFTY 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. P.Krishnaveni/SNSCT/Derivatives Management

P.Krishnaveni/SNSCT/Derivatives Management Contract months BANKNIFTY options contracts have a maximum of 3-month trading cycle - the near month , the next month and the far month. A new contract is introduced on the trading day following the expiry of the near month contract. Option Type The options contracts shall be European styled which can be exercised only on the expiration date Daily Settlement Price Daily premium settlement Final Settlement Price Final settlement price for an option contract shall be the closing price of the underlying index in the Normal Market of the Capital Market segment of National Stock Exchange on the last trading day of such futures contract. Final Settlement Procedure Final settlement will be Cash settled in INR based on final settlement price. long positions of in-the money contracts shall be assigned to open short positions in option contracts. Final Settlement day All open positions on expiry date shall be settled on the next working day of the expiry date (T+1) Position Limits The trading member/MF/FII position limits in BANKNIFTY options contracts shall be higher of Rs.500 crores or 15% of the total open interest in the market . This limit would be applicable on open positions in all options contracts on underlying index P.Krishnaveni/SNSCT/Derivatives Management

P.Krishnaveni/SNSCT/Derivatives Management Intermission…. P.Krishnaveni/SNSCT/Derivatives Management

P.Krishnaveni/SNSCT/Derivatives Management Hypothetical case An investor buys call option at a premium of Rs.50 per share. The spot price of the share is Rs.2900 and the strike price is Rs.2400. Suggest whether the investor will exercise or not.. P.Krishnaveni/SNSCT/Derivatives Management

P.Krishnaveni/SNSCT/Derivatives Management Conclusion Specifications of option contract How to make decision in option contract execution? P.Krishnaveni/SNSCT/Derivatives Management