Index Options Explained
Just like a derivative future contract, options too are an derivative product where the buyer holds a right to execute option of either buying or selling of an underlying asset at a certain pre-determined price (also known as the strike price) during a pre-determined time period. An Index option is a type of option where the underlying is an Index i.e. a basket of various selected stocks. The other type of options defined based on the underlying are Stock options.
Index Options is a derivative instrument wherein the underlying asset is corresponding Index viz. Nifty 50 Index, NSE Bank Nifty Index or NSE Nifty Midcap 50 or NSE NIFTY IT Index and so on and so forth. Each of the indices has a defined set of stocks with a corresponding weight to each stock and the value of the index is calculated based on CMP of the stock and the weight attributed to it. All index options have their own lot sizes, multiple strike prices and different expiry periods. We've discussed some of these in detail below. Options too are a derivative like Futures contracts but unlike Futures contracts your profit or loss will non - linear depending on the up move/down move in corresponding Index.
Traders in options need to pay only the premium. Traders need not pay the full notional value of the contract to buy the options lot. The premium/ option price is determined using options calculator and is usually nominal compared to actual Index contract value.
Index Options Example
Examples of popular Index options in India traded on the NSE are that of Nifty Options and Bank Nifty Options. Before we discuss index options, check articles on Call options and Put options. The payoffs & risk/rewards applicable for index options are the same as any other call option/put option.Quick Facts on NIFTY Options
Underlying - Nifty 50 Index Lot Size - 75 Strike Price - Prices multiples of 50 and 100. Eg. 8800, 8850, 8900 and so on Expiry Dates - A total of 15 Expiry dates for a period upto 5 years. NIFTY contracts expire on the last working Thursday of every month. In case the last Thursday is a trading holiday, the expiry date is the previous working day. Margin Requirements - Check out SPAN Margin Calculator Buying Nifty Options - No margin required. Premium payable upfront Selling Nifty Options - Premium received up front. Margin required as per SPAN calculator.Quick Facts on Bank Nifty Options - Monthly
Underlying - Nifty Bank Index Lot Size - 40 Strike Price - In multiples 100 Expiry Dates - A total of 10 Expiry dates for a period upto 1 year. Expiry on the last working Thursday of every month. In cases where the last Thursday is a trading holiday declared by the NSE, the expiry date is the previous working day. Margin Requirements - Check out SPAN Margin Calculator Buying Bank Nifty Options - No margin required. Premium payable upfront Selling Bank Nifty Options - Premium received up front. Margin required as per SPAN calculator.Quick Facts on Bank Nifty Options - Weekly
With Effect from May 2016, the NSE has also introduced weekly bank nifty options contracts. Underlying - Nifty Bank Index Lot Size - 40 Strike Price - In multiples 100 Expiry Dates - Expiry on the last working Thursday of every week. In cases where the last Thursday is a trading holiday declared by the NSE, the expiry date is the previous working day. Margin Requirements - Check out SPAN Margin Calculator Buying Bank Nifty Options - No margin required. Premium payable upfront Selling Bank Nifty Options - Premium received up front. Margin required as per SPAN calculator.Other Index Options in India
While Nifty Options and Bank Nifty options are the most popularly traded contracts, there are a few other Index options also available for trading in India. However, these options have very little liquidity and hence should be avoided by traders. These include- NIFTYIT options
- NIFTYInfra options
- NIFTYPSE options
- NIFTYMID50 options
- S&P500 options
- FTSE 100 options
Trading Index Options on NSE in India on SAMCO's online trading platforms
Instrument type on the SAMCO online trading platforms – OPTIDX. While trading index options in India, clients must select the instrument type OPTIDX on either of the SAMCO trading platforms. Average Notional Contract Value of Index Options in India – Approximately INR 500000 Margins for trading index options in India – to calculate margins on index options, refer the SAMCO span calculator.Brokerage and Transaction Charges
The Brokerage applicable on Nifty Options and other Index Options with SAMCO is on a per order basis irrespective of the number of lots in a particular order. Calculate the brokerage and transaction expenses for trading nifty options at SAMCO’s nifty options brokerage calculator. Things to remember while trading Index options and building options trading strategies in India- Determining fair value of index options in case of far out of money contracts – Due to the wide bid-ask spreads in far out of the money index options contract, it may become difficult for index options traders to judge the true value and price of an index option contract. The bid price for a contract in case of far out of the money contracts would be Re. 0.10 and the ask price may be Rs. 10. In such a situation, it can be tricky for a trader to try and figure out the correct fair price of the option. We would recommend traders to calculate the index options price/value on the SAMCO option price calculator.
- Avoid Market orders while trading index options in India. Due to the illiquid nature of index options contracts, placing market orders in index options can be detrimental. It is advisable to trade in index options only using the Limit order type and not market orders.
- Option IV and volatility in the option IV prior to major economic events - Index options IV's in India usually are in the range of 10 (lower band) - 30 (upper band). In times of low volatility the option IV's are in the lower band and in times of higher volatility the option IV's are in the higher band. What causes the option IV's to be high? Often ahead of major economic events such as elections, monetary policies, budget, etc which can significantly change the direction of the markets, options IV's are usually very high and fall dramatically after the end of the event. Since volatility is an important component in determining option prices, Option traders should be mindful of the prevailing option IV's and those in comparison to the range. Often ahead of events of high economic importance, it may be better to avoid trading in options all together and in case one must, it should be a hedged options trading strategy instead of trading naked options.
Summarizing Index Options
Instrument - Index Options Option Type - Call Options i.e. CE| Index Call Options | Buyer of Call Index Option | Seller/Writer of Call Index Option |
| Premium – To be Paid upfront | Premium – Is Received upfront | |
| Margin – N.A. | Margin – Applicable as per SAMCO SPAN calculator | |
| Risk – Limited to the extent of Premium | Risk – Unlimited risk | |
| Reward – Unlimited and increases as the price of the index increases. | Reward – Limited to the premium amount received up front. | |
| Expectation – Index will go up | Expectation – Index will either go down or NOT rise above the strike price |
| Index Put Options | Buyer of Put Index Option | Seller/Writer of Put Index Option |
| Premium – To be Paid upfront | Premium – Is received upfront | |
| Margin – N.A. | Margin – Applicable as per SAMCO SPAN calculator | |
| Risk – Limited to the extent of Premium paid | Risk – Unlimited (In theory - restricted to value of strike price) | |
| Reward – Increases as the price of the index falls. Maximum Payoff = Strike Price in case the index value falls to Zero (Only possible in theory since indices usually don't fall to zero) | Reward – Limited to the premium amount received upfront. | |
| Expectation – The underlying Index value will fall | Expectation – Index will either rise or NOT fall below strike price |
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