What are Options?

In this post I would like to explain the basics of Options, the post is intended for the complete beginner. I will try my level best at explaining about Options Trading with respect to Indian Markets. I will try to explain it using Questions and Answers as I feel its the best way to explain things, also if you have any other questions you are welcome to comment down below.

What is an Option?

Options is a type of derivative instrument, it is called derivative as they derive their value from other securities. Confusing at first but if we consider Nifty as the base security, there are Options of Nifty whose prices are derived based on the value of the underlying i.e Nifty. Like Nifty being the base instrument there are options for different stocks present in the F&O list.

Before explaining the different types of options I would like you to know some basics of the option contract

  1. They have an expiry date like the futures (last Thursday of each month) and there are up to 3 month contract available to trade with the maximum volumes in the current month.
  2. There are something called Strike Prices for Options more on this later.

There are two types of Options which everyone trades

  1. Call Option
  2. Put Option

Call Option – It gives the buyer of the option a right but not the obligation to purchase (in case of Nifty Call Option) Nifty or other securities at a determined price.

Now how does this help the Buyer of a Call Option?

As I told before, there are something called Strike Prices for Options. In case of Nifty, As the current closing price of Nifty is near 9304. If you were to believe Nifty could touch 9500 in the coming month what could you do?

  1. You could have a long position in a Futures Contract.
  2. You could possibly buy individual stocks based on your view.
  3. OR You could buy a Call Option

Now we are back to Strike Prices. There are different strike prices for each security and I could buy a Nifty Option of Strike Price 9500 for the coming month for which I would have to pay a price equal to premium for the right and could profit say once Nifty reaches near that levels.

Benefit of Options and why you would consider over other methods of trading

To buy an option the margin required would be limited to the option premium and the lot size.

For Nifty, the margin required for 1 lot of Nifty would be near 10% of Current Market Price * Lot Size (50k for current context)

while for Nifty 9500 the premium price is 27.50 so total margin required is 27.5*lotsize (75) = 2062.5

So for only 2k you can keep a position.

With this I would like to end the post, a continued post while be posted later explaining the Put Option and some basic Option Greeks.

 

Potential Head & Shoulders on Nifty

We were in an downtrend from March of last year and there was a clear downward trendlines which could be drawn forming a channel. We could also see a Head & Shoulders pattern on the daily and weekly charts of Nifty. Starting from budget day we have seen a consistent uptrend and a clear breakout of the down trend channel which is shown in the following image

varuntech

Now we have seen the retest of the trend channel which is now acting as support shown in the blue circle. I have tried to highlight with the curves a potential Head & Shoulders Pattern emerging which if successfully makes it will have a potential target of 9181 using conventional technical analysis which is close to the all time high of 9119. Although that is a very far target and should take some time before it reaches if at all medium term places of interest are also highlighted in the green areas. For now its a wait to see whether the red area is breached successfully with sufficient volumes to even think of medium term areas of interest.

Over Negativity Nifty

In my previous post I had highlighted how Nifty had formed a bearish engulfing pattern right at the bottom of the trend channel which was active since March of last year. While posting that I had given examples how earlier an bearish engulfing pattern actually cauight the exact lows and we rallied from that point onwards. I am no fortune teller and whether the low of Nifty which was formed stays as is or is broken in the near term I am not 100% sure but we did rally more than a 1000 points from that point onwards.

In this post I would like to share that context is king and we should not be following textbook patterns. The reason being among others that a bearish engulfing pattern is bearish and can be bullish at times. No pattern in the world is 100% accurate and no one can be 100% accurate in the markets. The view of Technical Analysis is to form a guideline and create a method or a process which suits you and are willing to take losses as part of business expenses.

I would like to reason out here why context is king.

Why did a bearish engulfing pattern become a positive trigger for the Markets?

  1. Nifty had a massive fall in the earlier months making the retail traders convinced that markets were finally in a down trend after having bought the dips last year for a continuation of an uptrend.
  2. Newbie traders would be looking at the bearish engulfing weekly candlestick pattern right at the lows of the trend channel and would be convinced the markets were going down.

Please share your views as well.

Bearish Engulfing On Channel Bottoms a Positive Clue?

Hi, yesterday we closed at 7029.75 on Nifty Spot creating a bearish engulfing pattern on the weekly charts. Now as we all know that Bearish Engulfing is a bearish candlestick pattern but my question is – At channel bottoms is it a bullish indication? Well to look at past history I identified two such occasions on Nifty Weekly Charts between the bear markets of 2010-2012. Here is the attached image

Nifty

As you can see at the top of the channels, it works great to identify the near term top whereas at the channel bottoms it does an equally good job to make as think that more downside is possible while Nifty reverses as a short term bottom. Have a look at this weeks chart

Nifty

Will be interesting to see whether we form a short term bottom out here as all the technical indicators are over extended and relief rally or a fresh bull run might be the case with the budget being announced this Monday.

Cheers!

Nifty Hourly 05-05-15

Hi,

So after the impulse move yesterday today was a consolidation and a doji was formed. The high of today broke yesterday’s high but could not close above however it closed above the 200 dma. For a confirmation we would like the prices to close above the 20dma which stands at 8501 and could be the next potential resistance if the price continue to move forward.

Support – 8300, 8257

Resistance – 8355, 8400, 8501

Pivot – 8324

nifty-05.05.15

Nifty Daily 04-05-15

Today was the first trading session for May and although we saw many negative news and sentiments for a lower low formation to be underway today turned out to be a White Marabuzo. Generally a White Marabuzo occurs on the start of a new trend and if the low of 8220.45 is not broken we may be at the start of a new trend which could take Nifty to all time highs. This however does not rule out the possibility of 8220 being broken and a new low being formed as the market is always correct and we are merely followers.

The possibility of the price continuing upwards is to the greater side as we closed above the 200 dma which stands at 8248.61 which should now act as support where people will try to defend a closing below this level. The two main resistances Nifty will face are 8400 and 8500 mark above which there should be smooth sailing with the technical indicators also giving a buy signal around those levels.

Here is the attaching daily price action of today’s move, please check it out. For tomorrow if the prices cross today’s high and sustains I would be bullish on the coming days.

nifty04

Nifty Daily Review 22-04-15

Hi,

Today was a volatile day and to profit from it you had to act very fast. The fifth wave ended with an extension of 38.2% which can be classified as a truncated fifth. The outcome of such waves is that the next move is usually swift and thus we should be looking for forming long positions unless the low of 8284.85 is broken. Also volume is one such factor based on which I can say that a climax was reached today

Nifty22