“Do Not Exercise” Option’s

“Do Not Exercise” Option’s

Dear Trader, If you are active in the F&O segment of the stock market you must be knowing that you have to pay higher STT on options that are In The Money (ITM) on expiry.  A call option is said to be In The Money when its strike price is below the market price of the underlying asset. The reverse is true for a put option – strike price exceeds the market price of the underlying asset. How much do you pay as STT? Take the example of a trader who bought a call option with a strike price of 600 @ Rs.2.50 as he expected that the underlying security will close above 600 for the day and suppose it did close above 600 say at 603. Suppose he bought 2000 units of the call option at Rs.2.50, shelling off Rs.5,000 as premium. By normal calculation the profit should be Rs.{ (603-600)*2000 ( QTY bought) -5,000(premium paid to buy) }= Rs.1,000. However, when he received the contract note, he will see that the actual profit received by him is much less than this. The reason being higher Security Transaction Tax (STT) being charged on exercised options. The rate of STT on exercised options is 0.125% of the full value of the contract. STT on Exercised options on Expiry of Options = 0.125 % * (Strike Price + Premium) * Quantity So in the above mentioned example, the STT would be Rs. 2000 x (600+2.50) x 0.125% = Rs. 1,506.25 So he actually ended up making a loss of Rs. (1506.25-1000) = Rs. 506.25. Such huge differences in STT were troublesome for...
Pre-open Session . How is the equilibrium price determined ?

Pre-open Session . How is the equilibrium price determined ?

If you are a trader you must have seen that there is a pre-open session from 9 am to 9:15 am for both the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). It is basically the period of trading activity that takes place just before the regular stock market session. Traders keep a close eye on this Pre-market session to guess the strength and mood of the market while looking forward to market opening. Let us try to understand how things work during these 15 minutes. At the outset let me tell you that you can place two types of orders in the stock market – market order and limit order (refer to the following graph). The 15 minutes of pre-open session consists of 3 time slots Now that we know the activities carried during these 3 time slots belonging to the pre-market session, let us take a look at how the equilibrium price determination or the call-auction session functions. Case I Say for example, previous day closing price of Stock A is Rs. 200. The following table gives the price and quantity figures during the pre-open session Share Price Order Book Demand & Supply Quantity Maximum Tradable Quantity Unmatched Orders BUY SELL Demand Supply 202 1000 985 3400 985 985 2415 204 1275 1161 13600 22000 22000 -8400 205 5000 4300 10000 10500 1000 -500 207 4000 7500 4000 6250 4000 -2250 199 2000 10000 27000 37000 27000 -10000 Share price Rs.199 corresponds to the highest tradable quantity of 27000 and hence will be considered as the equilibrium or call auction price. Case II Let’s have a look at another possible...
How Execution Range Effects your Option Trading ?

How Execution Range Effects your Option Trading ?

  Traders, Today we will discuss Execution Range and its effect on your option trading. Currently, option trading has been contributing up to 80% of total exchange volume in NSE. But the liquidity is limited to present month contracts. With low trading activity in most contracts, there is a higher probability of higher impact cost. Impact cost is the difference between ordered price and executed price. To save traders from higher impact cost, the exchange has prescribed execution range for option contracts. Now let us see how it protects the interest of traders. But first the definition,Execution range is the price range on both sides of the current price of a contract. It refers to a range in which you can place orders for the various option contracts. Order placed beyond this range will be rejected. Price for each contract shall be calculated as follows, At market open – Option price derived from the underlying price. During market hours – 1 minute simple average of trade prices. According to NSE the execution range on both sides of price would be:            Now let’s explain it with a simple example, Consider the price of a deep ITM (in the money) Nifty option is 100. Now check the below Order Window. We know from the previous table, execution range for this option would be from 80 to 120. (20% of both sides) Anything beyond this range will not be accepted by the exchange. Now if we put a buy market order of 20 lots @ 100, then only 12 lots will get executed at 105 and 112...
  It’s Time to be cautious in the markets

  It’s Time to be cautious in the markets

Valuations within the Indian equity markets have turned expensive. The Nifty 50 is currently trading at a PE of 24.43, way above its long-term average. The Nifty Midcap 50 is trading at 55.22, and the Nifty Small cap 50 at 44.21.When valuations are so stretched, there is always the risk that any adverse news from within the country or abroad could cause the markets to tumble. Here are points you can follow that will help you to navigate your way safely towards your goals in these markets. Use SIPs: One precaution that mutual fund investors must exercise in expensive markets is to take the systematic investment plan (SIP) route for investing. This is not the time to make a one-time, bulk investment in equities, unless you are prepared to invest and forget the money for at least 10 years. The risk is making a bulk investment in an expensive markets is that if there is a correction, and you purchased units at the current high levels, it could take several years for your investment to recover their current value. With the SIP route, on the other hand, your investments tend to be staggered and you get the benefit of rupee cost averaging. One more point to keep in mind regarding SIPs is that if you are using them to meet long-term goals, such as your child’s education or your own retirement, you should not stop them because the markets are expensive. If you do so, you may not be able to achieve these goals. Build a diversified portfolio: One mistake that investors make when investing in a bull market...