What Nifty Options say about market trend

Nifty options give a trader the right but not the obligation to buy or sell the Nifty index at a predetermined price anytime during the month of an active contract, for e.g. November options became active this month and expire on the 24. The seller of the options is obliged to give or take delivery from the buyer.

In actuality, options are settled in cash. They usually expire on the Thursday of the last week. Normally three contracts operate concurrently. However, the front month contract is the most active. Roll over to next month picks pace in the last week of the contract.

1. What do you normally buy?

You normally buy a call option on Nifty if you feel the index will rise. You buy a put option on Nifty if you feel the index will fall. For e.g., if you thought Nifty would fall you could buy an 8000 strike out-of-the-money put option for Rs 43 a share on Friday. Since 75 shares make one contract, your purchase price will be Rs 3,225. If on Monday the 8000 put becomes 60, you can cash settle the contract at a gross profit of 17X75 or Rs 1,275. If, how ever, the share falls to 30, your unrealised loss will be Rs 975 if Nifty underlying.

2. What do Nifty options indicate?
They indicate that Nifty will find support at 8000 and face stiff resis tance at 8200 till expiry on Thursday . That is the market will move in a 200 point range.

3. Is trading options risky?
Yes, for you can lose your capital.

However, unlike Nifty futures, where profits and losses are huge, option buyers' risk is limited to the price paid for the option. However, sellers get limited profit in form of price or premium paid by buyer for the option but can face unlimited losses if the contract ends in the money .

4. What are the types of options?
In-the-money (ITM), at-the-money ( ATM) and out-of-the-money ( OTM).

For a call, an ITM means the option strike or exercise price is less than current market price. ATM call means the strike price is near the CMP and OTM means it's higher than CMP . For a put, ITM means the option strike price is above the Nifty's CMP , ATM at...and OTM when the strike is below CMP .