• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

C. Raja Rajeshwari

* Equity options being of American type can be exercised before the expiry date. What is the procedure for exercising before the date? I bought five July options of Tata Power of Rs 130 at a price of Rs 13. Subsequently the spot price went up to 155 -160 for sometime. However, I could not sell them at that time, as there were no buyers. As I did not know the procedure, I waited until the expiry date when the Exchange settled it at Rs 14 resulting in a loss of profit of about Rs 80,000. — Raju

If you are dealing with a physical broker then you instruct him to exercise the option. This request is entered into the F&O system and is exercised by the Exchange at the close of the trading hours in the exercise session. Valid exercised option contracts are assigned to short positions in option contract with the same series, on a random basis by the Exchange.

The settlement price that you would receive is the closing price of the underlying security on the day of exercise. The amount would be credited to your account on T + 3 day, where T is the exercise day.

In the case of online broking, you would have a link or a button, which would let you exercise your position. If you do not know the details, contact your trading broker for details.

* It was mentioned in a portfolio organiser magazine of a reputed university that some notional losses are being booked in stock options on the NSE. Are there any price limits fixed by the SEBI just like in case of stocks where some circuit limit has been fixed to prevent notional loss booking in options having low liquidity? — Sushil Jain

The options are cash-settled in India. In some exchanges such as New York Stock Exchange, options can be physically settled. Sometimes, even if your option is out-of-the-money, the option is exercised and losses are booked notionally.

In India, when you exercise an option, the request is accepted only if the position is in-the-money.

* I am looking for information on all of listed securities in India (equities, fixed income, derivatives), specifically volume traded and growth over the past couple of years. Can you please refer me to an appropriate source for this information? — Charulatha

The National Stock Exchange has archived all the turnover data from 1995. This is available under the head `Equities-Market Today', where there is an archives link.

The data from the commencement of the retail debt segment and derivatives segment are available under the respective heads.

* For calculating margin required, is it necessary that in-the-money or out-of-the-money is considered? — Murugan

Yes, in case of option writing, the moneyness of the option is taken into account for calculating margin. An Initial Margin of 15 per cent of his gross exposure desired will have to be paid by the client in case he wants to sell and option. The incremental margins will be based on SPAN (Standard Portfolio Analysis of Risk). All credits of the premium received, for writing the options, will be retained in the clients account (i.e. it will not be paid to the client). The same will be utilised and adjusted for meeting the margin liability towards the exchange for the positions held by him.

In the case of in-the-money options, the option seller would be required to bring in additional amount equal to the difference between the underlying spot and the strike price for a call, whereas for a put, the margin would be the difference between strike price and spot for put. In the case of out-of-the-money options, the option seller is required to bring in lesser amount.

* What should I do if I think that the overall market is highly volatile - Peter

When the overall market is volatile, implied volatility tends to be high. Hence you can use short straddle /strangle index options. Index options would act as a mirror of the full market sentiment. Short straddles involve simultaneously selling put and call options for the same stock, same strike price and with the same expiration date. In contrast, a short strangle involves simultaneously selling both a put and call on the same stock and same expiration date, but with the different strike price.

The higher the implied volatility, the costlier the premium you receive. As a result, the ideal time to sell a straddle/strangle is when implied volatility is at the high end of its historical range. A straddle/strangle can be sold when the implied volatility has risen slowly and steadily. It can also be constructed when there has been a short sharp move either up or down. The move may continue or it may reverse quickly; either way a short straddle/strangle can be profitable. In any event, avoid selling straddles/ strangles after an extended up or down move because markets tend to consolidate after such rallies or declines.

Selling straddles and strangles can be attractive, but always dangerous. Loss is unlimited in both the strategies. Hence the position has to be monitored closely.

Once the implied volatility returns to normal levels, the short positions can be squared-off.

* I want to get a clarification about the implied volatility and historical volatility. Please help me. I use a Calculator program, `Option Scope' which asks me to input either the Volatility or the current price of The Option. Since, I do not know how to find Internal Volatility, I am inputting only the current price of the option. How do I calculate the implied volatility, so that I can give it as value and get a reasonable option price as calculated by the calculator? — Senthil

The historical volatility of the underlying can be calculated as the standard deviation of the lognormal return. This can be easily computed in MS-Excel. Take the close prices of the stock over a period of time. You can look at what volatility has been for the past week, for the past month, for the past three months, for the past six months, and so forth. The longer time period will yield more of an average volatility.

The lognormal return is the computed by inputting the following: ln (price on day 2/price on day 1). This is computed for the complete set of closing prices. Finally calculate the standard deviation of the lognormal returns so computed.

This standard deviation would be the historical volatility. In the option scope, input the current underlying price, the time until expiration, the strike price, dividends to be paid by the stock, the current risk free interest rate, and volatility and also the current option price. The output would be the implied volatility.

If you have any queries relating to the futures/options please mail them to Futures & Options, Kasturi & sons, 859-860, Anna Salai, Chennai 600 002 or email them to

fno@thehindu.co.in

with a mention of futures/options in the subject line of the mail.

The technical analysis column on stocks and indices will appear next on August 17. Publication of responses to readers' queries will resume on August 24. Hence, readers are requested to send in their queries to the below mentioned addresses, on or after August 15.

Tech Trail, 859-860, Kasturi Buildings, Anna Salai, Chennai - 600 002 (or)

e-mail : techtrail@thehindu.co.in

Article E-Mail :: Comment :: Syndication

Stories in this Section
Noble Explochem: Accept

Copyright © 2003, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line