NIFTY FUTURES & OPTIONS
erivatives are among the most complex financial instruments and also one of themost controversial. While they are as old as commerce itself, they have becomeprominent only in the last few decades.Their critics claim that they make markets less transparent and more prone toinstability and speculation. Their supporters say that derivatives improve riskmanagement and increase liquidity.Both sides would agree that derivatives are extremely important and have a bigimpact on other financial markets and the economy. So even if the average investordoesn't invest directly in derivatives it's important that he or she knows what theyare.
What is a derivative instrument?
A derivative, as the name suggests, is a financial instrument whose value is derivedfrom another asset (known as the underlying). The underlying can be a stock, acommodity, and a market index among other things. The two main types of derivatives are options and futures.
An option gives you the right to buy or sell the underlying asset but not anyobligation.A call option gives you right to buy the underlying asset while a put option gives youthe right to sell.An option contract specifies the strike price, that is, the price at which you can buyor sell the underlying and the expiry date after which the option is no longer valid. Inother words, the expiry is the last day on which a contract expires or ends. In Inidanmarkets, expiry is the last Thursday of every month.
A mutual fund with a differenceOptions are also classified into American, which can be exercised at any time prior tothe expiry date and European which can only be exercised at the expiry date.In India options on individual stocks are American-style while options on indices likethe Nifty are European.So in the newspaper if you read, say, a Ranbaxy [Get Quote] option contract: CA-330-Mar, it means that this is an American-style call option which gives you the rightto buy Ranbaxy shares at Rs 330 and which expires in March (the last Thursday).Similarly a PE-4300-April Nifty contract is a European-style put option, which givesyou the right to sell at Rs 4,300 and expires in April.