Can any one explain about options trading in a simple manner??

In a simple manner?
I referred the net and it was very complicated and there is different explanations in each site.
So tell me with an simple example ,what is options trading.

VERY DIFFICULT FOR ME TO EXPLAIN IN SIMPLE MANNER, YOU SHOULD GO ALL THROUGH THIS, AND BELIEVE ME THIS IS INTERESTING.

Understanding Derivatives (Futures and Options)

A futures or options contract which is based on a set of underlying securities is called a Stock Index Futures or Options Contract. When trading takes place in stock index futures, it means that market participants are taking a view on the way the index will move. By trading in Index-based Futures and Options you buy or sell the entire stock market as a single entity.

S&P CNX NIFTY

S&P CNX NIFTY is a scientifically developed index. Top 50 blue chip companies have been selected to form part of the index. The index covers more than 25 industry sectors and is professionally managed by India Index & Services Ltd (IISL). IISL has a licensing and co-branding arrangement with Standard & Poor's (S&P), the World's leading provider of investable equity indices, for co-branding IISL's equity indices. Daily derivatives trading based on S&P 500 index is over US $ 50 billion.

Uses of S&P CNX NIFTY

S&P CNX NIFTY can be used for the purpose of speculation, hedging as well as an arbitrage tool.

Think market will go up?

Do you sometimes think that the market index is going to rise? That you could make a profit by adopting a position on the index? After a good budget, or good corporate results, or the onset of a stable government, many people feel that the index would go up. How does one implement a trading strategy to benefit from an upward movement in the index? Today, you have two choices:

Buy selected liquid securities, which move with the index, and sell them at a later date,

Or

Buy the entire index portfolio and them sell it at a later date.

The first alternative is widely used a lot of the trading volume on stocks like HINDLEVER is based on using HINDLEVER as an index proxy. However, these positions run the risk of making losses owing to HINDLEVER-specific news; they are not purely focussed upon the index.

The second alternative is hard to implement. An investor needs to buy all the stocks in S&P CNX Nifty in their correct proportions. Most retail investors do not have such large portfolios. This strategy is also cumbersome and expensive in terms of transactions costs.

Taking a position on the index is effortless using the index futures market. Using index futures, an investor can "buy" or "sell" the entire index by trading on one single security. Once a person buys S&P CNX NIFTY using the futures market, he gains if the index rises and loses if the index falls.

Example

5/1/2000 - You feel the market will rise
Buy 100 S&P CNX NIFTY January futures contract at 1450 costing Rs.145000 (100*1450)
expiration date - 28/1/2000
14/1/2000 Nifty January futures have risen to 1470
You sell off your position at 1470
Make a profit of Rs. 2000 (100* 20)
Think the market will go down?
Do you sometimes think that the market index is going to fall? That you could make a profit by adopting a position on the index? After a bad budget, or bad corporate results, or the onset of a coalition government, many people feel that the index would go down. How does one implement a trading strategy to benefit from a downward movement in the index? Today, you have two choices:

Sell selected liquid securities which move with the index, and buy them at a later date,

Or

Sell the entire index portfolio and then buy it at a later date.

The first alternative is widely used a lot of the trading volume on stocks like ITC is based on using ITC as an index proxy (ITC has the highest correlation with S&P CNX Nifty amongst all the stocks in India). However, these position run the risk of making losses owing to ITC-specific news; they are not purely focussed upon the index.

The second alternative is hard to implement. This strategy is also cumbersome and expensive in terms of transaction costs.

Taking a position on the index is effortless using the index futures market. Using index futures, an investor can "buy" or "sell" the entire index by trading on one single security. Once a person sells S&P CNX NIFTY using the futures market, he gains if the index falls and loses if the index rises.

Example

8/2/2000 - You feel the market will fall
Sell 100 S&P CNX NIFTY February expiry contract
Expiration date 25/2/2000
Nifty February contract is trading at 1560
Your position is worth Rs. 156000
15/1/2000 - Nifty February futures have fallen to 1520
You squares off your position at 1520
Make a profit of Rs.4000 (100*40)
Have you bought a share hoping it will go up?
Have you ever felt that a stock was intrinsically undervalued?

That the profits and the quality of the company made it worth a lot more as compared with what the market thinks? Have you ever been a "stockpicker" and carefully purchased a stock based on a sense that it was worth more than the market price?

When doing this, you face two kinds of risks:

Your understanding can be wrong, and the company is really not worth more than the market price,

Or

The entire market moves against you and generates losses even though the underlying idea was correct.

The second outcome happens all the time. A person may buy Infosys thinking that Infosys will announce good results and the stock price would rise. A few days later, S&P CNX Nifty drops, so he makes losses, even if his intrinsic understanding of Infosys was correct. There is a peculiar problem here. Every buy position on a stock is simultaneously a buy position on S&P CNX Nifty. This is because a buy Infosys position generally gains if S&P CNX Nifty rises and generally loses if S&P CNX Nifty drops. It is useful to ask: does the person feel bullish about Infosys or about the Index?

Those who are bullish about the index should just buy S&P CNX Nifty futures; they need not trade individual stocks
Those who are bullish about the Infosys do wrong by carrying along a long position on S&P CNX Nifty as well.
There is a simple way out. Every time you adopt a long position on a stock, you should sell some amount of S&P CNX Nifty futures. When this is done, the stockpicker has "hedged away" his index exposure. How do you do this?

We need to know the "beta" of the stock, i.e. the average impact of a 1% move in S&P CNX Nifty, upon the stock. If betas are not known, it is generally safe to assume the beta is 1. Suppose we take LUPINLAB, where the beta is 1.2, and suppose we have a LONG LUPINLAB position of Rs. 200,000.
The size of the position that we need on the index futures market, to completely remove the hidden S&P CNX Nifty exposure, is 1.2 * 200,000, i.e. Rs. 240,000.
Suppose S&P CNX Nifty is at 1200, and the market lot on the futures market is 100. Hence each market lot of S&P CNX Nifty is Rs. 120.000. To sell Rs.240,000 of S&P CNX Nifty we need to sell two market lots.
We sell two market lots of S&P CNX Nifty (200 Nifties) to get the position:
Long LUPINLAB Rs. 200,000
Short S&P CNX NIFTY Rs. 240,000
Example

01/10/1999 - You buy INFOSYS of Rs. 10 lakhs
The expiry date of Nifty June futures is 29/10/1999
Nifty spot is at 1403.20 and Nifty futures is at 1420
The beta of INFOSYS is 1.2
You need to sell 1.2*10 lakhs = 12 lakhs on the index futures i.e., 12 market lots
29/10/1999 - Nifty fell 5.5%
29/10/1999 Nifty spot at 1325.45 and settlement price of Nifty October futures is also 1325.45
You close both positions earning Rs. 9640. i.e., your position on INFOSYS drops by Rs. 66,000 and your short position on Nifty gains Rs. 75,640
Have you sold a share hoping it will go down?

Have you ever felt that a stock was intrinsically overvalued? That the profits and the quality of the company made it worth a lot less as compared with what the market thinks? Have you ever been a "stockpicker" and carefully sold a stock based on a sense that it was worthy less than the market price?

His understanding can be wrong, and the company is really worth more than the market price,

Or
The entire market moves against him and generates losses even though the underlying idea was correct.
The second outcome happens all the time. A person may sell Reliance, expecting that Reliance would announce poor results and the stock price would fall. A few days later, S&P CNX Nifty rises, so you make losses, even if your intrinsic understanding of Reliance was correct.

There is a peculiar problem here. Every sell position on a stock is simultaneously a sell position on S&P CNX Nifty. This is because a SHORT RELIANCE position generally gains if S&P CNX Nifty falls and generally loses if S&P CNX Nifty rises. It is useful to ask: does the person fell bearish about Infosys or about the index?

Those who are bearish about the index should just sell S&P CNX Nifty futures; they need not trade individual stocks.
Those who are bearish about Reliance do wrong by carrying along a sell position on S&P CNX Nifty as well.
There is a simple way out. Every time you adopt a short position on a stock, you should buy some amount of S&P CNX Nifty futures. When this is done, the stockpicker has "hedged away" his index exposure. The basic point of this hedging strategy is that the stockpicker proceeds with his core skill, i.e. picking stocks, at the cost of lower risk

How do you do this?

We need to know the "beta" of the stock, i.e. the average impact of a 1% move in S&P CNX Nifty upon the stock. If betas are not known, it is generally safe to assume the beta is 1. Suppose we take LUPINLAB, where the beta is 1.2, and suppose we have a SHORT LUPINLAB position of Rs. 200,000.
The size of the position that we need on the index futures market, to completely remove the hidden S&P CNX Nifty exposure, is 1.2* 200,000, i.e. Rs. 240,000.
Suppose S&P CNX Nifty is at 12

Options are nothing but giving the buyer the right to buy something on a future val date for the price which was pre dertmined
EG u trade and buy an option on Rcom for 640 with a expiry of 29th May, now since u are a buyer u would ideally pay the premium amt first to the seller.The premium amt would be dertermined by the lot u want to buy and the premium rate going on..then at the maturity (which is 29th may) the price is more than 640 and has reached 680 so you shall excercise the option and make the difference amt...In case the price falls to below 640 then u shall abandon the option and loose ur premium amt which u paid at the start

u could try www.investopedia.com , good site it is on derivatives products

An Option: A contract that gives the holder the right to buy a certain number of shares of a stock, at some point in the future, at a PREDETERMINED price.

Ex: An options contract could read:
"The holder of this contract has the right to buy 1,000 shares of Yahoo from me on or before May 2009 at a price of $30/share."

I'm writing this contract so that I can sell it (not the stock, but sell the contract).

Someone thinks Yahoo will go up beyond $30/share, so they want to lock in a bargain, and pay me $5,000 in cash to get their hands on the contract.

CASE 1: YAHOO STOCK DROPS BELOW $30 AND STAYS THERE.

He thought it would go up. Sucker! :-)
The contract is now worthless, because if he can buy Yahoo for $25 on Wall Street, then the right to buy it at $30 from me doesn't mean much.
The $5,000 cash they paid me is now my profit.

I made $5,000

CASE 2: YAHOO STOCK GOES UP A LITTLE ($30 to $35)

Everyone comes out ahead, a little.

The guy who bought the contract says "Buying from you is better right now than buying from Wall Street. You signed a contract where you promised you'd sell me 1000 shares at $30/share. Here's $30,000 cash. I want to buy 1000 shares."

So I take his $30,000, plus the $5,000 he gave me last year, and buy the 1000 shares at the market price ($35/share).

My only gain is the interest I got from keeping $5,000 in the bank for a year.

CASE 3: YAHOO STOCK GOES WAY UP ($30 to $40).

I thought it would go down. Now I'm the sucker! :-(
It's now trading at $40.

The guy who bought the contract says "Woohoo! Buying from you is a great idea. You signed a contract where you promised you'd sell me 1000 shares at $30/share.. Here's $30,000 cash. I want to buy 1000 shares. I don't care that it's trading at $40/share: Honor your signed contract, or I'll sue you."

I now have to go to the stock market with $40,000 (The $30K he gave me, the $5K I got last year from him, and $5K out of my own pocket) to buy 1000 shares at $40/share, and turn around and give him the 1000 shares.

I lost $5,000

And that's how options work.

options means choice. If you are a buyer of options, you have choices: 1. enforce the contract 2. Not to enforce the contract.
When you buy an option you buy these choices.
An option contract is a contract to be executed on future date, but the terms of contracts are finalised now. Thus on the agreed date of performance of the contract, if it is favourable to you, as a buyer of the options( choices) you will enforce the contract otherwise not.
A buyer of the options purchases these choices, but the seller of the option ( the other party to the contract) has to perform and has no choices.
Is this simple enough?

try http://www.uronlineincome.blogspot.com

If you are asking this question, you are obviously new to investing.

Options may ideally be used as insurance instruments. Let's say you are holding a portfolio of stocks with a holding value of INR 1,00,000.00. During your holding period due to volatile market action you are quite unsettled; so you "buy a put" on the index or a stock of your choice with a value of about INR 1,00,000.00. In case, your fears come true and the equity market does move down, then the value of the put would increase as the value of the stocks in your portfolio reduce. Thereby, helping you to reduce or negate the loss you would otherwise have held in your portfolio. To do this in another way, you could also "sell a call option".

And, if your fears do not come true and the equity market and your stocks portfolio continue to maintain there present level or appreciate; then the "put option" which you had purchased would expire worthless. More like an insurance premium you pay for your car to cover for any damages or theft, etc.

However, if you wish to use options to leverage your resources then you would be speculating and the risks you are faced with would increase exponentially.

We would strongly recommend that you stick with investing in stocks. In case, you still wish to speculate through options; you may consider meeting an investment advisor to understand the nuances. You may also consider reading a book on the subject.

Akash
http://www.narachinvestment.com

You can look at it this way, you can buy a stock just like you buy anything else, you buy low and sell high or SHORT high and buy back low, if you understand this then option is easy.

Options, same as stocks, buy low sell high. The only difference is... Options expires. What does that mean? Well, somebody in their infinite wisedom, came up with an idea to make some money on the side while they are holding a stock. so they wrote a contract(an option) for some one to take the stock from their hand at certain price, if they agree to pay him a little extra money. The contract however has a time limit.

for example: a hot stock is trading at $100 per share
the seller is willing to let it go at $100 per share next month if they get $2 per shares now.
so the buyer comes along and got the option at $2 per shares and wait until next month.
If next month comes around the price went up to $105, well, the buyer than buy the shares from the seller at $100 and immediately sold it in the market for $105 and make $3 per share(less commissions and the $2 premium he paid for the option).
However, if the price of the stock went down to $95, there is no sense for the buyer to get the stock from your hands at $100 because it is cheaper to buy in the open market. Therefore the option expires and the buyer loses $2 instead of $5 per share.

To buy an option betting the stock will go up in value at the time interval is call the "CALL" option.

To buy an option betting the stock will go DOWN in value at the time interval is call the "PUT" option.

It is very speculative and it can be simple or it can be very complicated. I hope this help.

option trading is buying and selling options contract to gain profits.

Most of the guys over here have told you how options etc., work. If you are trading in Indian markets and especially on the index, then http://tradingforprofit.blogspot.com should be of good help.

Vinay

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