This PPT is helpful for the student who is doing MBA in finance extreme. it is just small help from my side in future also i will be uploading these type of PPT'S. Thank You Ritesh Sethi

1. contract terminology and
specifications for stock and
index options
By – Ritesh Sethi
(rsethi594@gmail.com)

2. Options Contracts
 An option gives the holder the right, but not the obligation, to buy or
sell a given quantity of an asset on (or perhaps before) a given date,
at prices agreed upon today.
 Calls versus Puts
 Call options gives the holder the right, but not the obligation, to buy a
given quantity of some asset at some time in the future, at prices agreed
upon today. When exercising a call option, you “call in” the asset.
 Put options gives the holder the right, but not the obligation, to sell a
given quantity of an asset at some time in the future, at prices agreed
upon today. When exercising a put, you “put” the asset to someone.

3. Options Contracts:Terminology
 Exercising the Option
 The act of buying or selling the underlying asset through the option contract.
 Strike Price or Exercise Price
 Refers to the fixed price in the option contract at which the holder can buy or
sell the underlying asset.
 Expiry
 The maturity date of the option is referred to as the expiration date, or the
expiry.
 European versus American options
 European options can be exercised only at expiry.
 American options can be exercised at any time up to expiry.

4. Options Contracts:Terminology
 In-the-Money
 The exercise price is less than the spot price of the underlying asset.
 At-the-Money
 The exercise price is equal to the spot price of the underlying asset.
 Out-of-the-Money
 The exercise price is more than the spot price of the underlying asset.
 Intrinsic Value
 The difference between the exercise price of the option and the spot price
of the underlying asset.
 Speculative Value
 The difference between the option premium and the intrinsic value of the
option.

5. Specifications of stock options
 Expiry
 10:59 CST on the
Saturday immediately
following the third
Friday of the month.
 The last trading day is
the third Friday.
 Holder of the option has
until 4:30 of that Friday
to exercise.
 His broker has until
10:59 the next day to
notify the exchange
 Expiry Cycles:
 January
 January, April, July, October
 February
 February, May, August,
November
 March
 March, June, September,
December
 When one option expires, trading
in another begins.

6. Specifications of stock options
 Contract specification for index options
 Contract specifications for stock options

7. Contract specification for index options
 On NSE’s index options market, there are one-month, two-month and three-
month expiry contracts with minimum nine different strikes available for
trading.
 Hence, if there are three serial month contracts available and the scheme of
strikes is 6-1-6, then there are minimum 3 x 13 x 2 (call and put options) i.e.
78 options contracts available on an index.

8. Underlying index CNX Nifty
Exchange of trading National Stock Exchange of India Limited
Security descriptor OPTIDX
Contract size Permitted lot size shall be 50 (minimum value Rs. 2 lakh)
Price steps Re. 0.05
Price bands A contract specific price range based on its delta value and is computed and updated
on a daily basis.
Trading cycle The options contracts will have a maximum of three month trading cycle - the near
month (one), the next month (two) and the far month (three). New contract will be
introduced on the next trading day following the expiry of near month contract. Also,
long term options have 3 quarterly and 5 half yearly expiries
Expiry day The last Thursday of the expiry month or the previous trading day if the last Thursday
is a trading holiday.
Settlement basis Cash settlement on T+1 basis.
Style of option European.
Strike price interval Depending on the index level
Final settlement price Closing value of the index on the last trading day.

9. Contract specifications for stock options
 Trading in stock options commenced on the NSE from July 2001. Currently
these contracts are European style and are settled in cash.
 The expiration cycle for stock options is the same as for index futures and
index options.
 A new contract is introduced on the trading day following the expiry of the
near month contract. NSE provides a minimum of eleven strike prices for
every option type (i.e. call and put) during the trading month.

10. Underlying Individual securities
Exchange of trading National Stock Exchange of India Limited
Security descriptor OPTSTK
Style of option European
Strike price interval As specified by the exchange
Contract size As specified by the exchange (minimum value of Rs.2 lakh)
Price steps Re. 0.05
Price bands Not applicable
Trading cycle The options contracts will have a maximum of three month trading cycle - the near
month (one), the next month (two) and the far month (three). New contract will be
introduced on the next trading day following the expiry of near month contract.
Expiry day The last Thursday of the expiry month or the previous trading day if the last
Thursday is a trading holiday.
Settlement basis Daily settlement on T+1 basis and final option exercise settlement on T+1 basis
Daily settlement price Premium value (net)
Final settlement price Closing price of underlying on exercise day or expiry day

11. Example
Index Buy Jan Call 4200 Sell Jan 3800 Call Cash Flow Profit & Loss (Rs.)
3700 0 0 0 +100
3750 0 0 0 +100
3800 0 0 0 +100
3850 0 -50 -50 +50
3900 0 -100 -100 0
3950 0 -150 -150 -50
4000 0 -200 -200 -100
4050 0 -250 -250 -150
4100 0 -300 -300 -200
4150 0 -350 -350 -250
4200 0 -400 -400 -300
4250 +50 -450 -400 -300
4300 +100 -500 -400 -300
Illustration 5.4: Expiration day cash flows for a Bear spread using two-month calls
The table shows possible expiration day profit for a bear spread created by selling one market lot of calls
at a strike of 3800 and buying a market lot of calls at a strike of 4200. The maximum profit obtained from
setting up the spread is the difference between the premium received for the call sold (Rs. 150) and the
premium paid for the call bought (Rs.50) which is Rs. 100.
In this case the maximum loss obtained is limited to Rs.300. Beyond an index level of 4200, any profits
made on the long call position will be canceled by losses made on the short call position, effectively
limiting the profit on the combination.