So, for example the break of an important support (such as the 5400-5500 support of the Nifty in August 2013) was not confirmed by a similar break in the MSCI EM index and as one can see, the market just retraced the move completely and now both the indices appear to be in synch again. Options are derivative contracts which give the holder the right (but not the obligation) to buy (call option) or sell (put option) a security at a particular price before or at the expiration of the contract.
Put options give the right to sell the underlying security (Nifty in this case) at 5800 which is called the strike price. So in our example, if Nifty is at 5400 on October 31st 2013, then the option holder can exercise the option which gives him the right to sell Nifty at 5800.
Since the lot size is 50, both the profit and loss along with the cost need to be multiplied by 50 to arrive at the actual figures in Rupee terms.
European options can be exercised only on expiry (31st October in this case) but can be sold anytime. Nifty is a widely followed Indian stock market index comprising of the 50 largest publicly traded companies in India. While the price of our options premium varies greatly as we live, we must pay more attention to the underlying because that is the one that actually is unaffected by time decay and truly represents the intrinsic value of our life’s option.
I had done a little research of my own yesterday (17th April 2013) and reviewed the 140 odd stock options available on NSE (National Stock Exchange, India).
The following experiment involves backtesting and analysing the EMA crossovers seen on the S&P CNX Nifty (the Indian stock market index) over the past three years.
There are also a lot of derivative contracts worth hundreds of millions of dollars linked to it.
European options can be exercised on expiry day only while American options can be exercised on any day.
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