Options can be traded on individual stocks or Indices. NSE introduced options on S&P CNX Nifty (Nifty options) on June 4, 2001. Options on individual securities were introduced subsequently (November 2001).

Options contracts where the underlying asset is an equity stock, are termed as Options on stocks. They are mostly American style options cash settled or settled by physical delivery. Prices are normally quoted in terms of the premium per share, although each contract is invariably for a larger number of shares, e.g. 100.

Options can offer an investor the flexibility one needs for countless investment situations. An investor can create hedging position or an entirely speculative one, through various strategies that reflect his tolerance for risk. Investors of equity stock options will enjoy more leverage than their counterparts who invest in the underlying stock market itself in form of greater exposure by paying a small amount as premium. Investors can also use options in specific stocks to hedge their holding positions in the underlying (i.e. long in the stock itself), by buying a Protective Put. Thus they will insure their portfolio of equity stocks by paying premium. ESOPs (Employees' stock options) have become a popular compensation tool with more and more companies offering the same to their employees. ESOPs are subject to lock in periods, which could reduce capital gains in falling markets - Derivatives can help arrest that loss along with tax savings. An ESOPs holder can buy Put Option in the underlying stock & exercise the same if the market falls below the strike price & lock in his sale prices

The Stock Index Options are options where the underlying asset is a Stock Index for e.g. Options on S&P 500 Index/ Options on BSE Sensex etc. Index Options were first introduced by Chicago Board of Options Exchange (CBOE) in 1983 on its Index 'S&P 100'. As opposed to options on Individual stocks, index options give an investor the right to buy or sell the value of an index which represents group of stocks.

Index options enable investors to gain exposure to a broad market, with one trading decision and frequently with one transaction. To obtain the same level of diversification using individual stocks or individual equity options, numerous decisions and trades would be necessary. Since, broad exposure can be gained with one trade, transaction cost is also reduced by using Index Options. As a percentage of the underlying value, premiums of index options are usually lower than those of equity options as equity options are more volatile than the Index.

Index Options are effective enough to appeal to a broad spectrum of users, from conservative investors to more aggressive stock market traders. Individual investors might wish to capitalize on market opinions (bullish, bearish or neutral) by acting on their views of the broad market or one of its many sectors. The more sophisticated market professionals might find the variety of index option contracts excellent tools for enhancing market timing decisions and adjusting asset mixes for asset allocation. To a market professional, managing the risk associated with large equity positions may mean using index options to either reduce their risk or to increase market exposure.

The contract specifications of options contract at NSE are as follows:

Nifty options allow the investor to trade a large segment of the equity market with one decision and, thus, provide a different perspective to investing in equities. Nifty options help the investors reflect their views on the market -- bullish, bearish or neutral -- to plan their investment strategies and trade efficiently.

S&P CNX Nifty (Nifty) is a 50-stock index comprising the largest and the most liquid companies in India. Nifty covers nearly 25 sectors and a market capitalisation of almost 49 per cent of the total market capitalisation. The ownership and management rights of this index rests with India Index Services and Products Ltd. (IISL), a corporate body jointly promoted by NSE and the Credit Rating and Information Services. IISL has a co-branding and licensing agreement with Standard and Poor's (S&P), one of the world's leading index services providers. Nifty is a scientifically developed market capitalisation weighted index with the advantage of technical oversight by S&P. Nifty was developed keeping in mind that an index, besides being a true reflection of the stock market, should also be used for modem applications such as index funds and index derivatives.

Nifty options allows the investor to trade a large segment of the equities market with one decision and thus provide a different perspective and new dimension to investing in equities. Nifty options helps the investors in reflecting their views on the market - bullish, bearish or neutral, in planning their investment strategies and thus trade efficiently.

Like Nifty Futures, Nifty options would also be cash settled.

• Instrument Type  :    OPTIDX

• Underlying  :    Index S&P CNX Nifty

• Exchange of Trading  :    National Stock Exchange of India Limited

• Contract size  :    Permitted lot size shall be 200 or multiples thereof

• 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  :    Cash settlement.

• Style of option  :    European (Call European/Put European)

Unlike Index based cash settled European style options, SEBI has also allowed to trade in options on Individual securities. The exercise style for these options is American and is settled with delivery of the underlying securtiy. These options can be exercised any time before maturity. The options goes worthless if these are not in-the-money (ITM).

For the purpose of trading and settlement, the contract descriptor will consist of instrument type, symbol, expiry date, strike price and option type. For e.g. an option contract on a security INFOSYS that expires on March 31, 2003 Will be represented as:

• Instrument type  :    OPTSTK

• Symbol  :    INFOSYS

• Expiry date  :    31MAR2003

• Strike Price  :    5000

• Price steps  :    Re.50.00

• 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.

• Exercise style  :    CA/PA (Call American/Put American)

• Lot size  :    Trading Members can enter into an options contract on a security (buy or sell) for a minimum value of Rs. 2,00,000/-

• Instrument type represents the instrument i.e. options on securities.

• Symbol denotes the underlying Scrip that is INFOSYS.

• The expiry date identifies the date and month of expiry of the contract i.e.,Mar31 2003. The Strike Price denotes the price at which the buyer has a right to purchase or sell the underlying.>

• Option type is a combination of the option type and the style of exercise

• CA represents that it is a call option with the exercise style as American. PA would mean Put option with exercise style as American.

There shall be separate contracts for each security for each month for each strike price and each option type .Eg. For the security INFOSYS suppose if there are 5 strike prices then there would theoretically minimum of 5 (strike prices) X 2 (call and put) = 10 option contracts for each security i.e. INFOSYS for each month or 30 contracts for 3 months for the same security.

• The option on Sensex would be premium style.

• Underlying Index  :   BSE 30 Sensex

• Contract Multiplier  :   INR 100

• Strike price Intervals  :   Shall have a minimum of 5 strikes. (In-the-Money, Near-the-Money, Out-the-money).

• PremiumQuotation  :    Sensex points.

• Last Trading Day  :   Last Thursday of the contract month. If it is a holiday, the immediately preceding business day.

• Expiration Day  :   Last Thursday of the contract month. If it is a holiday, the immediately preceding business day.

Note: Business day is a day during which the underlying stock market is open for trading.

• Contract Month  :   1, 2 and 3 months.

• ExerciseStyle  :    European.

• Settlement Style  :   Cash

• Trading Hours  :   9:30 a.m. to 3:30 p.m.

• Tick Size  :   0.1 Sensex points (INR 5).

• Settlement Value  :   Closing Value of the Sensex on the expiry day.

• Exercise Notice Time  :    It would be a specified time (Exercise Session) on the last trading day of the contract. All in-the money options would deem to be exercised unless the participant communicates otherwise in the manner specified by the Derivatives Segment.

• Underlying  :    Individual scrip as listed in Annexure-II(BSE Website - Notice- Stock Option).

• Ticker Symbol   :    As specified in Annexure-II(BSE Website - Notice- Stock Option).

• Contract Multiplier  :     As specified in Annexure-II (BSE Website - Notice- Stock Option).

• Strike Prices: Shall have a minimum of 5 strikes (2 in the money, 1 near the money, 2 out of the money).

• Premium Quotation: Rupees per share.

• Last Trading Day: Last Thursday of the contract month. If it is a holiday, the immediately preceding business day.

• Expiration Day: Last Thursday of the contract month. If it is a holiday, the immediately preceding business day.
  [Note: Business day is a day during which the underlying stock market is open for trading.]

• Contract Month*: 1, 2, and 3 months e.g. in the month of July: July, August and September contracts would be available for trading.

• Exercise Style: American.

• Settlement Style: Cash

• Trading Hours: 9:30 a.m. to 3:30 pm.

• Tick Size : 0.01

• Settlement Value: Closing Value of the respective Stocks in the Cash Segment of BSE. The following algorithm is used for calculating closing value of these individual stocks in the cash segment.

  • Weighted Average price of all the trades in the last fifteen minutes of the continuous trading session.

  • If there are no trades during the last fifteen minutes, then the last traded price in the continuous trading session would be taken as the official closing price.

• Exercise Notice Time: It would be a specified time (Exercise Session) every day. All in-the money options by certain specified ticks would deemed to be exercised on the day of expiry unless the participant communicates otherwise in the manner specified by the Derivatives Segment.