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the situation. Options are good when the implied volatility is high and futures are better when the premium is lower,” argues Siddharth Bhamre, Senior derivative analyst, Angel Broking.

How it works

In options, there is a clear-cut pay-off method. This means that the investor needs to be sure of how much they could lose or gain. “For this, the investor must have a clear view about the market and an understanding of the options and then take positions,” warns Navendra Singh, derivative analyst with a leading broking firm. Here is a simple example to illustrate derivatives option. Suppose you go to the market to buy tomatoes. The price is Rs 8 per kg. If you think that the price of tomatoes will go up to Rs 12 in the next five days then you make a deal with the vendor that you will buy tomato after five days at Rs 9 per kg and for that you will pay a premium of Rs 2 for the right to buy. If the price goes up to Rs 12 on the fifth day you gain Rs 1 per kg as your cost is Rs 9+2=11. However, if the price goes down or remains constant then you will be in loss. And if the price is Rs 11, you will buy (execute the contract) because you are in a no-profit-no-loss position. The vendor in this example is a seller of the options, so he gets the premium for giving the option/right to you.

In options, you can take exposure in stocks as well as the index, unlike the cash market where exposure is only in the individual stock. Practically speaking, even though majority of the investors predict the broader index, they can’t take positions in the cash market. However, this issue has been resolved and you can take positions on the index: for instance, S&P CNX Nifty index options on National Stock Exchange (NSE). And stock options deal with individual stocks: for instance, Reliance Industries, Grasim Industries, etc. Looking at the current market situation one can take a short-term view on the index.

Technical specification