Chaman Lal is a man vindicated. He is the personification of how a pessimist outlook could have you running all the way to the bank. He is part of a small, but growing, community of investors who bet on the bears and cash in when the stock markets crash.

The community we are talking about is one that trades options on the equity market and, more often than not, bets on the markets to fall. The philosophy is simple. Plain arithmetic calculations cannot just determine which way the stock markets would move.

The size of futures and options (F&O) market is estimated at Rs 60,000 crore. Compare that to NSE turnover of Rs 80,000 crore on Friday! However, the options part is still at a nascent point, with an average daily turnover of Rs 12,000 crore on the NSE. Just 5% of the total investors actually risk trading on the options platform.

Across the town in Mukherjee Nagar a couple, which trades on the stock exchanges, has had a tough week. ?We took position when the Sensex had touched 15,000. However, it has come down to 14,140 in just two weeks. This week alone it has lost more than 700 points,? say Veena and Kishore, at loss for words to explain the sudden change in the winds.

?Options is a part of the derivates market. The instrument can be used in various market scenarios, whether the market will go up, down, be volatile or range bound. Though the volume at BSE is not too high, on the NSE it has picked up,? said Harendra Kumar, head, research, ICICI Direct.

Traders exercise the ‘put’ option when the markets are falling. Put gives the holder the right to sell a stock at an agreed-upon price at any time up to an agreed-upon date. The holder is betting that the stock will decline in value. The difference between the stock price that day and the agreed-upon put value is the holder’s profit.

In a sector governed by so many variables, it would be foolhardy to overlook the improbabilities.

For example: An investor buys the put option when the Nifty is at 4100, at a premium of Rs 120 (4%). If Nifty, on the day of expiry, is less than 4100, the put can be exercised. The investor’s break-even point is 3980 (Strike Price – premium paid) i.e. the investor will profit if the market falls below 3980. Suppose Nifty is at 3900, the buyer of the put option buys Nifty share in the market @ 3900 and exercises his option selling the Nifty share at 4100 to the option writer and thereby making a net profit {(Strike price – Spot Price) – Premium paid}.

* Some names have been changed to protect identity