Page 136 - DCOM510_FINANCIAL_DERIVATIVES

Unit 8: Application of Options

8.2.3 Index Options Notes
The options contracts, which are based on some index, are known as Index options contract.
However, unlike Index Futures, the buyer of Index Option Contracts has only the right but not
the obligation to buy/sell the underlying index on expiry. Index Option Contracts are generally
European Style options i.e. they can be exercised/assigned only on the expiry date.

An index in turn derives its value from the prices of securities that constitute the index and is created
to represent the sentiments of the market as a whole or of a particular sector of the economy.

Notes Indices that represent the whole market are broad based indices and those that
represent a particular sector are sectoral indices.
By its very nature, index cannot be delivered on maturity of the Index futures or Index option
contracts therefore, these contracts are essentially cash settled on Expiry.

Did u know? Longer dated derivatives products are useful for those investors who want to
have a long term hedge or long term exposure in derivative market. The premiums for
longer term derivatives products are higher than for standard options in the same stock
because the increased expiration date gives the underlying asset more time to make a
substantial move and for the investor to make a healthy profit.
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. Option contracts are specified as follows: DATE-EXPIRYMONTH-YEAR-CALL/PUT-
AMERICAN/ EUROPEAN- STRIKE. For example the European style call option contract on the
Nifty index with a strike price of 5000 expiring on the 26th November 2009 is specified as
‘26NOV2009 5000 CE’. Just as in the case of futures contracts, each option product (for instance,
the 26 NOV 2009 5000 CE) has its own order book and its own prices.

!
Caution All index options contracts are cash settled and expire on the last Thursday of the
month.

The clearing corporation does the novation. The minimum tick for an index options contract is
0.05 paisa. Table 8.2 gives the contract specifications for index options trading on the NSE.

Table 8.2: Contract Specification of S&P CNX Nifty Options

Underlying index S&P CNX Nifty
Exchange of trading National Stock Exchange of India Limited
Security descriptor OPTIDX
Contract size Permitted lot size shall be 50
(minimum value ` 2 lakh)
Price steps ` 0.05
Contd....

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