Beginning Monday, trading in top 200 stocks will be done on a rolling basis. With this, 414 stocks (including all group A stocks on BSE) will be in the rolling mode.
The NSE will kickstart trading options on individual stocks from Monday while the BSE is yet to announce its plans to start stock options. Both the BSE as well as the NSE started trading in index options in the first week of June. Trading in index futures commenced in June last year.
Now the choice before an investor is either enter the cash market and take a delivery or trade in the derivatives market. Analysts feel one should wait and watch before taking the plunge in these instruments, at least till the market stabilises and achieves a sufficient learning curve.
Here is a ready-reckoner of the terms which will be the new mantra on Dalal Street.
What is rolling settlement and how is it different from the weekly market which existed earlier?
In a rolling settlement, all transactions that take place will have to be settled at the end of the day. These transactions could either result in delivery or a buy position could be converted into sell. Currently, all the stock exchanges follow a weekly settlement system and hence positions are either squared off on the last day of settlement or carried forward.
Under the rolling settlement, the market becomes a spot market as all open positions need to be squared off at the end of the day and cannot be carried forward.
How will this change affect trading on stock exchanges?
With the introduction of rolling settlement, investors will no longer able to carry-forward positions or shift positions between two stock exchanges.
This, in turn, will keep the speculators at bay. Further, rolling settlement on all stock exchanges mean that exchanges will have a common settlement cycle. Hence, there will not be any shifting of positions between exchanges.
How will settlements take place now onward?
In the rolling settlement, all trades (T) of each day will be settled on five working days (T+5) basis. For instance, if one enters into a transaction on Monday he/she will have to make the payment or hand over the securities after five working days.
Earlier, on the BSE, the pay-out or pay-in used to take place on the 12th day from the date of trade. Also, one could carry forward their position using BLESS or ALBM on BSE or NSE.
What are options?
An option is a contract which gives the buyer (holder) the right, but not the obligation, to buy or sell specified quantity of the underlying assets, at a specific (strike) price on or before a specified time (expiration date).
What are the important terminology in options trading?
Underlying: The specific security/asset on which an options contract is based.
Option Premium: Premium is the price paid by the buyer to the seller to acquire the right to buy or sell.
Strike Price or Exercise Price: The strike or exercise price of an option is the specified/ pre-determined price of the underlying asset at which the same can be bought or sold if the option buyer exercises his right to buy/ sell on or before the expiration day.
Expiration date: The date on which the option expires. On Expiration date, either the option is exercised or it expires worthless.
Exercise Date: It is the date on which the option is actually exercised. In the case of European Options, the exercise date is the same as the expiration date while in the case of American Options, the options contract may be exercised any day between the purchase of the contract & its expiration date (see European/ American Option).
Open Interest: The total number of options contracts outstanding in the market at any given point of time.
Option Holder: One who buys an option which can be a call or a put option. He enjoys the right to buy or sell the underlying asset at a specified price on or before specified time. His upside potential is unlimited while losses are limited to the premium paid by him to the option writer.
Option seller/ writer: One who is obligated to buy (in case of Put option) or to sell (in case of call option) the underlying asset in case the buyer of the option decides to exercise his option. His profits are limited to the premium received from the buyer while his downside is unlimited.
Option Class: All listed options of a particular type (call or put) on a particular underlying instrument -- all sensex call options (or) all sensex put options.
