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Futures & Options


In a futures contract, there is an obligation on the part of both the buyer and the seller. Options are of two types - Calls and Puts options: 'Calls' give the buyer the right, but not the obligation to buy  the underlying asset, at a given price on or before a given future date on the other hand ‘ Put’ option is an option contract in which the buyer has the right  but not the obligation to sell a specified underlying asset. Trading in options is like betting whereby the buyers have more chance losing with a calculative risk  & the writers have a better probability of winning with huge risk. Options provide an automatic stop albeit one should learn how to play, first. As options designed in such a way that buyers are hardly the winners and options writers are exposed to unlimited risk. Therefore, this segment on Futures & Options would be more focused on winning derivative strategies rather than punting derivative instruments by creating the naked positions, for consistent profit.

As such investors with less than  Rupee 10 lac trading capital must avoid opting for futures & option as they might miss most of the hedging strategies tailored on valine10x.com


PCR- Put Call Ratio – By Valine 21st Jan -  As we inch towards an understanding into Put Call Ratio (PCR), I would like to remind options traders that unfortunately, the law of probability works against the options buyers. The time decay eats up the whole premium even if the underlying remains stagnant at the strike price for which you have paid the premium at first instance. This doesn't mean that one should go and sell options right away' as probability works in his favour. But for options are designed in such a way that even if there are more chances of winning by writing the options there is a chance of losing unlimited amount if the trade does turn out against the writer of the options. So, learn, learn & learn before plunging into derivatives. It's a dicey game of betting.  By definition, the Put-Call Ratio is the number of put options traded divided by the number of call options traded in a given period. While the ratio is usually calculated on the basis of options trading volumes, it sometimes also computed using open interest volume. Since options are typically the hedging tools, put options are being used to hedge when bears are on the rampage or we can also use put options as a derivative instrument to bet on the decline. On the other hand call options are used for hedging against the bulls while they are on the roll or we bet can on market strength.  

The formula for computing PCR is very simple but the real fun lies in the interpretation of the concept.  

  Put Call Ratio (volume) = Put Volume / Call Volume  Put Call Ratio (OI) = Put open OI on a given day / Call OI on the same day  

Basing our case in the study on the options volume, a put/call ratio of 1.17 in Nifty means that for every  100 calls bought there were 117 puts bought. Which means a market participant in present scenario is in support of the bears. However, since the put-call ratio is a contrarian indicator essentially designed to determine the market sentiment to interpret what rest of the market participants are doing at a certain point in time. A PCR reading of 1 does mean that the market is in an equilibrium phase and the participants are neither very bullish nor bearish and the markets would remain sideways in near future. When it's  more than 1 it's very bullish as most people think the market is going down.  

However, a contrary opines interpret it as a good time to go long in the market as he assumes that further selling pressure will ease out as most market participants are already in a bear mode.  This means that  PCR as an indicator denotes that when the majority thinks the market is going to move a certain direction,  it usually does the opposite.  While interpreting PCR we must consider the fact that the average value for the put-call ratio is rarely 1.00  due to the very reason that equity options traders and investors almost always buy more calls than puts.  Hence, the average ratio is often far less than 1.00 for stock options and even in Bank Nifty. At present  Bank Nifty PCR in volume terms is .92 and in OI terms is .71. This would also mean that traders are mostly punting on the calls and funds are reluctant to hedge their portfolio with any other instrument apart from  Nifty.  I have been discussing mostly incorporation with Nifty. My view with Nifty PCR  at 1.17 by way trading volume is bullish and 1.34 on the basis of Open Interest is extremely bullish (this was the view on Nifty on 21st Jan.).