Straddle and paired options contracts

• The BSE (Bombay Stock Exchange) started new specialized contracts, named ‘straddle and paired options’, in its currency derivatives segment.
• Till now to come into option contract traders have to choose either call option or put option on one underlying asset. But now traders can use both put and call options on one underlying asset.

Paired Contract

•  The ‘paired options’ contracts are specialized two-legged contracts that allow a trader to take positions on two different option contracts belonging to the same product, at the same strike price and expiry.
• The paired option contract will comprise one call leg and one put leg. Buying such contract implies taking a buy position in the individual Call option contract and sell position in the individual Put option contract with same strike price and expiry.

The ‘straddle’ contract

•  The ‘straddle’ contract is a specialized two-legged option contract and comprises two individual legs — the first being the call option leg and the second being the put option leg. Buying a straddle contract implies taking a buy position in the individual Call option contract and buy position in the individual Put option contract with different strike price and expiry.
• Both these contracts are available on current, near and far monthly as well as quarterly and half yearly option contracts.
• The paired option contracts are already available in the BSE's Equity Derivatives segment and now they will also be available in the Currency Derivatives segment.
• The straddle contracts will be offered in the Currency Derivatives segment to start with.

About Derivative Market and Option contract

A derivative is a contract between two parties which derives its value/price from an underlying asset. The most common types of derivatives are futures, options, forwards and swaps.

 Option contract

• Options are contracts between two parties to buy or sell a security at a given price.
• They are most often used to trade stock options, but may be used for other investments as well.

Options contract is of two types:

a) Call Option:

• If an investor purchases the right to buy an asset at a particular price within a given time frame, he has purchased a call option.
• For example, in a simple call options contract, a trader may expect Company XYZ's stock price to go up to 100 rupee in the next month.  The trader sees that he can buy an options contract of Company XYZ at 10 rupees with a strike price of 75 rupees per share (current price of share).  The trader must pay the cost of the option (10 X 100 shares = 1000).  The stock price begins to rise as expected and stabilizes at 100 rupees.  Prior to the expiry date on the options contract, the trader executes the call option and buys the 100 shares of Company XYZ at 75 rupees, the strike price on his options contract.  He pays 7,500 rupees for the stock.  The trader can then sell his new stock on the market for 10,000 rupees making a 2,050 rupees profit.

b) Put option

• If an investor purchases the right to sell an asset at a given price, he has purchased a put option.  
• For example, if trader bought put option contract of any company ''XYZ with a strike price of 100 rupees per share for a specified time period. Trader will pay the fees for its put option. If in future price of share goes down to 75 rupees per share, trader can sell this share at its strike price which is 100. So, with the fall in share, trader is making profit.

By: Vishal