PM] => DISCLAIMER
[04:37:50 PM] => Mr.
Mukul Pal is an independent professional. At the time of this
conversation / chat, Mr. Manish may or may not have positions
in the stocks mentioned below , although holdings may change
at any time.
[04:38:37 PM] => The
views expressed by Mr. Mukul Pal is based upon information
that he considers reliable, but does not represent that it
is accurate or complete, and it should not be relied upon
as such. None of the information contained herein constitutes,
or is intended to constitute a recommendation of any particular
security or trading strategy or a determination that any security
or trading strategy is suitable for any specific person. To
the extent any of the information contained herein may be
deemed to be investment advice, such information is impersonal
and not tailored to the investment needs of any specific person.
You should consult with and rely upon your own advisors whether
and how to use such information in making any investment decision.
[04:38:55 PM] => Lastly
the views expressed by Mr. Mukul Pal have no bearing whatsoever
with that of IRIS Ltd. IRIS does not guarantee the accuracy,
adequacy or completeness of any information and is not responsible
for any errors or omissions or for the results obtained from
the use of such information. IRIS especially states that it
has no financial liability whatsoever to any user on account
of the use of information provided on its website www.myiris.com.
[04:44:50 PM] => Myiris:
Welcome to the live chat session, Mr Mukul Pal has just arrived
and will be joining the session in few minutes
[04:55:23 PM] => Welcome
to the chat session Mr Mukul
[04:56:54 PM] => Chopra12:
What is option?
[04:57:43 PM] => MP:
Option just like Futures are part of the Derivatives tools.
However, unlike Futures Options have an insurance cost, which
a speculator pays for a view on an asset. This asset can be
an Index or a stock. The view is allowed for a time period
of 1 to 90 days and protects the speculator from the downside
[04:58:15 PM] => Suhas:
What’s the difference between a call option and a put option?
[04:59:01 PM] => MP:
A Call is a Buy and a Put is a Sell, right to buy and right
to sell. A trader has the right to buy or sell a stock after
a time period without worrying about a possible loss. We ignore
the writers here. Writing or selling as we call it is a specialized
and more technical aspect.
[04:59:53 PM] => Vivek: Can options
on Indexes be traded on a daily basis or is settlement on
a single day
[05:00:40 PM] => MP:
Yes they are traded on a daily basis. Settlement is different
and varies with the different tools. For example in both Index
Futures and Options we have the European system which calls
in for a monthly expiry whereas the Options based on Stocks
will be American in nature and settled daily. However, irrespective
of the settlement a trader can see his mark to market losses
and gains daily.
[05:01:25 PM] => Rameshv: Is the
concept of Futures new to India. If I remember correctly the
same was employed for Unit 64 way back in 1988 - 90
[05:02:25 PM] => MP:
See frankly speaking it is not just futures but even options
that are traded in the grey market even today. We still have
jhota phatak and other synthetic option tools traded in the
grey market at Ahmedabad. SO nothing new about this. What
is different however is to bring it on a structured platform
and institutionalizing the set up.
[05:03:03 PM] => Krishnam: Do
you think that Futures & Option's are far superior to our
erstwhile Badla? Why and how?
[05:04:10 PM] => MP:
Yes why do you think we banned badla in the first case if
it was so superior. The recent scam was basically because
of the badla system not being able to manage the default and
counter party risk.
[05:04:26 PM] => The
systemic risk was simply too high to manage. F&O avoids this
systematic failure and delineates the cash market from the
carry forward market.
[05:05:16 PM] => This
shift was essential as we are moving toward a global market
and capital account convertibility where we are going to see
higher volatility and higher risk in the markets. Derivatives
are hence the rightly needed risk management tools.
[05:06:06 PM] => Manish: What
are the increment / decrease in the ticker of the index. Who
gives the denomination i.e. lays down that the June index
shall have the series of 3300,3400 etc.
[05:07:23 PM] => MP:
SEBI has stipulated a minimum number of strike prices in-at
and out of the money. A new strike price emerges as soon as
the market movement leads to an in the money strike price
out of the money. There are introduced by the sytem itself
like at BSE's derivatives trading screen. It is a cycle of
[05:08:13 PM] => Amit: If I sell
a Call or sell a Put I am obliged to give delivery / purchase
delivery. Then how does it differ with buying / selling a
[05:09:14 PM] => MP:
See we should not forget that we are talking about speculation
here. Derivatives are intrinsically speculative tools. Moreover,
how can you give delivery of the Sensex. 85 per cent of all
the listed derivatives trades are squared off and not exercised.
[05:10:03 PM] => Sunita_Rao: What
are the various forms of Options could you kindly explain?
[05:10:53 PM] => MP:
If you are asking about the types, we in India have just one
kind of Option tool traded today. This is the Index based
Option, where one takes a view on the Index. On July 2 we
should see the launch of scrip based Options. These options
will allow a trader to take a view on the individual scrip
for an aggregate period of 90 days. There are options based
on Futures too but our Indian markets are not mature enough
today to handle such high leverage instruments.
[05:11:54 PM] => Rajkishor: Could
you explain what this Black and Scholes formula is all about?
[05:12:47 PM] => MP:
BSOPM as we call it is a model to price a call option based
on certain variables like time period to expiry, volatility,
dividend on the underlying stock etc. These are theoretical
values and just give a trader an idea of a fair value of the
Option. Speculative view today will need much more than BSOPM
to price the Option correctly.
[05:13:48 PM] => Mrana: If I had
sold an option and it expires worthless how do I square of
my transaction. For example lets sale I sold a call option
of July index at 3500 and on expiry the index is at 3400.
Obviously the option holder would not exercise his call. Then
how would I square my short?
[05:15:09 PM] => MP:
You are right the option holder will not exercise his call.
U are the one who made a mark to market gain. At expiry the
exchange would do the needful and square it on your behalf
by reversing your position crediting the gains to your account.
[05:17:36 PM] => Ghanshyam: If
I sold an Aug Index option at 3450 at a premium of say 100
and against that I bought my self an Aug Future at 3475 would
it be a legitimate trade. Would I also be in the money? What
would be my expense besides margin and interest thereof. Will
I be completely hedged?
[05:18:09 PM] => MP:
In the money Option depends on the ruling Index price at that
point of time. Moreover I think the Options have a minimum
stipulation of 100 contracts whereas in Futures a contract
is at 50 times the Index.
[05:18:40 PM] => So
actually you are not hedged but exposed on your option leg.
Moreover the total price you pay on both legs is different.
The hedge is not perfect though the trade is very much legitimate.
[05:18:56 PM] => Vinvent77: If
I sold a June Index Put Option at 3450 at a premium of 10
would I be in the Money at this point when the current Index
is 3400? If no would it be better to buy a June put at 3450
at a premium of say 50 at the index of 3400? Kindly illustrate
[05:19:54 PM] => MP:
Yes you are in the money as the ruling price is below the
ruling price. You sold at a higher price.
[05:20:46 PM] => Rashesh: When
is the settlement for F & O\'s for the NSE and BSE. Are we
having one settlement cycle from now on?
[05:22:13 PM] => MP:
Yes we have same settlement dates for derivatives at both
BSE and NSE. In case of Index Futures and Index Options it
is last Thursday of every month.
[05:23:04 PM] => Sampart: Am I
allowed to write an option - I happen to be a trader / investor
[05:24:05 PM] => MP:
Yes you can, but please be careful as the downside risk is
unlimited in case one writes an Option.
[05:25:26 PM] => Subramanium:
There are certain calculators which Delta Gamma etc. How do
I interpret it? I do not know if you have seen the calculator
on the BSE India website - I cannot seem to make head or tail
of what it means. Can you kindly explain when is it a good
time to go long / short an option based on these calculators
[05:26:13 PM] => MP:
Option greeks take time to steep in. There is literature available
on the same very BSE site, which talks about these Option
greeks. About trading based on these theoretical prices...Yes
it is a very important benchmark for any trader.
[05:26:51 PM] => You
can't just buy on any premium. One needs to price it and see
whether he is buying or selling near the theoretical price.
The pricing can change as the calculator allows you to put
in your own volatility estimates, which I am sure will be
available on both the exchanges websites very soon.
[05:27:27 PM] => Ashokm: is the
writer of an option a view taker. If he is not how does he
make his money?
[05:28:18 PM] => MP:
Derivatives are a zero sum game and behind every matched trade
there are two views, one of a seller and one of a buyer. So
the writer is in the game for money too. However he earns
more on volumes than mere capital appreciation. His source
of earning is the premium, which the Option buyer pays him.
[05:29:10 PM] => Jamshed: What
are the various strategies if any to optimise profit in a
say bullish environment. Could you kindly take some time to
explain each strategy, I hope you have the time to answer
[05:30:10 PM] => MP:
The beauty of Options is that they not only allow you to make
money in a stagnant market but also in a high volatile situation.
[05:32:14 PM] => Illustrating
a simple strategy: In a bullish spread one can buy a lower
strike price and sell a higher strike price. This means that
Options allow him to make money if the market goes above the
lower strike price. It allows him to square off and exit at
the higher strike price. A bearish spread works on similar
lines. There are many other variations that can be worked
out like a straddle, strangle, butterfly bread etc.
[05:32:55 PM] => Kartek: Can I
do a naked short i.e sell a call or sell a put option or sell
a future without having the underlying stock or index
[05:34:04 PM] => MP:
Covered calls are a stipulation for institutions, a retail
investor can trade a naked call or put. It is the same with
Futures, Institutions can't short futures without having the
underlying stocks whereas a retail investor can do it.
[05:36:34 PM] => Myiris : Hold
on friends, Mr Pal is just taking a break for a minute
[05:41:50 PM] => Ramki: What are
the margins currently on buying / selling F & O\'s
[05:42:50 PM] => MP:
We have moved to a SPAN based risk management system at both
BSE and NSE Derivative exchanges. Prior to this we had the
VAR methodology, where we have seen margins varying from 5
per cent to 15 per cent. These were margins stipulated by
the exchange. A broker has to make sure that his clients fulfill
[05:43:08 PM] => Reddykambal:
When to buy share to get dividend? How about Zee to do in
[05:43:57 PM] => MP:
See ZEE is the only major scrip in the media segment. The
negativity linked with the scrip has been discounted for a
long time when it touched the sub Rs 100 levels. In case of
a market upside, which is imminent these should be one of
the counters that should do well.
[05:45:15 PM] => Rajesh_k_parikh:
what is my pay-off if I buy a put and a future on the index
with same expiration dates and strike prices?
[05:46:25 PM] => MP:
In ideal and perfectly hedged cases you will lose some money
as you have incurred an additional cost in buying the option.
Just draw the payoff profiles and u can see for yourself.
[05:47:23 PM] => Jayant: Could
you explain this funda to me. I saw today that on the BSE
that the BSXCJune3450 had a bid at 5 and a seller at 95. The
index at that given time was 3390. As a trader what would
you do. Could you explain the logic by probably playing around
with different nos.
[05:49:00 PM] => MP:
The bid offer spread highlights the illiquidity in the market
and that the buyers and sellers quote have a wide difference
between them. It's only because of such bid-ask spreads that
the no of option trades are low.
[05:49:15 PM] => As
a buyer you can only make money if the market moves beyond
3455. This is only possible if the market moves up by 65 points.
Now this is a call u have to take.
[05:51:04 PM] => Hiren: What is
the connection between cash market and futures market? How
to predict the cash market movement from the futures market
[05:51:57 PM] => MP:
There is no better forecasting tool than the Futures for the
cash market. Why do the trading community buys and sells after
a glimpse of NASDAQ futures. Primarily because Naz futures
give a clear idea about the underlying Naz composite. When
we can lok at US futures market as a forecasting or a trading
tool for Indian cash markets. Why can't we use Futures based
on the Indian indices. We can. And u will be surprise to know
that the forecasting works amazingly.
[05:53:11 PM] => One
has to look at carry costs, basis, volumes, open interest
and even plot charting software on Futures to see how the
cash market will behave. I have been personally working on
forecasting for about a year now. The strike rate surprises
me at times. It's only when a majority of players take to
future and the volumes increase that we can see forecasting
using futures coming of age
[05:53:57 PM] => Rohita: Is there
going to be a spot market for Indices?
[05:55:08 PM] => MP:
We have a spot market for Indices. SENSEX and Nifty are the
spot markets for indices. And post July 2 the spot will be
separated from the carry forward making it a perfect cash
[05:55:46 PM] => SNR: What will
be impact on the total volume of share market after introducing
the option in spite of badla system
[05:56:13 PM] => MP:
We have just one way to go and that is up.
[05:58:33 PM] => Krans: How the
options are useful in predicting the cash markets movements?
What should be considered, premium or strike price or both?
In what way?
[05:59:30 PM] => MP:
Futures are better forecasting tools. Options can just reinforce
the underlying trend. I suggest you look at Futures. It is
too early for us to look at the Put/ Call ratio to draw conclusions
about the underlying movement.
[06:00:06 PM] => Sachink: Is this
right time to introduce options when other facilities like
electronic tranfer of funds and securities are not in place?
[06:00:47 PM] => MP:
Do we have a choice. There is no badla where do you want the
carry forwarders to go :D
[06:01:31 PM] => Rpanikar:What
is span margining system? Explain how it calculates the margin?
[06:02:00 PM] => MP:
It is a simulated software which integrates itself with the
trading server and calculates the worst loss scenario for
an Option or Futures trader factoring in all possible scenarios.
This is the way the margin is specified. The software ensure
that the possibility of a default is minimal. This keeps the
risk under check.
[06:02:56 PM] => Kjeetesh: Why
there is need to take margins for buying an options as the
person is already paying the amount which could be its maximum
[06:03:38 PM] => MP:
You are confusing between premiums and margins. These are
two separate things.
[06:04:15 PM] => Myiris:
Hold on friends for a minute, Mr Pal is just on a call
[06:07:07 PM] => Sanjeev Kumar:
Sir, how can we quantify risk in writing options?
[06:08:39 PM] => MP:
Ultimately one should realise that even writing an Option
is a speculative transaction. The only difference is that
writing an option pays you a premium to take a potential risk
while hedging the buyer. Quantifying the risk can only be
done if one reads the underlying asset well. If your view
about the markets or the scrip is good, the possibility of
a loss is minimal. The answer to a writers woes is the value
the underlying well.
[06:09:13 PM] => Manish Turakhia:
Under Rolling regime do you foresee Brokers organizing funding
for traders and institutions lending the stocks in T3/T5 pay-in/pay-out
[06:09:42 PM] => MP:
Yes. And you won't believe me but mechanisms are already being
designed for such financing.
[06:10:07 PM] => Soeb Doi: What
will be criteria for determining option premium?
[06:10:28 PM] => MP:
There are Option pricing models which determines the premium.
Both BSE derivatives trading and NSE derivatives trading screen
has a calculator. Try using them. There are many calculators
available on the net too.
[06:13:49 PM] => Vijay V. Mane:
Options are much flexible than Futures. Would Index Options
kill the market of Index Futures?
[06:14:35 PM] => MP:
Futures and Options are two different tools, with different
payoffs and risk preferences. Such an expected overlap will
[06:14:58 PM] => Prashant: What
is the difference between European and American Option? In
Indian bourses what is being followed?
[06:16:10 PM] => MP:
European doesn't allow you a daily settlement whereas American
Options are settled daily. Index Options are European in natures
whereas Options based on stocks will be American.
[06:16:49 PM] => Manish: What
do you mean by in-Atand out of the money
[06:17:24 PM] => MP:
In the money is when you are in a mark to market gain positions
i.e. if u square off your position at that point of time you
can make a gain. At is neutral and out is a loss.
[06:20:55 PM] => Myiris: no more
new questions please, Mr Pal is constrained for time and hence
will answer questions already asked.
[06:22:47 PM] => Rajalakshmi:
What exactly is the carry cost in futures? How does one compute
it? is there an interest rate benchmark with which one can
[06:23:45 PM] => MP:
Carry cost is nothing but an extension the price of the Futures
contract ruling at that time. In simple words it is annualised
yield a buyer will get from the market and a seller offers
in the market. It tells a tall about the market sentiment
in the short - medium and long term. U can compare this with
ur cost of funds and the risk free rate of return.
[06:24:38 PM] => Janaki: As an
individual, how can I buy and index option. And from whom?
Can my regular broker do this for me?
[06:24:57 PM] => MP:
Yes he will forced to do it as all the deferral have been
[06:26:13 PM] => Rk: In order
to understand how theoretical value of an option is arrived
at, do you think that one should know calculus?
[06:26:31 PM] => MP:
No..life is easier
[06:26:49 PM] => Jhingan: How
accurate is the carry cost in forecasting future price movement
in cash market?
[06:27:03 PM] => MP:
Pretty accurate if u can read it well..reinforce the analysis
with volumes and open interest positions
[06:27:25 PM] => Rajeev: How much
impact good monsoon would have on the Sensex?
[06:27:39 PM] => MP:
This is old news... we have a 14 perfect in a row
[06:28:12 PM] => Ashish: Given
that our operators funds etc. are excellent at manipulating
the markets are you telling me that the F & O and Cash markets
cannot be manipulated at all by the rogue traders
[06:28:29 PM] => MP:
Try doing it :D
[06:28:56 PM] => Harsh Gupta:
Sir, what would be the role played by FIIs in derivatives
market? Also wont they will have an edge vis-à-vis
[06:29:14 PM] => MP:
Fund rich players always have an edge. But then the markets
[06:29:24 PM] => Feroza: The Open
Interest as shown on various websites is it a netting of of
all long calls, short calls long puts and short puts
[06:29:39 PM] => MP:
Open Interest is always one side of the investment spectrum.
Longs will always equal the shorts in the derivatives market.
[06:30:31 PM] => Vinvent77: Excuse
me Mr. Pal but if I sold a June Put option at 3450 at a premium
of 10 on expiry (since the Index is down I would have to compulsory
buy it. How can I be in the money ??
[06:31:20 PM] => MP:
Yes u are a writer and u have a mark to market loss.
[06:32:13 PM] => Myiris
: Thank you Mr Pal for excellent tutorial on F & O's
[06:33:42 PM] => MP
: I am overwhelmed by the interest shown by you participants
in F & O's , I am glad to see such a response, happy trading
post July 2, 2001
[06:34:55 PM] => Thank you all
the participants and don't forget to join us for the next
live chat session on Monday 18 June, 2001 with Mr Anup Maheshwari
Fund Manager- DSP Merrill Lynch
[06:35:10 PM] => Thank you and
bye for now