[04:37:33 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 rise.

[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 100 points.

[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 future
[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 and elaborate
[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 theoretically speaking
[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 this.
[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 the requirements.

[05:43:08 PM] => Reddykambal: When to buy share to get dividend? How about Zee to do in coming days?
[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 movement?
[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 (spot) market.

[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 profits?
[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 cycle.
[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 not happen.

[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 compare this?
[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 banned now.

[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 Indian institutions?
[06:29:14 PM] => MP: Fund rich players always have an edge. But then the markets are big.

[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