Day 13 Basics of F&O Trading

What is F&O?
F&O is Futures and Op ons, which are derivate products in the stock market.

Why is it deriva ves?

Since they derive their values from an underlying asset, like shares or commodi es, they are called
deriva ves

Two types of Deriva ves:

 Futures
 Op ons

Futures Contract

Future Contract is a legal agreement between two par es to buy or sell a par cular commodity or any
deriva ves at a predetermined price at a specified me in the future.

Futures can be bought in lots only as per the lot size already determined and available to buy or sell.
Unlike Equity, Future Contracts comes with an expiry date, which expires on the last Thursday of every
month. Also, Futures can be bought with margin amount.

Upto three months Futures Contracts are available for trading at any given point of me.

Op ons

Two types of Op ons:

 CALL (CE)
 PUT (PE)
E stands for European in both Call and Put

Price change of CE and PE is basis the change in the underlying asset.

There are mul ple contracts available for both CE and PE, with predetermined prices for each contract.
For example, if the value of BANKNIFTY is 51000, contracts are available with prices of 51100, 51200,
51300 etc. and 50900, 50800, 50700 etc. These are called Strike Price,

Op ons Contracts also can be traded in lot size.

Decoding the Scrip:

BANKNIFTY 3rd JUL 51400 CE 811.05 means

Underlying Asset: BANKNIFTY
Expiry Date: 3rd July 2024
Strike Price: 51400
Type of Op on: CE
Premium / Value: 811.05

Contracts of BANKNIFTY expires on every Wednesday

Contracts of NIFTY expires on every Thursday
Contracts without date is the last contract of the month
If the value of underlying asset is increasing (rising), buy CE or sell PE
If the value of underlying asset is decreasing (falling), buy PE or sell CE

Underlying
CE BUY CE SELL PE BUY PE SELL
Asset
RISES RISES RISES FALLS FALLS
FALLS FALLS FALLS RISES RISES

Day 14 Op on Strike Price and Terminologies

Op ons are classified into three:

1. ATM At the Money
2. ITM In the Money
3. OTM Out of the Money

Current Market Price (CMP) of underlying asset (here in this case, BANKNIFTY) is 51783
For CE:
All Strike Price above CMP is called OTM (51900, 52000, 52100 etc.)
All Strike Price below CMP is called ITM (51600, 51500, 51400 etc.)
Strike Price closest to the CMP is called ATM (51800)

CMP 51783 CMP 51729

Strike Price Category Strike Price Category

52300 OTM 52200 OTM
52200 OTM 52100 OTM
52100 OTM 52000 OTM
52000 OTM 51900 OTM
51900 OTM 51800 OTM
51800 ATM 51700 ATM
51700 ITM 51600 ITM
51600 ITM 51500 ITM
51500 ITM 51400 ITM
51400 ITM 51300 ITM
51300 ITM 51200 ITM

For PE:
All Strike Price above CMP is called ITM (51900, 52000, 52100 etc.)
All Strike Price below CMP is called OTM (51600, 51500, 51400 etc.)
Strike Price closest to the CMP is called ATM (51800)

CMP 51783 CMP 51729

Strike Price Category Strike Price Category

52300 ITM 52200 ITM
52200 ITM 52100 ITM
52100 ITM 52000 ITM
52000 ITM 51900 ITM
51900 ITM 51800 ITM
51800 ATM 51700 ATM
51700 OTM 51600 OTM
51600 OTM 51500 OTM
51500 OTM 51400 OTM
51400 OTM 51300 OTM
51300 OTM 51200 OTM
See the illustra on in summary:
CE PE
ATM = <>SP ATM = <>SP
ITM = SP < CMP ITM = SP > CMP
OTM = SP > CMP OTM = SP < CMP

Important note: The ATM, ITM and OTM keeps shi ing as per the above, depending upon the CMP.

Op on Chain

Use the below link to see all the current contracts available to trade. It is like a supermarket, where an
item of different values is available to buy at the predetermined price.

h ps://www.nseindia.com/op on-chain

Decoding the above data:

On the le side of the data table, all CALLS can be seen, and on the right, all PUTS can be seen.
There are two different shades on both sides, and the same shades are inverted to each other. One is
plain white and other is shaded.
For both CE and PE, the shaded area indicates ITM and white shade indicates OTM.
The area where the shade changes is where the CMP of the underlying asset is moving currently.
In a live market, this data keeps on refreshing and changing basis the CMP of underlying asset.

The premium (value / price) keeps on increasing towards the ITM and keeps reducing towards the
OTM. As such, the profit and risk is more in ITM and increases in further up.
To avoid huge risk, it is be er to buy contracts which are at ATM.

Imagine a person buys a contract of SP 100 which is in ITM, and the market moves up and crosses this
SP, then it becomes OTM and value of the contract substan ally increases, resul ng in profit.
ITM Contracts are of high premium, and the profit chances and loss risk too are high.

Op on Chain Terminologies

Bid Qty: Quan ty which Buyers are demanding

Bid Price: Price at which Buyers are ready to buy
Ask Qty: Quan ty which Sellers are supplying
Ask Price: Price at which Sellers are ready to sell
OI: Open Interest (to be discussed in next chapters)
Change in OI: Change in Open Interest
Volume: Total number of shares traded
IV: Implied Vola lity
LTP: Last Traded Price

In Op on Buying, maximum loss is the amount invested, whereas in Op on Selling, the maximum loss
is undefined as the stock price can reach any high without any limit. For example, if a contract is
bought for Rs. 200, the maximum value it can fall is upto zero, hence the loss is Rs. 200. However, if
the same is sold for Rs. 200, and the stock price keeps on moving upwards, there is no limit for the loss
un l margin is u lized fully or exit with loss.

When the market goes up, buy CE or sell PE

When the market goes down, sell CE or buy PE

Towards expiry of every contract, OTM contracts will gradually fall and close at zero value.

Day 15 Open Interest and Op on Chain Analysis

In Op ons, sellers are more than buyers, especially bigger traders are present in Op ons.
For Op on Selling, Capital requirement is more than what is required for Op on Buying, as well as the
profit is bigger for selling, based on the capital invested.

Open Interest (OI):

OI is the total orders (contracts) of CE & PE.
OI to be looked at from a seller’s point of view, rather from a buyer’s point of view.

CE Sellers expect market to go down

PE Sellers expect market to go up

Look for the maximum OI around OTM, and the strike price could be a Resistance area for CE OI.

Suppose CMP is 51800. In the picture in previous page, the OI for CE is huge for the strike price of
52000. This is an indica on that for a CE Sell entry, this could be a resistance area. The chances of
market to fall from this point is higher, and a CE Sell could benefit from the trade.

For PE, sellers will be more in the OTM, and hence OI also will be more in OTM.

As per the same example below, e OI is huge for PE for the strike price of 51500. This can be
considered as a support area for PE Sell.
Change in OI:
Change in Open Interest is the number of contracts added in the current date. When this number is
in nega ve, it represents the exit (closed contracts) today.

Op on Greeks / Parameters

The value of contracts keeps on increasing towards ITM, and decreases towards OTM for the Op on
Contract. The reason for this is based on five parameters or Op on Greeks.
These are DELTA, THETA, VEGA, GAMMA and RHEO

a) DELTA
Whenever the value of underlying asset moves up or down, the premium value of the
corresponding Op on contract also changes as per the below calcula on:
Contract = 44200 CE 200
CMP = 44250. When it becomes 44260, premium will be 200+(0.5x10) = 205
Value of Delta at ATM is always 0.5, which is considered in above example.
When the underlying asset’s price is changed by one rupee, premium will change by the value
x Delta Value (the difference between buy/sell price and CMP).
CMP 45000, drops to 44500, then premium will be 200+(0.5*-500) =
Delta Value is always between 0 and 1.
From ATM to OTM, Delta value decreases from 0.5 to 0
From ATM to ITM, Delta value increases from 0.5 to 1
Delta value is always equal to or near 0.5 at ATM
More details can be checked in Sensibull Op on Chain.

Why you should buy ATM and not OTM?

Three traders’ scenarios are as given below:
CMP 51783 CE, Price Increase 100
Trader Contract Category Premium Delta Profit Total
Trader 1 51000 OTM 100 0.2 20 120
Trader 2 51800 ATM 200 0.5 50 250
Trader 3 52500 ITM 500 0.8 80 580
Profit Calculation: Delta x Price Increase

As per the illustra on, Trader 3 has maximum profit, at the same me has the highest risk also
in case the price drops by 100. On other hand, Trader 1 has lesser profit and has lesser risk for
a downfall of price. Trader 2 who took ATM has average profit and average risk.

If Price goes up, profit increases, if price goes down, loss increases.

b) THETA
Theta is also called Time Decay, which is an important parameter.
Value of Op on Contract’s premium will decrease as the me goes by, and eventually become
zero when the contract is expired.
Theta is depended on each day. Theta is purely based on me. If the expiry days are less, the
Theta value is high. The rate of decay will be higher towards expiry.
On consolida on or ranging market, the premium will be less by Theta Value. If a trader chose
to buy an op on contract and if the market is in consolida on, the trader stands to lose the
capital to the extent of Time Decay.
Therefore, Op on sellers have more benefit than Op on buyers in a ranging market.
CMP 51800, Premium 200, Theta Value -15. 200-15=185
 The probability of making profit for an Op on Buyer is 33%, as the trader stands to lose 33%
on consolida on and 33% on market going down.
Whereas an Op on seller has the probability of making profit for 66%, on both the price fall
as well as consolida on due to Theta (Time Decay).

One can buy CE or sell PE when expec ng market to go up. However, for PE Sell, the maximum
profit is the capital, but if the market goes does down, loss is unlimited. For CE Buy, the risk is
limited to capital and profit is unlimited if market goes up.
CE Buy Loss is limited to Capital PE Sell Loss is unlimited

Day 16 Op on Greeks and Op on Selling Strategies

c) VEGA
IV = Implied Vola lity: IV is the markets forecast of a likely movement in a security’s price. IV
is used to price op on contracts where high IV results in high premiums and vice versa. Supply
and Demand and me value are major determining factors for calcula ng IV
When IV is changed by 1%, the change in premium of op on contract is called Vega.
CMP 51800, Premium 200, IV 9, Vega 15, Premium becomes 215.
The above is only an example as it is difficult to find out the values since the change in premium
is a result of change in all the parameters.

d) GAMMA
Gamma is change in Delta

e) RHO
Change in Interest

Gamma and RHO are not so important to trade, these are only for technical informa on
behind the changes happening in the premium, which is based on the net value of all these
parameters.

Op on Selling Strategies

Using the tools in Websites like Sensibull or Op ons Opstra, we can create strategies for Op on Selling.
In Op ons Opstra, select Op ons Por olio, Select Real Por olo, click on Strategy Builder, select Index
/ Stock and relevant contract / expiry.

Straddle:
In a ranging market, Selling the CE & PE on ATM at the same me is called Straddle. Profit will be net
of CE & PE.
Blue line indicates today’s P&L, Green Line indicates P&L towards expiry.
CMP 51783
Selling ATM CE & PE
Sell 51800 CE 225 and Sell 51800 PE 225
Check the breakeven point (BEP) in strategy builder to ensure the BEP is within the range. If it is a
ranging market and if the price is within the BEP towards expiry or at the me of exit, the profit will be
net of CE & PE.

Basis the strategy builder, take the trade with all other strategies.

Save the strategy to check the status on a later date or before expiry, and analyse the profit and loss
from the staved strategy. Free version of Opstra allows only limited strategies to be saved, so the
previous ones need to be deleted before adding a new strategy.

How to get margin for trade?

Since the risk in Op on Selling is unlimited, it requires a huge margin to place a trade for sell. To get
enough margin for this, buy a far OTM with a smaller premium for the required quan ty. Important
to note here, this buy will mostly end in loss because it is a far OTM and probability of it to become
profitable is less. For margin for CE selling, buy far OTM CE, and for PE selling, buy far OTM PE.

Strangle:

Selling OTM CE & PE

Sell CE and PE together from OTM, which should be around 600 to 800 away from the CMP. If the
market closes within the breakeven point, this becomes a profitable trade.
Call Spread:

CMP 51783

SELL OTM 52500 CE 200

BUY OTM 52900 CE 100

Buy doing this, the maximum loss can be limited using the Buying op on as both the contracts will be
come zero at the me of expiry. If the market is down, the profit will be 200-100=100. If the market is
going up, CE Sell will be loss and CE Buy will be profit.

Put Spread:

CMP 51783
SELL OTM 51200 PE 200
BUY OTM 50800 PE 100
Iron Condor:

Adding Call spread and Put Spread together is called Iron Condor strategy.

Iron Fly:

In Straddle, whenever the market goes out of BEP, it leads to heavy losses. Using the Iron Fly strategy,
loss can be limited as follows:
Add the Straddle strategy. (Selling ATM CE & PE). Check the up and down BEP and Buy PE for the lower
BEP and Buy CE for the upper BEP.
For CMP 44603, Sell 44600 CE, Sell 44600 PE, Buy 43700 PE, Buy 45500 CE.

Day 17: Op on Selling Strategies and Adjustments

CE Ra o Spread
Buy ATM CE at the available premium, Sell OTM CE 2x to match the same premium.

For example, Buy ATM CE 300 x 1, Sell OTM CE 150 x 2. When goes down, Buy CE will become 0 and
gives loss of 300, and at the same me Sell CE will give profit of 300, hence the net P&L will be zero –
no profit and no loss. But if the market closes 100 up, the Buy CE will give profit of 100. The Sell CE
will give profit of 300 as it becomes 0 towards expiry. Market closure at mid-range gives maximum
profit. Since OTM premium is always less than ATM, try to match
PE Ra o Spread
Strategy opposite to the PE Ra o Spread is called PE Ra o Spread, which is Buying ATM PE 300 x 1,
Selling OTM PE 150 x 2. All condi ons of PE Ra o Spread works in opposite direc on in this strategy.

Iron Bu erfly
Adding both CE and PE Ra o Spread strategy together is called Iron Bu erfly. In this, anywhere within
the BEP will end in profit.
All the strategies in a brief summary:

Straddle: On Ranging market, Selling ATM CE & PE

Strangle: On Ranging market, Selling OTM CE & PE
Call Spread: Expect market to be down, Sell and Buy CE OTM
Put Spread: Expect market to be up, Sell and Buy PE OTM
Iron Condor: Adding CE Spread and PE Spread together
Iron Fly: Adding Straddle with BEP
CE Ra o Spread: Buy ATM CE, Sell 2x OTM CE at half the premium
PE Ra o Spread: Buy ATM PE, Sell 2x OTM PE at half the premium
Iron Bu erfly: Add CE & PE Ra o Spread together

Op on Selling Adjustments
In case the market goes in opposite direc on, Op on Selling Adjustments can limit the loss using few
methods.

a) Shi ing:
When the market goes down, and if it is expected to go further down, then close the current
trade with minimum loss which is taken at the lower BEP.
In other words, closing or exi ng at minimum loss and add a new straddle to recover the loss.

b) Averaging:
Adding another CE & PE Sell with a nearby contract when the trade meets BEP.

Classes by: Jouhar Ali

Notes by: Shibu Nair