In India, options were first issued on an exchange in June 2001, when the world had already accepted options as a certified method to diversify and shift risk. The entry of options in India on any recognized platform was quite late, though they have since been accepted with open arms by the public, and as of 2011, the total value of the options traded in the year was close to Rs. 3 Crore Crore.
Options have appeared to the public as lucrative deals as these have limited downside and unlimited upside when bought. Although options in India have been welcomed, they don’t actually have the market and variety as in the developed countries. India, options have a limited field, and have concerned themselves to the equity segment basically, although currency options are also traded. In countries where financial markets are much more developed, options are available on commodities, swaps, interest rates, and even the weather. These kinds of innovative and exotic options can’t be expected to be made available in India anytime soon, for what we can attribute to the immaturity of the market.
Another fact that is peculiar about the Indian market is the fact that though derivatives have been introduced, the have a limited market, since the regulatory cap on the minimum contract value for them. This limits their appeal to the retail investors who could benefit by hedging their portfolio.
The technically sound Indian market is still a market that is governed by the expectation of the people and their sentiments. So far, what we can make of the scene of derivatives in India is that although India has the technology and infrastructure needed to venture further in the arena of derivatives, the mere immaturity of the market, regulatory hurdles etc. make it an uphill task for options and other derivatives to gain mainstream support for the retail investors, apart from the already active institutional ones. In this sense, India still has a long way to go before it can say that it is ready to accept the latest innovation in the field of finance, and in particular, options.

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The next option Greek that deserves a mention at this point, and also the only other option that is to be discussed under this series is the gamma. The gamma is for the delta what the delta is for the premium.
Understand it in this way, as when we discussed that the option’s delta is associated with the underlying and the strike price, but what happens when the underlying moves? When the underlying moves, the delta of the option also changes. We know that the delta reveals the change in the premium resulting from the movement of the underlying, and taking this another step ahead is the gamma, which in turn, reveals the movement in the delta that can be accounted for to the movement in the underlying. In terms that students of calculus would understand, the delta is the first order derivative, while the gamma is the second order derivative.
To understand the gamma better, we must take the help of an example, which goes like this: The spot is 8200, option is 8300 CE, and the delta is 0.3. The underlying then moves to the level of 8400, which implies that the option which was earlier out of the money, is now in the money. This naturally means that the delta of the option shall lie between 0.5 and 1, say 0.8. This difference in the delta is what is captured by the gamma.
For the same spot price, and when the option under consideration is 8100 PE with the delta of 0.4, a movement of 400 points that takes the current spot to 7800, will result in a change in the delta, say, that is increases to 1.0, then this change is reflected by the gamma.
Since the gamma reflects the change in the delta, it is really important that we consider the gamma while selecting the option, as gamma is one of the main components of the pricing equation for options, according to Black-Scholes.

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In the past posts, we have learnt the basics about the Greek delta, and in this post, we touch upon this topic for the last time. This time, we talk about the additive property of the delta.
The additive property of the delta implies that if two options, or more are bought by a person, then the delta of these options must be seen together to gain a fair view of the responsiveness of the portfolio to the market movement. Suppose a market participant holds two call options, one 8200 CE and another 8000 CE, and their respective deltas are 0.2 and 0.8 respectively. Thus, when the market gain in value, say 100 points, the holder of these options will also gain Rs. 100. This happens as he gains Rs. 20 on the 8200 CE and Rs. 80 on the 8000 CE. This in totality adds up to hundred, which is the actual movement in the underlying itself.
Since the delta is a measure of the responsiveness of the premium’s movement to the movement in the underlying, the delta of the portfolio here is 1, which is obtained from adding the deltas of the two options. This is true regardless of perspective we see from. This is also true for put options, as well as for portfolios that contain both calls and puts, in which case the portfolio delta is calculated by adding call deltas and subtracting put deltas.

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Options theory makes use of delta for its calculations, and thus it makes it all the more necessary to understand the delta. In the last article, we discussed the practical application of delta, but not into very detail. In this discussion, we shall take another step in understanding the delta.
Last time we understood how the delta affects the premiums, and to some of you, one thing might have struck, that why is the delta in the put options negative, while for call options, it is positive. Now, this has a very logical explanation. A call option becomes more favorable when the market level goes up, while the put option becomes more lucrative when the market level goes down. And when the option becomes more lucrative, it is natural that its value, i.e. the premium, increases.
Now, also remember that the delta is the rate of change of the premium with respect to the movement in the underlying. Thus, when the market level rises and calls become more lucrative, their premium increases by the rate of delta, which is positive as positive movement in the underlying makes the option more favorable. On the other hand, when the market gains value, the puts become less unfavorable, thus, their value is decreased, as signified by a negative delta.
Now, we talked in the last article that the delta is range bound, that is, its value shall not exceed 1, or fall below -1. To elaborate it, now we can say that the value of call options ranges between 0 and 1, while for put options, this value lies between -1 and 0. The reason of the association of positive and negative delta has just been explained, but still the question that remains is why the value of delta is range bound. To answer this question, one must go back to the definition of derivatives, which goes like this: A derivative is an instrument which obtains its value from an underlying.
So, it seems only reasonable that the derivative, at most, match the change in the value of the underlying. This is the reason that the values do not exceed one on either side of zero. Another thing worth noting is that although according to the delta calculations, the premium may turn negative, the loss to the buyer is always limited to the extent of the premium he has already paid, that is to say, the premium shall, atleast be 0.

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When we start with Option Greeks, we talk about the delta first. The delta is one of the fundamental elements of Options Theory.
The delta is a Greek alphabet, and its sign is Δ. The delta is used to measure the change in the option price with regards to the underlying. I think that puts it as simply as it can be put. Thus as we have already covered that the delta is measure of the rate of change in premiums in relation to the underlying, we must also be comfortable with the fact that it is represented as a ratio(or percentage), and that I should range between -1 and 1 only. This shall be explained in further discussions, but it must be kept in mind at all times.
Now, let us take an example. Suppose a call option has the delta of .4, Strike 8400, and market level is 8500. This means that when the market moves hundred points to 8500, the option premium, which was, say Rs. 12 earlier, will increase by Rs. 40 (100*.4) and become Rs. 52. This is the practical implication of delta. Now, suppose a put option of strike 8400, market level 8500, delta (-)0.4 and premium Rs. 15. Now, if the market were to lose another hundred points, and dive to 8400, the premium would increase by Rs. 40(100*.4), and become Rs. 55. This is the basic use of delta. The reason why call options and put options have different signs, is the matter of another discussion.
In the upcoming discussions, we shall discuss delta in much more detail, understand the association with call and put options, and it’s use, some basic market strategies, et al.

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Last time, we discussed how volume is an indicator of the movement in market trends. But this generalization is not foolproof, and we must consider other factors as well.
The reason we can’t consider volume as a sole indicator of the firmness of a movement is that it is susceptible to manipulation. Market players can manipulate and generate volume to t deceive the rest of the market. This is illegal, but that is no respite for the trader or investor as though the perpetrator shall be eventually punished, the losses incurred shall not be recovered.
What is the modus operandi of such manipulations? This question is quite expected, and we shall revert back to the basic example of Ravi and Rajesh to explain this. Suppose a village has 5,000 acres of land, and Ravi and Rajesh each own 2,000 acres. Suppose they want to increase the rates of their land, and they are successful in doing so, they can sell it off and earn huge profits. So what do they do to increase the profit? Suppose the market for land is the type of market we have on stock exchanges, where there are a lot of buyers and sellers who can transact with the help of a trading platform. So one of them, say Ravi sells his land for Rs. 5L per acre, which is more than the actual price, and Rajesh buys at this price. And then, Rajesh sells it back to Ravi at a higher price.
They repeat this series of transactions again and again, this leads to an increase in price. This price is inflated by the actions of the major players in the market, and is not sustainable as just as they exit the market, with lots of profits, the market will crash, and resume trade at earlier levels, or even lower. Now put this in perspective of the options markets. We can decipher that the volume, thus, must also be supported by open interest as well. This is a more than fair idea at this level.
We shall probably begin with option Greeks in the next discussion.

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Having talked about Open Interest (OI) and Volumes, it makes sense to gain a better understanding of these two. These two reveal certain points about the price movement, and there is a general consensus among traders what these signs indicate.
First let’s talk about the association of volume and price movement. An increase in volume is generally a positive sign about the price movement of a security, i.e. when the price of a security is increasing/decreasing, and the volume is also increasing, it signals that the price movement will trend, though the time period may vary from a few days to few months. On the other hand, if the volume is decreasing, it signifies that the movement is weak, i.e. a reversal in the movement is expected. If the price increasing/decreasing, and the volume is decreasing, it signals that the price is expected to decrease/increase in the near future, and that the established trend is about to end.
Now think about it. The reason that volume is usually a strong signal is that markets work on the mentality of the market participants. When the volume is high, it is an indication of the fact that a large number of market participants are ready to trade at the market level. Since, the people are trading in large numbers at the market level, the trend that has been set in motion is expected to continue as the market has expected this movement.
But do not take this to be an absolutely correct indicator, as this does not always work, and is susceptible to manipulation. But the signal is considered quite reliable if other factors are also considered. We’ll talk about other factor that allows scope for manipulation in the next article.

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One of the market participants are the put writers. They are generally traders who prefer to make risky trades and have the potential to take a large amount of downside risk. They are bulls and expect the market to go high. So let’s try to delve into what calculations go on in the mind of the call writer.
Call writers anticipate bullish movement, and thus have the options to purchase calls, securities or write puts. Suppose they were to buy securities, then they would take up unlimited risk without any added incentive, i.e. leverage. Thus we can more or less rule out this option. Second option that is available to them is buying calls, which limits the risk. Although the buyers limit the risk when they purchase calls, they do have to pay an unconditional payment to the writers, and this won’t be recoverable in any case. This makes them apprehensive towards the instrument as a bearish or even flattish market would result in a loss, as they would have to pay the premiums regardless, if the market doesn’t show much movement, it would only result in losses to the extent of the difference in the movement above the strike price and the premium, ceteris paribus.
So the option that is left is that of writing puts. Since they have a bullish stance, it makes sense to enter into writing puts, as an increase in the market value would only render their instrument un-exercisable, thus making them profits to the tune of the premiums that they stand to receive. Although they are exposed to much risk, their gain solace in the fact that if the market were to stay flat, they would stand a chance to gain from the time decay or theta loss in the put premium.
We have almost gained enough insight to begin with the complicated concept of the ‘Option Greeks’, and we must begin that vast topic soon, and topics that are vital to their understanding will be covered alongside.

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One of the terms that you might have already observed while looking up options, or should know before we proceed is open interest. Open interest is the indicator of the total number of open contracts in existence in the market at a time. Open interest is sometimes simply referred to as OI.
No suppose the case of Ravi and Rajesh again, and also assume that Ravi has sold a call option of NIFTY of the strike price of 8200. Here, clearly, Ravi is short by one lot and Rajesh is long by one lot. But the underlying contract is the same, and the different positions of Ravi and Rajesh are like the different sides of the same coin. Here, the open interest is the number of contracts in existence.
You might confuse this with volumes, but OI and volumes are not the same thing. First of all, volume is measured for the day, and begins at zero at the start of the day and increases during the day, while OI is measured at a point, and may increase or decrease during the day.
To illustrate this point, imagine that Rajesh further sells the option to his friend Rohan, that is, he squares-off his position. Here, the OI is still one, as the number of open contracts is the same as before, but the volume has increased by 100%. While the contract was only traded once (between Ravi and Rakesh) earlier, it has now changed hands once more (in the movement from Rakesh to Rohan).
Here, we must make the distinction very clear in our minds, as when we analyze the market, we must judge the two with different perspectives. We shall also study the analysis of the underlying with the help of volumes, probably in the next discussion.

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In the past discussions, we have shed light on the perception and thinking of market participants in a bullish market, but what would a participant do in a bearish market?
In a bearish market, the prices fall, and thus people exit on securities, buy puts, write calls, and so on. But say I choose to write calls, then what is it that attracts is what we’ll understand in this article. This can be supposed to be throwback to the previous article, where we pick out options one-by-one, and analyze them to justify our decision.

Well, in a bearish market, I could sell/short securities, and repurchase them later to book profit, but just in case my anticipated move doesn’t happen, I’ll have to book a loss. Well, this is pretty risky, and I wouldn’t want to invest money where I have equal chances of losing money. After doing some research, I learn that options are used to minimize risk, and that’s exactly what I want to do. So, in line with my anticipation that the market will fall, I understand that it’ll be beneficial to me to be able to sell at the current levels. Puts are the solution to this. When I purchase puts, effectively I gain a selling point which is equal to the strike price, and thus I buy the put options for some strike price which I anticipate the market would fall below.
This is only one of the options that a bearish trader has to himself, the other being writing of calls. Even in this, one might feel that the decision regarding the strike price is a bit random, but we’ll soon learn that the strike price can also be chosen in a logical manner.

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