Definitions

Some more fancy and not so fancy terminologies related to Options (or Derivatives in general) in this post:

Underlying: It is the item to be traded (in our example – the sugar cane). It could be anything under the Sun like Nifty or any other index, Individual stocks, house (estate agents do it all the time) or sugar cane literally

Strike Price:  Agreed price of the item to be traded (in our example – 2000 Rs). It can vary in a very wide range. For Nifty at 5000 the available options can be from 2500 to 7000 and more. While the most traded options are close to value of Nifty, such wide options serve some purpose which we will address in a separate post

Expiry Date: This is the time limit within which the option is valid (in our example – 2 months). This also covers a very wide range from few months to many years. Again the most popular and most traded option is the one which is valid for next one month or less. To keep matters simple, NSE keeps the common expiry date of monthly options as the last Thursday of every month. We will be talking mostly about the near month (options expiring on coming expiry Thursday) or next month (options expiring on next expiry Thursday)

This calls for an example…

Let’s day today is 17^th September 2011. The last Thursday of this month is on 29^th and hence the option of this month will expire on 29^th. New series will start from 30^th which will expire on October 27^th which is the last Thursday of October. However you can trade the October series even today. In fact you can trade November series as well. On NSE you can trade present series and next two series. We will simply call the present series as Near Month, next series as Next Month and series expiring after two months as Far Month series for simplification.

This is more than enough for one post… anything more and it will only cause confusion. I will have only couple more go as I try to confuse you… err, I mean, only couple more post for definitions.

It will have meaning of call, put, open interest, call/put ratio, volatility, intrinsic value, extrinsic value, time value, value decay, black-scholes model, alpha, beta, delta, theta, Indica Xeta and most important of all Duckworth-Lewis method.

Hey, I am just kidding… do come back for next post.