Why do stock prices go up and down and what u can do about it.

Why do share prices go up and down?

I shall try to give you the short answer first! Stocks go up because more people want to buy than sell. When this happens they begin to bid higher prices than the stock has been currently trading. On the other side of the same coin, stocks go down because more people want to sell than buy. It’s just as simple as the Demand-Supply rule of economics which most of us are aware of.

In order to quickly sell their shares, they are willing to accept a lower price. Having said this, one would try to contemplate at the various reasons that cause traders to want to buy or sell a stock. It is possible to look at the financial statements of a company and determine what the company is worth. Investors who take this approach are said to examine the company's "fundamentals" and are known as fundamental analysts. They attempt to find an undervalued stock - one that is trading below its "book value". They feel that sooner or later other traders will realize that the company is worth more than the current price and begin bidding it up.

Another investment psychology it called the "technical approach". This is when traders closely examine charts of the stock's past performance looking for trends that they feel will be repeated in the near future. These traders also look at what is happening in the market as a whole trying to anticipate the effect it will have on an individual stock.

Sometimes companies trade at half their "book value" while at other times they may trade at double, triple, or even higher. That is when we say that a particular stock is “overvalued” or “undervalued”. When this happens it can create some sudden and large price swings. This volatility is what makes it possible to make large profits in the market. It is also responsible for huge losses though. Think if it like this - The stock market is essentially a giant auction where ownership of large companies is for sale.

If some investors think that a particular company will be a good investment, they are willing to bid the price up. By the same token, when many investors want to sell a stock at the same time the supply will exceed the demand and the price will drop. Watching the stock market is somewhat similar to watching a ball bounce. It goes up and comes down and then goes right back up. This can be extremely frustrating for many investors who want it to go up in a steady pattern.It is this volatility in the market as a whole and in the individual stocks that the experienced trader profits from.

In the absence of a lot of experience, the individual investor needs a proven source of information and direction. The daily stock market recommendations from S K Investments can supply this need. Many investors (as opposed to traders) have a "buy and hold" philosophy. This would work well in a constantly rising market. Unfortunately, the stock market does not go up in a straight line. There are ups and downs that frustrate this type of investor.Today many investors have become "traders" who buy and sell on the fluctuations of the market and the individual stocks. These traders make money in any market - up or down!

A well known investment site lists the following reasons for stocks going up and down:

Why Stocks Go Up
* Growing sales and profits
* A great new president hired to run the company
* An exciting new product or service is introduced
* More exciting new products or services are expected
* The company lands a big new contract
* A great review of a new product in the press or on TV
* The company is going to split its stock
* Scientists discover the product is good for something else
* Some famous investor is buying shares
* Lots of people are buying shares
* An analyst or a brokerage house upgrades the company, changing her recommendation from, for instance, "buy" to "strong buy"
* Other stocks in the same industry go up
* A competitor's factory burns down
* The company wins a lawsuit
* More people are buying the product or service
* The company expands globally and starts selling in other countries
* The industry is "hot" -- people expect big things for good reasons
* The industry is "hot" -- people don't understand much about it, but they're buying anyway
* The company is bought by another company
* The company might be bought by another company
* The company is going to spin-off part of itself as a new company
* Rumors
* For no reason at all

Why Stocks Go Down
* Profits slipping, sales slipping
* Top executives leave the company
* A famous investor sells shares of the company
* An analyst or a brokerage house downgrades his recommendation of the stock, maybe from "buy" to "hold"
* The company loses a major customer
* Lots of people are selling shares
* A factory burns down
* Other stocks in the same industry go down
* Another company introduces a better product
* There's a supply shortage, so not enough of the product can be made
* A big lawsuit is filed against the company
* Scientists discover the product is not safe
* Fewer people are buying the product
* The industry used to be "hot," but now another industry is more popular
* Some new law might hurt sales or profits
* A powerful company enters the business
* Rumors
* No reason at all
Anyone who is known to the stock market can relate to all these reasons i feel.

Day Traders EDGE

Part II
It is easy to become a day trader, but many do not stick to prudent, common sense financial principles, which is why you must have heard that day traders lose a lot of money. In reality, this is not true - they most often make money because they have access to sophisticated stock price forecasting tools, the latest news and most of all, they do not take any positions home and hence are not subject to any overnight news or changes like company announcements, economic indicators, commodity prices, the sub-prime mess, political backdrops and so on.Having said that, let us also add that to become a successful day trader, you need to follow sound financial rules and get a basic grip on the stock market.

Basic issues faced by day traders

1. Newbie’s regard day trading as a glamorous, hotshot job - it is anything like that. Day trading is about acting swiftly while purchasing/selling stocks at a price and squaring up positions at a profit. One has to be street-smart and active to survive.

2. They must understand the stock markets and different indices - for example, if the IT sector or Oil stocks fall, then they can go short on the weakest stocks in that category, and so on.

3. They need to work with adequate working capital. As discussed earlier capital preservation is the key.

4. Online traders also have to invest in a high-speed broadband connection and subscribe to a sophisticated, proven website that doles out technical recommendations at regular intervals every trading day.

5. They must use their judgment wisely when it comes to booking profits or cutting losses.

The Most probable Day trading problems and most probable ways of overcoming them:

1. Many traders do not book profits or cut losses quickly - they wait to gain some more out of the trade. The result is that many times profits evaporate and losses build up. As a trader, you must learn to snake in and out of your positions quickly and be content with small profits or losses. Then even if a position where you have booked a profit skyrockets don’t regret because otherwise you would have been sitting on a loss which was also equally likely.

2. Some do not cut losses at all - instead they take delivery of the security (if they have gone long on it). The result is that they have very little or no capital left because of which they are not be able to trade daily, and that might frustrate them. Do this only if you ar sure and the company is sound.

3. They should trade within their financial capacity and at no time overextend themselves. Overextending yourselves amounts to gambling, not trading. We are not here to gamble right? 4. Sometimes they get emotional about the stocks they deal in and feel like holding their position/s for a while. On the other hand, some traders act in haste after watching the price fluctuations on the stock ticker. These are dangerous mistakes no one can afford to make because it is an unwritten rule that a trader should only deal in, and not marry, any stock and he should always stick to his profit/loss no matter how the prices on the ticker move.

5. They must be untrustworthy of dealing in stocks of suspicious companies even though such stocks are riding the momentum wave. Typically, they must stick to trading in liquid and reputed stocks and try to avoid the mediocre ones. Having said that, some rare opportunities in mediocre stocks can be taken advantage of by these traders. That’s again subjective though.This is what you need to know if you want to become a day trader.

So, go ahead, organize enough capital, use your judgment and then play the game to go long on profits. Good luck!

Day Traders EDGE

PART I
Did you ever predict the next card you would get in the game of cards? The answer is a definite no. On the other hand, while investing or trading in stocks each buys and sells move is a well-forecasted and calculated step. So how can stock trading be referred to as gambling? For those who are currently indulged in stock trading, it is quite clear that trading in shares is far different then gambling. Share trading not only lets an investor put the money at take, but also, needs time and intelligence to trade. And for those who think it is gambling, trust me, the stock market is not at all meant for them.However, the features indicate stock market to be a well-refined business that needs sheer attention, patience, consistency and knowledge to make profits. For those who are stepping into the world of share trading, it is important to know that day trading is just a part of the investments not the whole concept of stock investing.In literal terms, day trading refers to the trading in stocks that involve the buying and selling of shares within a day. It is a part of short-term investments that carries very high degree of risks. The risk being high notifies the fluctuations in the share prices with direct effect of economic conditions.It has a distinct feature of short term buying and selling. All the day traders trade for small profits. The fact that makes day trading so popular is it’s instantaneous and has low brokerage terms. Brokers generally charge low broking fees for day trading as compared to other investments like taking delivery of shares. Also, the results are quite instant and a day trader can carry money at the end of the day unlike other long-term investments.However, by being instant, it features greater risks that are to be dealt with. Hence, here are some tips that can help traders for better trade.

• Integrate the investments: Staking all money in a single company is not worth. Never put all your eggs in a single basket. Diversification of investments is the key. This not only integrates the risks but also create a balanced portfolio.

• Trading in right direction: Buy during bears and sell during bulls is the key mantra to be followed. To simplify, buying the shares in broken market tends to bag low priced shares. This helps in gaining more profits for any trader.

• Decide upon our Index levels: To avoid bankruptcy it is important to decide upon the amounts of your share prices. The share market has its own moves and in no case any trader can catch its speed. Hence, create your own Index for stock evaluation and sell them according to the market. Getting emotional and illogical and hoping to get the conditions better, always worsen the situation.

Trader guidelines for Success in Stock Market

Keys to Short term trading

Part I

In life, you have to learn to walk before you can run. In the stock market, you have to learn to lose before you can truly win. Sure, your first trade may be a winner, but to consistently make money in the stock market you have to learn how to lose. More to the point, you have to learn how to cut your losses. I do not mean to say that if you will make a loss couple of times, profits will start coming in instantly. Trading, after all, in the stock market is nothing but maximizing your profits and cutting (minimizing) your losses.

The majority of people who dabble in the stock market see themselves as smart, educated and sharp. Self-belief is great. The most successful people in the world have a strong belief in themselves. Irony is some of the most unsuccessful people in the world also have a strong belief in themselves. So what’s the difference between the successful and the unsuccessful traders???

One major difference between successful traders and unsuccessful traders is the ability to admit when one is wrong. It really takes a character to do that. Not admitting to others but to your own self. A successful trader will cut their losses before them getting out of hand. An unsuccessful trader will let their losses grow in the false belief or hope that things will pick up.

It would be nice if every stock selected was a winner, but when you get the odd loser you better make sure you cut that baby lose before you lose some big money.

The Stop-Loss before you even consider entering a trade, you should determine your stop-loss point. Your stop-loss point should be set at a price that you're willing to sell your stock at should things turn bad. The price you pick will vary depending on your financial position and the particular stock being considered. You may want to set a stop-loss exactly at a point under your purchase price, or you may want to set it just below some clear resistance in a chart (if the stock falls below that resistance level, you can be fairly sure, things will continue to be southwards for a while). The most important thing is to test your system, your own trading system. If you set your stop-loss too close, you'll never be in the game when the stock turns good. If you set your stop-loss too far away, you'll end up losing too much money.

Remember, the main aim is to make a profit across your entire portfolio. Imagine you owned Rs. 100000 worth of 5 different stocks. You set a stop loss at 10% current market value; so if the value of a single stock drops to Rs 90000 you'll sell at that price. Even if you are wrong with 3 of the 5 picks (an added loss of Rs.30000), you only need to make 15% on the remaining 2 stocks to break even. What if those remaining 2 stocks made 50% (which is very realistic if you pick your entry right)? You'd actually profit Rs. 70000 across your entire portfolio despite the fact 60% of what you picked were duds!

Starting with 5 positions worth Rs. 100000 each: Rs.500000

3 losing stocks lose 10% each: -Rs. 30000

2 winning stocks make 50% each: +Rs. 100000

Total = Rs. 570000

Modern trading systems have completely automated stop-loss systems. This makes it so easy to set stop-losses that you have no excuses for losing big in a single trade anymore! In fact, you're out of your mind if you don't take advantage of stop-losses some traders might comment. You'll learn how to plan and time your entry and exit points on this site over the next few months.

Until then, good luck and keep on learning.

Providence invests $640m in Idea Cellular's arm valuaing company at 13000 crs & adding about Rs. 38 per share. Idea looks good in intraday as well as positionsal.
RIL - Buy above 2640 for 2680, 2700. Options players can buy may 2700 call option. Or long 2800 June call option
RIL 2700 May Call option @ 14.50
RIL 2800 June Call option at 30

Providence invests $640m in Idea Cellular's arm valuaing company at 13000 crs & adding about Rs. 38 per share. Idea looks good in intraday as well as positionsal.
RIL - Buy above 2640 for 2680, 2700. Options players can buy may 2700 call option. Or long 2800 June call option
RIL 2700 May Call option @ 14.50
RIL 2800 June Call option at 30

Stocks to Watch today
Intraday : I-Flex solutions buy above 1522 target 1582 stop 1481. This one could be taken as an investment perspective also for a short term target of 1650+

India Cements : Buy India Cements for a target of 181-182, CMP 173, Stop loss 167

Today
1. Inflation data expected. ( Could come around 7.4%)
2. Us Jobless claims data came.
3. Heavy short covering has happened in dollar against yen and euro4. Yen trading at 104.14 so no selling pressure from FII'sIn all today again the market will be volatile.
Should not break 5000.

Keep an eye on RNRL today. If there is a gap down opening one can enter into IT stocks with a short term perspective.

Sell for a target 5066, 5015. Be cautious session can be volatile. Some news can come from Government can change direction

Intra day Picks : Buy GMR above 153 for 157-160 stop loss 149
Long Unitech for 290+, CMP 282, Stop loss 275
Long IFCI for 68, 70, CMP 64.55, stop loss 58

Short Jet Airways, for 515, stop loss 555, CMP 540

Short Air Deccan CMP 138.30 for a target of 130. Stop loss 143.

Short Aviation related stocks on concerns of rising crude for a minimum gain of 5-7 Rs.

Intraday trading rules

Intraday trading is like robbing a bank. What you get take and exit. You never know when one will press the buzzer and you might be caught in the wrong side.

- Larry Williams (Big time trader and Analyst)

Please try to keep all these points to get good profit in intraday and risk free intraday trading:

1) whenever any expert or analyst gives you a target for any stock. Please don't wait for target price (Just keep stoploss as mentioned), just wait and decide target yourself. Risk and targets are highly subjective. Some one can afford to take big risks while others can’t. Hence use trailing stop loss. Example given in the earlier article.

2) Nobody is God in share market, any analyst or expert can't give pure target and stoploss. Intraday trading totally depends upon the charts and news on that stock before that day. (So u can't blame to your analyst).

3) Don't depend upon your luck. When any stock crosses it target or touched stoploss just exit. If u go for some more profit then it will change in huge loss, unless you are one of the luckiest (and that’s one in a million).

4) Don't trade in early hours of market or even if you do watch the market trend carefully. Just wait and watch the market and put your stocks in which u want to trade in your watch list and just track them for correct price(which ever your experts have said) if u not getting that price just don't trade on that stock. Here I am assuming that all intraday players have an online trading account and are in front of the screen all the time during market hours.

5) So many experts give calls before markets open means they totally depends upon previous data and charts. If somebody has given that 'Buy ; then just see in what level it has opened. If it opens near to target price then don't trade on that stock and if touches the stoploss then wait for level in which experts had said.

I think it will help u to make a good, safe and of course Profitable intraday trading.

Suzlon positional 350+

Intraday : Go Long in HDIL for a target of 880+

Nifty Trader
Sell Nifty for a target of 5015, 5065

Remain Long in RPOWER for a target for 450, 470+

Short DLF below 633 for a target of 626, 616

Long Idea above 112.50 for 117 stop loss 110

Disclaimer: Ideas and sms which you receive for trading and other investment advices are provided for educational purpose of traders and investors. the newsletters & sms'es are information services only. recommendations, opinions or suggestions are given with the understanding that readers acting on this information assume all risks involved.

Buy LUPIN above 682 target 690-696 stop loss 676 Intraday

Positional

RELIANCE IND, Buy between 2645- 2650 Stoploss 2588, for a target of 2685-2720

Positional Call

Ispat can go to levels of 40+ soon. Keep an eye and make positions in dips.

JP ASSOCIATES
CMP: 270.70, Buy at : 268 - 274, Target : 304 (short term).

Hot stocks for today

UNITECH
Buy Above 292 Stoploss 285, Target 298,308

RANBAXY
BUY Above 512, Stop loss 505, Target 518, 525

Ashok leyland has consolidated a lot. But It is a risky counter. Intraday platyers keep an eye.

NIFTY TRADER

Go long above 5169(Cash) with a target of 5216, 5294. Stop loss in this case is 5082.

TUESDAY 20-05-2008

TUESDAY 20-05-2008

Market can be at Neutral Range at 5051-5163. Resistance at 5163, 5190. Above which 5216 and 5290 is possible. Stop loss 5082 in this case. Writing i Out of the money calls and puts, Maximum open open interest is in 5000 Puts and 5200 Calls

10 Most Important tips for Traders / Day Traders

1. Most news about good stocks to go long for that day, can be understood from major financial channels by 9:35A.M, but before 9:50 A.M. Never agree on it at all. All that price is already accounted for in the previous days closing. So maximum of times you end up getting stuck up at higher prices.

2. Work with strict stop loss.

3. Sit before the screen. Never place orders through telephone without having access to the stock's prices second to second.

4. Target 1 is always enough.

5. Trade only 2 or 3 stocks per day.

6. Past performance is not a guarantee for future performance.

7. If you can’t get scrip at the price u wanted and if it goes up simply don’t go behind it.

8. Never go by others comments, AFTER you bought the share.

9. Strict homework and analysis about the sudden increase in stock price or sudden fall is very very important for a trader.(It is the best tutor which can help you in the next day trade.)

10. If the price of the scrip you bought increases, use TRAILING STOPLOSS.

Example: If bought at 90 rs and cmp is 96, SL is 94.If it goes to 100, SL is 98.

This method helps you gain profits in a very volatile market.

If you follow the above strictly, I challenge you that you can never suffer from severe losses and take back handful of profits.

Futures and Options (derivatives) Demystified

What exactly are Derivatives?

A derivative is a financial instrument whose value depends on the values of other underlying variables. As the name suggests it derives its value from an underlying asset. For Example - A derivative may be created for a share, or any material object. The most common underlying assets include stocks, bonds, commodities etc.

Let us try and understand a Derivatives contract with an example:

Ramesh buys a futures contract in the scrip "Infosys". He will make a profit of Rs.1000 if the price of Infosys rises by Rs 1000. If the price remains unchanged Ramesh will receive nothing. If the stock price of Infosys falls by Rs 500 he will lose Rs 500.

As we can see, the above contract depends upon the price of the Infosys scrip, which is the underlying security. Similarly, futures trading can be done on the indices also. These are termed as Index futures. Nifty futures are a very commonly traded derivatives contract in the stock markets. The underlying security in the case of a Nifty Futures contract would be the Index-Nifty. Sensex futures have also been introduced in our market.

What are the different types of Derivatives?

Derivatives are basically classified into the following:

• Futures /Forwards
• Options
• Swaps
  
  

What are Futures?

A futures contract is a type of derivative instrument, or financial contract where two parties agree to transact a set of financial instruments or physical commodities for future delivery at a particular price.
The example stated below will simplify the concept:
Case1:
Vinod wants to buy a Car, which costs Rs 100,000 but owing to cash shortage at the moment, he decides to buy it at a later period say 2 months from today. However, he feels that after 2 months the prices of Cars may increase due to increase in input/ manufacturing costs. To be on the safer side, Vinod enters into a contract with the car Manufacturer stating that 2 months from now he will buy the car for Rs 100,000. In other words he is being cautious and agrees to buy the car at today's price 2 months from now. The forward contract thus entered into will be settled at maturity which in this case will be in 2 months from now. The manufacturer will deliver the asset to Vinod at the end of two months and Vinod in turn will pay cash delivery.
Thus a forward contract is the simplest mode of a derivative transaction. It is an agreement to buy or sell a specific quantity of an asset at a certain future time for a specified price. No cash is exchanged when the contract is entered into.

What are Index Futures?

As Stated above, Futures are derivatives where two parties agree to transact a set of financial instruments or physical commodities for future delivery at a particular price. Index futures are futures contracts where the underlying is a stock index (Nifty or Sensex) and helps a trader to take a view on the market as a whole.

What is meant by Lot size?

Lot size refers to the quantity in which an investor in the markets can trade in a derivative of particular scrip. For Ex-Nifty Futures have a lot size of 50 or multiples of 50. Hence if a person were to buy 1 lot of Nifty Futures, the value would be 50*Nifty Index Value at that point of time. Lot sizes are fixed and may differ from scrip to scrip.

Similarly lots of other scrip such as Infosys, reliance etc can be bought and each may have a different lot size. NSE has fixed the minimum value as two lakhs for any Futures and Options contract. Lot sizes are fixed accordingly which will be the minimum shares on which a trader can hold positions.

What is meant by expiry period in Futures?

Each contract entered into has an expiry period. This refers to the period within which the futures contract must be fulfilled. Futures contracts may have durations of 1 month, 2 months or at the most 3 months. Each contract expires on the last Thursday of the expiry month and simultaneously a new contract is introduced for trading after expiry of a contract.

What are options?

Before you begin options trading it is critical to have a clear idea of what you hope to accomplish. Only then will you be able to narrow down on an options trading strategy. Let us first understand the concept of options.
An option is part of a class of securities called derivatives.
The concept of options can be explained with this example. For instance, when you are planning to buy some property you might have placed a nonrefundable deposit to hold it for a short time while you evaluate other options. That is an example of a type of option.

Similarly, you have probably heard about Bollywood buying an option on a novel. In 'optioning the novel,' the director has bought the right to make the novel into a movie before a specified date. In both cases, with the house and the script, somebody put down some money for the right to buy a product at a specific price before a specific date.

Buying a stock option is quite similar. Options are contracts that give the holder the right to buy or sell a fixed amount of a certain stock at a specified price within a specified time. A put option gives the holder the right to sell the security; a call option gives the right to buy the security. However, this type of contract gives the holder the right, but not the obligation to trade stock at a specific price before a specific date.

Several individual investors find options useful tools because they can be used either as:
A) A type of leverage or
B) A type of insurance.
Trading in options lets you benefit from a change in the price of the share without having to pay the full price of the share. They provide you with limited control over the shares of a stock with substantially less capital than would be required to buy the shares outright.

When used as insurance, options can partially protect you from the specific security's price fluctuations by granting you the right to buy or sell shares at a fixed price for a limited amount of time.

Options are inherently risky investment vehicles and are suitable only for experienced and knowledgeable investors who are prepared to closely monitor market conditions and are financially prepared to assume potentially substantial losses.

What are the different types of Options? How can Options be used as a strategic measure to make profits/reduce losses?
Options may be classified into the following types:
a) Call Option
b) Put Option

As mentioned before, there are two types of options, calls and puts. A call option gives the holder the right to buy the underlying stock at the strike price anytime before the expiration date. Generally Call options increase in value as the value of the underlying instrument increases.

By contrast, the put option gives the holder the right to sell shares of the underlying stock at the strike price on or before the expiry date. The put option gains in value as the value of the underlying instrument decreases. A put option is one where one can insure a stock against subsequent price fall. If the value of your stocks goes down, you can exercise your put option and sell it at the price level decided upon earlier. If in case the stock price moves higher, all you lose is just the premium amount that was paid.
Note that in newspaper and online quotes you will see calls abbreviated as C and puts abbreviated as P.

The examples stated below will explain the use of Put options clearly:

Case 1:
Harish purchases 1 lot of Infosys Technologies MAY 3000 Put and pays a premium of 250 This contract allows Harish to sell 100 shares of Infosys at Rs 3000 per share at any time between the current date and the end of May.Inorder to avail this privilege, all Harish has to do is pay a premium of Rs 25,000 (Rs 250 a share for 100 shares).
The buyer of a put has purchased a right to sell. The owner of a put option has the right to sell.

Case 2:
If you are of the opinion that a particular stock say "Sundar Telecom" is currently overpriced in the month of February and hence expect that there will be price corrections in the future. However you don't want to take a chance , just in case the prices rise. So here your best option would be to take a Put option on the stock.

Lets assume the quotes for the stock are as under:
Spot Rs 1040
May Put at 1050 Rs 10
May Put at 1070 Rs 30
So you purchase 1000 "Sundar Telecom" Put at strike price 1070 and Put price of Rs 30/-. You pay Rs 30,000/- as Put premium.

Your position in two different scenarios have been discussed below:
1. May Spot price of Ray Technologies = 1020
2. May Spot price of Ray Technologies = 1080

In the first situation you have the right to sell 1000 "Sundar Telecom" shares at Rs 1,070/- the price of which is Rs 1020/-. By exercising the option you earn Rs (1070-1020) = Rs 50 per Put, which amounts to Rs 50,000/-. Your net income in this case is Rs (50000-30000) = Rs 20,000.

In the second price situation, the price is more in the spot market, so you will not sell at a lower price by exercising the Put. You will have to allow the Put option to expire unexercised. In the process you only lose the premium paid which is Rs 30,000.

What is open interest?

The total number of option contracts and/or futures contracts that are not closed or delivered on a particular day and hence remain to be exercised, expired or fulfilled through delivery is called open interest.

What are Index Futures?

As Stated above, Futures are derivatives where two parties agree to transact a set of financial instruments or physical commodities for future delivery at a particular price. Index futures are futures contracts where the underlying is a stock Index (Nifty or Sensex) and helps a trader to take a view on the market as a whole.

What is meant by the terms Option Premium, strike price and spot price?

The price that a person pays for a call option/Put Option is called the Option Premium. It secures the right to buy/sell that particular stock at a specified price called the strike price. In other words the strike price is the specified price at which the holder of a stock option may purchase the stock. If you decide not to use the option to buy the stock, and you are not obligated to, your only cost is the option premium. Premium of an option = Option's intrinsic value + Options time value The stated price per share for which underlying stock may be purchased (for a call) or sold (for a put) by the option holder upon exercise of the option contract is called the Strike price. Spot Price is the current price at which a particular commodity can be bought or sold at a specified time and place.

What is meant by settlement price?

The last price paid for a contract on any trading day. Settlement prices are used to determine open trade equity, margin calls and invoice prices for deliveries.

How does one determine the price of an option?

A variety of factors determine the price of an option. Various formulae are employed. Most widely used is the Black-Scholes Model.

The behavior of the underlying stock considerably affects the value of an option. Investors have different opinions about how a particular stock will behave in the future and hence may disagree about the value of any given option.

In addition, the value of an option decreases as its expiration date approaches. Thus, its value is also highly dependent on the amount of time left before the option expires.

Intrinsic & Time Value’

An options price is composed of its intrinsic value and time value.

What a particular option contract is worth to a buyer or seller is measured by how likely it is to meet their expectations. In the language of options, that's determined by whether or not the option is, or is likely to be, in the money or out-of-the-money at expiration. Intrinsic value is how far an option is 'in-the-money.' Thus, the phrase is an adjective used to describe an option with an intrinsic value. A call option is in- the-money if the spot price is above the strike price. A put option is in the money if the spot price is below the strike price.

It is calculated by subtracting the options strike price from the spot price. An out-of-the-money option has an intrinsic value of zero.

For example if ABC is trading at Rs 58 and the June 55 call is trading at Rs 4, to calculate the intrinsic value subtract Rs 55 from 58, leaving you with Rs 3 of intrinsic value. The remaining Rs 1 is known as extrinsic or time value.

Time value is the amount over intrinsic value that a buyer pays for the option. While buying time value, an options purchaser assumes that the option will increase in value before it expires. As the option nears expiration, its time value starts decreasing toward zero.

Theoretical Value

Theoretical value is the objective value of an option. It shows how much time-value is left in an option. The most commonly used formula to calculate the theoretical value of an option is known as the Black-Scholes model.
This model considers the price of the stock, the options strike price, the time remaining before expiration, the volatility of the underlying stock, the stock's dividends and the current interest rate while arriving at the theoretical value of the option.
Although an option may trade for more or less than its theoretical value, the market views the theoretical value as the objective standard of an option's value. This makes the price of all options tilt toward their theoretical value over time.

The Components of Theoretical Value

Volatility
The volatility of the underlying stock is one of the key factors in determining the value of an option. Often, the options price increases as the volatility of the stock increases. The difficulty in predicting the behavior of a volatile stock permits the option seller to command a higher price for the additional risk.
There are two types of volatility, historical and implied. As the term suggests, historical volatility is a measurement of the stocks movement based on its past behavior.
By contrast, implied volatility is calculated using option prices. It is a measurement of the stocks movement as implied by how the market is currently valuing options.
Dividends
As an owner of a call option you can always exercise your right to the stock and receive any dividend it might pay.
Interest Rate
If you buy an option rather than a stock, you invest less money upfront.
Days Until Expiration
An option, being a wasted asset; wastes a little as each day lapses. Thus its value is calculated in accordance to the amount of days left in its life.

What are swaptions?
A swaption is an option on an interest rate swap. Swaptions are options contracts, which give you the right to enter into a swap agreement at the option expiration, in return for a one-off premium payment.

What is meant by Covered Call, Covered Put, In the Money, Out Of the Money, At the Money?

Ø In-the-money
A call option is in the money if the strike price is less than the market price of the underlying security. A put option is in-the-money if the strike price is greater than the market price of the underlying security.

Ø Out of the money
A call option is out-of-the-money if the price of the underlying instrument is lower than the exercise/strike price. A put option is out-of-the-money if the price of the underlying instrument is above the exercise/strike price.

Ø At-the-money
At the money is a condition in which the strike price of an option is equal to (or nearly equal to) the market price of the underlying security.

Ø Covered Call
You can take a covered call if you take a long position in an asset combined with a short position in a call option on the same underlying asset.

Ø Covered Put
The selling of a put option while being short for an equivalent amount in the underlying security.

What are the uses of Derivatives? What are the various derivative strategies that I can use?

Derivatives have a multitude of uses namely:

a) Hedging
b) Speculation &
c) Arbitrage

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