Equities have always attracted a huge amount of interest, and with other asset classes losing their glitter, stocks are fast becoming the first choice for investments.

But the market is known for volatility and players wanting to hedge their bets or use their funds to leverage their bets can use derivatives effectively.

In fact, small investors can use the weekly options offered by the Bombay Stock Exchange to further their gains. Here we try and demystify the weekly options for you.

What are weekly options and how are they different from monthly options?

Weekly options are exchange-traded options based on a stock or index with shorter maturity of one or two weeks. Initially in India, the stock and index options were offered for near, middle and far month contract series.

BSE has now introduced weekly options series (normally Monday to Friday) in addition to the existing monthly options series. Normally, an investor will have, on any Monday, a choice of either a 1 week Option or 2 week Option. Weekly options differ mainly in terms of maturity.

Monthly options have maturity of one, two or three months.

In case of weekly options, the maturity will be either a week or two. Monthly options series expires on the last Thursday of every month. In case of weekly options, series expires every Friday.

An illustrative guide Strikes(Rs) Call Options Type Time To Maturity 5 days 12 days 25 days  450 In The Money 27.26 31.45 37.84  475 At The Money 10.18 15.96 23.36  500 Out of the Money   2.31   6.67 13.28 Strikes(Rs) Call Options Type Time To Maturity 5 days 12 days 25 days  500 In The Money 27.00 30.86 36.47  475 At The Money   9.81 15.07 21.51  450 Out of the Money   1.87   5.53 10.93 A small investor can use weekly options as against monthly options as the cash outflow in weekly options is less as compared to monthly options due to shorter maturity. The table is a hypothetical example of a stock with a spot price Rs 475 and annual volatility of 45 per cent which shows us the difference between the premium amount required to be paid for a 1 week , 2 weeks and monthly Options, respectively. Thus the above data show that the premium amount required to be paid for weekly options is much lesser as compared to monthly options and hence a small investor can use weekly options and enjoy the similar profit potential as that of monthly options by locking just a small amount.

How can a small investor benefit from weekly options?

Weekly options will benefit the small investor in the following ways: Weekly options will command lower premium owing to shorter maturity and hence will be cheaper than monthly options.

Thus, a small investor would have to pay a lesser amount as premium to take a position in weekly options compared with monthly options, and can enjoy similar profit potential as that of monthly options by locking just a nominal amount.

For a similar capital outlay as monthly options, small investors can take larger positions in weekly options and investors would also be able to take a short-term view in the underlying stock.

How does one start trading in weekly options? Does one need an underlying stock to do this?

An investor interested in trading in weekly options will have to get registered with a broker having membership of the BSE derivatives segment as weekly options are available only on the BSE at present. All derivative contracts are cash settled in India.

As weekly option is a derivative instrument one need not own the underlying stock to trade in weekly Options as it will be settled in cash on exercising it or on its expiry.

Powered by