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I would like to know the details about the process after expiry. I hold Reliance 460 call. What should I do and how much will I receive. — Mozibur Raheman Khan

All futures and options contracts are cash settled. On the date of expiry, all in-the-money options would be automatically exercised. The buyer of the options does not need to do anything. The settlement takes place on the third day following the date of expiry of the contract.

A call option is said to be in- the-money if the strike price of that option is below the closing price of the underlying security on the date of exercise. Closing price is the weighted average value of the trades in the last half an hour in NSE.

In your case, if the stock price of Reliance on the date of expiry is above Rs 460 then the option is said to be in the money. For example, in the case of June contracts, Reliance stock closed at Rs 423 on June 24. Let us assume this as the closing price. All call options with strike price that was below Rs 423 were therefore in-the-money. For such in-the-money calls, the difference between Rs 423 and the strike price is the settlement price.

For instance, in the case of the Reliance 390 call, the settlement price would have been about Rs 33. If you had bought 100 calls, the settlement value would be 100 multiplied by Rs 33, which is Rs 3,300. You would receive this amount after the third day following the date of expiry of the contract. If the strike price of the call option is above the closing price of the security then the options expire worthless. For instance, a Reliance 460 call would have expired worthless in the case of the June contracts.

Kindly explain rollover contracts and swaps. — Jomon Jacob

Rollover of contracts is a phenomenon associated with the futures markets. Futures allow an investor to take a position to hedge his position in the cash market, take advantage of any mispricing, or merely speculate. Futures, however, have a shorter time to expiry. The longest futures contract available in the Indian market, for example, is of three months duration. You may, however, need to maintain your position for a longer time horizon, as dictated by your strategy. In order to accomplish that, you will renew the position taken in the futures market. This is referred to as a rollover. For instance, let us assume you have sold the July Nifty Index Futures contract. This contract expires on July 29 th. On July 29 th, this contract will be settled. To retain your short position, you can sell the August 26th contract. This would mean that you have rolled over your contract.

Swaps are arrangements to exchange cash flows. For instance, if you are paying floating interest on your home loan, you could arrange with another person (referred to as the counter-party) to pay you floating interest and you will pay him fixed interest. You will, in return, pay the floating-interest that he pays to the housing finance company. On a net basis, you will be paying only fixed interest. In contrast to futures and options, swaps are not exchange traded. That is, you cannot buy a standardized contract in an exchange such as NSE or BSE. Mostly retail investors cannot trade in swaps.

Queries relating to futures/options may be mailed to

fno@thehindu.co.in

or to Futures & Options, Kasturi & sons, 859-860, Anna Salai, Chennai 600 002.

Suresh Krishnamurthy

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