How does Option Buying Work?

Option Buying:

If you are planning for the purchase of stocks in share markets it can happen in this manner. In option contracts, you can derive your buying/selling options by applying option strategies to make maximum profits as per your trading plans.

Fundamentally, you will find four kinds of option strategies employed by stock exchange traders/investors. To obtain better results in the buying of stocks of the underlying assets, you can adopt option long call, option short call, and option long put in the option buying strategies. Below you will find me explaining the long call option in short.

When employing the strategies to meet your trading plans you must know the risk profiles involved while implementing the four basic options. They are ‘buying a call,’ ‘buying a put,’ ‘writing a call,’ & ‘writing a put.’ They can be described in brief.

Buying a Call:

In this case, the common notion is, the stocks will rise thereby representing a bullish trend. In such a scenario, the risk is limited to the premium paid and you can seek maximum rewards if you are involved in ‘buying a call.’

Buying a Put:

In this case, you will proceed to buy a put only when you observe a bearish outlook. Here too, the risk is limited to the premium paid, you can gain maximum rewards until the strike price of the underlying asset is less than the premium paid.

Writing a Call:

In such a situation, the stock will fall showing a bearish outlook and maximum rewards shall be limited to the premium received. When the stock price rises, you can encounter an unlimited potential risk. When a risk arises you can combine with another position to limit the risk.

Writing a Put:

You will execute a put option with a faith that the stock will have a bullish approach. In this case, the risk is unlimited to a maximum to an extent of the strike price less the premium received. You can seek a maximum reward that is limited to the premium received. You can opt to combine with another position to limit the risk.

Trading a Long Call:

Long Call is an option to buy and when you do so, you will also anticipate the underlying share price to rise.

You may prefer to buy an option contract or S&P future options, then you need to step in to purchase stocks and step out by selling those stocks to generate adequate profits.

For instance, in the NASDAQ, one contract is for 100 shares and the price of 1.00 dollar per share is applicable, therefore you will have to pay 100 dollars per contract. While in case of S&P future options, you will have to make 250 dollars for one future contract when exercised and each contract comprises 100 shares.

Step-in Long Call Trading:

You must step into a long call trading, when the stock market trend is upward, and has a support.

Step-out Long Call Trading:

You must step out, that means, sell your long options before the final month before expiration just to avoid the effects of time decay.

In case, the stock triggers down below the stop loss, then the best way to limit the loss is to sell the calls.

Stock Selection/Stock Sell-out Period:

You must select the stock that holds adequate liquidity somewhere like 500,000 average daily volume (ADV).

When selecting the option, the open interest must be from 100 onwards and 500 is preferable.

You must sell out at either the ATM (stock price equal to strike price) or ITM where the strike is below the current stock.

You must choose the option at least three months before the expiration date.

Know How Option Chain Works in India

You have posted a wonderful query, interested to learn about the option chains work?

With my experience I would like to describe the usual process involved in option chain analysis that in turn should define the option chain working.

How does an option chain work in stocks

Before getting into the crux of the matter, you must understand the elements that abide by the making of the option chain and more importantly, what is the option chain matrix as such.

An option chain contains a table of information divided into two sections namely calls and puts. The two communities, namely buyers and sellers of the underlying assets, take the respective information from the option chain matrix and arrive to make judgements on buying and selling issues.

Certain elements in the option chain matrix become important inputs to engage in buying/selling of option contracts. You can find those to be premium, strike price, expiry dates, open Interest, change in open interest, implied volatility, LTP, Net change, bid quantity, bid price, ask price, & ask quantity.

I would like to cite an example to make you understand how option chains work by applying it to Bank Nifty Options.

Bank Nifty Option Chain:

Source: NSE on 25 August 2023

The sample copy represents option contracts of bank Nifty and the set date of expiry is 31-Aug-2023. If you pay attention to the columns of the table, you can find all the elements described above, segregated into calls/puts.

If you are planning to go for Bank Nifty options then the tabulated nifty options chain data can help you to interpret several aspects such as:

The Bank Nifty option chain generates a clear dimension of, in the money/out of the money options. Wherever you find the strike shaded in yellow then it is in the In the Money (ITM) options, and the unshaded strikes are the out of the money (OTM) options. when the spot value of the Nifty changes, the shading does change correspondingly. Therefore, you can utilise this observation as a rule to the calls/puts.

You can make a proper evaluation of the liquidity and depth of the strike price.

Elements like bid/ask price and quantity provides sufficient info for the traders while they progress to apply the OTM options as the liquidity is pretty low in such cases.

In the index markets, the Bank Nifty option chain provides an early warning system through sharp moves or break outs in the index.

In an empirical test, if you observe a major change in Bank Nifty then its impact is observed in the Open Interest, and the volume shifts. However, the occurrence of Bank Nifty changes are due to the active participation of the FIIs, mutual funds and institutional investors.

Traders can position their trades accordingly with an abrupt shift in price/Implied Volatility of the underlying assets. Thereby, price/implied volatility can be viewed as an important parameter to alter trade positions.

Aeroflex Industries Limited | IPO Details

Company Introduction:

Manufacturer of a multipurpose application of metallic flexible flow solutions, the company is fast scaling new highs year on year and here are the reasons behind that you should not miss to read it.

Aeroflex Industries Limited has recorded the total revenue, a new high every year, for instance, in FY 2023 the company has recorded a total revenue of INR 2964.78 Lakhs, and in FY2022 it noted a total revenue of INR 2409.92.

The company displayed an interesting figure of 1,700 product Stock Keeping Units in its product portfolio as on March 31, 2023. Attaining such a good performance was the result of the adoption of an environment friendly metallic flexible flow solution products in manufacturing and supplying those to their esteemed clients.

Another noticeable fact is that the metallic flexible flow solutions produce a multipurpose application and over time are replacing the conventional rubber, polymer pipers and tubes.

Based on this advantage, the company is rapidly advancing in its business operations and the yearly measure of progress can be evaluated in the consolidated financials for the past four years. However,the company wants to expand its capital base through public funding as a part of the expansion phase of the company.

The following paragraphs deal with various segments that signify the need to buy the shares in the IPO primary share markets. It does include the strengths of Aeroflex, Objects of the IPO fund, IPO details, IPO event calendar, consolidation of five year financials and key performance indicators.

Strengths of Aeroflex:

Aeroflex Industries Limited holds a good track record on exports of the  metallic flexible flow solutions under “Make in India”. The company exports the Aeroflex products to over 85 countries that generates a revenue of more than 80 percent of the total value.

The Aeroflex solutions have made their presence in different areas of operations such as space, aviation, and fire-fighting equipment. These metallic flexible flow solutions have recorded multipurpose applications and their utility does replace the utilisation of rubber, and polymer pipes and tubes.

Employees are benefited with a dividend distribution of about 7 to 15 percent as per the information in the offer document and it has become a custom for the past two years.

Objects of IPO Fund Utilisation:

As per the Red Herring Prospectus Document, RHPD, a little portion of the capital fund will be utilised to make a prepayment of INR 35 crores of the outstanding in regard to the borrowings.

A significant portion of the IPO fund shall be invested on working capital needs up to INR 84 crore.

A part of the fund will be utilised to manage and maintain the general corporate purposes, & acquisitions.

 Aeroflex IPO Details:

The promoters of Aeroflex Metallic Flexible flow solutions Ashish Kacholia, and Jagdish Master filed an IPO application to the SEBI regulatory authorities for the approval of the IPO in the month of March 2023.

SEBI regulatory authority gave approval to float an IPO issue worth INR 350 crore of which the fresh issue will be equity shares worth INR 160 crores and the Offer for Sale will be 17.5 million equity shares.

The IPO issue will comprise fresh issue and offer for sale, OFS, with each share possessing a face value of INR 2.00.

The company reserves an IPO issue quota for the various segments like retailer, QIB, and NII(HNI) in the following manner.

The share offers to the retailers shall be limited to 35 percent of the net offer, for the NII ( HNI), the share offers will be over and above 15 percent of the net offer. Likewise, the shares offered to the QIB segment will be equal to or below 50 percent of the net offer.

The price bandwidth of the share price is between INR 102 and INR 108 and the lot size will be 130 shares.

A retailer is allowed to purchase a minimum of a single lot equating to 130 shares and the amount aggregating up to INR 14,040 and the maximum lots of 14 aggregating to INR 196,560.

For S-HNI minimum lot will be 15 aggregating to INR 210,600 and a maximum lot of 71 aggregating to INR 996,840 and B-HNI minimum will be allowed to purchase a single lot size of 72 that equates to 9,360 aggregating to INR 1,010,880.

The total issue of the shares will be 32,500,000 which aggregates to INR 351.00 Cr, fresh issue 15,000,000 shares aggregating to INR 162.00, offer for sale shares will be 17,500,000 aggregating to INR 189.00 Cr.

In the pre issue period, the promoters will be holding 114,320,370 shares and after the IPO issue listing, the shares will rise to a figure of 129,320,370.

IPO Timetable:

The company shall open its IPO issue to the general public on Tuesday 22 August 2023, and the closing date will be Thursday, 24 August 2023.

The allotment of the shares to the applicants shall begin on Tuesday, 29 August 2023.

An applicant may not be able to seek an allotment due to oversubscription then the National Stock Exchange, NSE, or the Bombay Stock Exchange will initiate to refund the collected funds from Wednesday, 30 August 2023 onwards.

After the share allotment, they shall be credited to the applicant’s demat account on Thursday. 31 August 2023. And, on Friday, 01 September 2023, the stock exchange shall list the issue company’s IPO.

Key Performance Indicator:

The IPO prospectus book does mention the parameters that act to be performance indicators which enable an applicant to decide whether one can opt for IPO issue or not. They are Market Capital ( INR 1396.66 Cr), ROE(26.43%), ROCE(31.91%), and Debt/Equity(0.39).

Consolidated Financials for 4 years (2020 to 2023)

About Aeroflex Industries Limited

Location/Infrastructure

Began in 1994, Suyog Intermediaries Private Limited renamed as Aeroflex Industries Limited later. The company is located at Taloja, Navi Mumbai, Maharashtra, and holds a premises of 3,59,528 square feet.

Product Profile:

The company does manufacture a host of products like solar hoses, vacuum hoses, interlock hoses, braided hoses, unbraided hoses, and gas hoses. Other manufactured products are hose assemblies, lancing hoses assemblies, jacketed hose assemblies, exhaust connectors,exhaust gas recirculation (EGR) tubes, expansion bellows, compensators, and related end fittings.

Clientele Spread in Business:

The company serves clients belonging to different segments such as distributors, Maintenance Repair and Operations Companies (MROs), Original Equipment Manufacturers (OEMs), fabricators, and to those companies which operate in a wide range of industries.