The Advantages of Call Trading Options There is a low potential risk not like other option derivatives such

h as futures. Generally, you can only lose the amount you have invested and nothing more when you buy and option contract. Options allow you to have leverage on your investment efficiently taking control over the fortunes of an underlying asset for a small cost of purchasing the asset itself. If you are going to keep the option until its expiry date and it is in-the-money, you would receive the same benefit if you had bought the stocks that the options controlled. It is flexible. There are various options combination you can take out because there are a lot of option exercise prices and expiry dates. Plus, you can create options positions as well as purchase them. With the right conditions, you can sometimes take a small risk trading chance because of these variables. The Disadvantages of Call Trading Options The key disadvantage to buying call options is that it will expire worthless if you buy it and the underlying security does not move higher. Additionally, in the wrong hands, options can be very dangerous. Some traders may speculate that the market is going to move lower and sell a boatload of calls only to watch the stock move higher and put them on the hook for delivering the shares.

How Is Open Interest Different From Volume? Open interest is totally different from volume because volume transacted, like in stock trading, is simply a measure of how many times a futures contract has been traded for the day. Volume do not distinguish between opening transactions and closing transactions, neither does it show the total number of contracts that has been opened and still active in the market. Volume and open interest tell completely different stories about a futures contract and give futures traders a more complete idea on the liquidity of a futures contract. One more important difference between open interest and volume is that open interest is cumulative while volume isn't. Volume only indicates the number of contracts traded within a single day and then resets the next day while open interest does not reset. The table below shows the change in open interest and volume of an actively traded futures contract on a daily basis. end of Day... 1 2 2 Trades John Buys 10 contracts (the Long) Peter Sells 10 contracts (the Short) John Buys Another 20 contracts (the Long) Mary Sells 20 contracts (the Short) John offsets 20 contracts Open Interest Volume 10 (+10) 30 (+20) 10 (-20) 10 20 20

As you can see in the example above, volume merely records the number of contracts that gets transacted daily without regards to whether it is an opening or closing transaction while open interest is a running balance of the number of open contracts in the market that are still due for final settlement. Cash Vs physical settlement Consider a speculator who bought the futures at 40 and has seen the price rise to 55 before expiry. He would have received 15 as mark-to-market gains during the course of this price rise, and under cash settlement, there is nothing more to be done. Under physical settlement, the speculator has to undertake one extra sale transaction in the cash market to complete the transaction. At expiry, he pays 55 in the futures market and receives the underlying; simultaneously he sells the underlying for 55 in the cash market. These transactions on the expiry day cancel out apart from transaction costs. Consider next an arbitrageur who has sold futures and bought the underlying for a cash and carry arbitrage. Under physical settlement, the arbitrageur simply delivers the underlying into the futures market. Under cash settlement, the arbitrageur needs to sell the underlying in the cash market at

expiry. The transaction costs here include an execution risk - the risk that the price realised in the cash market may not be exactly the same as the settlement price used for cash settlement in the futures market. We now turn to the hedger who owns the underlying and is trying to hedge its value. Assuming that the hedge has been rolled over until the expiry matches the holding period of the underlying, the hedger's position is identical to that of the arbitrageur. Under cash settlement he needs to sell in the cash market and incur the transaction costs and execution risks. Finally, we look at the manipulator trying to implement a bear squeeze. Under both modes of settlement, the manipulator buys both spot as well as futures. In physical settlement, when he has bought up most of the floating stock, he makes a profit by selling the underlying to the shorts at an inflated price. The shorts deliver this underlying back to him. In cash settlement, the manipulator gains by the futures being settled at the inflated price. The underlying bought in the cash market remains with him. Under both settlement modes, the manipulator's transactions are the same and his holdings post expiry are also the same. In both modes, the defence against manipulation is position limits and large position disclosure. In short, apart from transaction costs, there is no difference between cash settlement and physical settlement. Even these costs do not apply to most trades because they are squared off before expiry. The choice of settlement mode can, therefore, be safely left to market forces. But if the regulator chooses to intervene, it should be on the side of physical settlement because it imposes lower transaction costs on hedgers and arbitrageurs at the cost of higher transaction costs on speculators. One final point about price discovery: under both modes of settlement, arbitrage keeps futures and cash prices tightly coupled. The principal exception is under intense short sale restrictions, when the cash price gets decoupled from the true equilibrium price. Cash settlement may allow the futures price to track the true price even in this scenario. When liquid futures and spot markets disagree, usually the futures is right because there are less friction in the futures market.

contract size
Definition
The quantity of the underlying security that the holder of an option possesses the right to buy or sell. For an equity option, the contract size is 100 shares (unless a split or other special circumstances have occurred).

Open interest
It refers to the total number of derivative contracts, like futures andoptions, that have not been settled in the immediately previous time period for a specific underlying security. A large open interest indicates more activity and liquidity for the contract.

Volume represents the total amount of trading activity or contracts that have changed hands in a given commodity market for a singletrading day. The greater the amount of trading during a market session the higher will be the trading volume. As mentioned earlier, a higher volume bar on the chart means that the trading activity was heavier for that day. Another way to look at this, is that the volume represents a measure of intensity or pressure behind a price trend. The greater the volume the more we can expect the existing trend to continue rather than reverse. Technicians believe that volume precedes price, meaning that the loss of upside price pressure in an uptrend or downside pressure in a downtrend will show up in the volume figures before presenting itself as a reversal in trend on the bar chart. Open Interest is the total number of outstanding contracts that are held by market participants at the end of each day. Where volume measures the pressure or intensity behind a price trend, open interest measures the flow of money into the futures market. For each seller of a futures contract there must be a buyer of that contract. Thus a seller and a buyer combine to create only one contract. Therefore, to determine the total open interest for any given market we need only to know the totals from one side or the other, buyers or sellers, not the sum of both.