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Option Mastery

The document provides an overview of the stock market, explaining the difference between the share market and stock market, as well as detailing the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) in India. It covers financial derivatives like futures and options, including their definitions, types, and key concepts such as moneyness, delta, gamma, vega, theta, and rho. Additionally, it introduces the India VIX Index and the concept of open interest in derivatives trading.

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16 views20 pages

Option Mastery

The document provides an overview of the stock market, explaining the difference between the share market and stock market, as well as detailing the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) in India. It covers financial derivatives like futures and options, including their definitions, types, and key concepts such as moneyness, delta, gamma, vega, theta, and rho. Additionally, it introduces the India VIX Index and the concept of open interest in derivatives trading.

Uploaded by

malayalimarketings
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Option Mastery

What Is Stock Market ?


The share market is a platform where buyers and sellers
come together to trade on publicly listed shares during
specific hours of the day. People often use the terms ‘share
market’ and ‘stock market’ interchangeably. However, the
key difference between the two lies in the fact that while the
former is used to trade only shares, the latter allows you to
trade various financial securities such as bonds, derivatives,
forex etc.
What is NSE and BSE?
The NSE or National Stock Exchange is the leading stock exchange
of India. It is the fourth largest in the world (based on equity trading
volume). Based in Mumbai and established in 1992, it was the first
stock exchange in India to offer a screen-based system for trading.

The BSE or the Bombay Stock Exchange is a lot older than its cousin.
It was Asia’s first stock exchange. With a trading speed of 6
microseconds, the BSE is the fastest stock exchange in the world.
Understanding Nifty and Sensex

Nifty
Nifty stands for National Stock Exchange Fifty and
is the equity benchmark index of the National
Stock Exchange (NSE).
Sensex
Sensex is the market index of
the Bombay Stock Exchange
(BSE). It is also known as S&P
BSE Sensex.
What is F&O (Futures and
Options)?
Futures and options are financial derivatives that allow traders to
speculate on the price movements of an underlying asset without
actually owning it. Futures contracts obligate the buyer to
purchase an underlying asset, while the seller must deliver it at a
predetermined price and date. In options contracts, the buyer
has the right, but not the obligation, to buy or sell the underlying
asset at a predetermined price and date, while the seller must
honour the contract if the buyer chooses to exercise their option.
What Is a Futures Contract?
A futures contract is an agreement between two parties – a buyer and a
seller – wherein the former agrees to purchase from the latter, a fixed
number of shares or an index at a specific time in the future for a pre-
determined price. These details are agreed upon when the transaction
takes place. As futures contracts are standardized in terms of expiry dates
and contract sizes, they can be freely traded on exchanges. A buyer may
not know the identity of the seller and vice versa. Further, every contract is
guaranteed and honored by the stock exchange, or more precisely, the
clearing house or the clearing corporation of the stock exchange, which is
an agency designated to settle trades of investors on the stock
exchanges.
What Is an Options Contract?
Options are financial instruments that are based on
the value of underlying securities such as stocks. An
options contract offers the buyer the opportunity to
buy or sell—depending on the type of contract they
hold—the chosen underlying asset at a price set out
in the contract either within a certain timeframe or
at the expiration date.
Call Options
A call option gives the holder the right, but not the
obligation, to buy the underlying security at the
strike price on or before expiration. A call option will
therefore become more valuable as the underlying
security rises in price (calls have a positive delta)
Put Options
Opposite to call options, a put gives the holder the
right, but not the obligation, to instead sell the
underlying stock at the strike price on or before
expiration. A long put, therefore, is a short position
in the underlying security, since the put gains value
as the underlying's price falls (they have a negative
delta).
Moneyness of an Option
Contract
Deep In the money
In the Money (ITM)
At the Money (ATM)
Out of the Money (OTM)
Deep Out of the Money
Delta, the direction (Δ)
Delta is a lot like a speedometer. It measures
how fast the option premium is changing
based on the underlying moving in a
particular direction. If everything else stays
the same, Delta tells us approximately how
many points the option premium will change
for every 100-point change in the underlying.
Gamma, the acceleration (γ)
Gamma measures the rate of change in
Delta. In other words, it shows how much
Delta changes if the security’s value goes up
or down by Rs. 1. Gamma will be a number
from 0 to 1.00 on the option chain.
Vega, the Volatility (ν)
Vega essentially measures the risk of changes in
implied volatility of the underlying asset. Volatility
is one of the most important factors affecting
option values. Just like how delta measures
actual change in price, vega focuses on
changes in implied volatility (IV).
Theta, the time (θ)
Theta is a measure of how time decay
affects the value of an options
contract. As time goes by, an options
contract will lose value every day due
to time decay. This is called “theta
erosion.
Rho
Rho measures the expected change in an
option’s price per one-percentage-point
change in interest rates. It tells you how
much the price of an option should rise or
fall if the risk-free interest rate (U.S. Treasury-
bills)* increases or decreases.
India VIX Index
Volatility Index is a measure of market’s
expectation of volatility over the near term.
Volatility is often described as the “rate and
magnitude of changes in prices" and in finance
often referred to as risk. Volatility Index is a
measure, of the amount by which an underlying
Index is expected to fluctuate, in the near term
What Is Open Interest?
Open interest is the total number of outstanding
derivative contracts, such as options or futures
that have not been settled for an asset. Open
interest keeps track of every open position in a
particular contract, rather than tracking the total
volume traded in it, which may also included
netting or closing positions.
The End Of Part - 1

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