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Options

The document discusses options contracts including their characteristics, types, factors affecting prices, and payoffs. It covers European and American options, call and put options, and pricing conditions like put-call parity.

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nipun9143
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Download as PPTX, PDF, TXT or read online on Scribd
23 views

Options

The document discusses options contracts including their characteristics, types, factors affecting prices, and payoffs. It covers European and American options, call and put options, and pricing conditions like put-call parity.

Uploaded by

nipun9143
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Options

Option contracts
• Options contracts, their characteristics/features and types

• Factors affecting option prices

• Pay-offs from the options

• Pricing Conditions: Put-call parity and Put-call-futures parity


conditions.
Options contracts
• Options are the derivative contracts, which offer a right to the holder
to buy/sell the underlying asset at a price, agreed upon today (called
strike price), on or up to future date(s).
• Options are, in general, the Exchange-traded-derivatives (ETD);
however, they are traded equally in the over-the-counter (OTC)
market as well.
• Option holder (buyer): has the right, but no obligation, to buy/sell the
underlying asset at the specified date(s).
• Option writer (seller): is obliged to honour the position, in case
exercised by the option holder.
Options types
• Based on the characteristics/ specifications:
• European options
• American options
• Exotic options (e.g., Bermudan options, Asian options, among others)
• Based on the right they offer:
• Call options
• Put options
• Based on moneyness:
• In-the-money (ITM)
• At-the-money (ATM)
• Out-of-the-money (OTM)
Options types
• Based on maturity:
• Near-the-month (NTM)
• Next-the-month (NXTM)
• Far-the-month (FTM)
• Long-dated-options (LDOs)
• Based on the underlying:
• Equity options: Stock options and Index options
• Bond futures options
• Currency options
• Swaptions
Example
• Assume the index is trading at 11,445 today. You are given a right
today to buy the same one month later, at say 11,500.
• Assume the index is trading at 11,445 today. You are given a right
today to sell the same one month later, at say 11,500.
• In order to get this right you are required to pay a small amount
today, say Rs. 150/-.
• (Define: Spot Price, Strike Price/ Exercise price, Moneyness, Call and
Put option, Lot size,
Call Option

This is
denoted
as X or K
Put Option
Option Positions
• There are two sides to every option contract.
• On one side is the investor who has taken the long position (i.e., has bought
the option).
• On the other side is the investor who has taken a short position (i.e., has sold
or written the option).
• There are four types of option positions:
• A long position in a call option
• A long position in a put option
• A short position in a call option
• A short position in a put option.
Options Payoff
• A European call option on Nifty index, with strike of 10200, trades at a price of Rs. 70.
The contract is scheduled to expire on August 31, 2018. Assume that on August 31, 2018,
Nifty index may take any of the following prices:
• ce
• 10000
• 10100
• 10200
• 10300
• 10400
• 10500
• 10600
• 10700
• 10800

• Based on the above-mentioned data, draw the pay-offs at maturity for a long call and a
short call position.
Factors affecting option prices
Bound on Options Prices
• European Call option
• The value of a call option will be highest for an option with zero
exercise value and infinite time until expiration.
• Similarly, the value will be lower for an option with higher exercise
price and shortest time to expiry.
• The bound for call option is given by
and
Bound on Options Prices
• European put option
• Value of put at expiry 𝑀𝑎𝑥 0, 𝑋 − 𝑆𝑇
• Upon exercise, the owner of put receives the exercise price- the spot
price at the time of expiry.
• Therefore, the lower the stock price, the more valuable the put must
be.
• For a European put
and
Bound on American options
• American Call
• Is it optimal to exercise an American call option on a non-dividend-paying
stock before the expiration date?
• At expiry?
• Bound?
• American Put
• Is it optimal to exercise an American put option on a non-dividend-paying
stock before the expiration date?
• At expiry?
• Bound?

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