Scribd
Upload
68 views

Options: Presented By:-Pramod Singh Baghel (30) Prince Asati (32) Rajat Agrawal

The document discusses various derivatives contracts such as forwards, futures, and options. It describes the different types of options including calls and puts, and provides examples of how option prices and profits are determined based on the underlying asset price. Key terms related to options are defined, and strategies like covered calls, bull spreads, and bear spreads are outlined.

Uploaded by

domcert
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
68 views

Options: Presented By:-Pramod Singh Baghel (30) Prince Asati (32) Rajat Agrawal

The document discusses various derivatives contracts such as forwards, futures, and options. It describes the different types of options including calls and puts, and provides examples of how option prices and profits are determined based on the underlying asset price. Key terms related to options are defined, and strategies like covered calls, bull spreads, and bear spreads are outlined.

Uploaded by

domcert
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 21

Options

Presented By :-
P r a m od S i ng h B a g h e l ( 3 0 )
Prince Asati (32)
Rajat Agrawal (36)
Derivatives

A product whose value is derived from the value


of one or more underlying assets in a contractual
manner. The underlying asset can be equity, forex
commodity or any other asset.
Types

 Forwards
A forward contract is customized contract between two
entities, where settlement takes place on a specific date in the
future at today’s pre-agreed price.
 Futures
An agreement between two parties to buy or sell an asset at a
certain time in the future at a certain price. Futures contacts are
special types of forward contracts in the contracts in the sense
that the former are standardized exchange-traded contracts.
Options
Options are of two types – calls and puts.

Calls give the buyer the right but not the obligation
to buy a given quantity of the underlying asset, at a
given price on or before a given future date.

Puts give the buyer the right, but not obligation to


sell a given quantity of the underlying asset at a given
price on or before a given date.
Options Terminology
 Option Seller - One who gives/writes the option. He has an obligation to
perform, in case option buyer desires to exercise his option.
 Option Buyer - One who buys the option. He has the right to exercise the
option but no obligation.
 Call Option - Option to buy.

 Put Option - Option to sell.


 American Option - An option which can be exercised anytime on or before the
expiry date.
 Strike Price/ Exercise Price - Price at which the option is to be exercised.
 Expiration Date - Date on which the option expires.
 European Option - An option which can be exercised only on expiry date.
 Exercise Date - Date on which the option gets exercised by the option
holder/buyer.
 Option Premium - The price paid by the option buyer to the option seller for
granting the option.
Call Option Put Option
Buys the right to Buys the right to
buy the sell the
Option Buyer underlying asset underlying asset
at the Strike at the Strike
Price Price
Has the Has the
obligation to sell obligation to buy
the underlying the underlying
Option Seller
asset to the asset from the
option holder at option holder at
the Strike Price the Strike Price
Illustration on Call Option

An investor buys one European Call option on one share of Suzlon at a


premium of Rs.2 per share on 31 July. The strike price is Rs.60 and the
contract matures on 30 September.
It may be clear form the graph that even in the worst case scenario, the
investor would only lose a maximum of Rs.2 per share which he/she had paid for
the premium. The upside to it has an unlimited profits opportunity.

On the other hand the seller of the call option has a payoff chart completely
reverse of the call options buyer. The maximum loss that he can have is unlimited
though a profit of Rs.2 per share would be made on the premium payment by the
buyer.
Illustration on Put Options

An investor buys one European Put Option on one share of


Suzlon at a premium of Rs. 2 per share on 31 July. The strike price is
Rs.60 and the contract matures on 30 September. The adjoining
graph shows the fluctuations of net profit with a change in the spot
price.
Operators in the Derivatives Market

 Hedgers - Operators, who want to transfer a


risk component of their portfolio.
 Speculators - Operators, who intentionally
take the risk from hedgers in pursuit of profit.
 Arbitrageurs - Operators who operate in the
different markets simultaneously, in pursuit of
profit and eliminate mis-pricing.
Strategies
STRADDLE
Long Straddle
 
Buying a Straddle is simultaneous purchase of a CALL & PUT option
for a Stock, with same expiration date & Strike Price.
 
Why Straddle – If you expect the stock to fluctuate wildly but unsure of
the direction. Enables investors to make profits on both upward and
downward fluctuation of stock. Potential gain can be unlimited
 
Abc ltd.
Spot Price = Rs. 250
Premium on Rs. 250 CA = Rs. 12
Premium on Rs. 250 PA = Rs. 12
 
BUY Rs. 250 CA and Rs. 250 PA
 You Start making profits if Price goes above Rs. 274 or goes below Rs.
226
STRANGLE
Long Strangle
 
Buying a Strangle is simultaneous purchase of Out of Money CALL
& PUT option for a Stock, with same expiration date.
 
IPCL
Spot Price = Rs. 250
Premium on Rs. 270 CA = Rs. 5
Premium on Rs. 230 PA = Rs. 5
 
BUY Rs. 270 CA and Rs. 230 PA
Total Premium Paid = Rs. 10
 
You Start making profits if Price goes above Rs. 280 or goes below
Rs. 220
 
SHORT STRADDLE
WRITE CALL & PUT OPTIONS
 
If you expect the Stock to show very little volatility, it is worthwhile to write a call & put
option.
 
Ashok Leyland – has been range bound for the last 3 months. You don’t expect it to move
up or down too much.
 
Ashok Leyland Spot Price Rs. 25
 
Premium of Rs.25 CA Rs. 1.5
Premium on Rs.25 PA Rs. 1.5
 
Sell Rs.25 CA and Rs.25 PA.
 
Total Premium Received = Rs.3 .
 
Investor incurs a loss incase price drops below Rs. 22 or goes up above Rs. 28
 
Risky Strategy since profits limited but losses unlimited.
SHORT
STRANGLE
SELL OUT OF MONEY CALL & PUT OPTIONS
 
CESE Spot Price = Rs.270
Premium on Rs. 250 PA= Rs.5
Premium on Rs. 290 CA = Rs.4

Sell CESE Rs. 250 PA @ Rs.5 and sell Rs.290 CA @ Rs.4.


 
Total Premium Received = Rs. 9

You start incurring a loss if price goes above Rs. 299 or drops below Rs. 241
Call Option

Call Option Premium


1100 10 Out of the money
Cash price 1000 20 At the money
@1000 900 120 In the money

Intrinsic Value
Time Value
Put Option

Put Option Premium


Nifty 6100 200 In the Money
Cash price 6000 100 At the money
@6000 5900 50 Out of the money

Intrinsic Value
Time Value
Bull Spread

Nifty -6100 CE @+35


6000 +6000 CE @-68
-33

BEP 6033
Max Profit 67
Max Loss 33
Cost of Creating Bull Spread 33
Bear Spread

Nifty +6000 PE @-142


5900 -5900 PE @+95
-47_

BEP 5953
Max Profit 53
Max Loss 47
Cost of Creating Bear Spread47
Covered Call Writing

+ Nifty Future @6000


- Nifty 6100 CE @+50_
+50_

BEP 5950
Max Profit 150
Max Loss Unlimited

You might also like