S.S. JAIN SUBODH P.

G (AUTONOMOUS) COLLEGE , JAIPUR

“OPTIONS AS A STRATEGIC INVESTMENT IN

INDIAN CAPITAL MARKET”

SURESH GODARA
M.com (IV Semester)
Roll No. 2471020
 INTRODUCTION .

OPTIONS STRATEGIC IN CAPITAL MARKET

• Derivative securities: value is derived or stems from changes in the value of some
other assets.

• Call option: the right (but not obligation) to buy

• Put option: the right (but not obligation) to sell

• The most popular options - equity options

Characteristics of Exchange Traded
Options
• Four types of underlying assets
• Equity securities
• Stock indexes
• government debt securities
• foreign currencies

• Have standardized terms

• Trading activity is determined by supply and demand
• Option interest: number of outstanding options
• Exercise price : The exercise price, also called the strike price, is the
price at which you can buy or sell an asset (like a stock) when you
have a stock option.
At-the-money: when option price equals current market price of
underlying assets
• In-the-money: when the strike price is less (more) than the market
price of the underlying asset for a call (put)
• Out-of-money: when the strike price is more (less) than the market
price of the underlying asset for call (put)
• Option premium: price at which the contract trades (the amount paid
for the option)
Option concept
 Hedged position: A hedged position is a way to reduce the risk of
losing money on an investment by taking an opposite position.
(to limit risk)

 Speculative position: In options trading, a speculative position is

when you buy or sell options just because you believe the price of a
stock will move a certain way — either up or down — and you want
to make a profit from that move.
 Option types
1. Stock Options: Stock options are a kind of contract.
They give you the choice (but not the obligation) to buy or sell a stock at a certain
price within a certain time.
2. Index options: Index Options are financial tools that let you make money if you
think a stock market index will go up or down.
• ➡️An index is just a group of stocks.
• You are not buying the actual stocks — you’re just trading based on the index’s
direction. (Nifty 50 , Bank Nifty )

3. Debt Options: In capital markets, companies, governments, and banks borrow

money from investors instead of from banks.
• They promise to pay interest regularly and return the full amount later (this is called
maturity). (Bonds, Debentures, Government Securities )
Call Option strategies
• Long position: the right (but not obligation) to buy the underlying
asset at a strike price for a limited period of time.
• The right to buy stock at a fixed price becomes more valuable as price of stock
increases (in the money when current stock price > exercise price)
• Risk for buyer is limited to the call premium and potential is unlimited
•
• Short position: payoff mirror image of long position (zero sum game)
•
• Covered call: sale of a call option on a stock that is owned.
Put option strategies
• Long position: the right, but not obligation, to sell an underlying asset
at strike price.
• The right to sell stock at a fixed price becomes valuable as price of the stock
decreases (in the money when current price < exercise price)
• Risk for buyer is limited to the premium and profit is also limited (price
cannot be below zero)
• Short position: mirror image of long position
• Protective put: insurance against a sharp correction. Purchase of a
stock and put option
Option pricing
• Factors contributing value of an option
• price of the underlying stock
• time until expiration
• volatility of underlying stock price
• cash dividend
• prevailing interest rate.
• Intrinsic value: difference between an in-the-money option’s strike price and
current market price
• Time value: speculative value.

Call price = Intrinsic value + time value

Option risks
• Delta: the sensitivity of option value to a unit change in the
underlying asset (hedge ratio)
• Gamma: The responsiveness of delta to unit changes in the value of
the underlying asset
• Theta: The sensitivity of option value to change in time
• Vega: The sensitivity of option value to change in volatility
• Rho: The sensitivity of option value to changes in interest rate
Learning Objectives
• Understand the characteristics of call and put options

• Know the uses of index options

• Be able to implement covered call and protective put strategies

PERIOD OF STUDY
• 👉 "Period of study" in option trading just means how long you should learn
and practice before you actually start trading with real money.
• In easy words:=
• First few weeks: You learn what options are — like calls, puts, strike price,
expiry date.
• Next 1–3 months: You practice by watching the market and maybe doing
paper trading (fake trading with no real money).
• After 3–6 months: If you feel confident and understand basic strategies, you
can start small with real money — just tiny trades.
• Full learning never ends: Even pros keep learning because markets always
change!
RESEARCH METHODOLOGY
1. Find a Stock
• Look for a stock you like or that is moving a lot.
2. Analyze the Trend
• Is the stock price going up, down, or sideways?
• You can check the chart (line that shows price movement) and news.
3. Pick a Strategy
• If you think it’s going up, maybe you buy a call.
• If you think it’s going sideways, maybe you sell a call.
 4. Check the Option Details
• Look at things like:
• Strike price (at what price you can buy/sell)
• Expiry date (how long the option lasts)
• Premium (how much it costs)
5. Manage Your Risk
• Decide: "How much money am I ready to lose?"
• NEVER bet everything! Small bets at first!
6. Make the Trade
• Once you have your plan, you place the option trade.
TECHNIQUES
1.Buy a Call
➡️You bet a stock will go up.
2.Buy a Put
➡️You bet a stock will go down.
3.Spread
➡️You combine two options (buy one, sell one) to control risk and
cost.
4.Straddle
➡️You bet that the stock will move a lot — but you don't care which
direction.
 5. Covered Call
• You own the stock already.
• You sell a call option to earn extra money.
• If the stock rises too much, you might have to sell it.
6. Protective Put
• You own the stock but want to protect yourself.
• You buy a put option as insurance in case the stock drops.
7. Strangles
• What it is: A strangle is similar to a straddle but involves buying a call
option and a put option with different strike prices.
CONCLUSIONS
1. HIGH Risk and HIGH Reward: Options can offer high rewards, but they come with
significant risk. You can lose all your investment if the market doesn’t move in your
favor, especially if you're buying options.
2. Flexibility: Options give traders flexibility, allowing them to make money in rising,
falling, or even sideways markets (depending on the strategy).
3. Time Sensitivity: Options have expiration dates, meaning they lose value over time.
This is called "time decay." You need to be aware of when your options will expire.
4. Strategy Matters: There are many strategies in options trading, like buying calls,
buying puts, or more complex ones like spreads or straddles. Choosing the right
strategy is key.
5. Market Knowledge: Success in options trading requires a good understanding of the
market, the underlying asset, and how options work. It’s not a guaranteed way to
make money without learning and careful planning.
 SUGGESTIONS
1. Start small.
• Trade with a small amount of money first.
2. Buy options, don’t sell yet.
• Buying is safer for beginners.
3. Pick strong, famous companies.
• Like Reliance, Tata, HDFC Bank, ….
4. Choose short expiry dates.
• 1 to 2 months ahead — easy to manage.
5. Use limit orders.
• Set your buying price. Don’t rush.
 6. Practice first.
• Try demo accounts (fake trading) before real money.
7. Avoid risky news days.
• Like earnings announcements — prices jump a lot.
8. Accept small losses.
• Don’t chase after lost money. Protect your cash.
9. Learn slowly.
• Don’t jump into complicated strategies.
10. Always have a plan.
• Know when you want to sell — win or lose