BASICS OF OPTIONS
TOPICS FOR
TODAY
Derivatives and Options
Types of Options
Components / Building Blocks of
Options
Styles of options
Types of Contracts
Risk in Options
Basic Strategies in Options
When to Buy / Sell an option
Option Greeks
DERIVATIVES &
OPTIONS
Derivatives :-
A derivatives is a contract between two or more
parties whole value is based on an agreed – upon
underlying financial asset, index or security. Common
underlying instruments including bonds, commodities ,
currencies, interest rates, Market index and stocks.
Options :-
An option is a contract which gives the buyer
( the owner Or holder of the option) the right, but not the
obligation, to buy or sell and underlying asset or instruments
at a specified strike price on a specified date, depending on
USAGE OF
OPTIONS
o Hedging :-
Used to hedge portfolios in uncertain situation.
o Arbitrage :-
Make benefit from known arbitrage.
o Money Making :-
Money making using Option writing and option
Buying.
TYPES OF
OPTIONS
Call : A call is an agreement that gives an investor the right,
but not the obligation. To buy a stock, bond, commodity or other
instrument at a specified
price within a specific time period….. You Profit on a call when the
underlying asset increase in Price.
- Called as CE in NSE (ex, NIFTY 8800 CE)
Put :
A put option is an option contract giving the owner the right, but
not the obligation, to sell a specified amount of an underlying security
at a specified price Within a specified time. This is the opposite of a call
Option, which gives the holder the right to buy shares.
OPTIONS STYLES
European :
An option that may only be exercised on expiration
- Used in NSE
American :
An option that may be exercised on any
trading day on or before
expiry.
- Not used in
NSE
Bermudan :
An option that may be exercised on specified dates on or
COMPONENTS IN OPTIONS
Strike Price :-
A strike Price is the price at which a specific derivatives
contract can be exercised. The term is mostly used to describe options in
which prices are fixed in contract.
Options Premium :
It is the total cost to buy an option, which gives the holder
the right but not the obligation to buy or sell the underlying financial
instrument at a specified strike price.
- Intrinsic Value: It is the value Primarily used I options pricing to
indicate the
amount an option is in the money.
-Time value: The portion of an option’s Premium that is attributable
to the amount of time remaining until the expiration of the option
contract.
Time Decay :
TYPES OF OPTION CONTRACTS
At the Money (ATM) :
At the money is a situation where an Option’s Strike
price is identical to the price of the underlying security….
In the Money (ITM) :
In the money means that a call Option’s strike price is
below the market price of the underlying asset or that the strike price of
a put option is above the market price of the underlying asset….
Out of the Money (OTM) :
Out of the money (OTM)is term used to describe a call
option with a strike price that is higher than the market price of the
underlying asset. Or a put option with a strike price that is lower than
the market price of the underlying asset…
Type of Option Contract Call Option Put Option
In the Money Spot Price > Strike Spot Price < Strike
Price (S>K) Price (S<K)
At the Money Spot Price = Strike Spot Price = Strike
Price (S=K) Price (S=K)
Out of the Money Spot Price < Strike Price Spot Price > Strike Price
(S<K) (S>K)
RISK IN OPTIONS
• Options have limited risk and unlimited
profit.
• Why people Write/ Sell Options?
To keep the benefit of premium paid for the
options.
CALL OPTION
BUYING
• Invest
or
STOC
K
OR
Call Option
on
stock
PUT OPTION
BUYING
• Invest
or
Sells STOC
K
OR
Put Option
on
stock
OPTIONS
STRATEGIES
• Long call :
You buy the call options. Used when
bullish
Short
call : You sell the call options. Used when
bearish.
Long put You buy the put options. Used when
bearish.
: Short You Sell the put options. Used when
bullish.
put :
• Long Call
Short
: Call :
• Long Put
: Short Put :
OPTIONS STRATEGY
SUMMARY
Strate Sentiment/ Profi Los
gy Vie
Market t s
w
Long Bullish / Unlimite Limite
call Uptrend d d
Short Bearish/ Limite Unlimite
call Downtrend d d
Long Bearish/ Unlimite Limite
put Downtrend d d
Short Bullish/ Limite Unlimite
Put Uptrend d d
OPTION
GREEKS
Delta :
Change in Option Price Due to Change in Spot Price It is
DELTA. called as
Gama
: Change in Option Price Due to Change in Delta It is called
as GAMA.
Vega Change in Option Price Due to Change in Volatility It is
: called as
VEGA.
Theta :
Change in Option price due to change in Time to Expiry
as called
THETA.