BASICS OF OPTIONS
Made By – Rohit Bombale
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 the form of the options.
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.
- Called as PE in NSE. ( ex NIFTY 8800 PE)
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 before
expiration.
- Not used in NSE
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 :
Time decay is the ratio of the change in an options price to the decrease in
time to expiration.
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 Call Option Put Option
Contract
In the Money Spot Price > Strike Spot Price < Strike
Price Price
(S>K) (S<K)
At the Money Spot Price = Strike Spot Price = Strike
Price Price
(S=K) (S=K)
Out of the Money Spot Price < Strike Spot Price > Strike
Price 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
• Investor
Expects STOCK
stock price
to go up OR
hence he
buys Call Option
on stock
PUT OPTION BUYING
• Investor
Sells STOCK
Expects
stock price
to go DOWN OR
hence he
BUY 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 put :
You Sell the put options. Used when bullish.
• Long Call : Short Call :
• Long Put : Short Put :
OPTIONS STRATEGY SUMMARY
Strategy Sentiment/ Profit Loss
Market View
Long call Bullish / Uptrend Unlimited Limited
Short call Bearish/ Limited Unlimited
Downtrend
Long put Bearish/ Unlimited Limited
Downtrend
Short Put Bullish/ Uptrend Limited Unlimited
OPTION GREEKS
Delta :
Change in Option Price Due to Change in Spot Price It is called as
DELTA.
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.
Rho :
Change in Option Price due to change in Rate of interest.