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 Contract Call Option Put Option

In the Money Spot Price > Strike Price (S>K)

Spot Price < Strike Price (S<K)

At the Money Spot Price = Strike Price (S=K)

Spot Price = Strike Price (S=K)

Out of the Money Spot Price < Strike Price (S<K)

Spot Price > Strike Price (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

OR

STOCK

Call Option on stock

PUT OPTION BUYING

• Investor

OR

STOCK

Put Option on stock

Sells

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/ Market View

Profit Loss

Long call Bullish / Uptrend Unlimited Limited

Short call Bearish/ Downtrend Limited Unlimited

Long put Bearish/ Downtrend Unlimited Limited

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.