Derivatives PPT 2022

but not an obligation, to buy or sell the underlying stated price, for a price. The party taking a long r/ holder of the option and the party taking a the seller/ writer of the option. The option buyer to buying or selling the underlying asset, while the act. Therefore, option buyer/ holder will exercise le to him, but, when he decides to exercise, option contract. types:‐ e underlying asset, is called Call option he underlying asset, is called Put option.

Option Options are the contracts that give the the obligation, to buy or sell a spec price on or before a specified date. Type o Option Call Bullish

ns e buyers the right, but not cified underlying at a set of ns Put Bearish

Real Life Example 49 You wa house Rs.25 Total Profit of Rs. 2.5Laks. You exercise your right

ant to buy e worth 5lakhs You pay Rs. 50k as a token (Valid for 2 months) After 1 month you get an offer of Rs.28lakh www.isfm.co.in 23 May 2022

More Example of O 50 • Buying a put is like buying an in • Suppose you buy an insurance p • The premium paid guarantees th upon time frame(expiry), you w • Insurance Companies are like op assuming obligations. • Put buyers pay a fee(Premium)

Options nsurance policy. policy for your car. hat if your car is stolen, within the agreed will get the full insured value(Strike Price) ption sellers, receiving premium for to transfer risk to put sellers. www.isfm.co.in 23 May 2022

Why Options ??  Investment – Options can be used to protect  Attractive return – Make large profits on the  Limited risk – Buying option is like buying pro  Less price and high volatility – Volatility in o returns possible .  Operational in all market scenarios – Option ranging market.  Higher Leverage in Options  While trading in Intraday Cash, we need 25  For Equity Future segment we need 10% ma  For Option segment we need 2% (approx. fo  Thus Option gives you opportunity to trad  Margin required in Commodity & Currency

existing positions. e back of a small capital outlay. otection against downside. option market is quite high making handsome ns can be traded in both trending as well as 5% margin of the turnover. argin of the turnover. for buying) margin of the turnover. de higher with little money. segment is around 6 to 8%.

Moneyness of Options



Duration and Moneyness of 53 Moneyness In The Money Call Option At The Money Strike Price < Spot Price Out of the Mon Strike Price = Spot Price Strike Price > Spot Price In India, options can be traded for 3 months: 1. Near Month January (current on-going month) 2. Next Month February (next month) 3. Far Month March (next to next month)

an Option Put Option Strike Price > Spot Price Strike Price = Spot Price ney Strike Price < Spot Price : www.isfm.co.in 23 May 2022

Intrinsic Value and Time 54 Intrinsic value (IV) & Time Value (TV):  The intrinsic value is the amount by which a  Time value of an option is the difference b  E.g. Let us assume DLF is trading at Rs.220 of Rs.32. Of the premium of Rs.32, the IV DLF 200 CA Rs. 32 IV Spot-StrikeDPrLicFe SPOT 220-200=20 TV Premium-IV 32-20=12

Value Concept an option is in the money. between premium and intrinsic value. 0 and DLF 200 CA is trading at a premium V is Rs.20 and time value is Rs. 12 DLF 240 PA Rs.32 Strike Price-Spot T 220 IV 240-220=20 TV Premium-IV 32-20=12 www.isfm.co.in 23 May 2022

Moneyness of an Opt 55  In-The-Money option (ITM): ITM option is an option t would lead to a positive cash flow to the holder if exerci immediately. E.g.: In case of call option, if spot price>str price. In case of put option, if strike price>spot price.  At-The-Money option (ATM): ATM option is an option t would lead to zero cash flow if exercised immediately. E Spot price=Strike price  Out-Of-The-Money Option (OTM): OTM option is an opt that would lead to negative cash flow if exerci immediately. E.g. In case of call option, if spot price<str price. In case of put option, if strike price<spot price.

tions that ised NIFTY SPOT 10000 rike Call 9800 ITM OTM Put 9600 Put 9800 that Put 10000 Put 10200 E.g. Call 9900 ITM OTM Put 10100 Call 10000 ATM ATM tion Call 10100 ITM ised OTM rike Call 10200 ITM OTM www.isfm.co.in 23 May 2022

Understanding of Time Deca 56 Time Decay:  As an option approaches its expiry date without being in the money, its TV declines as the probability of that option being profitable (in the money) is reduced.  When the option is deep-in-the-money, since the intrinsic value is high, time decay too occurs rapidly due to which the sellers discount the time value to attract the buyers. Time decay and time value are inversely related.  Both calls and puts have time value. An option that is OTM or ATM has only time value.

ay Day 1 Nifty CE Day 16 Nifty CE Day 2 100 Day 17 50 Day 3 97 Day 18 46 Day 4 94 Day 19 43 Day 5 91 Day 20 39 Day 6 88 Day 21 36 Day 7 85 Day 22 32 Day 8 81 Day 23 29 Day 9 78 Day 24 25 Day 10 74 Day 25 22 Day 11 71 Day 26 18 Day 12 67 Day 27 15 Day 13 64 Day 28 11 Day 14 60 Day 29 8 Day 15 57 Day 30 4 53 0 www.isfm.co.in 23 May 2022

Options Terminology



Options Terminology… 58 1 Index options These options have the ind 2 Stock options Stock options are options o 3 Buyer of an option The buyer of an option is th option premium buys the ri seller/writer. 4 Writer of an option The writer of a call/put opt the option premium and is on him. 5 Call option A call option gives the hold certain date for a certain pr 6 Put option A put option gives the hold certain date for a certain pr 7 Option price/premium Option price is the price wh pays to the option seller. It

dex as the underlying. Like : Nifty, Bank Nifty on individual stocks. he one who by paying the ight but not the obligation to exercise his option on the tion is the one who receives thereby obliged to sell/buy the asset if the buyer exercises der the right but not the obligation to buy an asset by a rice. der the right but not the obligation to sell an asset by a rice hiischaltswhoewrwoep.fiestifromren.cdbotu.oinyaesr t2h3e Mopatyio2n0p2r2emium

Options Terminology… 59 8 Expiration The date specified in the options contra date strike date or the maturity 9 Strike price The price specified in the options contra strike price or the exercise price. 10 American American options are options that can b options: any time up to the expiration date. Mos 11 European European options are options that can b options only on the expiration date itself. 12 In-the-money A call option on the index is said to be option higher than the strike price (i.e. spot pri 13 At-the-money An at-the-money (ATM) option is an op option immediately. An option on the index is (i.e. spot price = strike price). 14 Out-of-the- An out-of-the-money (OTM) option is a money option: option on the index is out-of-the-money the strike price (i.e. spot price < strike p

act is known as the expiration date, the exercise date, the act is known as the be exercised at st exchange-traded options are American. be exercised in-the-money when the current index stands at a level ice > strike price). ption that would lead to zero cash flow if it were exercised at-the-money when the current index equals the strike price an option that would lead to a negative cash flow. A call y whewnwtwh.eiscfmur.creon.int ind2ex3 sMtaanyd2s0a2t2a level which is less than price).

Options Terminology.. 60 15 Intrinsic value The option premium can be broken dow of an option intrinsic value of a call is the amount the option is ITM, if i another way, the intrinsic value of a ca is the greater of 0 or (St — K). Similar greater of 0 or (K — St). K is the strike 16 Time value of The time value of an option is the dif an option between its premium and its intrinsic 17 Exercise When we exchange settle the ITM op 18 Square off When you oneself clear the position 19 Lot Size It would be same as in the Future con 20 Strike Price Target price of the buyer or seller of 21 Interval Difference between Strike price called securities 22 Open Interest Open interest is the total number of o

wn into two components - intrinsic value and time value. The it is ITM. If the call is OTM, its intrinsic value is zero. Putting it all is Max[0, (St — K)] which means the intrinsic value of a call rly, the intrinsic value of a put is Max[0, K — St],i.e. the ke price and St is the spot price. fference c value ptions on expiry of the contract rather than you before the expiry ntract Like for Nifty it is : 75 the option d interval, it will depend on the price of the underlying www.isfm.co.in option contracts outstanding for an underlying asset.

Call Option 61

n Example www.isfm.co.in 23 May 2022

Stock Option Stock Option Escort 62 30th Jan 2021 1280 ( as on 14/03/2 1 Instrument type 1100 2 Underlying asset Call Options 3 Expiry date 8 -/ Rs. pay : Lot size 4 CMP (Support) Out of the Money Cal 5 Strike Price Near – March, Next – 6 Option Type 9 7 Premium / CMP 11 8 Options Category 6 9 Contract Cycle 8 10 Open 11 High 12 Low 13 Closing

2017) e* Premium ( 1100*8 = 8800-/ ll (OTM) – April, Far – May www.isfm.co.in 23 May 2022

Call Option – Optio 63

on Series www.isfm.co.in 23 May 2022

Call Option – Premiu S St 64

um Components Spot Price 10700 trike Price Option Premium Intrinsic Value Time Value 15.70 11100 15.70 - 26.35 45.25 11000 26.35 - 76.70 10900 45.25 - 122.45 82.75 10800 76.70 - 56.00 37.00 10700 122.45 - 24.70 13.00 10600 182.75 100.00 10500 256.00 200.00 10400 337.00 300.00 10300 424.70 400.00 10200 513.00 500.00 www.isfm.co.in 23 May 2022

Put Option Index Option 65

n Stock Option www.isfm.co.in 23 May 2022

Put Option – Opti 66

ion Series www.isfm.co.in 23 May 2022

Put Option – Premium Spot Pri Strik 11 10 10 10 10 10 10 10 10 10 10 67

m Components ice 10500 ke Price Option Premium Intrinsic Value Time Value 1000 557.90 500.00 57.90 0900 468.00 400.00 68.00 0800 385.35 300.00 85.35 0700 305.00 200.00 0600 241.00 100.00 105.00 0500 185.00 - 141.00 0400 143.00 - 185.00 0300 109.00 - 143.00 0200 82.55 - 109.00 0100 63.00 - 0000 47.50 - 82.55 63.00 47.50 www.isfm.co.in 23 May 2022

Options Pricing



Option Pricing 69

www.isfm.co.in 23 May 2022

Options Payoff



Option Pay off  Long on option Sh  Buyer of an option is said to be “long on Se option”. As described above, he/she would As ha  have a right and no obligation with regard to se buying/ selling the underlying asset in the co eq  contract. When you are long on equity option contract: du co  You have the right to exercise that option. w as  Your potential loss is limited to the premium amount you paid for buying the de option.  Profit would depend on the level of underlying asset price at the time of exercise/expiry of the contract.

hort on option eller of an option is said to be “short on option”. s described above, he/she would ave obligation but no right with regard to elling/buying the underlying asset in the ontract. When you are short (i.e., the writer of) an quity option contract: Your maximum profit is the premium received. You can be assigned an exercised option any time uring the life of option ontract (for American Options only). All option writers should be aware that ssignment is a distinct possibility. Your potential loss is theoretically unlimited as efined below.

Profit and Loss for th (Buyer of a Call) Op Profit “ + 100 “Out of the money” 0 + 50 2800 2900 300 - 50 Limited loss - 100 Loss 72