Derivatives PPT 2022

he Long Call ption “At the money” Strike price ” “In the money” 00 3100 3200 Unlimited profit Spot price Break-even price www.isfm.co.in 23 May 2022

Profit and Loss for (Writer of a Cal Profit + 100 Limited profit 2900 3000 + 50 2800 0 - 50 - 100 Loss 73

r the Short Call ll) Option “At the money” Strike price 3100 Break-even price 3200 Spot price Unlimited loss www.isfm.co.in 23 May 2022

Profit and Loss for (Buyer of a Put) Op Profit “ “In the money” + 100 +50 Unlimited 2900 Profit 0 - 50 2800 - 100 Break-even price 74 Loss

the Long Put ption “At the money” Strike price “Out of the money” 3000 3100 3200 Spot price Limited loss www.isfm.co.in 23 May 2022

Profit and Loss for th (Writer of a Put) Op Profit + 100 Break-even + 50 price 0 2800 2900 - 50 Unlimited loss - 100 Loss 75

he Short Put ption “At the money” Strike price n Spot price Limited profit 0 3000 3100 3200 www.isfm.co.in 23 May 2022

Short Call Settlement 76 On expiry 30th March Nifty Net Payoff from Call closes at Option (Rs.) T9h00e0payoff schedule 40 40 9100 40 9200 0 9240 -60 9300 -160 9400 -260 9500

Put Current Nifty index 9200 Option Strike Price (Rs.) 40 Premium (Rs.) Mr. XYZ Break Even Point (Rs.) 9240 Pays (Strike Price + Premium Received www.isfm.co.in 23 May 2022

Short Put Settlement 77 Net Payoff from Call Option (Rs.) On expiry 30th March Nifty closes at 9T2h0e0 payoff schedule 20 9100 20 9000 20 8980 0 8900 -80 8800 -180 8700 -280

Current Nifty index Strike Price (Rs.) 9000 Call Premium (Rs.) 20 Option Mr. XYZ Break Even Point (Rs.) 8980 Pays (Strike Price - Premium Received www.isfm.co.in 23 May 2022

Options Summary



Options – 79

Summary www.isfm.co.in 23 May 2022

When to trad An Option trader can take 4 : Bullish • When o Calls or • Eg: If N Bearish • When on Expecting a movement buy Puts in any direction • Eg: If ma • Before an markets, e Call & Bu • Eg: If mar Expecting a range • After an e bound market range, on strikes. 80 • Eg: If mar

de What..? 4 views on the market one is expecting the market to move up, he can buy r sell Puts. Nifty is at 8700, buy 8700 Call or Sell 8700 Put. ne is expecting the market to move down, he can s or sell Calls. arket is at 8700, buy 8700 Put or Sell 8700 Call. n event which is likely to create huge volatility in the eg: Elections, Results , etc. , one can use strategies like Buy uy Put rket is at 8700, buy 8700 Call and buy 8700 Put. event, when the market is likely to consolidate in a narrow ne can use strategies like sell Call and sell Put of different rket is at 8700, sell 8000 Call and Sell 8400 Put www.isfm.co.in 23 May 2022

Precautions while using o  Always maintain strict stop loss.  Never do averaging of losing position.  As the option nears the expiry, the value of the opt  While executing a strategy, understand the combin  Initiation of a strategy is very important. Eg: A long premiums are almost equal.  Keeping a stop loss order on a strategy can be dif strategy.  Selling of options would require initial and exposu  Losses are limited in buying of options in compariso  Always prefer to take view in option’s closer to ma money).

options tion reduces due to time decay. nation of options and the risks involved. g call and long put strategy should be initiated when both fficult, hence keep a watch on the profit/loss of the ure margin. on to selling of options. arket price (At the money option is better than out of the

Analyzing Future Options



Analyzing Futures & Op  Futures can be analyzed using following –  Price movement  Premium and discount  Cost of Carry  Technical tools and study  Open Interest  Options can be analyzed using following –  Price (Spot & Strike)  Historical and Implied Volatility  Time Value  Greeks  Technical Tools

ptions

Options Greeks



Others IMP term  Option Greeks:  Option premiums change with chan factors such as strike price, volatility, term to maturity etc. T known collectively as “Greeks” represented by Delta, Gam  Delta (δ or Δ)  The most important of the ‘Greeks’ i option value to a given small change in the price of the und which an option moves with respect to price of the underlyi change in price of the underlying asset. Delta for call optio contract increases as the share price rises. To that extent it asset. Delta for call option seller will be same in magnitude option buyer is negative. The value of the contract increase ‘bear’ position in the underlying asset. Delta for put option sign (positive). Therefore, delta is the degree to which an o stock or index price, all else being equal.

nges in the factors that determine option pricing i.e. The sensitivities most commonly tracked in the market are mma, Theta, Vega and Rho. is the option’s “Delta”. This measures the sensitivity of the derlying asset. It may also be seen as the speed with ing asset. Delta = Change in option premium/ Unit on buyer is positive. This means that the value of the is rather like a long or ‘bull’ position in the underlying e but with the opposite sign (negative). Delta for put es as the share price falls. This is similar to a short or n seller will be same in magnitude but with the opposite option price will move given a change in the underlying

Others IMP term Option  Gamma (γ):  It measures change in delta with respect to change derivative option with regard to price of the under for a unit change in market price of the underlying change in price of underlying asset Gamma works with which an option will go either in‐the‐money or underlying asset.  Theta (θ) :  It is a measure of an option’s sensitivity to time dec decrease in time to expiration. It is a measure of ti how time decay is affecting your option positions. T expiry  Usually theta is negative for a long option, whe  being equal, options tend to lose time value ea  due to the fact that the uncertainty element in

e in price of the underlying asset. This is called a second rlying asset. It is calculated as the ratio of change in delta g asset. Gamma = Change in an option delta/ Unit s as an acceleration of the delta, i.e. it signifies the speed r out‐of‐the‐money due to a change in price of the cay. Theta is the change in option price given a one‐day ime decay. Theta is generally used to gain an idea of Theta = Change in an option premium/ Change in time to ether it is a call or a put. Other things ach day throughout their life. This is the price decreases.

Others IMP term Option  Vega (ν)  This is a measure of the sensitivity of an option pric option premium for a given change (typically 1%) premium/ Change in volatility Vega is positive for volatility of the underlying increases the expected  Rho (ρ)  Rho is the change in option price given a one perce measures the change in an option’s price per unit in Change in an option premium/ Change in cost of f  Summary  From a trader’s perspective, we may say that he ha options of various expiries and various strikes. Dep conditions and his risk appetite, he can devise  various strategies,

ce to changes in market volatility. It is the change of an in the underlying volatility. Vega = Change in an option a long call and a long put. An increase in the assumed pay-out from a buy option, whether it is a call or a put. entage point change in the risk‐free interest rate. Rho ncrease in the cost of funding the underlying. Rho = funding the underlying as the choice of futures of various expiries and also pending upon his analysis of the then existing market

Introduction to Delta



Delta  ‘Delta of an Option’ comes handy. The changes with respect to the change in th an option helps us answer questions of t option premium change for every 1 poi  Therefore the Option Greek’s ‘Delta’ ca movement of the market on the Option’  The delta is a number which varies –  Between 0 and 1 for a call option, some So the delta value of 0.55 on 0 to 1 sca  Between -1 and 0 (-100 to 0) for a put to 0 scale is equivalent to -40 on the -1

Delta measures how an options value he underlying. In simpler terms, the Delta of this sort – “By how many points will the int change in the underlying?” aptures the effect of the directional ’s premium. e traders prefer to use the 0 to 100 scale. ale is equivalent to 55 on the 0 to 100 scale. t option. So the delta value of -0.4 on the -1 100 to 0 scale

How to apply  We know the delta is a number that ranges between 0 and 1. A  Well, as we know the delta measures the rate of change of prem that for every 1 point change in the underlying, the premium is li underlying the premium is likely to change by 30 points. The foll  Nifty @ 10:55 AM is at 8288, Option Strike = 8250 Call Optio  Premium = 133, Delta of the option = + 0.55  Nifty @ 3:15 PM is expected to reach 8310  What is the likely option premium value at 3:15 PM?  Well, this is fairly easy to calculate. We know the Delta of the o premium is expected to change by 0.55 points.  We are expecting the underlying to change by 22 points (8310  = 22*0.55 == 12.1  Therefore the new option premium is expected to trade around  Which is the sum of old premium + expected change in premium

Assume a call option has a delta of 0.3 or 30 – what does this mean? mium for every unit change in the underlying. So a delta of 0.3 indicates ikely change by 0.3 units, or for every 100 point change in the lowing example should help you understand this better – on option is 0.55, which means for every 1 point change in the underlying the 0 – 8288), hence the premium is supposed to increase by 145.1 (133+12.1) m

How to apply We know the delta is a number that ranges between 0 and 1. As mean? Well, as we know the delta measures the rate of change of prem indicates that for every 1 point change in the underlying, the pre in the underlying the premium is likely to change by 30 points. Th Nifty @ 10:55 AM is at 18000, Option Strike = 18050 Call Op Premium = 133, Delta of the option = + 0.55 Nifty @ 3:15 PM is expected to reach 18200 What is the likely option premium value at 3:15 PM? Well, this is fairly easy to calculate. We know the Delta of the op underlying the premium is expected to change by 0.55 points. We are expecting the underlying to change by 200 points (1800 = 200*0.55 == 11o Therefore the new option premium is expected to trade around 2 Which is the sum of old premium + expected change in premium

ssume a call option has a delta of 0.3 or 30 – what does this mium for every unit change in the underlying. So a delta of 0.3 emium is likely change by 0.3 units, or for every 100 point change he following example should help you understand this better – ption ption is 0.55, which means for every 1 point change in the 00 – 18200), hence the premium is supposed to increase by 243 (133+110) m

Example  What if one anticipates a drop in Nifty? What will happen  Nifty @ 10:55 AM is at 18000  Option Strike = 18050 Call Option  Premium = 133  Delta of the option = 0.55  Nifty @ 3:15 PM is expected to reach 17900  What is the likely premium value at 3:15 PM?  We are expecting Nifty to decline by – 100 points (18000  = – 100 * 0.55  = – 55  Therefore the premium is expected to trade around  = 133 – 55  = 78 (new premium value)

n to the premium? 0 – 17900), hence the change in premium will be –

Delta Helps in Evaluation  For example assume you expect a massive 100 point up mo option. There are two Call options and you need to decide  Call Option 1 has a delta of 0.05  Call Option 2 has a delta of 0.2  Now the question is, which option will you buy?  Let us do some math to answer this –  Change in underlying = 100 points  Call option 1 Delta = 0.05  Change in premium for call option 1 = 100 * 0.05 = 5  Call option 2 Delta = 0.2  Change in premium for call option 2 = 100 * 0.2 = 20  As you can see the same 100 point move in the underlying trader would be better off buying Call Option 2. This shoul to trade. But of course there are more dimensions to this, wh

n of the options ove on Nifty, and based on this expectation you decide to buy an which one to buy. has different effects on different options. In this case clearly the ld give you a hint – the delta helps you select the right option strike hich we will explore soon.

Delta Table 94  The value of the delta is one of the many pricing formula. However for now, you n Greeks are market driven values and are  However here is a table which will help y Optioan Tgypiveen option. Approx Delta Deep ITM Between + 0.8 to + 1 Slightly ITM Between + 0.6 to + 1 ATM Between + 0.45 to + 0 Slightly OTM Between + 0.45 to + 0 Deep OTM Between + 0.3 to + 0

y outputs from the Black & Scholes option need to be aware that the delta and other e computed by the B&S formula. you identify the approximate delta value for a value (CE) Approx Delta value (PE) Between – 0.8 to – 1 Between – 0.6 to – 1 0.55 Between – 0.45 to – 0.55 0.3 Between – 0.45 to -0.3 Between – 0.3 to – 0 www.isfm.co.in 23 May 2022

Delta versus spot price  Have a look at the chart below – it cap price. The chart is a generic one and no as such. As you can see there are two li  The blue line captures the behavior of t  The red line captures the behavior of th

ptures the movement of delta versus the spot ot specific to any particular option or strike ines – the Call option’s delta (varies from 0 to 1) he Put option’s delta (varies from -1 to 0)

Delta Acceleration  This graph talks about the ‘Delta stages mentioned in the graph, l

a Acceleration’ – there are 4 delta let us look into each one of them.

Predevelopment  This is the stage when the option is OTM or deep OTM. Th 0 even when the option moves from deep OTM to OTM. F Deep OTM, which is likely to have a delta of 0.05. Now delta of 8700 Call option will not move much as 8700 C – zero number.  So if the premium for 8700 CE when spot is at 8400 is Rs the premium is likely to move by 100 * 0.05 = 5 points.  Hence the new premium will be Rs.12 + 5 = Rs.17/-. How not really deep OTM.  Most important to note – the change in premium value in terms the Rs.12/- option has changed by 41.6% to Rs.17  Conclusion – Deep OTM options tends to put on an impre to move by a large value.  Recommendation – avoid buying deep OTM options beca move massively for the option to work in your favor. There very same reason selling deep OTM makes sense, but we the Greek ‘Theta’.