Basics of options
- 1. BASICS OF OPTIONS Made By – Rohit Bombale
- 2. 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
- 3. 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.
- 4. 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.
- 5. 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)
- 6. 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.
- 7. 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.
- 8. 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…
- 9. 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)
- 10. 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.
- 11. CALL OPTION BUYING •Investor OR STOCK Call Option on stock
- 12. PUT OPTION BUYING •Investor OR STOCK Put Option on stock Sells
- 13. 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.
- 14. • Long Call : Short Call :
- 15. • Long Put : Short Put :
- 16. 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
- 17. 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 :