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Transcript of Options
OPTIONSPROF. MALLIKARJUN BALIBLDEA’S VP DR. P. G. H . CETMBA DEPARTMENTBIJAPUR
Introduction
Options, like futures, are also speculative financial instruments. An option is a legal contract which gives the holder the right to buy or sell a specified amount of underlying asset at a fixed price within a specified period of time. It gives the holder the right to buy (or sell) a designated asset. The holder is, however, not obliged to sell (or buy) the same.
Option is the right to either buy or sell something, at a specified price within a specified period of time.
Types of Options
Call Options It gives the right to buy underlying asset,
but not obligation to buy. Put Options
It gives the right to sell underlying asset, but not obligation to sell.
Call Option Buying
A Call option buyer basically is bullish about the underlying stock.
Put Option buying
• A buyer of put option is bearish on underlying stock.
Terminologies used in Options
Call options and Put options American options and European options Physical delivery v/s cash- settled options Expiration date Exercise price Option premium Long Call & Long Put Shot Call & Short Put Covered and Uncovered (Naked) Call
Return and risk of Buyer and seller of Option contract
• Seller has an obligation and buyer has a right in option agreement
• Buyer• Limited amount of risk (max loss is premium
paid)• Return (profit) potential in unlimited
• Seller• Unlimited risk• Limited return potential
Options Terminology
At any time, option maybe: Call
Put At the money (ATM) : ExP = MP ExP =
MP In the money (ITM) : ExP < MP
ExP > MP Out of the money (OTM): ExP > MP
ExP < MP
Call Option at Expiration
Call optionStrike price : 100; Premium : Rs 10/share;No of shares – 100; Expiration : 31.03.2012
On 31.03.2012, Market price of share
Profit (Loss) for buyer
80 (1000)
90 (1000)
100 (1000)
110 0
120 1000
130 2000
140 3000
Put optionStrike price : 100; Premium : Rs 10/share;No of shares – 100; Expiration : 31.03.2012
On 31.03.2012, Market price of share
Profit (Loss) for buyer
70 2000
80 1000
90 0
100 (1000)
110 (1000)
120 (1000)
Exercise of Puts
Pay off from a Long Call
Payoff from Short Call
Options Trading Strategies
Hedging a Long position in stock Hedging a short position in stock Hedging with writing call and put options Spreads and Combinations
Bull spreads Bear spreads
Butterfly spreads Straddle Strips and straps strangles
Option Valuation Modules
The Binomial model Black and Scholes model
Thank You!