Options Presentation123(2)

Options“The Rising

Wave”

Derivatives Segment Growth

0

50

100

150

200

250

300

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

Tri

llio

ns

Index Futures Stock Futures Index Options Stock Options Cash

Index Option Volumes grown by more than 10 times in last five

years

Stock and index future Volumes were in a declining trend

Overall market volumes increased by about 150%

Reasons for growth of option segment

• Lower cost. (Options: 13 Paisa, Futures: 1.25 Rupees)

• Inbuilt stop loss.

• Does not require large corpus.

• Higher leverage with limited risk..

• Potential to make exponential profit.

• Protection against opening gap risk.

• Can take advantage of volatility (Events).

• Flexibility to control risk, using strategies.

• Risk reward will be in your favor. (Delta example)

What is an Option

Option is an instrument giving holder the right to buy or sell a specific quantity (lot) of a specific assets (Underlying) at a specific price (Premium) up to a specific date (Contract Expiry).

Options are further classified in two types

Call Option An agreement which gives buyer the right to buy but not the obligation to buy a stock.

Put OptionIt is opposite of call

option I.e.., giving the owner the right to sell but not the obligation.

Terminologies of Options

• Index options: These options have the index as the underlying. Like index futures contracts, index options contracts are also cash settled.

• Stock options: Stock options are options on individual stocks.

• Buyer of an option: The buyer of an option is the one who by paying the option premium buys the right but not the obligation to exercise his option on the seller/writer.

• Writer/Seller of an option: The writer of a call/put option is the one who receives the option premium and is thereby obliged to sell/buy the asset if the buyer exercises on him.

Cont……...

• Option price/premium: Option price is the price which the option buyer pays to the option seller.

• Expiration date: The date specified in the options contract is known as the expiration date, the exercise date, the strike date or the maturity.

• Strike price: The price specified in the options contract is known as the strike price.

• American options: American options are options that can be exercised at any time up to the expiration date.

• European options: European options are options that can be exercised only on the expiration date itself.

In The Money -- At The Money -- Out Of Money

Why not able to reap option benefits:

• Lack of money management.

• Don’t trade option but invest/ Longer holding

period.

• Wrong Strike price selection.

Why option investments loses

money

Every 5 days will cost option buyer around 25 points (0.5%)

Which Option to buy?• Wrong strike price selection.

– Beginning of the Fresh contract : Out Of money option

– Middle of the month: Move towards ATM Option

– Towards the expiry: At the Money option.

• Momentum

• Delta, gamma, Vega.

• Lesser Theta

– ITM Option should never be used for trading as it require huge premium and Liquidity issue.

– If ITM option is left for expiry it will attract delivery STT that is 0.125% (6-7 nifty points) and will trade at a discount to that extent towards the expiry.

Nifty Spot= 5300

Strike Price Selection

5200

5300

5400

5500

5600

21 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1

Days to expire

Str

ike

Cash/Future/Option Trading

Reliance has given upside breakout above 1000 levels now it may test 1050 levels. But if it fails to hold 1000 then may test 950 levels.

-----------------------------------------------------------------------------Buy Cash : Buy 250 shares @ 1000/- Investment : 2,50,000/- If it moves to 1050 then profit = 12,500/- Return on Investment :

5%If it goes to 950 then risk = 12,500/- Risk on Investment : -

5%-----------------------------------------------------------------------------Buy Future : Buy 1 lot of 250 shares Investment : 20% of

total value =50,000If it moves to 1050 then profit = 12,500 Return on Investment :

25%If it goes to 950 then risk = 12,500 Risk on Investment : -

25%-----------------------------------------------------------------------------

Call Option

Buy Call Option:

Buy 1000 Call @ 25/-Investment = 6,250/-

After 2 days :

If it moves to 1050 then option value: 57/-

Profit = (57-25)*250= 8,000

ROI = 128%

If it goes down to 950 then Option Value:7

Risk = (7-25)*250 = (4500)/-

ROI = -72%

StraddleStraddle: Involves buying ATM Call and Put of the same strike price.

Buy 1000 Call @ 25/-Buy 1000 Put @ 25/-Investment = 12500/-

After 2 days :

If it moves to 1050 then Call: 57 ; Put: 8 Profit = (65-50)*250=3,750ROI = 30%

If it goes down to 950 thenCall: 7 ; Put: 57Profit = (64-50)*250=3,500ROI = 28%

StrangleStrangle: Involves buying OTM of call and OTM Put.

Buy 1050 Call @ 8/-Buy 950 Put @ 7/-Reliance= 1000Investment = 3,750/-

After 2 days :


If it goes down to 950 thenCall: 1 ; Put: 23Profit = (24-15)*250=2,750ROI = 73%

Strip

Strip: Involves buying one ATM/OTM Call and Buying two

ATM/OTM Put.

Buy 1000 Call @ 25/-Buy 1000 Put @ 25/-Buy 1000 Put @ 25/-Investment = 18750/-

After 2 days :


If it goes to 1050 thenCall: 58 ; Put: 7Profit = (72-75)*250=(750)ROI = -4%

Strap

Strap: Involves buying two ATM/OTM Call and Buying one

ATM/OTM Put.

Buy 1000 Call @ 25/-Buy 1000 Call @ 25/-Buy 1000 Put @ 25/-Investment = 18,750/-

•After 2 days :If it moves to 1050 then Call: 57 ; Put: 7 Profit = (121-75)*250=11,500ROI = 63%

If it goes down to 950 thenCall: 7 ; Put: 57Profit = (71-75)*250=1,000ROI = -5.5%

Where to get option calls from:

• Trading Systems.

• Pattern Finder.

• Derivative Calls.

• Derivative Portfolio.

• Fortune finder (Intraday).

Myths

• Complex.

• Only writing makes money.

• Option will expire worthless.

• Option takes time to appreciate.

• 80% of the option buyers loses money.

• Option trading is only for professionals.

• Option trading will lose when volatility reduces.

“Writing option is the key to growth of options”

Wishing You All The Very Best And Lots Of Success In The Stock Markets!!

Options Presentation123(2)

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