Option Sem1

Hedging Through Call option Ram an investor is bothered about the increase in the share price of a company. So He wants to buy 100 shares 2 months from now. He can hedge himself by buying a call option to purchase. No. of Shares

Strike Price/Share

Premium/Share

100

1000 10 100000 1000 Now he has the right but not the obligation to purchase. Situation - 1 At the end of 2 months If Spot Price increases He will go for option so he will pay Now he will sell the shares Profit Less: Premium Net Profit Situation - 2 At the end of 2 months If Spot Price decreases He will not go for option so he will pay Add: Premium Total Purchase Price

Rs. 1500/share =1000x100 =1500x100

100000 150000 50000 1000 49000

Rs. 900/share =900x100

90000 1000 91000

Hedging Through Put option Ram an investor is bothered about the decrease in the share price of a company. So He wants to sell 100 shares 2 months from now. He can hedge himself by buying a put option to purchase. No. of Shares

Strike Price/Share

Premium/Share

100

1000 100000 Now he has the right but not the obligation to sell. Situation - 1 At the end of 2 months If Spot Price increases He will not go for option so he will get Less: Premium Net Profit

10 1000

Rs. 1500/share =1500x100

Situation - 2 At the end of 2 months If Spot Price decreases

Rs. 900/share

He will go for option so he will get Less Premium

=1000x100 =10x100

150000 1000 149000

100000 1000

Market Price of 100 shares Net Profit

=900x100

99000 90000 9000

Here his breakeven is 1000 -10 = 990 Since he sells at Rs. 1000, he makes a profit of Rs.90 (990-900) per share

Hedging Through Call option Ram an investor is bothered about the increase in the share price of a company. So He wants to buy 1000 shares 4 months from now. He can hedge himself by buying a call option to purchase. No. of Shares Strike Price/Share Premium/Share 1000

1000 10 1000000 10000 Now he has the right but not the obligation to purchase. Situation - At 1 the end of 4 months If Spot Price increasesRs. 1500/share He will go for option so=1000x1000 he will pay 1000000 Now he will sell the shares =1500x1000 1500000 Profit 500000 Less: Premium 10000 Net Profit 490000 Situation - At 2 the end of 4 months If Spot Price decreasesRs. 900/share He will not go for option =900x1000 so he will pay900000 Add: Premium 10000 Total Purchase Price 910000

Hedging Through Put option

Ram an investor is bothered about the decrease in the share price of a company So He wants to sell 1000 shares 4 months from now. He can hedge himself by buying a put option to purchase. No. of Shares Strike Price/Share Premium/Share 1000

2000 10 2000000 10000 Now he has the right but not the obligation to sell. Situation - At 1 the end of 4 months If Spot Price increasesRs. 2500/share He will not go for option =2500x1000 so he will get 2500000 Less: Premium 10000 Net Profit 2490000

Situation - At 2 the end of 4 months If Spot Price decreasesRs. 1800/share He will go for option so=2000x1000 he will get 2000000 Less Premium 10000

1990000 Market Price of 1000 shares =1800x1000 1800000 Net Profit 190000 Here his breakeven is 2000 -100 = 1990 Since he sells at Rs. 2000, he makes a profit of Rs.190 (1990-1800) per share

e in the share price of a company.

se in the share price of a company.

f Rs.190 (1990-1800) per share