Options Final
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What are Options Options are of two basic types Call Option and Put Option
1
Call Option •
A call option gives the holder the right to buy an underlying asset by a certain date for a certain price.
•
The seller is under an obligation to fulfill the contract and is paid a price of this which is called "the call option premium or call option price".
2
Put Option •
A put option, on the other hand gives the holder the right to sell an underlying asset by a certain date for a certain price.
•
The buyer is under an obligation to fulfill the contract and is paid a price for this, which is called "the put option premium or put option price".
3
Options undertakings •
Stocks
•
Foreign Currencies
•
Stock Indices
•
Commodities
4
Terminology •
The price at which the underlying asset would be bought in the future at a particular date is the "Strike Price" or the "Exercise Price".
•
The date on the options contract is called the "Exercise date", "Expiration Date" or the "Date of Maturity".
5
Types of Options European Options •
European options can be exercised only on expiry. Index options are European.
American Options •
Buyer of an American Option has the right to exercise at any point of time on or before expiry. Stock options are American.
•
Option type identifies whether it is a call or a put option., CA-Call American, PA - Put American.
•
In case of Index Options they are identified with CE -Call European, PE – Put European. 6
Snapshot Trade Tiger
Expiry date
Strike price
CE: Call European
PE: Put European
CA: Call American
PA: Put American 7
Trading Parameters Contract size •
The value of the option contracts on individual securities may not be less than Rs. 2 lakhs at the time of introduction for the first time at any exchange.
•
The permitted lot size for futures contracts & options contracts shall be the same for a given underlying or such lot size as may be stipulated by the Exchange from time to time.
8
Trading cycle •
Options contracts have a maximum of 3-month trading cyclethe near month (one), the next month (two) and the far month (three).
•
On expiry of the near month contract, new contracts are introduced at new strike prices for both call and put options, on the trading day following the expiry of the near month contract. The new contracts are introduced for three months.
•
New contracts with new strike prices for existing expiration date are introduced for trading on the next working day based on the previous day's underlying close values, as and when required.
•
In order to decide upon the at-the-money strike price, the underlying closing value is rounded off to the nearest strike price interval. 9
Price steps The price step in respect of the options contracts is Re.0.05. Price of Underlying Strike Price interval (Rs.) Less than or equal to Rs. 50 2.5 > Rs.50 to less than or equal to Rs. 250 5 > Rs.250 to less than or equal to Rs. 500 10 > Rs.500 to less than or equal to Rs. 1000 20 > Rs.1000 to less than or equal to Rs. 2500 30 > Rs.2500 50
10
Options Classifications Options are often classified as •
In the money: These result in a positive cash flow towards the investor
•
At the money: These result in a zero-cash flow to the investor
•
Out of money: These result in a negative cash flow for the investor
11
Snapshot Trade Tiger
In the money
At the money
Out of the money
12
Example (1) •
Assumption: Bullish on the market over the short term Possible Action by you: Buy Nifty calls Current Nifty is 4380. You buy one contract (lot size 50) of Nifty near month calls for Rs.20 each. The strike price is 4400. The premium paid by you : (Rs.20 * 50) Rs.1000. Given these, your break-even Nifty level is 4420 (4400+20). If at expiration Nifty advances to 4474, then Nifty expiration level 4474 Less Strike Price 4400 Option value 74.00 (4474-4400) Less Purchase price 20.00 Profit per Nifty 54.00 Profit on the contract Rs. 2,700 (Rs. 54* 50) 13
Example (2) •
Assumption: Bearish on the market over the short term Possible Action by you: Buy Nifty puts Current Nifty is 4380. You buy one contract (lot size 50) of Nifty near month puts for Rs.17 each. The strike price is 4340. The premium paid by you will be Rs.850 (17*50). Given these, your breakeven Nifty level is 4323 (i.e. strike price less the premium). If at expiration Nifty declines to 4286, then Put Strike Price 4340 Nifty expiration level 4286 Option value 54 (4340-4286) Less Purchase price 17 Profit per Nifty 37 Profit on the contract Rs.1850 (Rs.37* 50) 14
Pay off from Call Buying (Rs.) Example of Trading in call option Spot Price Strike Price Premium
Payoff
Net Profit
57
60
2
0
-2
58
60
2
0
-2
59
60
2
0
-2
60 61
60 60
2 2
0 1
-2 -1
62
60
2
2
0
63
60
2
3
1
64 65
60 60
2 2
4 5
2 3
66
60
2
6
4 15
Pay off from Put Buying (Rs.) Example of Trading in Put Option Spot Price Strike Price
Premium
Payoff
Net Profit
55
60
2
5
3
56
60
2
4
2
57
60
2
3
1
58
60
2
2
0
59 60
60 60
2 2
1 0
-1 -2
61
60
2
0
-2
62
60
2
0
-2
63
60
2
0
-2
64
60
2
0
-2 16
Exercising Options •
Exercising the Call Option: when the spot/cash price is higher than the strike price (plus cost), then buyer of Call could exercise his “right to buy” at the strike price.
•
Exercising the Put Option: when the spot/cash price (less cost) is lower than the strike price, then buyer of Put could exercise his “right to sell” at the strike price.
17
Sharekhan
Advisory Products
Smart Trades Portfolio Derivatives Portfolio
18
Smart Trades Portfolio This is a model portfolio run by Sharekhan Advisory Team. Delivery-based calls generated on market pulse. Ideal for a short term investor looking for aggressive returns with medium risk appetite. To be followed in a disciplined manner. Portfolio Returns
51.10% (Net of Costs)
Sensex performance 25.60% Portfolio period
1st April 2007-31st March 2008
Portfolio Returns
-10.4% (Net of Costs)
Sensex performance -5.50% Portfolio period
1st April 2008-9th Sept 2008 19
Smart Trades Portfolio-Reporting
Open Positions of model trading portfolio
Any sell action done in the day
Back
20
Derivatives Portfolio Portfolio Rules Call for Segment
Only Derivative Segment calls 20-25 % of corpus as Margin
Min Investment per call
(Quantity also specified)
Time frame of call
Max : 1 month
Monitoring
Derivative Team
Min : 1 day
Portfolio Performance Returns (Absolute) 73.22% (Costs**) Returns (Relative) Nifty Returns
78.80% -5.61%
Portfolio period ** Costs
1st April 2008 - 09th Sept 2008 Net of Brokeage & doesn’t not considers other charges
21
Derivatives Portfolio
Open Positions of Derivatives portfolio
Any sell action done in the day
Back
22
Thank You
23
1
Call Option •
A call option gives the holder the right to buy an underlying asset by a certain date for a certain price.
•
The seller is under an obligation to fulfill the contract and is paid a price of this which is called "the call option premium or call option price".
2
Put Option •
A put option, on the other hand gives the holder the right to sell an underlying asset by a certain date for a certain price.
•
The buyer is under an obligation to fulfill the contract and is paid a price for this, which is called "the put option premium or put option price".
3
Options undertakings •
Stocks
•
Foreign Currencies
•
Stock Indices
•
Commodities
4
Terminology •
The price at which the underlying asset would be bought in the future at a particular date is the "Strike Price" or the "Exercise Price".
•
The date on the options contract is called the "Exercise date", "Expiration Date" or the "Date of Maturity".
5
Types of Options European Options •
European options can be exercised only on expiry. Index options are European.
American Options •
Buyer of an American Option has the right to exercise at any point of time on or before expiry. Stock options are American.
•
Option type identifies whether it is a call or a put option., CA-Call American, PA - Put American.
•
In case of Index Options they are identified with CE -Call European, PE – Put European. 6
Snapshot Trade Tiger
Expiry date
Strike price
CE: Call European
PE: Put European
CA: Call American
PA: Put American 7
Trading Parameters Contract size •
The value of the option contracts on individual securities may not be less than Rs. 2 lakhs at the time of introduction for the first time at any exchange.
•
The permitted lot size for futures contracts & options contracts shall be the same for a given underlying or such lot size as may be stipulated by the Exchange from time to time.
8
Trading cycle •
Options contracts have a maximum of 3-month trading cyclethe near month (one), the next month (two) and the far month (three).
•
On expiry of the near month contract, new contracts are introduced at new strike prices for both call and put options, on the trading day following the expiry of the near month contract. The new contracts are introduced for three months.
•
New contracts with new strike prices for existing expiration date are introduced for trading on the next working day based on the previous day's underlying close values, as and when required.
•
In order to decide upon the at-the-money strike price, the underlying closing value is rounded off to the nearest strike price interval. 9
Price steps The price step in respect of the options contracts is Re.0.05. Price of Underlying Strike Price interval (Rs.) Less than or equal to Rs. 50 2.5 > Rs.50 to less than or equal to Rs. 250 5 > Rs.250 to less than or equal to Rs. 500 10 > Rs.500 to less than or equal to Rs. 1000 20 > Rs.1000 to less than or equal to Rs. 2500 30 > Rs.2500 50
10
Options Classifications Options are often classified as •
In the money: These result in a positive cash flow towards the investor
•
At the money: These result in a zero-cash flow to the investor
•
Out of money: These result in a negative cash flow for the investor
11
Snapshot Trade Tiger
In the money
At the money
Out of the money
12
Example (1) •
Assumption: Bullish on the market over the short term Possible Action by you: Buy Nifty calls Current Nifty is 4380. You buy one contract (lot size 50) of Nifty near month calls for Rs.20 each. The strike price is 4400. The premium paid by you : (Rs.20 * 50) Rs.1000. Given these, your break-even Nifty level is 4420 (4400+20). If at expiration Nifty advances to 4474, then Nifty expiration level 4474 Less Strike Price 4400 Option value 74.00 (4474-4400) Less Purchase price 20.00 Profit per Nifty 54.00 Profit on the contract Rs. 2,700 (Rs. 54* 50) 13
Example (2) •
Assumption: Bearish on the market over the short term Possible Action by you: Buy Nifty puts Current Nifty is 4380. You buy one contract (lot size 50) of Nifty near month puts for Rs.17 each. The strike price is 4340. The premium paid by you will be Rs.850 (17*50). Given these, your breakeven Nifty level is 4323 (i.e. strike price less the premium). If at expiration Nifty declines to 4286, then Put Strike Price 4340 Nifty expiration level 4286 Option value 54 (4340-4286) Less Purchase price 17 Profit per Nifty 37 Profit on the contract Rs.1850 (Rs.37* 50) 14
Pay off from Call Buying (Rs.) Example of Trading in call option Spot Price Strike Price Premium
Payoff
Net Profit
57
60
2
0
-2
58
60
2
0
-2
59
60
2
0
-2
60 61
60 60
2 2
0 1
-2 -1
62
60
2
2
0
63
60
2
3
1
64 65
60 60
2 2
4 5
2 3
66
60
2
6
4 15
Pay off from Put Buying (Rs.) Example of Trading in Put Option Spot Price Strike Price
Premium
Payoff
Net Profit
55
60
2
5
3
56
60
2
4
2
57
60
2
3
1
58
60
2
2
0
59 60
60 60
2 2
1 0
-1 -2
61
60
2
0
-2
62
60
2
0
-2
63
60
2
0
-2
64
60
2
0
-2 16
Exercising Options •
Exercising the Call Option: when the spot/cash price is higher than the strike price (plus cost), then buyer of Call could exercise his “right to buy” at the strike price.
•
Exercising the Put Option: when the spot/cash price (less cost) is lower than the strike price, then buyer of Put could exercise his “right to sell” at the strike price.
17
Sharekhan
Advisory Products
Smart Trades Portfolio Derivatives Portfolio
18
Smart Trades Portfolio This is a model portfolio run by Sharekhan Advisory Team. Delivery-based calls generated on market pulse. Ideal for a short term investor looking for aggressive returns with medium risk appetite. To be followed in a disciplined manner. Portfolio Returns
51.10% (Net of Costs)
Sensex performance 25.60% Portfolio period
1st April 2007-31st March 2008
Portfolio Returns
-10.4% (Net of Costs)
Sensex performance -5.50% Portfolio period
1st April 2008-9th Sept 2008 19
Smart Trades Portfolio-Reporting
Open Positions of model trading portfolio
Any sell action done in the day
Back
20
Derivatives Portfolio Portfolio Rules Call for Segment
Only Derivative Segment calls 20-25 % of corpus as Margin
Min Investment per call
(Quantity also specified)
Time frame of call
Max : 1 month
Monitoring
Derivative Team
Min : 1 day
Portfolio Performance Returns (Absolute) 73.22% (Costs**) Returns (Relative) Nifty Returns
78.80% -5.61%
Portfolio period ** Costs
1st April 2008 - 09th Sept 2008 Net of Brokeage & doesn’t not considers other charges
21
Derivatives Portfolio
Open Positions of Derivatives portfolio
Any sell action done in the day
Back
22
Thank You
23
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