basics of options
TRANSCRIPT
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BASICS OF OPTIONS
Made By – Rohit Bombale
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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
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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.
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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.
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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)
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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.
- Not used in NSE
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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.
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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…
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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)
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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.
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CALL OPTION BUYING
• Investor
OR
STOCK
Call Option on stock
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PUT OPTION BUYING
• Investor
OR
STOCK
Put Option on stock
Sells
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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.
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• Long Call : Short Call :
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• Long Put : Short Put :
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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
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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 :
Change in Option Price due to change in Rate of interest.
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