by sheriq sumar

8/9/2019 By Sheriq Sumar

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OPTIONS

By

Sheriq Sumar


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What is an Options Contract?

An Option Contract gives it owner

the right, but not the legal obligation,

to conduct a transaction involving anunderlying asset at a predetermined

Future date (the exercise date) and at

a predetermined price (the exerciseprice or spot price).


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Option Terminologies

Call & Put

Long Call & Short Call

Long Put & Short Put

Option Premium

American Option

European Option

Moneyness of an Option

In the Money

Out of the Money

At the Money


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Terminologies Contd

Protective Put

Covered Call

Intrinsic Value Exercise price


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Types of Options Contract

Financial Option

Bond Option

Index Option Options on Futures

Options on Commodity

Interest rate option


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Interest Rate Options

Exercise Price is an Interest rate

Underlying Rate is the reference rate

Settled in Cash Eg: Bank giving Loan at Floating rate

Notional Amount Rs. 1,00,000/-

Strike rate 5%

Reference rate LIBOR

Option exercised if LIBOR > 5%

Option expired if LIBOR < 5%


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Interest Rate Options

Interest Rate Cap

Interest Rate Floor

Interest Rate Collar


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Long Call

Strike Price: Rs.2250

Premium: Rs. 86.60


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Short Call


Premium: Rs. 86.60


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Long Put


Premium: Rs. 61.70


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Short Put


Premium: Rs. 61.70


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Intrinsic Value of Call Option

C = Max[0, S-X]

where C = Intrinsic Value of a Call Option

S = Spot Price

X = Exercise Price

Eg: X = 50 & S = 45, 50, 55

S = 55; C = Max[0, S-X] = MAX[0, 55-50] = 5

S = 50; C = Max[0, S-X] = MAX[0, 50-50] = 0 S = 55; C = Max[0, S-X] = MAX[0, 45-50] = 0


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Intrinsic Value of Call Option

0

5

-5

50 55

Long Call

Short Call


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Intrinsic Value of Put Option

P = Max[0, X-S]

Where P = Intrinsic Value of a Put Option

S = Strike Price

X = Exercise Price

Eg: X = 50 & S = 45, 50, 55

S = 55; C = Max[0, X-S] = MAX[0, 50-55] = 0

S = 50; C = Max[0, X-S] = MAX[0, 50-50] = 0 S = 55; C = Max[0, X-S] = MAX[0, 50-45] = 5


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Intrinsic Value of Put Option

0

50

Long Call

40Short Put

X

-X


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American & European Option

Pricing

Option Minimum Value Maximum Value

European Call ct MAX[0, St

X/(1+ RFR)T-t

]

St

American Call C T MAX[0, St

X/(1+ RFR)T-t]

St

European Put pt MAX[0, X/(1+

RFR)T-t - St ]

X/(1+ RFR)T-t

American Put P t MAX[0, St X] X


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Strategies in Options

Strategies involving a Single Option and a Stock

Spreads

Bull Spread

Bear Spread

Combinations

Strangle

StraddleStrips & Straps


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Strategies Involving a SingleOption and a Stock


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Long Position in a Stock Combined

with Short Position in a Call

Long Stock

Short Call

K


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or os on n a oc

Combined with Long Position in a

Call

Long Call

Short Stock

K


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Long Position in a Put Combined

with Long Position in a Stock

Long Put

Long Stock

K


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Short Position in a Put combined

with short Position in a Stock

K

Short Stock

Short Put


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Spreads

Bull Spread Bear Spread


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Bull Call Spread

K1 K2


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Bull Put Spread

K1

K2


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Bear Call Spread

K1

K2


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Bear Put Spread

K1 K2


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Long Butterfly Using Calls

K1

K2

K3


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Long Butterfly Using Puts

K1

K2

K3


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Combinations

Straddle

Strangle Strips and Straps


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Straddle

K


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Strangle

K1 K2


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Strips & Straps

KK


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Thank You

by sheriq sumar

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