Options Strategies Jan2009 Nmims

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Options Strategies Jan2009 Nmims

  1. 1. Options - Basics January 2009 1
  2. 2. What is a derivative? A derivative instrument is a financial contract whose payoff structure is determined by the value of underlying commodity, security, interest rate, share price index, exchange rate, oil price, or the like. 2
  3. 3. Derivatives Futures Options Forwards Swaps Call Put 3
  4. 4. Options Options grants the right, but not the obligation, to buy or sell a futures contract at a predetermined price for a specified period of time. 4
  5. 5. Basic types of Options PUT OPTION Gives buyer right to sell underlying futures contract. CALL OPTION Gives buyer right to buy underlying futures contract. Note: In both cases the underlying commodity is a futures contract, not the physical commodity 5
  6. 6. Terms used Strike Price (Exercise price) The predetermined price of the futures contract i.e. price at which the futures contract can be bought or sold. Premium The cost of the right to buy or sell a futures contract – cost of the option. The buyer loses the premium regardless of whether the option is used or not. 6
  7. 7. Terms used Option Writer : Person selling the option, and is exposed to margin requirements Underlying Futures : It is corresponding Future Contract which can be transacted by exercise in the transaction. Exercise: Action taken by the buyer of an option whose intention is to deliver Or take delivery of the underlying futures Expiration Date: Last date on which an option can be exercised or offset 7
  8. 8. Terms used Open interest 1. The total number of options and/or futures contracts that are not closed or delivered on a particular day. 2. The number of buy market orders before the stock market opens. A common misconception is that open interest is the same thing as volume of options and futures trades. This is not correct, as demonstrated in the following example: -On January 1, A buys an option, which leaves an open interest and also creates trading volume of 1. -On January 2, C and D create trading volume of 5 and there are also five more options left open. -On January 3, A takes an offsetting position, open interest is reduced by 1 and trading volume is 1. -On January 4, E simply replaces C and open interest does not change, trading volume increases by 5. 8
  9. 9. Open Interest indicators •What are the other combinations and impact of them? 9
  10. 10. Call Option A call option gives the holder the right, but not the obligation, to buy a specific futures contract at a specific price “To call from them” 10
  11. 11. Gold Example (Call) Suppose that on June 1, a farmer is approached by a goldsmith for purchasing 1 tola of gold at Rs.9,000/10gm. The Goldsmith is almost certain that he wants the gold but is unable to arrange finance for six months. The farmer propose to grant a six-month option at Rs.9,000/10gm in exchange for a Rs.90/10gm. Purchaser = The Goldsmith (Option-Call buyer) Grantor = The Farmer (Option-Call seller) Exercise price = Rs.9,000 /10gm (Strike price) Expiration date = December 1 Call Premium = Rs.90 (paid by goldsmith – call buyer) 11
  12. 12. Put Option A put option gives the holder the right, but not the obligation, to sell a specific futures contract at a specific price “To put it on them” 12
  13. 13. Gold Example (Put) Suppose that on June 1, a farmer approaches a goldsmith for selling 1 tola of gold at Rs.9,000 /10gm . The Farmer is almost certain that he wants to sell the gold but is unable to arrange the delivery for six months. The Goldsmith proposes to grant a six-month option at Rs.9,000 /10gm in exchange for a Rs.90 /10gm. Purchaser = The Goldsmith (Option-Put seller) Grantor = The Farmer (Option-Put buyer) Exercise price = Rs.9,000 /10gm (Strike price) Expiration date = December 1 Put Premium = Rs.90 (paid by farmer-option buyer) 13
  14. 14. Options are popular because Price Insurance. • Limited financial obligation. • Marketing flexibility. • 14
  15. 15. Factors affecting Option Premium Changes in the price of the underlying futures contract- E.g. gold futures Strike Price – E.g. Rs.10,000 /10gm Time until expiration Volatility of the underlying futures contract Dividends Risk free interest rates. 15
  16. 16. Components of Premium Intrinsic Value + Time Value = Premium 16
  17. 17. Intrinsic Value “Positive” difference between the strike price and the underlying commodity futures price. FOR A CALL OPTION – strike price below futures price FOR A PUT OPTION – strike price exceeds futures price Note: Futures price means current price of underlying futures contract. 17
  18. 18. Intrinsic Value: An Example May Corn Futures Price= Rs.329 What is the Intrinsic Value for a: Q: Rs.310 Call Option? A: Rs. 19 Q: Rs.340 Put Option? A: Rs. 11 Q: Rs.340 Call Option? A: Rs. 0 18
  19. 19. Time Value for Mar 07 and Apr 07 Options on Jan 1, 2007 Apr 07 Futures = 237 Mar 07 Futures = 209.25 Apr 07 240 Call Option Mar 07 210 Call Option Premium = 20.5 Premium = 8.625 Intrinsic Value = 0 Intrinsic Value = 0 Time Value = 20.5 Time Value = 8.625 Apr 07 240 Put Option Mar 07 210 Put Option Premium = 23.25 Premium = 9.5 Intrinsic Value = 3 Intrinsic Value = 0.75 Time Value = 20.25 Time Value = 8.75 19
  20. 20. TIME DECAY Time value 0.50 0.25 0 180 0 90 Days to expiration 20
  21. 21. CALL OPTION In-the-Money (ITM) Strike price < Futures price At-the-Money (ATM) Strike price = Futures price Out-of-the-Money (OTM) Strike price > Futures price 21
  22. 22. In-the-Money (ITM) PUT OPTION Strike price > Futures price At-the-Money (ATM) Strike price = Futures price Out-of-the-Money (OTM) Strike price < Futures price 22
  23. 23. Deep-In-the-Money (DITM) CALL/PUT OPTIONS No Chance of Out-of-the-Money Close-to-the-Money (CTM) Strike price near Futures price Deep-Out-of-the-Money (DOTM) No Chance of In-the-Money 23
  24. 24. Options – Exercise Mode American Style Options – Buyer of the options can choose to exercise, prior to the expiry date. European Style Options – Buyer of the options can choose to exercise only on the date of expiry. ≥ American Premium European Premium 24
  25. 25. Interest rate – continuous compounding A = P (1 + r ) t r nt A = P (1 + ) n n r r rt A = {P (1 + ) } n n r r rt A = lim{P(1 + ) } n →∞ n n r r rt A = P{lim (1 + ) } where n →∞ n P is principal, r is rate of interest (annual), n is A = Pe rt frequency of compounding, t is time, A is amount. 25
  26. 26. Stochastic Process •Any variable whose value changes over time in an uncertain way is said to follow a stochastic process. •Markov process: • Present Value of a variable is relevant for predicting the future. • Weak form of market efficiency φ(0,1) • Change of value can be given by probability distribution •Change in variable in two years is sum of two independent normal distributions • Mean is sum of the means • Variance is sum of the variances φ (0, 2 ) φ (0, T ) •Hence we have 26
  27. 27. Wiener Process •A Wiener process with zero drift and variance rate of 1.0 δ z =∈ δt •A generalised Wiener process can be written down as: dx = adt + bdz •Now for a small time interval we can say: δx = aδt + b ∈ δt δs = µ sδt S T = S 0 e µt δt → 0 dS = µ dt + σ ∈ δt S 27
  28. 28. Ito’s Lemma dx = a ( x, t ) dt + b( x, t ) dz ∂G ∂G 1 ∂ 2 G 2 ∂G dG = ( a+ + b )dt + bdz ∂x ∂t ∂x 2 ∂x 2 Value of a stock follows log normal distribution. This result by Japanese Mathematician was used by Black – Scholes to solve the Black Scholes Merton PDE. 28
  29. 29. Options Pricing C = S 0 N ( d 1 ) − Ke − rt N ( d 2 ) P = Ke − rt N ( − d 2 ) − S 0 N ( − d 1 ) σ2 σ2 S0 S0 ln( ) + (r − ln( ) + ( r + )T )T K 2 K 2 d2 = d1 = σT σT Black – Scholes Formulae Where, S = Spot Price N(d) = probability that a deviation less than “d” will occur in a normal distribution with a mean zero & standard deviation is 1 E = Exercise Price or Strike Price e = 2.71828 29
  30. 30. Option Greeks Delta :First derivative, considers sensitivity of options to price of future contract. (Hedge Ratio) Gamma : Considers sensitivity of options to changes in Delta (Curvature) Theta : Considers sensitivity of options to time factor (time decay) Vega : Considers sensitivity of options to market volatility. Rho : Considers sensitivity of portfolio to interest rates. 30
  31. 31. Types of Options - Exotics •Barrier options: •Path dependent exotics •Become active when underlying reaches a predetermined level (barrier) •“In” options •start worthless and become active if predetermined level is breached •“Out” options •Start active and become worthless if predetermined level is breached •Lookback options •Path dependent exotics •Exercise price = previous high/low (over preceding period) •Russian options •Lookback option till perpetuity 31
  32. 32. Types of Options - Exotics •Binary option •Cash or nothing; asset or nothing •Bermuda option •Where buyer of the option has the right to exercise the option at a set (always discretely spaced) number of times. •10 yr swap or 9 yr 6 month swap •Canary option •Where buyer can exercise at quarterly dates but only after a fixed period of time has elapsed. (eg. 1 year) •Compound option •Option on an option 32
  33. 33. Types of Options - Exotics •Swing option •A Bermudan option where on exercise you bet a put or call. •Parisian option •the payoff is dependent by time spent above or below the strike price. •Asian option •Payoff determined by average trading price over a defined period of time. •Eg: average price over last 3 months. 33
  34. 34. Options - Strategies January 2008 34
  35. 35. Strategy Guide - Table 35
  36. 36. Risk-Return Profile 36
  37. 37. Long Call Comment View Unlimited, Increases as the Spot Price increase Profit Loss Limited to the premium paid Breakeven Strike price + premium Time Decay Hurts Use Very Bullish Outflow Volatility increase helps the position Volatility Margin No 37
  38. 38. Details of Call Option 10 Deal Details: SAMPL Analysis Parameters: Stock Price 11000.00 Deal Date 28-Jan-08 Centre Price on Graph 11200.00 Days to Expiry 32 Initial Debit/Credit Deal Expiration 28-Feb-08 Graph Increment 100.000 Analysis Date 27-Jan-08 Volatility 30.00% Dividend Underlying Type Spot Ex Date Pricing Model: Black-Scholes European Risk Free Rate 5.75% Action: Option No. Trade Override Days to Option Greeks: Buy/Sell Type Opt'ns Volatility Expiry Price Expiry Value Debit/ Credit Delta Net Option Trades: Strike Option Trade 1 b c 1 10900.00 31 462.3096 (462) 0.58 In' money Option Trade 2 9999 Option Trade 3 9999 Option Trade 4 9999 Option Trade 5 9999 Option Trade 6 9999 (462) (462) Action: No. Buy/Sell Shares Price Stock Trades: Stock Trade 1 11000 Stock Trade 2 11000 11000 Days to expiry: 32 Totals: (462) (462) 38
  39. 39. Long Call - Payoff 39
  40. 40. Long Futures Comment View Increases as the Spot Price increase Profit Loss Increases as the Spot Price increase Breakeven Purchase price + Brokerage Time Decay No impact Use Very Bullish outlook No Impact Volatility Margin Yes 40
  41. 41. Long Futures - Payoff 41
  42. 42. Bull Call Spread Formation Buy Call A and, Sell Call B. Variant Buy Call A, Sell Put B and, Short futures. Example Buy Gold Feb Call 10800 @ Rs. 250 and, Sell Gold Feb Call 11200 @ Rs. 100. 42
  43. 43. Bull Call Spread Comment View Limited, Maximum Profit = (B – A) – Net Premium Profit Loss Limited, Maximum Loss = Net Premium Breakeven Strike A + Max Loss Time Decay Mixed – Hurts for long call and helps for short Call Bullish outlook Use Volatility Neutral Margin Yes 43
  44. 44. An example of Bull Spread 10 Deal Details: SAMPL Analysis Parameters: Stock Price 11000.00 Deal Date 28-Jan-08 Centre Price on Graph 11200.00 Days to Expiry 32 Initial Debit/Credit Deal Expiration 28-Feb-08 Graph Increment 100.000 Analysis Date 27-Jan-08 Volatility 30.00% Dividend Underlying Type Spot Ex Date Pricing Model: Black-Scholes European Risk Free Rate 5.75% Action: Option No. Trade Override Days to Option Greeks: Buy/Sell Type Opt'ns Volatility Expiry Price Expiry Value Debit/ Credit Delta Net Option Trades: Strike Option Trade 1 b c 1 10800.00 250 31 518.7498 (250) 0.62 In' money Option Trade 2 s c 1 11200.00 100 31 317.7105 100 0.46 Out' money Option Trade 3 9999 Option Trade 4 9999 Option Trade 5 9999 Option Trade 6 9999 (150) (150) 44
  45. 45. Bull Call Spread - Payoff 45
  46. 46. Bull Put Spread Formation Buy Put A of lower strike price and, Sell Put B of higher strike price. Variant Buy Put A, Sell Call B and, Long Futures. Example Buy Gold Feb PA 10800 @ Rs. 50 and, Sell Gold Feb PA 11200 @ Rs. 250. 46
  47. 47. Bull Put Spread Comment View Profit Limited, Maximum Profit = Net Premium Limited, Maximum Loss = (B – A) - Net Premium Loss Breakeven Strike A + Max Loss Mixed – Hurts for long Put and helps for short Put Time Decay Use Bullish outlook Neutral Volatility Margin Yes 47
  48. 48. Bull Put Spread - Example 10 Deal Details: SAMPL Analysis Parameters: Stock Price 11000.00 Deal Date 28-Jan-08 Centre Price on Graph 11200.00 Days to Expiry 32 Initial Debit/Credit Deal Expiration 28-Feb-08 Graph Increment 100.000 Analysis Date 27-Jan-08 Volatility 30.00% Dividend Underlying Type Spot Ex Date Pricing Model: Black-Scholes European Risk Free Rate 5.75% Action: Option No. Trade Override Days to Option Greeks: Option Trades: Buy/Sell Type Opt'ns Strike Volatility Expiry Price Expiry Value Debit/ Credit Delta Net Option Trade 1 b p 1 10800.00 50 31 266.1359 (50) -0.38 Out' money Option Trade 2 s p 1 11200.00 250 31 463.1479 250 -0.54 In' money Option Trade 3 9999 Option Trade 4 9999 Option Trade 5 9999 Option Trade 6 9999 200 200 48
  49. 49. Bull Put Spread - Payoff 49
  50. 50. Short Put Comment View Limited to the premium received Profit Unlimited, increase as the spot price decrease Loss Strike price - Premium Breakeven Time Decay Helps Use Bullish outlook Volatility Volatility decreases helps the position Margin Yes 50
  51. 51. Short Put - Variant Covered Call Have underlying or Buy Futures, and Write A Call Maximum Profit Futures < Strike = Premium + ( Strike – Futures) Futures > Strike = Premium – (Futures – Strike) Breakeven = Call Strike – Maximum Profit 51
  52. 52. Short Put- Example 10 Deal Details: SAMPL Analysis Parameters: Stock Price 11000.00 Deal Date 28-Jan-08 Centre Price on Graph 11200.00 Days to Expiry 32 Initial Debit/Credit Deal Expiration 28-Feb-08 Graph Increment 100.000 Analysis Date 27-Jan-08 Volatility 30.00% Dividend Underlying Type Spot Ex Date Pricing Model: Black-Scholes European Risk Free Rate 5.75% Action: Option No. Trade Override Days to Option Greeks: Buy/Sell Type Opt'ns Strike Volatility Expiry Price Expiry Value Debit/ Credit Delta Net Option Trades: Option Trade 1 s p 1 10800.00 50 31 266.1359 50 -0.38 Out' money Option Trade 2 9999 Option Trade 3 9999 Option Trade 4 9999 Option Trade 5 9999 Option Trade 6 9999 50 50 52
  53. 53. Short Put - Payoff 53
  54. 54. Long Straddle 54
  55. 55. Long Straddle Formation Buy Call A and, Buy Put A. Both of the same strike price Variant Buy 2 Calls A & Short Futures or Buy 2 Puts A & Long Futures Example Buy Gold Feb CA 10800 @ Rs. 50 Buy Gold Feb PA 10800 @ Rs. 70 55
  56. 56. Long Straddle - Example 10 Deal Details: SAMPL Analysis Parameters: Stock Price 11000.00 Deal Date 28-Jan-08 Centre Price on Graph 10800.00 Days to Expiry 32 Initial Debit/Credit Deal Expiration 28-Feb-08 Graph Increment 100.000 Analysis Date 27-Jan-08 Volatility 30.00% Dividend Underlying Type Spot Ex Date Pricing Model: Black-Scholes European Risk Free Rate 5.75% Action: Option No. Trade Override Days to Option Greeks: Buy/Sell Type Opt'ns Strike Volatility Expiry Price Expiry Value Debit/ Credit Delta Net Option Trades: Option Trade 1 b c 1 10800.00 50 31 518.7498 (50) 0.62 In' money Option Trade 2 b p 1 10800.00 70 31 266.1359 (70) -0.38 Out' money Option Trade 3 9999 Option Trade 4 9999 Option Trade 5 9999 Option Trade 6 9999 (120) (120) Action: No. Buy/Sell Shares Price Stock Trades: Stock Trade 1 11000 Stock Trade 2 11000 11000 Days to expiry: 32 Totals: (120) (120) 56
  57. 57. Long Straddle - Payoff 57
  58. 58. Long Strangle Formation Buy out of the money Put A and, Buy out of the money Call B. Example Buy Gold Feb PA 10800 @ Rs. 50 Buy Gold Feb CA 11200 @ Rs. 150 58
  59. 59. Long Strangle 59
  60. 60. Long Strangle - Example 10 Deal Details: SAMPL Analysis Parameters: Stock Price 11000.00 Deal Date 28-Jan-08 Centre Price on Graph 10800.00 Days to Expiry 32 Initial Debit/Credit Deal Expiration 28-Feb-08 Graph Increment 300.000 Analysis Date 27-Jan-08 Volatility 30.00% Dividend Underlying Type Spot Ex Date Pricing Model: Black-Scholes European Risk Free Rate 5.75% Action: Option No. Trade Override Days to Option Greeks: Buy/Sell Type Opt'ns Volatility Expiry Price Expiry Value Debit/ Credit Delta Net Option Trades: Strike Option Trade 1 b c 1 11200.00 150 31 317.7105 (150) 0.46 Out' money Option Trade 2 b p 1 10800.00 50 31 266.1359 (50) -0.38 Out' money Option Trade 3 9999 Option Trade 4 9999 Option Trade 5 9999 Option Trade 6 9999 (200) (200) Action: No. Buy/Sell Shares Price Stock Trades: Stock Trade 1 11000 Stock Trade 2 11000 11000 Days to expiry: 32 Totals: (200) (200) 60
  61. 61. Long Strangle Payoff 61
  62. 62. Long Strap Formation Buy 2 Calls A and, Buy Put A Variants Buy 3 Calls A & Short Futures Example Buy Gold Feb PA 11000 @ Rs. 50 Buy 2 Gold Feb CA 11000 @ Rs. 50 62
  63. 63. Long Strap 63
  64. 64. Long Strap - Example 10 Deal Details: SAMPL Analysis Parameters: Stock Price 11000.00 Deal Date 28-Jan-08 Centre Price on Graph 10800.00 Days to Expiry 32 Initial Debit/Credit Deal Expiration 28-Feb-08 Graph Increment 100.000 Analysis Date 27-Jan-08 Volatility 30.00% Dividend Underlying Type Spot Ex Date Pricing Model: Black-Scholes European Risk Free Rate 5.75% Action: Option No. Trade Override Days to Option Greeks: Buy/Sell Type Opt'ns Volatility Expiry Price Expiry Value Debit/ Credit Delta Net Option Trades: Strike Option Trade 1 b c 2 11000.00 50 31 410.0049 (100) 0.54 At' Money Option Trade 2 b p 1 11000.00 50 31 356.4167 (50) -0.46 At' Money Option Trade 3 9999 Option Trade 4 9999 Option Trade 5 9999 Option Trade 6 9999 (150) (150) Action: No. Buy/Sell Shares Price Stock Trades: Stock Trade 1 11000 Stock Trade 2 11000 11000 Days to expiry: 32 Totals: (150) (150) 64
  65. 65. Long Strap Payoff 65
  66. 66. Long Strip Formation Buy 2 Puts A and, Buy Call A. Variant Buy 3 Puts A & Long Futures 66
  67. 67. Long Strip 67
  68. 68. Long Strip - Payoff 68
  69. 69. Short Straddle Formation Sell Call A and, Sell Put A. Variant Sell 2 Calls A & Long Futures or Sell 2 puts A and Short Futures.. 69
  70. 70. Short Straddle View Comment Profit Limited to the Net premium received Loss Unlimited Low BEP = Middle Strike - Profit Breakeven High BEP = Middle Strike + Profit Time Decay Helps Expecting a tight sideways movement Use Volatility Volatility decrease helps the position Yes Margin 70
  71. 71. Short Straddle - Payoff 71
  72. 72. Short Strangle Formation Sell Call A and Sell Put B. Variants Sell Put A and Sell Call B Sell Put A, Sell Put B and Short Futures Sell Call A, Sell Call B and Long Futures 72
  73. 73. Short Strangle 73
  74. 74. Short Strangle - Payoff 10 Deal Details: SAMPL Analysis Parameters: Stock Price 11000.00 Deal Date 28-Jan-08 Centre Price on Graph 10800.00 Days to Expiry 32 Initial Debit/Credit Deal Expiration 28-Feb-08 Graph Increment 300.000 Analysis Date 27-Jan-08 Volatility 30.00% Dividend Underlying Type Spot Ex Date Pricing Model: Black-Scholes European Risk Free Rate 5.75% Action: Option No. Trade Override Days to Option Greeks: Buy/Sell Type Opt'ns Volatility Expiry Price Expiry Value Debit/ Credit Delta Net Option Trades: Strike Option Trade 1 s c 1 11200.00 150 31 317.7105 150 0.46 Out' money Option Trade 2 s p 1 10800.00 50 31 266.1359 50 -0.38 Out' money Option Trade 3 9999 Option Trade 4 9999 Option Trade 5 9999 Option Trade 6 9999 200 200 Action: No. Buy/Sell Shares Price Stock Trades: Stock Trade 1 11000 Stock Trade 2 11000 11000 Days to expiry: 32 Totals: 200 200 74
  75. 75. Short Strangle - Payoff 75
  76. 76. Long Put View Comment Profit Unlimited, Increases as the Spot price decreases Loss Limited to the premium paid Strike price - premium Breakeven Time Decay Hurts Very Bearish Outlook Use Volatility Volatility increases helps the Position Margin No 76
  77. 77. Payoff Profile 77
  78. 78. Short Futures View Comment Profit Increases as the Spot price decreases Loss Increases as the Spot price increases Breakeven Sell price + Brokerage No Impact Time Decay Use Very Bearish Outlook No impact Volatility Margin Yes 78
  79. 79. Bear Put Spread View Comment Profit Limited, Maximum Profit = (B - A) - Net Premium Strike B - Maximum Loss Loss Breakeven Limited, Maximum Loss = Net Premium Mixed - Hurts for Long Put and helps for Short Put Time Decay Use Bearish outlook Neutral Volatility Margin Yes 79
  80. 80. Bear Put Spread Formation Buy Put B and Sell Put A. Variant Buy Call B, Short Futures & Sell Put A Example Buy Gold Feb PE 11200 @ Rs. 250 and, Sell Gold Feb PE 10800 @ Rs. 50. 80
  81. 81. Bear Put Spread 10 Deal Details: SAMPL Analysis Parameters: Stock Price 11000.00 Deal Date 28-Jan-08 Centre Price on Graph 11200.00 Days to Expiry 32 Initial Debit/Credit Deal Expiration 28-Feb-08 Graph Increment 100.000 Analysis Date 27-Jan-08 Volatility 30.00% Dividend Underlying Type Spot Ex Date Pricing Model: Black-Scholes European Risk Free Rate 5.75% Action: Option No. Trade Override Days to Option Greeks: Buy/Sell Type Opt'ns Volatility Expiry Price Expiry Value Debit/ Credit Delta Net Option Trades: Strike Option Trade 1 s p 1 10800.00 50 31 266.1359 50 -0.38 Out' money Option Trade 2 b p 1 11200.00 250 31 463.1479 (250) -0.54 In' money Option Trade 3 9999 Option Trade 4 9999 Option Trade 5 9999 Option Trade 6 9999 (200) (200) 81
  82. 82. Bear Put Spread Payoff 82
  83. 83. Bear Call Spread View Comment Profit Limited, Maximum Profit = Net Premium Limited, Maximum Loss = (B - A) - Net Premium Loss Breakeven Strike B - Maximum Loss Mixed - Hurts for Long Call and helps for Short Call Time Decay Bearish Outlook Use Neutral Volatility Margin Yes 83
  84. 84. Bear Call Spread Formation Buy Call B and Sell Call A. Variant Buy Call B, Short Futures & Sell Put A Example Buy Gold Nov CA 230 @ Rs. 7.50 and, Sell Gold Nov CA 210 @ Rs. 18. 84
  85. 85. Short Call View Comment Profit Limited to the premium received Unlimited, increases as the spot price increases Loss Breakeven Strike price + Premium Helps Time Decay Bearish Outlook Use Volatility decreases helps the position Volatility Margin Yes 85
  86. 86. Short Call - Payoff 86
  87. 87. OPTIONS PRICING Put – Call Parity Formula: C + PV (x) = P + S Where, C = present value of the call P = present value of the put S = present value of the underlying PV(x) = present value of the strike price discounted from the expiration date at a suitable risk free rate. 87
  88. 88. Thank You 88

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