Derivatives & Risk Management in Financial Derivation

1. Presented By – Ashish Sadavarti
Course Name – Derivatives & Risk Management
Topic – Short Call Option Strategy

2. CONTENT Introduction
Definition
What is Option???
Definition & Meaning
Short Call Option Strategy
Example

3. INTRODUCTION
Derivatives are financial instruments that have values derived from other assets like
stocks, bonds, or foreign exchange. Derivatives are sometimes used to hedge a
position (protecting against the risk of an adverse move in an asset) or to speculate on
future moves in the underlying instrument. Hedging is a form of risk management that
is common in the stock market, where investors use derivatives to protect shares or
even entire portfolios.

4.  A Derivative is a financial instrument whose value is derived from the value of an underlying
asset. The underlying asset can be equity shares or index, precious metals, commodities,
currencies, interest rates etc. A derivative instrument does not have any independent value.
Its value is always dependent on the underlying assets. Derivatives can be used either to
minimize risk (hedging) or assume risk with the expectation of some positive pay-off or
reward (speculation).
Definition

5. “Option is one type of contract between two Parties, first (one)
party grants to the other (second) party the rights but not
obligation to buy a specific asset at a specific price with in a
specific period of time.” A unique instrument that confers a
right without an obligation to buy or sell another asset, called
the underlying asset. an option may be defined as a contract
that gives the owner the right but no obligation to buy or sell
at a predetermined price within a given time frame.

6. Meaning
“Option is one type of contract between two
Parties, first (one) party grants to the other
(second) party the rights but not obligation to
buy a specific asset at a specific price with in a
specific period of time.” A unique instrument
that confers a right without an obligation to buy
or sell another asset, called the underlying asset.
an option may be defined as a contract that gives
the owner the right but no obligation to buy or
sell at a predetermined price within a given time
frame.

7. Short Call
Option Strategy
A Call option means an Option to buy. Buying a Call option means an investor
expects the underlying price of a stock / index to rise in future. Selling a Call
option is just the opposite of buying a Call option. Here the seller of the option
feels the underlying price of a stock / index is set to fall in the future. When to
use: Investor is very aggressive and he is very bearish about the stock/index. Risk
or loss: unlimited. Reward or Profit: Limited to the amount of premium
Breakeven: Strike price + premium paid by call option buyer

8. Mr. Nelson’s is Bearish about Nifty and feels that it falls soon.
He write/sells a call option at a strike price of Rs. 2600 at a
premium of Rs. 154 and that time the current nifty is at Rs.
2694. If the nifty remains at Rs. 2600 or below, the option
buyer of the call will not exercise, the call option and Mr.
Nelson’s can retain the whole premium of Rs. 15 Solution: Mr.
Nelson (Call Writer) Premium Received – Rs.154 Maturity
Period – 3 Months Nifty Index Current Price – Rs. 2694 Per
Share Strike Price – Rs.2600 Strategy
Example
Strategy: Buy Call Option
Current Price Rs.2694
Call option Strike Price Rs.2600
Mr. Nelson Premium Paid Rs.154
Break Even
Point= (Rs.)
(Strike Price +
Premium)
Rs.2754

9. Pay Off Schedule : Contract Piece 2600
On Expiry Share Price Net Pay Off From Call
Option
2500 +154
2600 +154
2700 +54
2754 0
2800 -46
2900 -146
3000 -246
3100 -346
250
200
150
100
50
0
-50
-100
-150
-200
-250
-300
-350
-400
2600 2754 2800 3000
2500 2700 2900 3100