Options

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Options

  1. 1. OPTIONS PROF. MALLIKARJUN BALI BLDEA’S VP DR. P. G. H . CET MBA DEPARTMENT BIJAPUR
  2. 2. Introduction  Options, like futures, are also speculative financial instruments. An option is a legal contract which gives the holder the right to buy or sell a specified amount of underlying asset at a fixed price within a specified period of time. It gives the holder the right to buy (or sell) a designated asset. The holder is, however, not obliged to sell (or buy) the same.  Option is the right to either buy or sell something, at a specified price within a specified period of time.
  3. 3. Types of Options  Call Options  It gives the right to buy underlying asset, but not obligation to buy.  Put Options  It gives the right to sell underlying asset, but not obligation to sell.
  4. 4. Call Option Buying A Call option buyer basically is bullish about the underlying stock.
  5. 5. Put Option buying • A buyer of put option is bearish on underlying stock.
  6. 6. Terminologies used in Options  Call options and Put options  American options and European options  Physical delivery v/s cash- settled options  Expiration date  Exercise price  Option premium  Long Call & Long Put  Shot Call & Short Put  Covered and Uncovered (Naked) Call
  7. 7. Return and risk of Buyer and seller of Option contract • Seller has an obligation and buyer has a right in option agreement • Buyer • Limited amount of risk (max loss is premium paid) • Return (profit) potential in unlimited • Seller • Unlimited risk • Limited return potential
  8. 8. Options Terminology At any time, option maybe: Call Put  At the money (ATM) : ExP = MP ExP = MP  In the money (ITM) : ExP < MP ExP > MP  Out of the money (OTM): ExP > MP ExP < MP
  9. 9. Call Option at Expiration
  10. 10. Call option Strike price : 100; Premium : Rs 10/share; No of shares – 100; Expiration : 31.03.2012 On 31.03.2012, Market price of share Profit (Loss) for buyer 80 (1000) 90 (1000) 100 (1000) 110 0 120 1000 130 2000 140 3000
  11. 11. Put option Strike price : 100; Premium : Rs 10/share; No of shares – 100; Expiration : 31.03.2012 On 31.03.2012, Market price of share Profit (Loss) for buyer 70 2000 80 1000 90 0 100 (1000) 110 (1000) 120 (1000)
  12. 12. Exercise of Puts
  13. 13. Pay off from a Long Call
  14. 14. Payoff from Short Call
  15. 15. Options Trading Strategies  Hedging a Long position in stock  Hedging a short position in stock  Hedging with writing call and put options  Spreads and Combinations  Bull spreads  Bear spreads  Butterfly spreads  Straddle  Strips and straps  strangles
  16. 16. Option Valuation Modules  The Binomial model  Black and Scholes model
  17. 17. Thank You!

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