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. 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. Call Option Buying
A Call option buyer basically is bullish
about the underlying stock.
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. 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. 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
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