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Futures and options
1.
2. • Forward Contract: It is a simple derivative that
involves an agreement to buy/sell an asset on a
certain future date at an agreed price.
• Future Contract: It is a standardized contract
between two parties who do not necessarily know
each other and it is for performance by a clearing
corporation or clearing house.
• Options Contract:It 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.The holder is not
obliged to buy or sell the underlying asset.
• (A) CALL &(B)PUT
3. Options
• Options are of two types –Calls and Puts
• Call options give the buyer the right but not the obligation
to buy a given quantity of the underlying asset , at a given
price on or before a given future date.
• Put options give the buyer the right , but not the obligation
to sell a given quantity of the underlying asset at a given
price on or before a given date.
• Long=Buy= Holder
• Short=Sell=Writer
• C= Current Price of the Call
• E=Exercise Price=Strike Price
• So=The current price of the share
• S1=The stock price at the expiration date of the call.
4. Terminology
• Spot Price: The price at which an asset trades in the spot
market.
• Future Price:The price at which the futures contract trades
in the futures market.
• Option Price:Option price is the price which the option
buyer pays to the option seller.
• Exercise Price:The price specified in the options contract is
known as the strike price or the exercise price.
• Basis: Basis is usually defined as the spot price minus the
future price.
13. Life of an option
• The life of an option is limited: it has an
expiration date. After the expiration date all
the rights and obligations conferred by the
option are null and void. The option holder
can exercise the option, i.e. declare he or
she wants to use the right to buy (or to sell)
conferred by the option.
14. American-Style option
• American-Style option An option contract
that may be exercised at any time between
the date of purchase and the expiration date.
Most exchange-traded options are
American-style. In India options on stocks
are American option.
15. European-style options
• European-style options
An option contract that may be exercised
only during a specified period of time just
prior to its expiration. In India Index
options are European-style options.
16. QUESTION
You are reading the Wall Street Journal and you see the following table:
C A L L P U T
Exercise M a r J u n S e p M a r J u n S e p
Price
30 10.15 10.85 11.65 0.05 0.35 0.85
35 5.40 6.90 8.10 0.25 1.35 2.15
40 1.90 4.00 5.35 1.75 3.40 4.35
45 0.40 2.10 3.45 5.30 6.50 7.40
50 0.05 1.05 2.15 10.05 10.50 11.15
Stock price: $40 Today's date: February
If you want to acquire the right to buy the underlying asset at $45 within 1 month, how much would that cost you per share?
a) $5.30
b) $40.00
c) $45.00
d) $5.40
e) $0.40
17. QUESTION
CALL PUT
Exercise Mar Jun Sep Mar Jun Sep
Price
30 10.15 10.85 11.65 0.05 0.35 0.85
35 5.40 6.90 8.10 0.25 1.35 2.15
40 1.90 4.00 5.35 1.75 3.40 4.35
45 0.40 2.10 3.45 5.30 6.50 7.40
50 0.05 1.05 2.15 10.05 10.50 11.15
Stock price: $40 Today's date: February
Now you want to acquire the right to sell the underlying asset after 6 months at $50. How much would that cost you?
a) $2.15
b) $0.05
c) $10.50
d) $11.15
e) $0.85
19. Option terms
• Strike Price can be In-the-Money (ITM),
Out-of-the-money (OTM) or At-the-Money
(ATM)
• For example, if the current market price
of ACC = 166, Strike Price of:
• Call at 164 - ITM, Call at 166- ATM and
Call at 170 - OTM
• Put at 164 - OTM, Put at 166- ATM and
Put at 170 - ITM
20. Market Price
Strike Prices Strike Prices
166 168 170 172164162160
In the Money
Call Options
Out of the Money
Call Options
Out the Money
Put Options
In the Money Put
Options
Calls
Puts
21. Intrinsic & Time Value
• Option premiums can be divided into two
parts.
• Intrinsic value: Is the amount the option
is ITM. Its zero for ATM and OTM.
• Time value is the difference between its
premium and its intrinsic value.
• Usually Time Value is maximum when the
call/Put is ATM.
22. IN, AT , OUT-
OF-THE-MONEY
• To identify whether an option is IN-, AT- or OUT-OF-
THE-MONEY, one need only compare the
EXERCISE PRICE of the option to the STOCK
PRICE of the underlying asset.
• KEEP IN MIND THAT...
• In-the-Money Options have INTRINSIC VALUE
• At-the-Money Options have INTRINSIC VALUE
EQUAL TO ZERO
23. Stock Options: Example
• An Indian Investor has to deliver 100 shares of ACC in
60 days. He buys a call option at a price of Rs. 20 and
the strike price is Rs. 200 per share.
• Premium Paid by the Investor:
Rs. 2,000 or , (Rs. 20 X 100).
• If at the time of payment :-
♦ ACC has risen to Rs. 230 per share - In - the - Money
position (Profit = Rs. 3,000 – 2,000) = Rs. 1,000
♦ ACC declined to Rs.190 -Out-of-Money position
24. Profit from Call Options
Profit
+
0
-
Loss
Rs. 200 S1
Call Premium “P”
Rs. 220
Buy A Call Option
Profitable Above S1
Rs. Per ACC
Profit
E
.
E = Exercise Price
Loss
25. Profit from Put Options
Profit
+
0
-
Loss
Rs. 180
S2
Put Premium “q”
Rs. 200
Buy A Put Option
Profitable Below S2
Rs per ACC
E
..
E = Exercise Price
26. Options: Strategy
• An investor who expects a bull market
should buy a call option.
• An investor who expects a bear market
should buy a put option.
• The seller receives the premium but his
risk is unlimited.
• For this reason, the selling of options
should be considered only by experienced
traders.
28. FACTORS AFFECTING
PREMIA
• There are five major factors affecting
the Option premium:
• Price of Underlying
• Exercise Price Time to Maturity
• Volatility of the Underlying
• And two less important factors:
• Short-Term Interest Rates
• Dividends
31. Trading Members
Trading members are members of NSE. They can
trade either on their own account or on behalf of
their clients including participants. The exchange
assign a trading member ID to each trading
member. Each trading member can have more
than one user. The number of user for each
trading member is notified by the exchange from
time to time. Each user of a trading member must
be registered with the exchange and is assigned an
unique user ID.
Entities in the trading system
32. Trading Members (contd..)
The Unique trading member ID functions as a
reference for all orders/trades of different
users. This ID is common for all users of a
particular trading member. It is the
responsibility of the trading member to
maintain adequate control over persons
having access to the firm’s User IDs.
Entities in the trading system
33. Entities in the trading system
Clearing Members
Clearing members are members of NSCCL.
They carry out risk management activities and
confirmation/inquiry of trades through the
trading system.
34. Entities in the trading system
Participants
A participant is a client of trading members like
financial institutions. These clients may trade
through multiple trading members but settle
through a single clearing member.
35. Order types and conditions
Time conditions
Price conditions
Other conditions
36. Order types and conditions
Time conditions
- Day Order:
A day order, as name suggest is an order
which is valid for the day on which it is entered.
If the order is not executed during the day, the
system cancels the order automatically at the
end of the day
37. Order types and conditions
Time conditions (contd…)
- Good till canceled(GTC):
A GTC order remains in the system until the
user cancels it. Consequently, it spans trading
days, if not traded on the day the order is
entered. The maximum number of days an
order can remain in the system is notified by
the exchange from time to time after which the
order is automatically cancelled by the system.
38. Order types and conditions
Time conditions (contd…)
- Good till canceled(GTC): (contd…)
Each day counted is a calendar day inclusive
of holidays. The days counted are inclusive of
the days on which the order is placed and the
order is cancelled from the system at the end
of the day of the expiry period
39. Order types and conditions
Time conditions (contd…)
- Good till days/date (GTD):
A GTD order should stay in the system if not
executed. The maximum days allowed by the
system are the same as in GTC order. At the
end of this day/date, the order is cancelled
from the system. Each day/date counted are
inclusive of the day/date on which the order is
placed and the order is cancelled from the
system at the end of the day/date of the expiry
period
40. Order types and conditions
Time conditions (contd…)
- Immediate or Cancel (IOC):
An IOC order allows the user to buy or sell a
contract as soon as the order is released into
the system, failing which the order is cancelled
from the system. Partial match is possible for
the order, and the unmatched portion of the
order is cancelled immediately.
41. Order types and conditions
Price conditions
- Stop – loss:
This facility allows the users to release an order into
the system, after the market price of the security
reaches or crosses at threshold price. E.g. if for
stop-loss buy order, the trigger is 1024.00, the limit
price is 1030.00 and the market (last traded) price is
1023.00 then this order is released into the system
once the market price reaches or exceeds 1024.00.
This order is added to the regular lot of books with
time of triggering as the time stamp, as a limit order
of 1030.00. For the stop-loss sell order, the trigger
price has to be greater than the limit price
42. Order types and conditions
Other conditions (contd…)
- Market Price:
Market orders are for which no price is
specified at the time the order is entered (i.e.
price is market price). For such order, the
system determines the price.
- An opening price(ATO):
ATO price is the price arrived at by the system
after the pre-open phase is over
43. The market watch window
The following windows are displayed
on the trader workstation screen.
Title bar
Ticker window of futures and option market
Ticker window of underlying(capital) market
Tool bar
Market watch window
Inquiry window
Snap quote
Order/trade window
System message window
44.
45.
46.
47. Inquiry window
Market by order (MBO)
The purpose of the MBO is to enable the user to
view passive orders in the trading books in the
order of price/time priority for a selected security.
The F5 key invokes the selection window for
MBO. If a particular contract or security is
selected, the details of the selected contract or
security defaults in the selection screen or else
the current position in market watch defaults.
48. Inquiry window
Market by order (MBO) (contd…)
Details of contract or security from the contract
list or from the last operation. The field that
are available on the selection screen are
instrument, symbol, expiry and book type. The
instrument type, symbol, expiry and book type
fields are compulsory.
49. Inquiry window
Market by price (MBP)
The purpose of MBP is to enable the user to
view passive orders in the market aggregated
at each price and are displayed in order of best
prices. The window can be involved by
pressing the (F6) key. If a particular contract
or security is selected the details of the
selected contract or security can be seen on
this screen.
50. Inquiry window
Market Inquiry (MI) contd….
The market inquiry screen can be involved by
using the (F11) key. If a particular contract or
security is selected, the details of the selected
contract or selected security defaults in the
selection screen or else the current position in
the market watch defaults. Fig. 8.2 shows the
detailed market inquiry output screen. The first
line of the screen gives the instrument type,
symbol, expiry, contract status, total traded
quantity, life time high and life time low.
51. Inquiry window
Market Inquiry (MI)
The second line displays the closing price, open
price, high price, low price, last traded price and
indicator for net change from closing price. The
third line displays the last traded quantity, last
traded time and last traded date. The fourth line
displays the closing open interest, the opening
open interest, day high open interest, day low
open interest, current open interest, life time high
open interest, life time low open interest and net
change from closing open interest.
52. Inquiry window
Market Inquiry (MI)
The fifth line display very important information,
namely the carrying cost in percentage terms. It
also displays the present value of dividends, best
buy price, best buy quantity, best sell quantity and
best sell price
53. Placing orders on the trading system
For both the futures and the options market, while
entering orders on the trading system, members
are required to identify orders as being proprietary
or client orders. Proprietary orders should be
identified as “Pro” and those of clients should be
identified as “Cli”. Apart from this, in the case of
“Cli” trades, the client account number should
also be provided. Client orders should be marked
as either:
Buy “Open”
Sell “Open”
Buy “Close”
Sell “Close”
54. Placing orders on the trading system
Buy “Open” client orders are those wherein
the client has first opened a buy position
before sell. At the time the client wishes to
close out this open positions, the respective
sell order should be identified as Sell
“Close” and when the same Sell “Open”
position is to be closed out the respective
buy order should be marked as “Buy “Close”
order.
The futures market is a zero sum game I.e.
the total number of long in any contract
always equals the total number of short in
55. Placing orders on the trading system
The total number of long in any contract
(long/ short) in any point of time is called the
“open interest”. This Open interest figures
is a good indicator of the liquidity in every
contract. Based on studies carried out in
international exchanges, it is found that
open interest is maximum in near mouth
expiry contracts.
57. Contract specifications for futures
Underlying index
Exchange of trading
Contract size
Price steps
Price bands
S&P CNX Nifty Options
National Stock Exchange of
India Limited Permitted lot
size shall be 200 and multiples
thereof Rs. 0.05
Not applicable
S&P CNX Nifty Options
58. Contract specifications for futures
Trading Cycle The Options contracts will
have a maximum of three
month trading cycle – the near
month (one), the next month
(two) and the far month(three).
New contract will be
introduced on the next trading
day following the expiry of
near month contract
S&P CNX Nifty Options
59. Contract specifications for futures
Expiry day
Settlement basis
Style of option
The last Thursday of the
expiry month or the previous
trading day if the last
Thursday is a trading holiday.
Cash settlement
European.
S&P CNX Nifty Options
60. RILCJUL0320
As at 11.7.2001
• Spot price: 320
• Contract multiplier: 600
• Strike prices: 280;300;320;340;360
• Share price return
volatility: 35% p.a.
• Risk-free rate: 10% p.a.
• Time to maturity: 15 days
• Premium: Rs.10
61. Charges
The maximum brokerage chargeable by a
trading member in relation to trades effected
in contract admitted to dealing on the
derivatives segment of the exchange is fixed
at 2.5% of the contract value, exclusive of
statutory levies.
The transaction charges payable by each
trading member for the trades executed by
him on the derivatives segment are fixed at
Rs. 2 per lakh of turnover(0.002%) (each
side) or Rs. 1 lakh annually, whichever is
higher
62. Charges
The trading members contribute to Investor
Protection Fund of derivatives segment at
the rate of Rs.10 per crore of turnover
(0.0001%) (each side)
63. REFERENCES
• Black-Scholes and Beyond:Option Pricing
Models: By Neil A.Chriss
• Applied Maths for Derivatives: By John S.Martin .
• Derivative: By Paul Wilmott
• An Introduction to Derivative:-By Don M.Chance
• Advanced Modelling in Finance using Excell and
VBA: By Marry Jackson and Mike Staunton
65. TOPIC FOR PRESENTATIONS
• The Fall of Barings.
• Is Future with stock lending a Synthetic Badla?
• The Function of CBOE and lessons for Indian
Stock Exchanges.
• The best Derivative product.
• Can US-64 survive with the help of Derivatives?
• Market Integration & Derivatives.
• Development of World Derivatives’ market and
lessons for India.
