2. Raju Indukoori
Option
Option is a contractual agreement
between two parties which gives the right,
but not the obligation to the buyer of the
contract to buy or sell depending on the
nature of the contract for a predetermined
price on a contract agreement date.
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3. Raju Indukoori
Option Features
Strike Price
The fixed price at which the owner of an
option can purchase, in the case of a call, or
sell, in the case of a put, the underlying
security or commodity.
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5. Raju Indukoori
Option Features
Margin
It is similar to margin system in futures
trading. Margins are more essential when the
trader sells either call or put option.
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6. Raju Indukoori
Option Features
Open Interest
It is the total number of outstanding contracts
that are held by market participants at the
end of the day. It can also be defined as the
total number of futures contracts or option
contracts that have not yet been exercised
(squared off), expired, or fulfilled by delivery.
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7. Raju Indukoori
Option Features
Price OI Interpretation
Rising Rising Market is Strong
Rising Falling Market is Weakening
Falling Rising Market is Weak
Falling Falling Market is Strengthening
Open Interest (OI)
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8. Raju Indukoori
Option Positions
1. Long position - Call option
2. Long position - Put option
3. Short position - Call option
4. Short position - Put option
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15. Raju Indukoori
Types of Options
Based on Moneyness
1) In the money
2) At the money
3) Out of the money
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16. Money Ness
Call Option
In the Money
Strike price < Asset Price
At the Money
Strike price ≈ Asset Price
Out of the Money
Strike price > Asset Price
Put Option
In the Money
Strike price > Asset Price
At the Money
Strike price ≈ Asset Price
Out of the Money
Strike price < Asset Price
Raju Indukoori 16
17. Raju Indukoori
Call Option
A call option gives the holder of the option
the right to buy an asset by a certain date for a
certain price. It is often useful to characterize
European option positions in terms of the
terminal value or payoff to the investor at
maturity.
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18. Raju Indukoori
Put Option
A put option gives the holder the right to sell
an asset by a certain date for a certain price.
Whereas the purchaser of a call option is
hoping that the stock price will increase, the
purchaser of a put option is hoping that it will
decrease.
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19. Raju Indukoori
Pay-off for Long Call
Profit from buying one SAIL call option:
Option Price = Rs5, Strike Price = Rs100, Asset Price = Rs 100
30
20
10
0
-5
70 80 90 100
110 120 130
APSP
Pay-Off = Max (APt - SP, 0)
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20. Raju Indukoori
Pay-off for Short Call
Profit from writing one SAIL call option:
Option Price = Rs 5, Strike Price = Rs100, Asset Price = Rs 100
-30
-20
-10
0
5
70 80 90 100
110 120 130
AP
SP
Pay-Off = Min (SP – APt, 0)
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21. Raju Indukoori
Pay-off for Long Put
Profit from buying MRPL put option:
Option Price = Rs7, Strike Price = Rs70, Asset Price = Rs 70
30
20
10
0
-7
70605040 80 90 100
SP
Pay-Off = Max (SP – APt, 0)
AP
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22. Raju Indukoori
Pay off for Short Put
Profit from buying MRPL put option:
Option Price = Rs7, Strike Price = Rs70, Asset Price = Rs 70
-30
-20
-10
7
0
70
605040
80 90 100 AP
SP
Pay-Off = Min (APt - SP, 0)
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23. Long Put
Raju Indukoori
Options Pay-Off in the absence of initial Cost
Long Call Short Call
Short Put
SP
SP
SP
SP AP
AP
AP
AP
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24. Raju Indukoori
Factors Influencing Option Prices
1. Underlying asset’s Price
2. Strike price and moneyness
3. Expiry date
4. Risk free interest rate
5. Anticipated volatility of the price of underlying asset
6. Corporate actions like dividend declaration
7. Demand for the option
8. Supply of the option
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25. Raju Indukoori
Factors influencing option prices
# Factors influencing Option Price
Call Option
Price
Put Option
Price
1 Underlying asset’s Price Increases Increases Decreases
2 Strike Price Increases Decreases Increases
3 Longer expiry date Increases Increases
4 Risk Free Rate increases Increases Decreases
5 Volatility of underlying asset increases Increases Increases
6 Cash Payment Like dividends Decreases Increases
7 Increase in demand for option Increases Increases
8 Increase in Supply of option Decreases Decreases
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27. Raju Indukoori
Hedging Strategies
The origin of derivatives is to hedge the
price volatility of the underlying asset
which is part of price risk management.
Different Combinations for hedging
strategies can be designed with
underlying asset and options or with
options alone
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Hedging Strategies
Underlying asset and options
Following strategies are used to manage price risk of the
underlying asset or protect the value of the underlying asset from
price risk
1) Underlying asset and call option
2) Underlying asset and put option
3) Underlying asset, call and put option
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29. Raju Indukoori
Hedging Strategies
Option and options
Following strategies are used to make profits from the volatility of
the price of an underlying asset without holding the underlying
asset.
1) Call option and Call option
2) Call option and put option
3) Put option and put option
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30. Raju Indukoori
SP
Options & Underlying Asset Positions
Profit
APT
SP
Profit
Profit Profit
Long Asset - Short Call
Long Asset – Long Put Short Asset – Short Put
Long Call – Short Asset
SP
SP
APT
APT
APT
Loss
Loss
Loss
Loss
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31. Raju Indukoori
Pay-off of portfolio
(Underlying asset and Options)
Profit
APT
SP
Profit
Profit Profit
Long asset - Short call
Long asset - Long put Short asset – Short put
Long call –Short Asset
SP
SP
SP
APT
APT
APT
Loss
Loss
Loss
Loss
•Thin Colored lines indicate UA and option positions and their respective profit relationship with UAP movement.
• Thick Colored line indicates portfolio profits according UAP movement. 31
33. Raju Indukoori
Post Session Activities
1) Find out how many scrips are available
on options in NSE.
2) Find out option moneyness i.e. in the
money, at the money and out of the
money strike prices of an underlying
asset of your choice.
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