Options

Monieness and Options ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Value of an Option ,[object Object],[object Object],[object Object],[object Object]

How is Value of Options Affected*? *American Options Increase Decrease Increase in dividend paid Decrease Increase Increase in interest rate Increase Increase Increase in time to expiration Increase Increase Increase in variance of underlying asset Increase Decrease Increase in strike price Decrease Increase Increase in asset value Put Value Call Value Factor

Call Option ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Put Option ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Options other than Calls and Puts ,[object Object],[object Object],[object Object]

Buying and Selling Stock: Long Position 400 E MP (T) Profit (-) 400 Loss 0

Buying and Selling Stock: Short Position MP (T) Profit 240 Loss 0 240 E

Elementary Investment Strategies ,[object Object],[object Object],[object Object],[object Object]

Long Call MP (T) Profit Loss 0 400 440 E (-) 40 This refers to the purchase of a call These are cash flows when a bullish Investor buys a 3-month call on the Stock with an exercise price of Rs.400 Per share by paying a premium of Rs.40

Short Call MP (T) Profit Loss 0 400 440 E (+) 40 This involves writing a call without owning the underlying asset These cash flows relate to writing a 3-month call on a stock at an exercise price of Rs.400 per share by receiving a premium of Rs.40.

Long Put MP (T) Profit Loss 0 240 216 E (-) 24 (+) 216 This involves buying a put – the right to sell the Underlying asset at a specified price These cash flows relate to a bearish investor Buying 3-month put with a exercise price of Rs.240 per share by paying a premium of Rs.24

Short Put MP (T) Profit Loss 0 240 216 E (-) 216 This involves writing a put These cash flows relate to a bullish investor Writing a put at an exercise price of Rs.240 Per share receiving a premium of Rs.24.

Complex Investment Strategies ,[object Object],[object Object],[object Object],[object Object],[object Object]

Covered Call Writing ,[object Object],Profit MP (T) (+)48 (-)302 302 350 E These are cash flows when we buy 100 shares @310 and write a May 350 call for Rs.8 so that initial Investment is Rs.302

Covered Call Writing: CF 0 = (Rs.302) ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Covered Call: Why better than stock or only short calls? ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Protective Put ,[object Object],Profit Loss (-)42 MP (T) 270 312 E These are cash flows when buy 100 shares @ Rs.310 and buy a Jun 270 put for Rs.2 so that initial Investment is Rs.312

Protective Put ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Synthetic Put and Call ,[object Object],[object Object]

Long Straddle ,[object Object],[object Object],Profit 247 Loss (-)63 MP (T) 247 373 E1 Buying a Jun 310 call for Rs.21 And Jun 310 put for Rs.42 per Share. Initial investment Rs63. 310 E2

Short Straddle ,[object Object],[object Object],Profit Loss (-)247 (63) MP (T) 247 310 E2 373 E1

Straddle Variants ,[object Object],[object Object],[object Object],[object Object]

Long Strangle ,[object Object],[object Object],Profit 247 -23 Loss E1 E2 333 247 270 310 Buy Jun 310 call for Rs.21 and Jun 270 Put for Rs. 2. Initial investment Rs.23. Usually one in-the-money and another Out-of-the-money. Initial investment Can be less than straddle MP (T)

Spreads ,[object Object],[object Object],[object Object],[object Object]

Spreads ,[object Object],[object Object],[object Object]

Vertical Spread (Across Strike Prices) ,[object Object],[object Object],MP (T) Profit Loss E + 30 - 50 270 320 350 Bullish vertical spread using calls wherein we Buy Mar 270 calls for Rs.58 and sell Mar 350 Calls for Rs.8 i.e. buy lower strike price and Sell higher strike price calls.

Vertical Spread ,[object Object],[object Object],MP (T) Profit Loss E + 68 - 12 282 270 350 Bullish vertical spread using puts wherein We buy Mar270 put for Rs.2 and sell Mar 350 put for Rs.70.

Vertical Spread ,[object Object],MP (T) E Profit Loss +59 -21 270 329 350 Bearish vertical spread wherein Sell Jun 270 call for Rs.71 and buy Jun 350 call for Rs.12.

Vertical Spread ,[object Object],MP (T) E Profit Loss +12 -68 270 282 350 Bearish vertical spread using Puts wherein Buy Mar 350 put for Rs.70 and sell Mar 270 put for Rs.2

Horizontal Spreads (Across Expiration Months) ,[object Object],[object Object],[object Object]

Diagonal Spreads ,[object Object]

Butterfly Spread ,[object Object],[object Object],[object Object],[object Object]

Reverse Butterfly or Sandwich Spreads ,[object Object],[object Object]

Evaluation of the Strategies ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Futures vs. Options: Performance ,[object Object],[object Object],[object Object],[object Object]

Illustration 1 ,[object Object]

Illustration 5 ,[object Object],[object Object]

A Transaction on an Option Exchange ,[object Object],Buyer Buyer’s Broker Options Exchange 3 Buyer’s Broker’s Floor Broker Options Clearing House Buyer’s Broker’s Clearing Firm Buyer’s Broker’s Clearing Firm Seller’s Broker’s Floor Broker Seller’s Broker Seller ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],1a 6a 7a 2a 5a 4 8a 8b 9a 9b 2b 5b 1b 6b 7b Note: Either buyer or seller (or both) could be a floor trader, eliminating the broker and floor broker.

Options

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