1. OPTIONS
PROF. MALLIKARJUN BALI
BLDEA’S VP DR. P. G. H .
CET
MBA DEPARTMENT
BIJAPUR

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.

5. Put Option buying
• A buyer of put option is bearish on
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

9. Call Option at Expiration

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. 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. Exercise of Puts

13. Pay off from a Long Call

14. Payoff from Short Call

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. Option Valuation Modules
 The Binomial model
 Black and Scholes model

17. Thank You!