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To OPTIONS
By : DINESH KUMAR
B.COM (HONS)
III YEAR
Roll No.: 753
OPTIONS
Types
Working
Terminologies
Options
An option is a derivative financial instrument
that specifies a contract between two parties
for a future transaction on an asset at a
reference price.
The buyer of the option gains the right, but
not the obligation, to engage in that
transaction, while the seller incurs the
corresponding obligation to fulfill the
transaction.
Option Classifications
Call Option : an option which gives a
right to buy the underlying asset at a
strike price.
Put Option : an option which gives a
right to sell the underlying asset at
strike price.
Some Terminologies
Call Option: Right but not the obligation to buy
Put Option: Right but not the obligation to sell
Option Price: The amount per share that an option
buyer pays to the seller
Expiration Date: The day on which an option is no
longer valid
Strike Price: The reference price at which the
underlying may be traded
Long Position: Buyer of an option assumes long
position
Short Position: Seller of an option assumes short
position
Option Styles
European option an option that may only
be exercised on expiration.
American option an option that may be
exercised on any trading day on or before
expiry.
Bermudan option an option that may be
exercised only on specified dates on or
before expiration.
Exercise of calls
Exercise of Puts
Summary of basic
option strategies
Merits of Options
Options protect downside risk to the buyer
The buyer of the option limits losses to
the premium paid on the purchase of the
options
Eg. If I buy a nifty 2900 put at Rs 34, my
loss is limited to Rs 34 while gain potential
is limitless
If the price goes above Rs 2900 I do not
exercise the option limiting my loss to the
premium paid.
Option Pricing
Black Scholes formula is the most widely used
for pricing options
The factors going into the pricing of options are
the share price(S), time to expiry (t), risk free
rate of interest r, and risk of underlying asset
measured by standard deviation or volatility
These are also called the greeks as changes in
any one of these variables affect the option price
Options contracts can be classified into out of
the money, at the money and in the money
Options A
Options or option
contracts are
review
instruments
Options A review
Options have a buyer and a writer
The option writer receives premium for giving the
buyer the right but not the obligation to sell an
asset at a future date
The option writer is not protected on the
downside risk
Option writers have to settle mark to market
profit or loss on a daily basis
Options can be cash settled or settled by
physical delivery
Options in India are cash settled
THANK YOU
By: DINESH
KUMAR