options-understanding the financial derivative
TRANSCRIPT
Options
Basics of the option derivatives
Option
Exchange OTC
Option
Buyer Seller
Option Price
Long Short
Basic types of options
Call option
Put Option
•A call option is the right to buy•A put option is the right to sell
Strike Price
Option type- based on the style of exercising
European style options
American style options
A quick revision
Why trade options ?
Limited Risk
Portfolio 11 option =1000 XYZ sharesCurrent price of XYZ=$100Option price=$200
Price of XYZ = $90 Maximum loss=$200
Portfolio 2Buy 100 shares of XYZCurrent price of XYZ=$100Investment=$10000
Price of XYZ=$90Maximum loss=$1000
After 3 months
Unlimited profit potential
Portfolio 11 option =1000 XYZ sharesCurrent price of XYZ=$100Option price=$200
Portfolio 1Buy 100 shares of XYZCurrent price of XYZ=$100Investment=$10000
Price of XYZ = $110 Maximum gain=$10000
Price of XYZ = $110 Maximum gain=$1000
After 3 months
Insurance
Do you own a stock ?
Are you bearish about the market ?
Buy a put option on the stock !
Profits from buying the options
Option positions
Long Call Long Put Short Call Short Put
Option contract - example
Option profit (Call Option)
Stock price Strike price+ option price
Case 1 :The option profit = 120-(105+10)=$5 .
Case 2 :The option profit= 0
Option contract - example
Option profit (Put Option)
Strike price Stock price+ option price
Case 1 :The option profit= 0.
Case 2 :The option profit = 100-(85+10)=$5
Buying a call option
Stock : XYZOption price=$5Strike price=$100
30
20
10
0-5
70 80 90 100
110 120 130
Profit ($)
Terminalstock price ($)
-30
-20
-10
05
70 80 90 100
110 120 130
Profit ($)
Terminalstock price ($)
Stock : XYZOption price=$7Strike price=$70
Buying a put option
30
20
10
0
-770605040 80 90 100
Profit ($)
Terminalstock price ($)
-30
-20
-10
7
070
605040
80 90 100
Profit ($)Terminal
stock price ($)
Moneyness of an option
In the money
At the money
Out of the money
Moneyness of a call option
In the money
Out of the money
At the money
S – K > 0
S – K < 0
S – K = 0
S= stock priceK=strike price
Moneyness of a put option
In the money
Out of the money
At the money
K – S > 0
K– S < 0
K – S = 0
S= stock priceK=strike price