option

Anyone eligible to enter into contract as per the Law of Contract can write an option irrespective of the fact whether one owns the underlying stock or not. If the writer of a call option owns the stock that he is obliged to deliver upon exercise of the call he has written, he is called a...

WHAT IS AN OPTION? Option is a legal contract in which the writer of the contract grants to the buyer, the right to purchase from or to sell to the writer a designated instrument or a scrip at a specified price within a specified period of time. The right to purchase a specified stock is...

The value of an option before expiration depends on six factors: ¦ The level of the underlying index ¦ The exercise price of the option ¦ The time to expiration ¦ The volatility of the index The risk-free rate of interest ¦ Dividends expected during the life of the option These factors set...

The Black–Scholes formulas for the prices of European calls and puts on a non-dividend paying stock are: C = SN(d1) – Xe-rT N(d2) P = Xe-rT N(-d2)- SN(-d1) Where d1 = [ ln s/x +(r+δ2/2)T ]/ δ √T And d2 = d1 –δ√T • The Black Scholes equation is done in continuous time. This requires...

Option Terminology • Index options: These options have the index as the underlying. Some options are European while others are American. Like index futures contracts, index options contracts are also cash settled. • Stock options: Stock options are options on individual stocks. Options...

SHORT CONDOR Sell One + Buy One + Buy One + Sell One = Credit received RISK COLLAR / FENCE (RISK CONVERSION) Long Underlying Security = Purchasing OTM Put + Selling the OTM call RISK COLLAR / FENCE (RISK REVERSAL) Short Underlying Security = Purchasing OTM Call + Selling the OTM Put

LONG IRON BUTTERFLY Sell ATM Straddle – Buy OTM Strangle = Receive a credit SHORT IRON BUTTERFLY Buy ATM Straddle – Sell OTM Strangle = Total Debit LONG CONDOR Buy One + Sell One + Sell One + Buy One = Total Debit paid

SHORT STRANGLE OTM Put Strike Price – (OTM Call Price + OTM Put Price) = Low Break-even Point OTM Call Strike Price + (OTM Call Price + OTM Put Price) = High Break-even Point LONG BUTTERFLY Buy One + Sell Two + Buy One = Total Debit SHORT BUTTERFLY Sell One + Buy Two + Sell One = Total Credit

SHORT STRADDLE Strike Price – (Call Price + Put Price) = Low Break-even Point Strike Price + (Call Price + Put Price) = High Break-even Point LONG STRANGLE OTM Put Strike Price – (OTM Call Price + OTM Put Price) = Low Break-even Point OTM Call Strike Price + (OTM Call Price + OTM Put...

RATIO BEAR SPREAD (SHORT) A long put spread plus a short OTM put LONG STRADDLE Strike Price – (Call Price + Put Price) = Low Break-even Point Strike Price + (Call Price + Put Price) = High Break-even Point

RATIO BULL SPREAD (LONG) A short call spread plus a long OTM call RATIO BULL SPREAD (SHORT) A long call spread plus a short OTM call RATIO BEAR SPREAD (LONG) A short put spread plus a long OTM put

*MARRIED PUT (Stock Price – Strike Price) + Put Price = Maximum Loss *PROTECTING UNREALIZED PROFIT (Strike Price – Put Price) – Initial Stock Purchase = Unrealized Profit *COVERED CALL POTENTIAL (Call Price + Strike Price) – Stock Price = Covered Call Potential * BULL SPREAD (LONG CALL...

Option Strategies Long Call Married Put Covered Call Bull Call Spread Long Put Protective Put Covered Put Bear Put Spread

What is an Option Contract ? An Option Contact conveys upon its buyer the right, but not an obligation to buy / sell the underlying security on the expiry date at a pre-determined price.

Hedging a receivable with a put option A German chemical firm has supplied goods worth Pound 26 million to a British customer. The payment is due in two months. The current DEM/GBP spot rate is 2.8356 and two month forward rate is 2.8050. An American put option on sterling with 3 month...

a. Maturity of an option: higher the price higher the value of an option and vice a versa b. Spot price of underlying assets: c. Strike price of underlying assets: d. Interest rate structure in the market: higher the interest rate structure in the market higher the value of an option and...

Call Option: A call option gives the buyer the right, but not the obligation, to buy the underlying instrument. Selling a call means that you have sold the right, but not the obligation, to someone to buy something from you. Put Option: A put option gives the buyer the right, but not the...

Option Valuation Option Premium = Intrinsic Value + Time Value Intrinsic Value: The exercisable value of the option. Intrinsic value of a call option is the difference between the spot price and the strike price. Intrinsic value of a put option is the difference between the...

Selection of most appropriate Pricing option The pricing methods available are: 1. Market Skimming: This strategy involves a deliberate attempt to reach a market segment that is willing to pay a premium price for a product. The strategy is often used to introduce high value products. E.g...

Important Terms in Greenshoe option: Stabilizing Agent (J M Morgan Stanley) Greenshoe lender (Tata Sons, Sheba Properties, Kalimati Investment Company, etc.) Greenshoe transferor (Tata sons) GSO Bank account GSO Demat account NUMBER OF GREENSHOE OPTIONS PROPOSE: Tata Son...