options

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Options on commodities have existed indifferent forms since 1860 for various commodities in the US, but as the contracts were not regulated, intermediaries resorted to large scale manipulations and these contracts lost popularity and disappeared from the exchanges by 1968. They became again...

Broadly, if a funds manager holds an equity portfolio and expects the market to decline, he can sell the index futures at the current price for future delivery. if the market did decline, his equity portfolio value will come down, but his futures contract will show corresponding profit, since he...

There are two types of options – a put option permits the owner to sell a security to the writer of options at a predetermined price while a call option permits the owner to purchase a security from the writer of the option at a predetermined price. These options can also be on individual...

Introduction to Options Options Greeks Rho Rho indicates the change in value of an option for 1 unit change in interest rate Interest rates are almost constant over the expiry hence are considered insignificant Introduction to Options Options Greeks Gamma Gamma indicates how much the delta...

Options Pricing Factors affecting options price: Volatility It is a measure of risk, uncertainty or the variability in the future price of a stock Higher volatility reflects greater expectations of fluctuations in either direction for a stock Options are more valuable with increase in...

Introduction to Options Options Terminology Exercise Invoke the rights approved to buyer of option Assignment When the buyer of an option exercises his right to buy / sell, a randomly selected option seller (at the client level) is assigned the obligation to honor the underlying contract...

Both the strategies discussed above aim at limiting the risk of an underlying position in an equity stock. Options may also be used for enhancing returns from the positions in stock. If the common stock is not expected to experience significant price variations in the short run, then the...

Hedging represents a strategy by which an attempt is made to limit the losses in one position by simultaneously taking a second offsetting position. The offsetting position may be in the same or a different security. In most cases, the hedges are not perfect because they cannot eliminate all...

We have considered above the profit/loss resulting to the investors with long and short positions in the call and put options. It is important to note that an investor need not take positions in naked options only or in a single option alone. In fact, a number of trading strategies involving...

In a put option, since the investor with a long position has a right to sell the stock and the writer is obliged to buy it at the will of the buyer, the profit profile is different from the one in a call option where the rights and obligations are different. Consider a put option contract on a...

Consider a call option on a certain share; say ABC Suppose the contract is made between two investors X and Y, who take, respectively, the short and long positions. The other details are given below: Exercise price = Rs 120 Expiration month = March, 2001 Size of contract = 100 shares Date...

COVERED AND UNCOVERED OPTIONS An option contract is considered covered if the writer owns the underlying asset or has another offsetting option position. In the absence of one of these conditions, the writer is exposed to the risk of having to fulfill the contractual obligations by buying the...

EXERCISE PRICE The exercise price (also called the strike price)is the price at which the buyer of a call option can purchase the stock during the life of the option, or the buyer of the put option can sell during the life of the option. Exercise price is that price at which the writer has to...

AMERICAN v/s EUROPEAN OPTIONS The definitions of options, both call and put, given above apply to the American-style options. An American option can be exercised by its owner at any time on or before the expiration date. Besides the American type there are European-style options as well...

There are broadly three reasons why an investor could buy a call option instead of buying the stock outright. These are as follows: 1. Return on Investment An investor anticipates that a stock is shortly going to appreciate from Rs. 300 to Rs. 400 per share and buying 100 shares of the stock...

OPTIONS An option is the right, but not the obligation, to buy or sell a specified amount (and quality) of a commodity, currency, index, or financial instrument, or to buy or sell a specified number of underlying futures contracts, at a specified price on or before a given date in the future...

Derivatives occupy a very significant place in the field of finance and are virtually driving the global financial markets of the day. Futures and options exchanges are an integral part of virtually all the advanced economies. Many more countries like India are in different stages of the process...

Option is a contract wherein the buyer of the option has the right but no obligation to buy or sell a specific quantity of a particular asset, at a specified price at or before a specific date in the future. An option may increase, decrease or remain unchanged in value depending on the price...

There are potentially innumerable ways of trading on the index options market. However we shall look at eight basic modes of trading on the index futures market: Hedging H5 Have portfolio, buy puts Speculation S3 Bullish index, buy Nifty calls or sell Nifty puts S4 Bearish index, sell Nifty...