To aware Basics of Options

1. BASICS OF OPTIONS
Made By – Rohit Bombale

2. TOPICS FOR TODAY
 Derivatives and Options
 Types of Options
 Components / Building Blocks of Options
 Styles of options
 Types of Contracts
 Risk in Options
 Basic Strategies in Options
 When to Buy / Sell an option
 Option Greeks

3. DERIVATIVES & OPTIONS
 Derivatives :-
A derivatives is a contract between two or more parties
whole value is based on an agreed – upon underlying financial asset,
index or security. Common underlying instruments including bonds,
commodities , currencies, interest rates, Market index and stocks.
 Options :-
An option is a contract which gives the buyer ( the owner
Or holder of the option) the right, but not the obligation, to buy or sell
and underlying asset or instruments at a specified strike price on a
specified date, depending on the form of the options.

4. USAGE OF OPTIONS
o Hedging :-
Used to hedge portfolios in uncertain situation.
o Arbitrage :-
Make benefit from known arbitrage.
o Money Making :-
Money making using Option writing and option Buying.

5. TYPES OF OPTIONS
 Call : A call is an agreement that gives an investor the right, but not the
obligation. To buy a stock, bond, commodity or other instrument at a specified
price within a specific time period….. You Profit on a call when the underlying asset
increase in Price.
- Called as CE in NSE (ex, NIFTY 8800 CE)
 Put :
A put option is an option contract giving the owner the right, but not the
obligation, to sell a specified amount of an underlying security at a specified price
Within a specified time. This is the opposite of a call Option, which gives the holder
the right to buy shares.
- Called as PE in NSE. ( ex NIFTY 8800 PE)

6. OPTIONS STYLES
 European :
An option that may only be exercised on expiration
- Used in NSE
 American :
An option that may be exercised on any trading day on or before
expiry.
- Not used in NSE
 Bermudan :
An option that may be exercised on specified dates on or before
expiration.

7. COMPONENTS IN OPTIONS
 Strike Price :-
A strike Price is the price at which a specific derivatives contract can be
exercised. The term is mostly used to describe options in which prices are fixed in
contract.
 Options Premium :
It is the total cost to buy an option, which gives the holder the right
but not the obligation to buy or sell the underlying financial instrument at a specified
strike price.
- Intrinsic Value: It is the value Primarily used I options pricing to indicate the
amount an option is in the money.
- Time value: The portion of an option’s Premium that is attributable to the
amount of time remaining until the expiration of the option contract.
 Time Decay :
Time decay is the ratio of the change in an options price to the
decrease in time to expiration.

8. TYPES OF OPTION CONTRACTS
 At the Money (ATM) :
At the money is a situation where an Option’s Strike price is
identical to the price of the underlying security….
 In the Money (ITM) :
In the money means that a call Option’s strike price is below the
market price of the underlying asset or that the strike price of a put option is above
the market price of the underlying asset….
 Out of the Money (OTM) :
Out of the money (OTM)is term used to describe a call option with
a strike price that is higher than the market price of the underlying asset. Or a put
option with a strike price that is lower than the market price of the underlying
asset…

9. Type of Option Contract Call Option Put Option
In the Money Spot Price > Strike Price
(S>K)
Spot Price < Strike Price
(S<K)
At the Money Spot Price = Strike Price
(S=K)
Spot Price = Strike Price
(S=K)
Out of the Money Spot Price < Strike Price
(S<K)
Spot Price > Strike Price
(S>K)

10. RISK IN OPTIONS
• Options have limited risk and unlimited profit.
• Why people Write/ Sell Options?
To keep the benefit of premium paid for the options.

11. CALL OPTION BUYING
•Investor
OR
STOCK
Call Option on
stock

12. PUT OPTION BUYING
•Investor
OR
STOCK
Put Option on
stock
Sells

13. OPTIONS STRATEGIES
• Long call :
You buy the call options. Used when bullish
Short call :
You sell the call options. Used when bearish.
Long put :
You buy the put options. Used when bearish.
Short put :
You Sell the put options. Used when bullish.

14. • Long Call : Short Call :

15. • Long Put : Short Put :

16. OPTIONS STRATEGY SUMMARY
Strategy Sentiment/ Market
View
Profit Loss
Long call Bullish / Uptrend Unlimited Limited
Short call Bearish/ Downtrend Limited Unlimited
Long put Bearish/ Downtrend Unlimited Limited
Short Put Bullish/ Uptrend Limited Unlimited

17. OPTION GREEKS
 Delta :
Change in Option Price Due to Change in Spot Price It is called as
DELTA.
 Gama :
Change in Option Price Due to Change in Delta It is called as GAMA.
 Vega :
Change in Option Price Due to Change in Volatility It is called as
VEGA.
 Theta :
Change in Option price due to change in Time to Expiry as called
THETA.
 Rho :