2. 2
An option whose underlying security is an index. If exercised, settlement is made by
cash payment, since physical delivery is not possible.
A financial derivative that gives the holder the right, but not the obligation, to buy or
sell a basket of stocks, such as the S&P 500, at an agreed-upon price and before a
certain date. An index option is similar to other options contracts, the difference being
the underlying instruments are indexes. Options contracts, including index options,
allow investors to profit from an expected market move or to reduce the risk of
holding the underlying instrument.
3. 3
Exchange Traded Options (Options) are a versatile and flexible tool that
allow you to employ a range of approaches. Options can be used to
complement or refine your existing share strategies, or take advantage of
opportunities in ways that owning shares can't.
Options can be used to limit risk or to take on risk to profit depending on
your approach. Options can be as simple or as complex as you want.
4. 4
Options can be used in a variety of ways, depending on the strategy you can:
Manage risk in a falling market - lock in your gains or limit losses.
Generate additional income without taking on additional risk.
Give yourself time to decide - allows you the freedom to decide whether to
invest in specific shares, without being committed to a course of action.
Potentially profit from any market direction - rising, falling or going sideways.
Provides leverage to potentially increase returns .
5. 5
There are two types of Options - Call Options and Put Options. These
two options can be bought or sold. They can also be used in
combinations to create a variety of strategies suited to your risk
tolerance.
With options positions it's important to look at the implications of
holding options positions from both the stand point of the BUYER (or
taker) of the option, and the SELLER (or writer) of the option.
6. Options can be either American-Style Options or
European-Style Options and the only difference is that
the holder of an American style option can exercise their
option any time before and at expiration of the option
contract whereas a European option holder can only
exercise their option on the expiry date of the option
contract.
6
9. 9
Call option
• A call option gives you the right to buy within
a specified time period at a specified price
• The owner of the option pays a cash
premium to the option seller in exchange for
the right to buy
10. 10
Put option
• A put option gives you the right to sell within a
specified time period at a specified price
• It is not necessary to own the asset before
acquiring the right to sell it
11. 11
The Option Premium
The price of an option has two components:
Intrinsic value:
• For a call option equals the stock price
minus the striking price
• For a put option equals the striking price
minus the stock price
Time value equals the option premium minus the
intrinsic value
12. 12
Cont……
• An option with no intrinsic value is out of the
money
• An option with intrinsic value is in the money
• If an option’s striking price equals the stock
price, the option is at the money
Team MembersNileshPatilSaurabhNaikSwapnilRaghusheManoj Yadav 41
What's a call option? 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.A call is the option to buy the underlying stock at a predetermined price (the strike price) by a predetermined date (the expiry). The buyer of a call has the right to buy shares at the strike price until expiry. The seller of the call (also known as the call "writer") is the one with the obligation. If the call buyer decides to buy -- an act known as exercising the option -- the call writer is obliged to sell his/her shares to the call buyer at the strike price.What's a put option? If a call is the right to buy, then perhaps unsurprisingly, a put is the option to sell the underlying stock at a predetermined strike price until a fixed expiry date. The put buyer has the right to sell shares at the strike price, and if he/she decides to sell, the put writer is obliged to buy at that price.Why use options?A call buyer seeks to make a profit when the price of the underlying shares rises. The call price will rise as the shares do. The call writer is making the opposite bet, hoping for the stock price to decline or, at the very least, rise less than the amount received for selling the call in the first place.The put buyer profits when the underlying stock price falls. A put increases in value as the underlying stock decreases in value. Conversely, put writers are hoping for the option to expire with the stock price above the strike price, or at least for the stock to decline an amount less than what they have been paid to sell the put.
1. Bought Call OptionsA Call option provides the BUYER with the right (but not the obligation) to buy a specific number of securities, for a specific price, for a set period of time. There is no obligation placed on the holder of the Call option; you have the right to decide to buy or not.Benefits:Time to decide - whilst the price to buy stock is set.Risk limited to cost of the option premium.2. Sold Call OptionsA seller or writer of an option is obligated to deliver stock if required by the buyer at the agreed price and quantity up until expiry of the option.Benefits:Receive premium income of the option.Leverage - gain exposure greater than the upfront margin required.Can lodge existing stock as security.Risks:Possibly unlimited risk (where you don't own the underlying shares & the price rises dramatially).Daily margin requirements - these can be substantial.1. Bought Put OptionsA Put option provides the BUYER with the right to Sell a specific number of securities, for a specific price, for a set period of time. No obligation is placed on the holder of the put option; they have the right to any upside, while having the protection in place.Benefits:Insurance against the downside (if you are holding the underlying shares), with a guaranteed exit/sale price for your shares.Risk limited to the cost of the option premium2. Sold Put Options:A seller of an option is obligated to buy the stock if required by the buyer at the agreed price and quantity up until expiry of the option.Benefits:Receive the premium income of the option.Leverage - gain exposure greater than the margin lodged as collateral.Can lodge stock as security.Risks:Possibly large losses on positions if the underlying company falls substantially (including to $0).Daily margin requirements - these can be substantial.