Deals with the basics of options.

1. Manav Preet Singh 2005A3PS295 MANAV PREET SINGH | 2005A3PS295 Options & Its Combinations

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3. What is an OPTION ??? MANAV PREET SINGH | 2005A3PS295

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7. Thus, the buyer has received something of value. The amount the buyer pays the seller for the option is called the Option Premium MANAV PREET SINGH | 2005A3PS295

8. Let’s take an example… MANAV PREET SINGH | 2005A3PS295

9. Unfortunately, you won't have the cash to buy it for another three months . You discover a house that you'd love to purchase. MANAV PREET SINGH | 2005A3PS295

10. You talk to the owner and negotiate a deal that gives you an option to buy the house in three months for a price of Rs.2,00,000 . The owner agrees, but for this option, you pay a price of Rs.3,000. MANAV PREET SINGH | 2005A3PS295

11. Let’s say, that the house turns out to be the true birthplace of a great man. As a result, the market value of the house rockets to Rs.1,00,00,000 . What happens? Does the owner of the house go through with the deal? SCENARIO 1 MANAV PREET SINGH | 2005A3PS295

12. Since the owner is the seller of the option, he is obliged to honour the deal. And you make a profit of Rs.97,97,000 !!! MANAV PREET SINGH | 2005A3PS295 YES!

13. Now, say, while touring the house, you discover not only that the walls are full of asbestos, but also that a family of super-intelligent rats have built a fortress in the basement. Though you originally thought you had found the house of your dreams, you now consider it worthless. You seem to be in a fix. What do you do? SCENARIO 2 MANAV PREET SINGH | 2005A3PS295

14. Nothing …you simply walk away from the deal. Because you bought an option, you are under no obligation to go through with the sale. Of course, you still lose the Rs.3,000 (price of the option). MANAV PREET SINGH | 2005A3PS295

15. STYLES OF OPTIONS MANAV PREET SINGH | 2005A3PS295

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17. TYPES OF OPTIONS MANAV PREET SINGH | 2005A3PS295

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20. A graphical interpretation of the payoffs and profits generated by a call option buyer is given below. A higher stock price means a higher profit. Eventually, the price of the underlying (e.g., stock) will be high enough to fully compensate the price of the option MANAV PREET SINGH | 2005A3PS295

21. A graphical interpretation of the payoffs and profits generated by a call option writer is given below. Profit is maximized when the option expires worthless (when the strike price exceeds the price of the underlying), and the writer keeps the premium. MANAV PREET SINGH | 2005A3PS295

24. A graphical interpretation of the payoffs and profits generated by a put option as by the writer of the option is given below. Profit is maximized when the option expires worthless (when the price of the underlying exceeds the strike price), and the writer keeps the premium. MANAV PREET SINGH | 2005A3PS295

25. A graphical interpretation of the payoffs and profits generated by a put option by the purchaser of the option is given below. A lower stock price means a higher profit. Eventually, the price of the underlying (i.e. stock) will be low enough to fully compensate the price of the option . MANAV PREET SINGH | 2005A3PS295

27. PARTICIPANTS IN THE OPTIONS MARKET MANAV PREET SINGH | 2005A3PS295

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29. WHY OPTIONS ??? 1. Speculation 2. Hedging MANAV PREET SINGH | 2005A3PS295

30. ADVANTAGES OF OPTIONS MANAV PREET SINGH | 2005A3PS295

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