1. INTRODUCTION TO
DERIVATIVES
BY: NILIMA DAS

2. GOLD CONTENT:50gms

3. AGREEMENT
Date:1st Jan 2008
Three month after
words I will sell to
Mr. BISWO 50 gm 22ct
gold @14,000 per
10gm.
Signature

4. Define a derivative?
• A derivative is an instrument whose value is
derived from, and therefore, depends upon, the
value of some underlying asset or factor.

5. What kind of underlying assets are
derivatives generally available on?
Common underlying assets for derivatives are:
• Equity Shares
• Equity Indices
• Debt Market Securities
• Interest Rates
• Foreign Exchange
• Commodities
• Derivatives themselves etc.

6. Differentiate between Exchange-traded
and over-the-counter derivatives
• Exchange-traded derivatives are contracts
that trade on an organized exchange.
• Contracts can be bought and sold any time
the exchange is open.
• The contracts have standardized terms set
by the exchange or the clearinghouse.
• Prices are publicly available.

7. Differentiate between Exchange-traded and
over-the-counter derivatives
• Over-the-counter derivatives result from
agreements between two parties.
• The parties can negotiate contract terms that
are mutually acceptable.
• Contracts can be terminated only with the
agreement of the other party.
• Prices are not available

8. Players in the derivatives
market?
• Hedgers
• Speculators
• Arbitrageurs

9. HEDGER
• A hedge is a position taken in futures for the
purpose of reducing exposure to one or more
types of risk.
• The hedging strategy can be undertaken in all
the markets like futures, forwards, options,
SWAP etc.

10. SPECULATOR
• Speculators use derivatives to bet on the future
direction of the markets. Their objective is to gain
when the prices move as per their expectation.
• 3 types based on duration
iii.SCALPERS – hold for very short time (in minutes)
iv.DAY TRADERS- one trading day
v. POSITION TRADERS- long period (week, month, a
year).

11. ARBITRAGEURS
• Arbitrageurs try to make risk-less profit by
simultaneously entering in to transactions in
two or more market.
• Arbitrageurs assist in proper price discovery
and correct price abnormalities.

12. What role does each person
play in the derivatives market?
• Speculators provide liquidity and volume to the
market.
• Hedgers provide depth.
• Arbitrageurs assist in proper price discovery and
correct price abnormalities.
• Speculators are willing to take risks.
• Hedgers want to give away risks (generally to the
speculators

13. Types of derivatives
• Standardised derivatives
• Exotic derivatives

14. Types of derivatives
• Standardised derivatives are as specified by
exchanges and have simple standard features. These
are also called vanilla derivatives or plain vanilla
derivatives.
• Exotic derivatives have many non-standard features,
which might appeal to special classes of investors.
These are generally not exchange traded and are
structured between parties on their own.

15. Standardised derivatives
• Futures
• Options
• Swaps

16. Exotic derivatives
• FORWARD CONTRACT

17. Forward contracts
• A forward contract is an agreement to buy or sell an
asset on a specified date for a specified price. .

18. Essential features of a forward
contract-----
• Contract between two parties (without any exchange between
them)
• Price decided today
• Quantity decided today (can be based on convenience of the
parties)
• Quality decided today (can be based on convenience of the
parties)
• Settlement will take place sometime in future (can be based on
convenience of the parties)
• No margins are generally payable by any of the parties to the
other

19. Essential features of a forward
contract-----
• They are bilateral contracts and hence exposed to
counter-party risk.
• Each contract is custom designed, and hence is unique
in terms of contract size, expiration date and
the asset type and quality.
• The contract price is generally not available in public
domain.
• On the expiration date, the contract has to be settled by
delivery of the asset.

20. Limitations of forward
markets
• Lack of centralization of trading
• Illiquidity
• Counterparty risk

21. Futures
• Futures markets were designed to solve the
problems that exist in forward markets .
• A futures contract is an agreement between
two parties to buy or sell an asset at a certain
time in the future at a certain price.
• But unlike forward contracts, the futures
contracts are standardized and exchange
traded.

22. Futures---
• To facilitate liquidity in the futures contracts, the
exchange specifies certain standard features of the
contract .
• The standardized items in a futures contract are:
3. Quantity of the underlying
4. Quality of the underlying
• A futures contract may be offset prior to maturity by
entering into an equal and opposite transaction. More
than 99% of futures transactions are offset this way

23. Essential features of a Futures
contract
• Contract between two parties through an exchange
• Exchange is the legal counterparty to both parties
• Price decided today
• Quantity decided today (quantities have to be in
standard denominations specified by the exchange)
• Quality decided today (quality should be as per the
specifications decided by the exchange)

24. Essential features of a Futures
contract
• Tick size- the minimum amount is decided by the
Exchange.
• Striking price- the price of the underlying asset
specified in the contract.(delivery price)
• Delivery will take place in future &expiry date is
specified by the exchange.
• Margins are payable by both the parties to the
exchange
• the price limits can be decided by the exchange

25. Distinction between futures and
forwards
Forwards Futures
OTC in nature Trade on an organized
exchange
Customized contract Standardized contract
terms terms
Hence less liquid Hence more liquid
No margin payment Requires margin
payments
Settlement happens Follows daily settlement
at end of period

26. Do Futures suffer from any
limitation?
• Futures suffer from lack of flexibility. Suppose you want to buy 103 shares
of Satyam for a future delivery date of 14th February, you cannot.
• The exchange will have standardized specifications for each contract.
Thus, you may find that you can buy Satyam futures in lots of 1,200 only.
You may find that expiry date will be the last Thursday of every month.
• Thus, while forwards can be structured according to the convenience of
the trading parties involved, futures specifications are standardized by the
exchange.

27. What is the meaning of expiry
of Futures?
• Futures contracts will expire on a certain pre-
specified date. In India, futures contracts expire on
the last Thursday of every month. For example, a
February Futures contract will expire on the last
Thursday of February. In this case, February is
referred to as the Contract month.
• If the last Thursday is a holiday, Futures and Options
will expire on the previous working day.
• On expiry, all contracts will be compulsorily settled.
• Settlement can be effected in cash or through
delivery.

28. What does Cash Settlement
mean?
• Cash Settlement means settlement by payment/receipt
in cash of the difference between the contracted price
and the closing price (spot price) of the underlying on
the expiry day.
• In the Cash settled system, you can buy and sell
Futures on stocks without holding the stocks at any
time.
• For example, to buy and sell Futures on Satyam, you
do not have to hold Satyam shares

29. What does Delivery based
Settlement mean?
• In Delivery based Settlement, the seller of Futures delivers to
the Buyer (through the exchange) the physical shares, on the
expiry day.
• For example, if you have bought 1,200 Satyam Futures at Rs
250 each, then you will (on the day of expiry) get 1,200
Shares of Satyam at the contracted Futures price of Rs 250. It
might happen that on the day of expiry, Satyam was actually
quoting at Rs 280. In that case, you would still get Satyam at
Rs 250, effectively generating a profit of Rs 30 for you.

30. What is the Current System in
India?
• Currently in India 99.9% Futures transactions
are settled in Cash.
• It is widely expected that we will move to a
physical delivery system soon.
• However, Index based Futures and options
will continue to be based on Cash Settlement
system.

31. How many month Futures are
available at any point of time?
• Exchanges have currently introduced three series in
Futures and Options. For example during the month
of February on any day on or before last Thursday,
you will find three Series available viz. February,
March and April.
• The February Series will expire on the last Thursday
of February.
• On the next working day, the May Series will open.
Thus, on a rolling basis, three Series will be made
available

32. Futures: Concluding Remark
• In a forward or futures contract, the two
parties have committed themselves to doing
something.
• It costs nothing except margin requirements)
to enter into a futures contract

33. Options
• Options are fundamentally different from forward and
futures contracts.
• An option gives the holder of the option the right to
do something (right to sale or right to buy).
• The purchase of an option requires an up-front
payment called premium.
• Option contract adjust your position according to any
situation that arises.

34. Option terminology
• Buyer of an option: The buyer of a call/put option is
the one who by paying the option premium, buys the
right .
• Writer of an option: The writer of a call/put option is
the one who by receives the option premium , sale the
right.

35. Other Option terminology
• Option price/premium: Option price is the price which the
option buyer pays to the option seller. It is also referred to as
the option premium.
• Expiration date: The date specified in the options contract is
known as the expiration date, the
exercise date, the strike date or the maturity.
• Strike price: The price specified in the options contract is
known as the strike price or the exercise price.

36. What type of Options are
available?
• Call Options
• Put Options.

37. What are Call Options?
• Call Options give the buyer the right to buy a
specified underlying at a set price on or before a
particular date.
• For example, Satyam 260 Feb Call Option gives the
Buyer the right to buy Satyam at a price of Rs 260 per
share on or before the last Thursday of February.
• The price of 260 in the above example is called the
strike price or the exercise price.

38. What are Put Options?
• Put Options give the buyer the right to sell a
specified underlying at a set price on or before
a particular date.
• For example, Satyam 260 Feb Put Option
gives the Buyer the right to sell Satyam at a
price of Rs 260 per share on or before the last
Thursday of February.

39. Style of option contract--
• American style
• European style

40. Two basic styles of options
• American options: American options are options that
can be exercised at any time up to the expiration
date. Most exchange-traded options are American .
• European options: European options are options that
can be exercised only on the expiration date
itself.

41. Swaps
• Swaps are the contracts between two to
exchange cash flows in the future as
prespecified.

42. Two commonly used swaps
• Interest rate swaps
• Currency swaps

43. Interest rate swaps
• These entail swapping only the interest related cash flows
between the parties in the same currency.

44. Currency swaps
• These entail swapping both principal & interest between the
parties, with the cash flows in one direction being in a
different currency than those in the opposite direction.

45. INFORMATION
• NSE,s is the largest derivative exchange in India.
• Currently, the derivatives contracts have a maximum of 3-months
expiration cycle.
• Three contracts are available for trading, with 1 month, 2 months, & 3
months expiry.& a new contract is introduced on the next trading day
following the expiry of the near month contract.
• Future trading commenced first on Chicago Board of Trade.
• The first exchange traded financial derivative in India commenced with the
trading of Index futures.
• BASIS= the difference between a future price & cash price (spot price) of
the asset is known as the basis.

46. • LONG POSITION- One of the parties to the contract
assumes a long position and agrees to buy the
underlying asset on a certain specified future date for
a certain specified price.
• SHORT POSITION-The other party assumes a short
position and agrees to sell the asset on the same date
for the same price.

47. • SHORT SELLING- short selling involves selling securities
you do not own. Means borrows the security from another
client & sells them in the market.
• PAY OFF- the losses as well as profits for the buyer and the
seller of a futures contract are known as pay-off.

48. Forward Contracts
The specified price for the sale is known as the delivery price, we
will denote this as K.
– Note that K is set such that at initiation of the contract the
value of the forward contract is 0.
As time progresses the delivery price doesn’t change, but the
current spot (market) rate does. Thus, the contract gains (or
loses) value over time.
– Consider the situation at the maturity date of the contract.
If the spot price is higher than the delivery price, the long
party can buy at K and immediately sell at the spot price
ST, making a profit of (ST-K), whereas the short position
could have sold the asset for ST, but is obligated to sell for
K, earning a profit (negative) of (K-ST).

49. Forward Contracts
• Example:
– Let’s say that you entered into a forward contract to buy wheat at
$4.00/bushel, with delivery in December (thus K=$4.00.)
– Let’s say that the delivery date was December 14 and that on
December 14th the market price of wheat is unlikely to be exactly
$4.00/bushel, but that is the price at which you have agreed (via the
forward contract) to buy your wheat.
– If the market price is greater than $4.00/bushel, you are pleased,
because you are able to buy an asset for less than its market price.
– If, however, the market price is less than $4.00/bushel, you are not
pleased because you are paying more than the market price for the
wheat.
– Indeed, we can determine your net payoff to the trade by applying the
formula: payoff = ST – K, since you gain an asset worth ST, but you
have to pay $K for it.
– We can graph the payoff function:

50. Forward Contracts
Payoff to Futures Position on Wheat
Where the Delivery Price (K) is $4.00/Bushel
4
3
2
Payoff to Forwards
1
0
0 1 2 3 4 5 6 7 8
-1
-2
-3
-4
Wheat Market (Spot) Price, December 14

51. Forward Contracts
• Example:
– In this example you were the long party, but what about the short
party?
– They have agreed to sell wheat to you for $4.00/bushel on December
14.
– Their payoff is positive if the market price of wheat is less than $4.00/
bushel – they force you to pay more for the wheat than they could sell
it for on the open market.
• Indeed, you could assume that what they do is buy it on the open
market and then immediately deliver it to you in the forward
contract.
– Their payoff is negative, however, if the market price of wheat is
greater than $4.00/bushel.
• They could have sold the wheat for more than $4.00/bushel had
they not agreed to sell it to you.
– So their payoff function is the mirror image of your payoff function:

52. Forward Contracts
Payoff to Short Futures Position on Wheat
Where the Delivery Price (K) is $4.00/Bushel
4
3
2
Payoff to Forwards
1
0
0 1 2 3 4 5 6 7 8
-1
-2
-3
-4
Wheat Market (Spot) Price, December 14

53. Forward Contracts
• Clearly the short position is just the mirror
image of the long position, and, taken together
the two positions cancel each other out:

54. Forward Contracts
Long and Short Positions in a Forward Contract
For Wheat at $4.00/Bushel
4
3
Short Position
2
1
Long Position
Payoff
0
0 1 2 3 4 5 6 7 8
-1
-2
Net
Position
-3
-4
Wheat Price

55. Valuing a Forward Contract
No storage costs: gold
Price set so that initial value of contract is zero. How is this possible?
Gold, one year hence sale contract. Let current price is = $400, interest
rate = 10%
Suppose: forward price = $450
Strategy: "Buy the asset now"
Now:
Borrow funds +400
Buy gold -400
_______
Net cash flow 0
One year later:
Deliver gold at contract price +450
Pay off loan -440
Net cash flow +10
Risk?

56. Suppose: Forward price =$420, Let current price is = $400, interest rate =
10%. Buy contract.
Strategy: "Sell the asset now"
Now:
Short gold in cash market +400
Invest funds in 10% loan -400
_______
Net cash flow 0
One year later:
Buy gold at contracted price - 420
Deliver on short position
Receive payment on loan + 440
Net cash flow + 20
Risk?

57. PRICING FUTURE
Calculation of fair value of a contract.(Cost-of- carry logic method)-
F = Sert
Where F= fair value, S= spot price, e= 2.71828, t= time till expiration in
years, r= cost of financing or interest rate.
Q- security XYZ ltd trades in the spot market at Rs. 1150. money can
be invested at 11% p.a.. Calculate the fair value of a one-month
futures contract of XYZ .?
F= Sert
1150 * e0.11*1/12
= 1160

58. Types of future contract
• Index future (stock)
• Index future (bond)
• Cost of living index future
• Interest rate currency
• Foreign currency

59. INDEX DERIVATIVE
INDEX
• Indexes have been used as information sources.
• by looking at an index , we know how the market if fairing.
• Index movements reflect the changing expectations of stock market
about future dividends of the corporate sectors.
• Index goes up, if the stock market thinks that the prospective
dividends in future will be better & vise-versa.
Example: Suppose an index contains two stocks, A and B. A has a
market capitalization of Rs.1000 crore and B has a market
capitalization of Rs.3000 crore.
Then we attach a weight of 1/4 to movements in A and 3/4 to
movements in B.

60. INDEX DERIVATIVE
• Index derivatives are derivative contracts which derive their
value from an underlying index.
• Most popular index derivative are- index future & index
option.
• Stock index being an average, is much less volatile than
individual stock price.
• Index derivatives are cash setteled, hence do not suffer from
forged/fake certificates.

61. FUTURE INDEX
• Stock index future is an index derivative that draws its
value from an underlying stock index like Nifty or Sensex
• Futures contracts have linear payoffs. In simple words, it
means that the losses as well as profits for the buyer and
the seller of a futures contract are unlimited.

62. Major Stock index futures
Stock Exchange Name Index Future Contract
Korean Stock Exchange KOSPI 200
Hong Kong Future Hang Seng
Exchange
Simex Nikkei Stock Average
Osaka Stock Exchange Nikkei 300
Chicago Mercantile Exchange S&P 100
New york Future Exchange NYSE Composite

63. More on Index Future
• A stock index future contract gives the buyer
(seller) the right and obligation to buy sell)
the portfolio of stock represented by the index.
• The settlement is in cash mode.

64. Why physical delivery not
possible?
• The reason for non-existence of physical
delivery is that it would be impractical for a
trader to deliver all the stocks in exactly the
same proportion as they make up the index.

65. Index Future in India
BSE NSE
Underlying SENSEX NIFTY
Contract Multiplier
50 200
Trading Cycle Near,Next,Far Near,Next,Far
Tick size 0.05 index point 0.05 index point
Expiry Date Last Thursday Last Thursday
Final Settlement Cash Cash

66. Settlement in Index Future
• MTM Settlement
• Final Settlement

67. MTM Settlement----
• All future contracts are marked to market to the daily
settlement price at the end of each day.
• The traders who incurred a loss are required to pay
the MTM loss amount in cash, which in turn is passed
on to those traders who have made an MTM gain.

68. ---MTM Settlement
• Once the daily settlements are worked out ,all the
open positions are reset to the daily settlement price
and they become the open position for the next day.
• On NSE, the daily settlement price or MTM
settlement price is calculated as the last half an hour
weighted average price of the contract .

69. Final Settlement for Futures
• After the trading on expiry day ends, all positions are
settled by marking the contract to final settlement
price and the resulting profit/loss is settled in cash.
• Final settlement price is the closing price of relevant
underlying index/security in cash market ,on the last
trading day of the contract.
• The closing price of the underlying index/security is
the last half an hour weighted average value.

70. Why Buy Index Futures
• Leverage trading
• Ease of short-selling

71. 1. Leverage trading- trading that does not require
you to pay the full amount of the position.
• Allow to leverage the difference.
2. Ease of short selling-
• means making profit in a short while.
• short selling involves selling securities you do
not own.

72. Payoff for buyer of future index: Long futures
• Take the case of a speculator who buys a two month
Nifty index futures contract when the Nifty stands at
2220.
• The underlying asset is- Nifty portfolio.

73. When the index moves up, the long futures position starts
making profits, and when the index moves down it starts
making losses.
Payoff diagram for a buyer of Nifty futures-

74. Payoff for seller of future index: Short futures
• a speculator who sells a two-month Nifty
index futures contract when the Nifty stands at
2220.
• The underlying asset is - Nifty portfolio.

75. When the index moves down, the short futures position starts making
profits, and when the index moves up, it starts making losses
Payoff for a seller of Nifty futures

76. BOND INDEX
• Like stock, these are based on bond indices.
• Exa- US municipal bond index traded on
Chicago Board of Trade (CBOT).

77. FOREIGN CURRENCY FUTURE
• Here underlying asset is foreign currency
• started in early 1970’s.

78. Interest rate future
• Started in 1975 .
• Here trading is made on interest bearing
securities.
• Underlying asset- treasury bill, notes, bonds,
debentures, Euro-dollars, municipal bonds.

79. COST OF LIVING INDEX FUTURE OR INFLATION
FUTURES
• Based on specific cost of living index.
• Exa- consumer price index (CPI)
• whole sale price index (WPI)

80. Options Contracts
• Options on stocks were first traded in 1973.
• There are two basic types of options:
– A Call option is the right, to buy the underlying asset by a certain
date for a certain price.
– A Put option is the right, to sell the underlying asset by a certain date
for a certain price.
• Note that unlike a forward or futures contract, the holder of the
options contract does not have to do anything - they have the
option to do it or not.

81. Options Contracts
• The date when the option expires is known as the
exercise date, the expiration date, or the maturity date.
• The price at which the asset can be purchased or sold
is known as the strike price.
• If an option is said to be European, it means that the
holder of the option can buy or sell (depending on if it
is a call or a put) only on the maturity date.
• If the option is said to be an American style option,
the holder can exercise on any date up to and
including the exercise date.

82. New terminology (option)
In-the-money option:
• An in-the-money (ITM) option is an option that
would lead to a positive cashflow to the holder if it
were exercised immediately. A call option on the
index is said to be in-the-money when the current
index stands at a level higher than the strike price (i.e.
spot price >strike price). If the index is much higher
than the strike price, the call is said to be deep ITM.
In the case of a put, the put is ITM if the index is
below the strike price.

83. At-the-money option:
An at-the-money (ATM) option is an option
that would lead to zero cash-flow if it were
exercised immediately. An option on the index
is at-the-money when the current index equals
the strike price(i.e. spot price = strike price).

84. Out-of-the-money option
• An out-of-the-money (OTM) option is an
option that would lead to a negative cashflow if it
were exercised immediately. A call option on the
index is out-of-the-money when the current index
stands at a level which is less than the strike price
(i.e. spot price < strike price). If the index is much
lower than the strike price, the call is said to be deep
OTM. In the case of a put, the put is OTM if the
index is above the strike price.

85. Intrinsic value of an option
The option premium can be broken down into two
components intrinsic value and time value.
Intrinsic value is the payoff if the option were to be
exercised immediately. Intrinsic value is always
greater than or equal to zero. For example, a certain
asset is trading for $30. The intrinsic value of a $25
call is therefore $5.

86. Time value of an option
• The time value of an option is the difference
between its premium and its intrinsic value.
Both calls and puts have time value.

87. Option Contracts Defined
Question 1:
An option gives the holder...
A. the obligation to buy the underlying asset.
B. the right to sell the underlying asset.
C. the obligation to buy or sell the underlying
asset.
D. the right to buy or sell the underlying asset.

88. Option Contracts Defined
Question 1: Answer D
An option gives the holder...
A. the obligation to buy the underlying asset.
B. the right to sell the underlying asset.
C. the obligation to buy or sell the underlying
asset.
D. the right to buy or sell the underlying asset.

89. Option Contracts Defined
Question 2:
What is the difference between an American
option and a European option?
A. An American option is traded on American exchanges, while
European options are traded on European exchanges.
B. An American option is written on an the assets of an
American company, while a European option is written on the
assets of a European company.
C. An American option can only be exercised at expiration,
while a European option can be exercised at anytime up to
expiration.
D. An American option can be exercised at anytime up to
expiration, while a European option can be exercised only at
expiration.

90. Option Contracts Defined
Question 2: Answer D
What is the difference between an American
option and a European option?
A. An American option is traded on American exchanges, while
European options are traded on European exchanges.
B. An American option is written on an the assets of an
American company, while a European option is written on the
assets of a European company.
C. An American option can only be exercised at expiration,
while a European option can be exercised at anytime up to
expiration.
D. An American option can be exercised at anytime up to
expiration, while a European option can be exercised only
at expiration.

91. Examples Of More Sophisticated
Derivatives
• Barrier Options
• Compound Options
• Options On Futures
• Swap Options or Swaption

92. Barrier Options
• A type of option whose payoff depends on whether or not the
underlying asset has reached or exceeded a predetermined
price.
• A barrier option is a type of exotic option. It can be either a
knock-in or a knock-out.
• Are exotic options that are traded , not on stock exchanges but
over-the counter (OTC), in finance banks
• For example, if you believe that IBM will go up this year, but
are willing to bet that it won't go above $100, then you can
buy the barrier and pay less premium than the vanilla option.

93. barrier is triggered when the option is in the money (i.e. above
spot for a call, or “up and in” and below spot for a put or
“down and in.
example- A European call option may be written on an
underlying with spot price of $100, and a knockout barrier of
$120. This option behaves in every way European call, except
if the spot price ever moves above $120, the option "knocks
out" and the contract is void. Note that the option does not
reactivate if the spot price falls below $120 again.

94. IN/OUT
• IN / knock-in
Options start worthless and are activated
when asset price reaches the predetermined
barrier level
• OUT/ knock-out
Options start active and canceled or
become null and void in the event that the
barrier value is breached

95. Compound Options
• A compound option is simply an option on an
option. The exercise payoff of a compound
option involves the value of another option.
• A compound option then has two expiration
dates and two strike prices.

96. • There are four types of these options:
– Call on a call.
– Call on a put.
– Put on a call.
– Put on a put.

97. Swap Options or Swaption
• An option on a swap, usually an interest rate
swap.
• The agreement will specify whether the buyer
of the swaption will be a fixed-rate receiver
(like a call option on a bond) or a fixed-rate
payer (like a put option on a bond).

98. SPREADS
• The difference in pricing among two relative
contracts.
• A spread trading strategy can be constructed
by taking a position in two or more options at
the same type.
• That means combining two or more calls or
two or more puts at same time.

99. VERTICAL BULL SPREAD
This is one popular strategy.
• One buy a call option at a certain strike price.
• Sell a call option at a higher price of same stock.
• The asset choosen is having same expiry date.
• The investor pay the premium while buying.
• The investor receives the premium while selling option.
• So the investment by trader is the difference in two price
• Max. loss= lower premium to receive- higher premium to pay
• Max profit= higher strike price- lower strike price-net
premium paid
• Break even price= lower strike price+net premium paid.

100. Bearish vertical spread
• This will give profit, when there is a decline in price of
underlying asset.
• Here the trader purchase one option at higher strike
price
• Selling one option at relatively lower strike price having
same expiration date.
• Max.profit= premium on selling option at lower strike
price-premium on buying at higher strike price.
• Max. loss= higher strike price-lower strike price-net
premium earned.
• Break even price= higher strike price-net premium
earned.

101. Butterfly spread
• Means a position in options with different
strike price.
• The investor purchase a call option with a
relative low strike price(x1) & high strike
price(X3) & selling two call options in
between (X2).

102. DIAGONAL SPREAD
• A combination of one option trading which
involves taking positions of several horizontal
(call, put), vertical (bull, bear) spread where
both expiration dates & strike prices are differ.

103. THANKING YOU