Options Types Call: Investors who believe that a stock price will increase ‘over time are said to be bullish. Investors who buy calls are bullish on the underlying stock. That is, they believe that the stock price will rise and hhave paid for the right to purchase the stock at 2 specific price known as the exercise price or strike: price.+ Put: The buyer of a put wants the price to drop so that they may sell the stock at a higher price to the seller of the put contract. They are also considered to be bearish on the stock Buying calls + An investor who purchases a call believes that the underlying stock price will rise and that they will be able to profit from the price appreciation by purchasing calls. * An investor who purchases a call can control the underlying stock and profit from its appreciation while limiting their loss to the amount of the premium paid for the calls.Buying puts + An investor who purchases a put believes that the underlying stock price will rise and that they will be able to profit from a rise in the stock price by purchasing puts. + An investor who purchases a put can control the underlying stock and profit from its price rising while limiting their loss to the amount of the premium paid for the puts. Selling calls underlying stock price will fall and that they will be able to profit from a decline in the stock price by selling callsSelling Puts * An investor who sells a put believes that the underlying stock price will fall and that they will be able to profit from a fall in the stock price by selling puts. Example of a call option + An investor buys a call option to buy 100 reliance shares at a price of Rs.300 on October 15,2014; + The current price is Rs.250 and the premium for the option is Rs. 25 per share; + The investor will have to pay Rs. 2500 as the premium for buying the call option; + He is entitled to get 100 shares of Rs. 300 on October 15,2014;If the market price of the shares go up to RS. 400, what should the investor do? The investor will exercise his right by paying Rs. 30000 which is the original contract price ; He can sell these shares in the market at current price of RS.400 and get Rs.40000; The net gain to the investor will be: spot price strike price- the premium paid; which is (40000-30000)-2500 =7500. If the price of the share goes down to RS. 200 by october 15, what should the investor do? The investor will not exercise his right as he is under no obligation to buy the shares; So, what will be his loss? His loss will be only Rs. 2500, the premium that he has paid to buy the call option; The call option has unlimited profit potential as there is no upper limit to the stock price.Example of a Put Option + An investor buys a put option, to sell reliance shares at a price of Rs. 300 by october 15, 2014; + He pays the premium of Rs. 25 per share to buy this option; + Now if the shares of the reliance goes down, say Rs. 200, the investor can exercise his right to sell these 100 shares at strike price of Rs. 300; * He will buy 100 shares at RS. 200 per share to. sell them at rs. 300 per share; * His net gait Rs. 7500, + Suppose the share prices go up to rs 350, the investor will not exercise his option and his loss will be equal to the premium paid to enter into the contract;Moneyness. An option concept that refers to the potential profit or loss from the exercise of the option; ‘An option can be “in the money” “out of the money” “at the money” for call and put options both. In the Money (ITM) option + When the underlying asset price is greater than the strike price of the call option i.e S>X; + ITM would lead to a positive cash flow to the holder ; sensex call option with strike price of 4900 is in the money when the spot price is at 5100 as S>X; + The call holder has the right to buy a sensex at 4900 and sell at 5100 to make profit+ In case of a put option, the put is in the money if spot price is less than the strike price nthemeney ‘Sorpiceor mart pce Sporpriceormartetorce lofthensre s>sthepret ofthese secre ce ox (ey acremoney Spotencecr martes Sporpniceormarestarcs ion on CCutctine money Spat piceot meskmprce Spot priceormarat pice onheassascsriconee ofthe ase>riueprece ear on+ When the market price is very close to the strike price, the option is called near the money option. Option trading strategies: Volatility Trading + Stradale ; + strangle; + These are the examples of the combinations which are option trading strategies that involve trading strategies that involve taking a position in both calls and puts on the same stock.Straddle: it is a position of buying a put and call with same price and expiration date; Straddle is an expensive strategy as one pays two premiums; But a price swing in either direction compensates this high cost. The investor believes that the price of the underlying asset will either fall or rise but doesnt know in which direction; Budget time, acquisitions announced by companies are a good example of choosing the straddle strategy; A long straddle (bottom straddle) is buying one put and one call option simultaneously on the same stock at the same strike price with same maturity; A short straddle( top straddle) is selling one put and one call option simultaneously on the same stock at the same strike price with same maturityStrangle + Itis buying/ selling of a combination of one call and one put option with the same maturity; * But unlike straddle, it has different exercise prices; + the call has an exercise price above the stock price and put has an exercise price below the stock price. + Along strangle (aggressive form) is buying one put and one call option at different strike price; + Ashort strangle( conservative form) is selling one put and one call option at different strike price;Intrinsic Value and Time Value + Intrinsic value of the option: intrinsic value of the option at a given time is the amount the holder of the option will get if he exercises the option at that time; * In other words, Intrinsic value of the option is the amount of the option when itis in the money; * If the option is out of the money, its intrinsic value is zero; + For call option intrinsic value will exist when the spot price is more than the strike price arm) + For put option intrinsic value will exist when the strike price is more than the spot price;(ITM)Time value of option + In addition to intrinsic value, the seller charges a time value” from the buyer of the optior + Because the more the time left for the contract to expire, the greater the chance that the exercise of the contract will become more profitable for the buyer; * This is a risk for the seller and he seeks compensation for it by demanding a “time value” + It is obtained by taking the difference between its premium and intrinsic value; + Both calls and puts have time value; * Options that is OTM or ATM has only time value and no intrinsic value;Factors influencing option prices The underlying pric The strike price; THE time to expiration; Volatility; Swap The meaning of the word swap or “swop"” is to barter or to give in exchange one for another; Financial swap is a special funding technique which permits a borrower to access one market and then exchange the liability for another type of liability; Swap is a private agreement between two parties to exchange predetermined amount of cash flows in future as per desired predetermined formula alongwith others terms and conditions;Evolution + Swap markets owe their origin to the exchange rate instability that led to the demise Bretton Wood System during 1971- 1973; * The first swap contract was negotiated in 1981 between Deutsche Bank and an undisclosed counter party; * Since then, the swap market has grown rapidly + The formation of (ISDA) International Swap Dealers Association in 1984 was a significant development to speed up the growth in the swaps market by standardising swap documentation; + Currency swaps were first introduced in 1970s and interest rate swaps in 1981; * equity and commodity swaps in mid 1980s;Features + Counter partie * Facilitators; * Cash flows; + Documentations: less as compared to loan deals; * Transaction costs: to loan agreements; * Benefit to parties atively low as compared + Termination: not possible at the end of one party;Types: + Interest rate swaps; * Currency swaps; + Equity swaps.