Course Instructor: Dr.

Mahesh Sarva Course Code: FIN 645

Academic Task No.: CA2 Course Title: Option Strategies

Date of Allotment: 15th August 2020 Date of submission: 5th October 2020

Student’s Roll no: A17 Student’s Reg. No: 11909837

Evaluation Parameters: (Parameters on which student is to be evaluated- To be mentioned by students as specified at the
time of assigning the task by the instructor)

Learning Outcomes:

Declaration:

I declare that this Assignment is my individual work. I have not copied it from any other student’s work or from
any other source except where due acknowledgement is made explicitly in the text, nor has any part been
written for me by any other person.

Student’s Sign/Name: Aastha gupta

Evaluator’s comments (For Instructor’s use only)

General Observations Suggestions for Improvement Best part of assignment

Evaluator’s Signature and Date:

Marks Obtained: Max. Marks:

OPTION – A DERIVATIVE INSTRUMENT

INSIGHT INTO LONG CALL OPTION
The long call option strategy is the most basic option trading strategy whereby the options trader buy call
options with the belief that the price of the underlying security will rise significantly beyond the strike price
before the option expiration date. Call options have a limited lifespan. If the underlying stock price does not
move above the strike price before the option expiration date, the call option will expire worthless.

Unlimited Profit Potential

Since they can be no limit as to how high the stock price can be at expiration date, there is no limit to the
maximum profit possible when implementing the long call option strategy.
The formula for calculating profit is given below:

 Maximum Profit = Unlimited

 Profit Achieved When Price of Underlying >= Strike Price of Long Call + Premium Paid
 Profit = Price of Underlying - Strike Price of Long Call - Premium Paid

Limited Risk
Risk for the long call options strategy is limited to the price paid for the call option no matter how low the
stock price is trading on expiration date.
The formula for calculating maximum loss is given below:

 Max Loss = Premium Paid + Commissions Paid

 Max Loss Occurs When Price of Underlying <= Strike Price of Long Call

Breakeven Point(s)
The underlier price at which break-even is achieved for the long call position can be calculated using the
following formula.

 Breakeven Point = Strike Price of Long Call + Premium Paid

NEAR MONTH CONTRACT

PAYOFF DIAGRAM

INSIGHT INTO SHORT PUT OPTION

A short put refers to when a trader opens an options trade by selling or writing a put option. The trader who
buys the put option is long that option, and the trader who wrote that option is short. The writer (short) of the
put option receives the premium (option cost), and the profit on the trade is limited to that premium. 

Basics of the Short Put

A short put is also known as an uncovered put or a naked put. If an investor writes a put option, that investor
is obligated to purchase shares of the underlying stock if the put option buyer exercises the option. The short
put holder could also face a substantial loss prior to the buyer exercising, or the option expiring, if the price
of the underlying falls below the strike price of the short put option. 

Short Put Mechanics

A short put occurs if a trade is opened by selling a put. For this action, the writer (seller) receives a
premium for writing an option. The writer's profit on the option is limited to that premium received. 

Initiating an option trade to open a position by selling a put is different than buying an option and then
selling it. In the latter, the sell order is used to close a position and lock in a profit or loss. In the former, the
sell (writing) is opening the put position.

If a trader initiates a short put, they likely believe the price of the underlying will stay above the strike price
of the written put. If the price of the underlying stays above the strike price of the put option, the option will
expire worthless and the writer gets to keep the premium. If the price of the underlying falls below the strike
price, the writer faces potential losses.

Risk

The profit on a short put is limited to the premium received, but the risk can be significant. When writing a
put, the writer is required to buy the underlying at the strike price. If the price of the underlying falls below
the strike price, the put writer could face a significant loss.

NEXT MONTH CONTRACT

PAYOFF DIAGRAM

INSIGHT INTO SHORT CALL OPTION

A short call is an options trading strategy in which the trader is betting that the price of the asset on which
they are placing the option is going to drop.

How Does a Short Call Work?

A short call strategy is one of two simple ways options traders can take bearish positions. It involves selling
call options, or calls. Calls give the holder of the option the right to buy an underlying security at a specified
price.

If the price of the underlying security falls, a short call strategy profits. If the price rises, there’s unlimited
exposure during the length of time the option is viable, which is known as a naked short call. To limit losses,
some traders will exercise a short call while owning the underlying security, which is known as a covered
call.

Profit/Loss

Maximum Profit = Net Premium Received

The maximum loss for a short call strategy is unlimited, as the stock can continue to move higher with no
limit.

Breakeven

The breakeven on a short call option is calculated by adding the premium to the strike price.

If a stock is trading $100 and an investor wants to sell a 110-strike price call for $2.00, then the breakeven
would be $112.00.

The potential for profit with this strategy is low due to the unlimited risk involved if the stock continues to
rise. Traders prefer to sell calls because the possibility of profiting from it is high if the option is very out of
the money and the trade is timed correctly.
FAR MONTH CONTRACT

PAYOFF DIAGRAM