DERIVATIVES AND RISK MANAGEMENT 2021

MODULE 4
OPTIONS - BASICS AND STRATEGIES
1. The Infosys stock is selling at. 5000. Mr.X has a negative view about the stock. He decides to
go through the option route to take advantage of the situation. He buys an option from Mr. A
which will entitle him to sell 100 shares on or before 30th December at Rs.4500 per share for
which he has to pay Rs.20 per share today. Identify:
a. Type of option,
b. Exercise price,
c. Expiry date.
d. Option premium.
e. Buyer of the option.
f. Writer of the option.
g. Underlying asset.
h. Current market price.

2. State whether each one of the following is in the money or out of the money:
Option Exercise Spot price on ITM/ATM/OTM
maturity
Call 60 55
Call 50 50
Call 110 115
Call 40 35
Put 110 100
Put 105 115
Put 12 15
Put 25 25

3. An investor buys a calls option with an exercise price of Rs 100 for Rs 10. What is the
maximum loss that he could incur? What is the maximum profit, which could accrue to him?
Determine the break –even price, what is maximum position for the call writer?

4. An investor buys a put option with an exercises price of Rs.200 for Rs 15. What is the
maximum loss that he should incur? What is the maximum profit, which could accrue to him?
Also determine the break –even stock price? What is the position for the put writer?

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5. The share price of XYZ Ltd, is selling for RS 104 ABC buys a 3-months calls option at a
premium of Rs. 5. The exercises price is RS.105. What is ABC pay-off if the share prices are Rs.
100 or Rs.105 or Rs. 110 or Rs.115 or Rs.120 at the time the option is exercised? What is the pay
off of the seller of the call option? Kindly draw the pay off diagram.
6. The September Option of RK Ltd., stock at a strike price of Rs. 130 are available at a call
option price of Rs. 10. The contract size is 100 shares. The price of stock today is Rs. 140. A
range of prices beginning from 110 and ending with 160 with intervals of 10 is possible as at the
expiry date.
a. What is the pat-off for the call holder on expiration?
b. Draw the pay-off graph.
c. What is the call writer’s pay off on expiration?
d. Draw the pay-off table and the pay-off graph.

7. Ms. Meera hopes that the price of AB Ltd. will fail after three months. Therefore, she
purchases a put option on share with maturity of three months at a premium of Rs. 5. The
exercise price is Rs. 30. The current market price of AB Ltd. Share is Rs. 28. How much is profit
or loss for Ms. Meera and the Put seller if the price of share at the time of maturity of the option
turns out to be Rs 18 or Rs 25 or Rs 28 or Rs 30 or Rs 40? What is the Pay-off of the seller of put
option? Draw the pay-off diagram.

8. The equity shares of Arathi Ltd., are begin sold at Rs. 210. A 3-month call option is available
for premium of Rs. 6 per share and a 3 month put option is available for a premium of Rs. 5 per
share. Find out the net pay off option holder of the call option and put option given that (i) the
strike price in both cases is Rs. 220, and (ii) the share price on the exercise day is Rs. 200 or Rs.
220 or Rs. 230 or Rs. 240.

9. Equity shares of Asha Ltd., are begin currently sold for Rs. 90 per share. Both the call option
and the put option for a 3 month period are available for a strike price of Rs. 97 at a premium of
Rs. 3 per share and Rs. 2 per share respectively. An investor wants to create a straddle position in
this share. Find out his net Pay-off at the expiration of option period, if the share prices on that
day happens to be Rs. 90 or Rs. 105.

10. You have set up a straddle position on a company’s share. You have bought one 6 month call
with an experience price of Rs. 75 for a premium of Rs. 3 and 6 month put with same exercise
price for a premium of Rs. 2. Assume that after six months price goes up to Rs. 78 or it comes
down to Rs. 70. What is your pay off at expiration of the option?

11. A call option with an experience price Rs. 40 is available at premium of Rs. 3, A put with
same maturity and exercise price can be purchased at premium of Rs. 2, If u create a straddle,
show the pay-off from it . When the straddle result in loss

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12. Shyla has bought a 3 month call option on Narendra Ltd’s share with an exercise price of Rs.
50 at a premium of Rs. 3. She has also bought a put option on the same share at an exercise price
of Rs. 40 at a premium of Rs 1.5. Narendra’s share is currently selling for Rs. 45. What will be
the Shyla’s position after three months if the share price turns out to be Rs 50 or Rs. 30?

13. A call option with an exercise price of Rs. 100 can be bought at a premium of Rs. 3. A put
option with an exercise price of Rs. 95 is available at a premium of Rs. 5. How can you combine
these options to from a portfolio? What will be your pay-off at expiration? (Assuming on
maturity day prices may be 80 to 115 and 5 is intervals)
14. A one year call option with an exercise option of Rs. 60 is available at premium of Rs. 6.
You can also buy a one-year put with an exercise price of Rs. 55 at a premium of Rs. 3. If you
set up a portfolio of a put and a call, what will be your pay-off if the share price after one year is
(a) Rs. 58, (b) Rs. 45 (c) Rs. 75?

15. In respect of a particular share , a call option with a strike price of Rs. 50 is available for Rs.
2. On the same share, a put option with a strike price of Rs. 45 is available for Rs. 3. Explain
how a strangle can be created and what is the pay-off profile of that strategy?

Option Trading Strategies

1. Long Stock – Long Put
2. Long Stock – Short Call
3. Short Stock – Long Call
4. Short Stock – Short Put
Formula for Value for an Option
Call Holder  Max(S-E,0) - Premium
Put Holder  Max(E-S,0) - Premium
Call Writer  Min(E-S,0) + Premium
Call Writer  Min(S-E,0) + Premium
Long Stock – Long Put
1. Consider an investor who buys a share for Rs. 100. To guard against the risk of loss from
fall in price, he buys put for Rs. 16 for an exercise price of Rs. 110. Explain how this
position will perform in different price scenario on maturity.
Share Price on maturity date P/L on Stock P/L on Option Net Payoff
70
80

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90
100
110
120
130
140
2. An investor holds long position in 1000 shares of a certain company. He bought these
share at Rs. 210 each. Fearing a fall in market he has bought a put option contract
involving 1000 shares with exercise price of Rs. 212 at a premium of Rs. 8 per share.
Explain how this position will perform in different price scenario on maturity.
Share Price on maturity date
190
195
200
205
210
215
220
225
Short Stock – Long Call
3. An investor short a share at Rs. 100 and buys a call options for Rs. 4 with a exercise price
of Rs. 105. How will this position perform?
Share Price on maturity date P/L on Stock P/L on Net Payoff
Option(CH)
90
95
100
105
110
115
120
125

4. An investor has short position of 500 shares at Rs. 412 each. Expecting a raise in the
market he decide to hedge his position by way of buying call option contract at Rs. 410
and Rs. 5 per share as a premium. Each contract consisting of 500 shares. How will this
position perform in case of different share prices below and above Rs. 450?
Share Price on maturity date P/L on Stock P/L on Option Net Payoff
390 22 -5

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395 17 -5
400 12 -5
405 7 -5
410 2 -5
415 -3 0
420 -8 5
425 -13 10
430 -18 15

Long Stock – Short Call

5. An investor who has bought a share for Rs. 100 and who writes a call with a exercise
price of Rs. 105 and premium of Rs. 3. How will this position will performs?
Share Price on maturity date
90
95
100
105
110
115
120
125
130

6. Mr. Shukla holds 1000 shares of company R which he acquired at an average rate of Rs.
210 each. Anticipating fall in the market, he decided to sell call options on R at level of
Rs. 210 & premium of Re. 1. Each contract consisting of 1,000 share so he decided to
short one call option contract. Explain how this position will perform in various price
scenarios.
Share Price on maturity date
190
195
200
205
210
215
220
225

Short Stock – Short Put

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7. An investor short a share at Rs. 100 and write a put option for Rs. 3 having exercise price
of Rs. 100. Prepare his net pay off position
Share Price on maturity date
90
95
100
105
110
115
120
125
130

8. Mr. A short stock at Rs. 450 simultaneously takes put writer position by receiving of Rs.
10 & strike price of Rs. 440. Prepare his pay off matrix if prices are
Share Price on maturity date
390
400
410
420
430
440
450
460
470
480
490
500

9. Ambuja Cement share price in the market today Rs. 239. Ms. Komala entered long call
option, at a strike price of Rs 245 with a premium of Rs. 3. And simultaneously buys put
option for same stock at Rs. 255 with premium of Rs. 25. Prepare her pay of matrix. If
share price on maturity date settled at...
Share Price on maturity date
200
210
220
230
240
250

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260
270
280
290
300
310

10. Mr. Raju entered long call of Adani Power Ltd. at a strike price of Rs 25 with a premium
of Rs. 1.70. And simultaneously buys put option for same stock at Rs. 27.5 with premium
of Rs. 2.35 with market lot of 20,000 shares. Prepare his pay of matrix. If share price on
maturity date settled at...
Share Price on maturity date
18
19
20
21
22
23
24
25
26
27
28
29

11. Mr. Somu enters Short call for BEL at a strike price of Rs 150 with a premium of Rs. 5
and simultaneously short put option for same stock at Rs. 140 with premium of Rs. 6 per
shares. Prepare his pay of matrix. If share price on maturity date settled at...
Share Price on maturity date
100
110
120
130
140
150
160
170
180
190
200

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210

12. Mr. Navneesh entered long call of BHEL at a strike price of Rs 90 with a premium of Rs.
2. And simultaneously sells call option for same stock at Rs. 95 with premium of Rs.5 per
shares. Prepare his pay of matrix. If share price on maturity date settled at...
Share Price on maturity date
70
75
80
85
90
95
100
105
110
115
120
125

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