OPTIONS

Chetan Gupta
16/699
 * What are
Options?
• Contracts that give its holder the option to buy/sell
specified quantity of the underlying assets at a
specified price (exercise price) on or before a
specified time period (expiration date).
• The word “Option” means that the holder has the
right but not the obligation to buy/sell underlying
assets.
• NO RIGHT COMES FREE OF COST. Hence the buyer
(holder) pays option premium to the seller (writer) to
buy the right to buy or sell
 * OPTION EXAMPLE

CALL OPTION Current Price= Rs. 250

Premium= Rs. 25/ Right to buy 100
share Reliance shares at a Strike Price
price of Rs.300 per
share after 1 month.
Expiry Date
Amt to buy Call
Option= Rs. 2,500
 *Types of Options
Options are of two types:
a. Call Option
b. Put Option
Call option give the buyer the right but not the
obligation to buy a given quantity of the underlying
asset, at a specified price on or before a particular
date by paying a premium.
Put option give the buyer the right, but not
obligation to sell a given quantity of the underlying
asset at a specified price on or before a particular
date by paying a premium.
 *PUT OPTION EXAMPLE
Current Price =
Rs. 250
Premium= Rs. Right to sell 100
25/share Reliance shares at a
price of Rs.300 per Strike Price
share after 1 month.
Amount to buy call Expiry Date
option = Rs. 2500
 *Styles of Option
a. European Options: European style options can be
exercised only on the maturity date of the option,
also known as the expiry date and not before
that.
b. American Options: American style options can be
exercised at any time before and on the expiry
date. Therefore, American Style of option have
higher options premium rather than the European
style of options.
 *Covered and Naked
options
a.Covered Option: Covered Option
means an option for which the seller
owns the underlying securities.
b.Naked Option: Naked option means an
option for which the seller does not
own the underlying security.
 *Classification on the basis
of the Underlying Assets
1. Index Options
2. Stock Options
3. Currency Options
 *Options Terminology
Moneyness: Concept that refers to the potential profit or
loss from the exercise of the option. An option maybe in the
money, out of the money, or at the money.

Basis Call Option Put Option

In the money Spot Price > Strike Spot Price < Strike
Price Price

At the money Spot Price = Strike Spot Price = Strike

Price Price

Out of the money Spot Price < Strike Spot Price > Strike
Price Price