Future Terminology

Expiry date :- This is the last day on which the contract will be traded .
Contract size :- The amount of asset that has to be delivered under one Contract
Initial margin :- To save the market from liquidity crisis arising out of defaults
Minimum margin is mandatory as stipulated by stock exchange.
Margin to settle mark to market :- in the futures market , at the end of each
Trading day , the margin account is adjusted to reflect the investors gain or
Loss depending upon the futures closing price . This is called mark to market
Discount :- if the future price is below the spot price , the difference is
Known as discount .
Premium :- if the future price is above the spot price the difference is
Known as premium
Beta :- it is a measure of the volatility or systematic risk , of a security or
Portfolio comparison to the market as a whole . High beta stock react more
Sharply than market during rise or fall.
Final Settlement price :- Final settlement price in the future is the closing
Price on the last trading day of contract . (currently its last half an hour
Weighted average value ) The option writers pull the market in the last
30 minutes to eat the premium because if the way the final settlement
Price calculated .

1
Understanding Profit and Loss Graph

P
R
O
F
I
T

0 X Axis
Price

L
O
S
S

2
 OPTIONS

CRM:- Capital Risk Management is the No.1 reason for using options strategies

CBOE :- Chicago Board of Options Exchange have gives the names to standard
32 Strategies for option , The Traders have their own combination of standard strategies
Other than named by CBOE are know as HYBRID strategies.

Call Options (Buying Rights ):- call option gives the holder the right but not the
Obligation to buy an asset by certain date for certain price call buyer buy call
By paying premium to the seller

Call Seller or writer :- He receives the premium given by call buyer and hence he has
to perform obligation of selling the assets to the call buyers.

Put options (selling rights ):- A put option gives the holder the right but not the obligation
To sell an asset by a certain price , put buyer one who buys a put option by giving
Premium to put sellers .
Put seller or writer:- He receives the premium from option buyer & he has to perform
The obligation of buying the assets from option buyers

3
 Terminology of Option

Strike Price :- The price specified in the option contract is known as the
Strike price or the exercise price . This difference that spot price & future
Price . The strike price are specified at the intervals . While Choosing
Strike , you must calculate minimum move required to generate BEP
( Break Even Point ) and minimum profit

Exercise Price : Is the price at which the contracts is settled even by making
Full payment

Expiration Date :- Last date when the option expires

America Option :- American option are exercised at any time up to the

Expiration date

European Option :- European Option are exercised only on the expiration

Date itself.
4
 Terminology of Option

The option Premium :- It is the Price of option, The option premium

Can be broken down into two components- intrinsic value & time value

The intrinsic value :- for in-the-money option is the absolute value of the
Difference between the current price of the underlying and the strike
Price of the option

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 . An option that is OTM or ATM has only Time value Usually.
1) Maximum time value exist when the option is ATM
2) The longer the time to expiration, the greater is an options time
value, all else equal . At expiration , an option should no time value.

5
 Terminology of Option

Moneyness :- Money means Current market price

At The Money Option (ATM) :- for call or put when the strike is at the level or
Near CMP then strike is know as ATM

In-the-money option (ITM):- profitable strike

For call When strike is lower then CMP , the strike is called as ITM and when
Much lower, then it called Deep ITM
For Put When strike is higher than CMP , The strike called as ITM and when
Much higher then it is called Deem ITM on profitable strike

Out of the money option (OTM) :- non profitable strike

For Call When strike is higher than CMP , the strike is called as OTM
And when much higher , then it is called Deep OTM
For Put When strike is lower than CMP the Strike is called as OTM and
When much lower, then it is called Deep OTM

6
 Moneyness

Deep far ITM or OTM are illiquid , you may not find buyers or he will ask low
Price. Study IV of ATM call and put is higher commoner are bullish but we
Are bearish . Highest time value at ATM

Intrinsic Premium call Strike Put Premium Intrinsic Time

Time Value Spot/Future Value Value
Value Price
Deep Deep
ITM ITM
ITM ITM

ATM ATM

OTM OTM

Deep Deep
OTM OTM

7
 Six Building Blocks of option

Stock Call Put

Long

Short