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OPTIONS
By
Sheriq Sumar
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What is an Options Contract?
An Option Contract gives it owner
the right, but not the legal obligation,
to conduct a transaction involving anunderlying asset at a predetermined
Future date (the exercise date) and at
a predetermined price (the exerciseprice or spot price).
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Option Terminologies
Call & Put
Long Call & Short Call
Long Put & Short Put
Option Premium
American Option
European Option
Moneyness of an Option
In the Money
Out of the Money
At the Money
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Terminologies Contd
Protective Put
Covered Call
Intrinsic Value Exercise price
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Types of Options Contract
Financial Option
Bond Option
Index Option Options on Futures
Options on Commodity
Interest rate option
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Interest Rate Options
Exercise Price is an Interest rate
Underlying Rate is the reference rate
Settled in Cash Eg: Bank giving Loan at Floating rate
Notional Amount Rs. 1,00,000/-
Strike rate 5%
Reference rate LIBOR
Option exercised if LIBOR > 5%
Option expired if LIBOR < 5%
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Interest Rate Options
Interest Rate Cap
Interest Rate Floor
Interest Rate Collar
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Long Call
Strike Price: Rs.2250
Premium: Rs. 86.60
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Short Call
Strike Price: Rs.2250
Premium: Rs. 86.60
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Long Put
Strike Price: Rs.2250
Premium: Rs. 61.70
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Short Put
Strike Price: Rs.2250
Premium: Rs. 61.70
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Intrinsic Value of Call Option
C = Max[0, S-X]
where C = Intrinsic Value of a Call Option
S = Spot Price
X = Exercise Price
Eg: X = 50 & S = 45, 50, 55
S = 55; C = Max[0, S-X] = MAX[0, 55-50] = 5
S = 50; C = Max[0, S-X] = MAX[0, 50-50] = 0 S = 55; C = Max[0, S-X] = MAX[0, 45-50] = 0
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Intrinsic Value of Call Option
0
5
-5
50 55
Long Call
Short Call
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Intrinsic Value of Put Option
P = Max[0, X-S]
Where P = Intrinsic Value of a Put Option
S = Strike Price
X = Exercise Price
Eg: X = 50 & S = 45, 50, 55
S = 55; C = Max[0, X-S] = MAX[0, 50-55] = 0
S = 50; C = Max[0, X-S] = MAX[0, 50-50] = 0 S = 55; C = Max[0, X-S] = MAX[0, 50-45] = 5
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Intrinsic Value of Put Option
0
50
Long Call
40Short Put
X
-X
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American & European Option
Pricing
Option Minimum Value Maximum Value
European Call ct MAX[0, St
X/(1+ RFR)T-t
]
St
American Call C T MAX[0, St
X/(1+ RFR)T-t]
St
European Put pt MAX[0, X/(1+
RFR)T-t - St ]
X/(1+ RFR)T-t
American Put P t MAX[0, St X] X
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Strategies in Options
Strategies involving a Single Option and a Stock
Spreads
Bull Spread
Bear Spread
Combinations
Strangle
StraddleStrips & Straps
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Strategies Involving a SingleOption and a Stock
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Long Position in a Stock Combined
with Short Position in a Call
Long Stock
Short Call
K
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or os on n a oc
Combined with Long Position in a
Call
Long Call
Short Stock
K
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Long Position in a Put Combined
with Long Position in a Stock
Long Put
Long Stock
K
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Short Position in a Put combined
with short Position in a Stock
K
Short Stock
Short Put
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Spreads
Bull Spread Bear Spread
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Bull Call Spread
K1 K2
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Bull Put Spread
K1
K2
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Bear Call Spread
K1
K2
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Bear Put Spread
K1 K2
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Long Butterfly Using Calls
K1
K2
K3
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Long Butterfly Using Puts
K1
K2
K3
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Combinations
Straddle
Strangle Strips and Straps
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Straddle
K
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Strangle
K1 K2
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Strips & Straps
KK
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Thank You