options-understanding the financial derivative
TRANSCRIPT
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Options
Basics of the option derivatives
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Option
Exchange OTC
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Option
Buyer Seller
Option Price
Long Short
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Basic types of options
Call option
Put Option
•A call option is the right to buy•A put option is the right to sell
Strike Price
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Option type- based on the style of exercising
European style options
American style options
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A quick revision
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Why trade options ?
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Limited Risk
Portfolio 11 option =1000 XYZ sharesCurrent price of XYZ=$100Option price=$200
Price of XYZ = $90 Maximum loss=$200
Portfolio 2Buy 100 shares of XYZCurrent price of XYZ=$100Investment=$10000
Price of XYZ=$90Maximum loss=$1000
After 3 months
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Unlimited profit potential
Portfolio 11 option =1000 XYZ sharesCurrent price of XYZ=$100Option price=$200
Portfolio 1Buy 100 shares of XYZCurrent price of XYZ=$100Investment=$10000
Price of XYZ = $110 Maximum gain=$10000
Price of XYZ = $110 Maximum gain=$1000
After 3 months
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Insurance
Do you own a stock ?
Are you bearish about the market ?
Buy a put option on the stock !
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Profits from buying the options
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Option positions
Long Call Long Put Short Call Short Put
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Option contract - example
Option profit (Call Option)
Stock price Strike price+ option price
Case 1 :The option profit = 120-(105+10)=$5 .
Case 2 :The option profit= 0
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Option contract - example
Option profit (Put Option)
Strike price Stock price+ option price
Case 1 :The option profit= 0.
Case 2 :The option profit = 100-(85+10)=$5
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Buying a call option
Stock : XYZOption price=$5Strike price=$100
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30
20
10
0-5
70 80 90 100
110 120 130
Profit ($)
Terminalstock price ($)
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-30
-20
-10
05
70 80 90 100
110 120 130
Profit ($)
Terminalstock price ($)
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Stock : XYZOption price=$7Strike price=$70
Buying a put option
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30
20
10
0
-770605040 80 90 100
Profit ($)
Terminalstock price ($)
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-30
-20
-10
7
070
605040
80 90 100
Profit ($)Terminal
stock price ($)
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Moneyness of an option
In the money
At the money
Out of the money
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Moneyness of a call option
In the money
Out of the money
At the money
S – K > 0
S – K < 0
S – K = 0
S= stock priceK=strike price
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Moneyness of a put option
In the money
Out of the money
At the money
K – S > 0
K– S < 0
K – S = 0
S= stock priceK=strike price