Derivatives

A security whose price is dependent upon or derived from one or more underlying assets.
Contract between two or more parties. Value derived from the underlying assets. Underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes etc. High leverage Product.
STOCK CONCEPTS

Example
Person who comes with this paper can purchase a Peter England shirt at Rs.400 on or before 31st March, 09
Comes with the paper, Predetermined asset, Predetermined maturity, Predetermined rate, now find out the value of that paper, if.
STOCK CONCEPTS

Question - Answer
Price of that shirt is Rs. 500 If price changes from 500 to 700 ? If price changes from 500 to 400 ? If price comes to 300 ? If price comes to 100 ? If price comes to 1000 ? If asset does not exist ?
STOCK CONCEPTS

Pay off of Peter England Shirt

1200 1000 800

600

Value of Paper

400

200

0 0 -200 100 200 300 400 500 600 700 800 900 1000 1100

-400

-600 Price of Shirt

STOCK CONCEPTS

Call Option
An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument at a specified price within a specific time period. Buyer of Call ----- Bullish View Seller of Call ----- Bearish View

STOCK CONCEPTS

Example
Mr. X Purchases the 3000 Nifty Feb 09 Call Option at Rs.100.
If Price goes up. The value of call option will go up If Price goes down. The value of call option will go down If Price remains constant the value of call option will come down

STOCK CONCEPTS

Break Even Point

Mr. X has already paid Rs.100 to Purchase the Call option. If price goes up than he can buy Nifty at Rs.3000,,,, that means he has to pay Rs.3000. So net costing to Mr. X will be Rs.3100. Above Rs.3100, Mr. X will be in Profit Below Rs.3100, He will loose money. Max Loss to him is Rs.100 at price on or below Rs.3000 Max Profit to him is unlimited. He has to use his option on or before the maturity.

STOCK CONCEPTS

Question - Answer
Calculate the Value of Call option if Nifty Spot Price is
3100 3200 3500 3000 2950 2900 2500 3050 3025
STOCK CONCEPTS

Pay off of Call Option Buyer

Events
Price Of Nifty Value of Opti on Profit / (Los s)

Pay off of Call Option

600 500
Profit / (Loss)

1 2 3 4

2700 2750 2800 2850

0 0 0 0

-100 -100 -100 -100

400 300 200 100 0

2700 2750 2800 2850 2900 2950 3000 3050 3100 3150 3200 3250 3300 3350 3400 3450

5
6 7 8 9 10

2900
2950 3000 3050 3100 3150

0
0 0 50 100 150

-100
-100 -100 -50 0 50

-100 -200

11
12 13 14 15 16

3200
3250 3300 3350 3400 3450

200
250 300 350 400 450

100
150 200 250 300 350

Price of Nifty

STOCK CONCEPTS

17

3500

500

400

3500

Example
Mr. Y has sold the 3000 Nifty Feb 09 Call Option at Rs.100.
If Price goes up. The value of call option will go up If Price goes down. The value of call option will go down If Price remains constant the value of call option will come down

STOCK CONCEPTS

Break Even Point

Mr. Y has already received Rs.100 to sell the Call option. If price goes up than he has to sell Nifty at Rs.3000,,,, that means he will get Rs.3000. So net receipt to Mr. Y will be Rs.3100. Above Rs.3100, Mr. Y will be in Loss. Below Rs.3100, He will earn money. Max Profit to him is Rs.100 at price on or below Rs.3000 Max Loss to him is unlimited. After the date of maturity, the option will be lapsed. Mr. Y will not be forced to sell the Nifty at Rs.3000 after the maturity.
STOCK CONCEPTS

Pay off of Call Option Seller

Events Price Of Nifty Value of Optio n Profit / (Loss)

Pay Off of Call Option

600 400
Profit / (Loss)

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

2700 2750 2800 2850 2900 2950 3000 3050 3100 3150 3200 3250 3300 3350 3400 3450 3500

0 0 0 0 0 0 0 50 100 150 200 250 300 350 400 450 500

100 100 100 100 100 100 100 50 0 -50 -100 -150 -200 -250 -300 -350 -400 STOCK

200 0
2700 2750 2800 2850 2900 2950 3000 3050 3100 3150 3200 3250 3300 3350 3400 3450 3500

-200 -400 -600

Price of Nifty

CONCEPTS

Date 1-Feb

Maturity 26-Feb 26-Feb

Price 100.20 98.18

Change

Impact of Time
Price of Option comes down as the time passes. Speed of Price reduction increases as the maturity comes nearer. Here price of call was Rs.100 on 1st of the month Which comes to Rs.87 after one week, Then it comes to Rs.66 after 15 days And finally it came to 0 on maturity
STOCK CONCEPTS

2-Feb

-2.02

3-Feb
4-Feb 5-Feb 6-Feb 7-Feb

26-Feb
26-Feb 26-Feb 26-Feb 26-Feb

96.11
94.00 91.84 89.63 87.36

-2.07
-2.11 -2.16 -2.21 -2.27

8-Feb
9-Feb 10-Feb 11-Feb 12-Feb

26-Feb
26-Feb 26-Feb 26-Feb 26-Feb

85.03
82.64 80.17 77.63 74.99

-2.33
-2.39 -2.47 -2.54 -2.63

13-Feb
14-Feb 15-Feb 16-Feb 17-Feb 18-Feb 19-Feb 20-Feb 21-Feb 22-Feb 23-Feb 24-Feb 25-Feb 26-Feb

26-Feb
26-Feb 26-Feb 26-Feb 26-Feb 26-Feb 26-Feb 26-Feb 26-Feb 26-Feb 26-Feb 26-Feb 26-Feb 26-Feb

72.27
69.43 66.48 63.38 60.13 56.69 53.03 49.10 44.82 40.09 34.72 28.35 20.05 0.00

-2.73
-2.83 -2.96 -3.09 -3.25 -3.44 -3.66 -3.93 -4.28 -4.73 -5.37 -6.37 -8.30 -20.05

Price and Change

120.00 100.00 80.00 60.00 40.00 20.00 0.00

Date

Impact of Time

STOCK CONCEPTS

2/ 1/ 20 2/ 0 9 3/ 2 2/ 00 9 5/ 20 2/ 0 9 7/ 2 2/ 00 9 9/ 2/ 200 11 9 / 2/ 20 0 13 9 / 2/ 20 0 15 9 / 2/ 20 0 17 9 / 2/ 20 0 19 9 / 2/ 20 0 21 9 / 2/ 20 0 23 9 / 2/ 20 0 25 9 /2 00 9

0.00

-5.00

-25.00

-20.00

-15.00

-10.00

Put Option
An agreement that gives an investor the right (but not the obligation) to Sell a stock, bond, commodity, or other instrument at a specified price within a specific time period. Buyer of Put ----- Bearish View Seller of Put ----- Bullish View

STOCK CONCEPTS

Example
Mr. X Purchases the 3000 Nifty Feb 09 Put Option at Rs.100.
If Price goes down. The value of Put option will go up If Price goes up. The value of Put option will go down If Price remains constant the value of Put option will come down

STOCK CONCEPTS

Break Even Point

Mr. X has already paid Rs.100 to Purchase the Put option. If price goes down than he can Sell Nifty at Rs.3000,,,, that means he will receive Rs.3000. So net receipt to Mr. X will be Rs.2900. Above Rs.2900, Mr. X will be in Loss Below Rs.2900, He will earn money. Max Loss to him is Rs.100 at price on or above Rs.2900 Max Profit to him is unlimited. He has to use his option on or before the maturity.

STOCK CONCEPTS

Question - Answer
Calculate the Value of Put option if Nifty Spot Price is
2900 2500 2800 2000 3100 3200 3500 3000 2950

STOCK CONCEPTS

Pay off of Put Option Buyer

Events Price Of Nifty Value of Option Profit / (Loss) 1 2 3 4 5 6 2700 2750 2800 2850 2900 2950 300 250 200 150 100 50 200 150 100 50 0 -50

Pay off of Put Option

350 300 250 200 150 100 50 0 -50 -100 -150

7
8 9 10 11 12 13 14 15

3000
3050 3100 3150 3200 3250 3300 3350 3400

0
0 0 0 0 0 0 0 0

-100
-100 -100 -100 -100 -100 -100 -100 -100

Profit / (Loss)

2700

2750

2800

2850

2900

2950

3000

3050

3100

3150

3200

3250

3300

3350

3400

3450

16
17

3450
3500

0
0

-100
-100

Price of Nifty
STOCK CONCEPTS

3500

Example
Mr. Y has sold the 3000 Nifty Feb 09 Put Option at Rs.100.
If Price goes up. The value of Put option will come down If Price goes down. The value of Put option will go up If Price remains constant the value of Put option will come down

STOCK CONCEPTS

Break Even Point

Mr. Y has already received Rs.100 to sell the Put option. If price goes down than he has to buy Nifty at Rs.3000,,,, that means he has to pay Rs.3000. So net cost to Mr. Y will be Rs.2900. Below Rs.2900, Mr. Y will be in Loss. Above Rs.2900, He will earn money. Max Profit to him is Rs.100 at price on or above Rs.3000 Max Loss to him is unlimited. After the date of maturity, the option will be lapsed. Mr. Y will not be forced to buy the Nifty at Rs.3000 after the maturity.
STOCK CONCEPTS

Pay off of Put Option Seller

Events Price Of Nifty Value of Option Profit / (Loss)

Pay Off of Put Option

-200 -150 -100

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

2700 2750 2800 2850 2900 2950 3000 3050 3100 3150 3200 3250 3300 3350 3400 3450 3500

300 250 200 150 100 50 0 0 0 0 0 0 0 0 0 0 0

400 300
Profit / (Loss)

-50 0 50 100 100 100 100 100 100 100 100 100 100

200 100 0
2700 2750 2800 2850 2900 2950 3000 3050 3100 3150 3200 3250 3300 3350 3400 3450 3500

-100 -200 -300

Price of Nifty

100 STOCK

CONCEPTS

Allocation of + and - Sign

CALL PUT

Sign
BEP View

+
Strike + Premium Buy Call ( + +) = + Bullish Sell Call ( + -) = Bearish
STOCK CONCEPTS

Strike - Premium Buy Put ( - +) = Bearish Buy Call ( - -) = + Bullish

Synthetic Option and Futures

Long Call option = Buy one future and buy one put option Long Put option = Sell one future and buy one call option Long Future = Buy one call and sell one put option

STOCK CONCEPTS

For making Synthetic Call, Put or Future. Strike Price of Call and Put Should be Same
+Call = +Future +Put -Call = -Future Put +Put = -Future +Call -Put = +Future Call +Future = +Call Put -Future = -Call +Put

Difference Between Future Price and Strike Price should be equal to Difference between Call Premium and Put Premium.

STOCK CONCEPTS

Types of Option
As per Maturity
Current Month Option Next Month Option Far Month Option

As per Right to Exercise

European Option American Option
Short key to understand

STOCK CONCEPTS

Intrinsic Value
The intrinsic value of an option is the amount an option holder can realise by excercising the option immediately. Intrinsic value is always positive or zero. An out of the money & at the money option has zero intrinsic value. Intrinsic value of In the money call option = underlying product price strike price. Intrinsic value of In the money put option = strike price underlying product price.
STOCK CONCEPTS

Options as per Intrinsic Value

At the Money Option ATM
When the intrinsic value of the option is 0, it is called ATM
Meaning of Intrinsic Value Eg. Spot price of Nifty is 3000, the call n put of 3000 strike price is ATM Option

In the Money Option ITM

When the intrinsic value of the option is positive, it is called ITM
Eg. Spot price of Nifty is 3000, the call of 2800 strike price and put of 3200 strike price is ITM Option

Out of the Money Option OTM

When the intrinsic value of the option is negative, it is called OTM
Eg. Spot price of Nifty is 3000, the call of 3200 and put of STOCK 2800 strike priceCONCEPTS is OTM Option

If Spot Price = 4000

Strike Price Spot Price 3800 4000 CALL ITM PUT OTM

4000 4200

4000 4000

ATM OTM

ATM ITM

STOCK CONCEPTS

Bullish Strategies
Buy Lower Strike Call Option & Sell Higher Strike Call Option Buy Lower Strike Put Option & Sell Higher Strike Put Option Risk Return Profile :
Limited Risk on Down Side Limited Return on Upper Side

STOCK CONCEPTS

Purchase 2500 March Call option at Rs.100 and Sell 2700 March Call option at Rs.50
Events Price Of Nifty Value of I Option Value of II Option Profit / (Loss)

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

2200 2250 2300 2350 2400 2450 2500 2550 2600 2650 2700 2750 2800 2850 2900 2950 3000

-100 -100 -100 -100 -100 -100 -100 -50 0 50 100 150 200 250 300 350 400

50 50 50 50 50 50 50 50 50 50 50 0 -50 -100 -150 -200 -250

-50 -50 -50 -50 -50 -50 -50 0 50 100 150 150 150 150 150 150 STOCK CONCEPTS 150
Profit / (Loss)

Pay off of Bull Call Spread

500 400 300 200 100 0 -200 -300 Price of Nifty
22 00 22 50 23 00 23 50 24 00 24 50 25 00 25 50 26 00 26 50 27 00 27 50 28 00 28 50 29 00 29 50 30 00

-100

Bearish Strategies
Buy Higher Strike Call Option & Sell Lower Strike Call Option Buy Higher Strike Put Option & Sell Lower Strike Put Option
Risk Return Profile :
Limited Risk on Upper Side Limited Return on Down Side

STOCK CONCEPTS

Purchase 2700 March Put option at Rs.100 and Sell 2500 March Put option at Rs.50
Events Price Of Nifty Value of I Option Value of II Option Profit / (Loss) 1 2 3 2200 2250 2300 400 350 300 -250 -200 -150 150 150 150

Pay off of Bear Put Spread

500 400
Profit / (Loss)

4
5 6 7

2350
2400 2450 2500

250
200 150 100

-100
-50 0 50

150
150 150 150

300 200 100 0 -200 -300 Price of Nifty

22 00 22 50 23 00 23 50 24 00 24 50 25 00 25 50 26 00 26 50 27 00 27 50 28 00 28 50 29 00 29 50 30 00

8
9 10 11

2550
2600 2650 2700

50
0 -50 -100

50
50 50 50

100
50 0 -50

12
13 14 15

2750
2800 2850 2900

-100
-100 -100 -100

50
50 50 50

-50
-50 -50 -50

-100

16
17

2950
3000

-100
-100

50
50

-50
-50

STOCK CONCEPTS

Long Straddle
Buy same strike Risk Return price one call and Profile : one put option. Limited Risk when Market is range It is beneficial when Bound market looks very Unlimited Return volatile. when Market is Trader has to pay Volatile time value.
STOCK CONCEPTS

Purchase 2600 March Call option at Rs.75 and 2600 March Put option at Rs.75
Events Price Of Nifty Value of I Option Value of II Option Profit / (Loss) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 2200 2250 2300 2350 2400 2450 2500 2550 2600 2650 2700 2750 2800 2850 2900 2950 3000 -75 -75 -75 -75 -75 -75 -75 -75 -75 -25 25 75 125 175 225 275 325 325 275 225 175 125 75 25 -25 -75 -75 -75 -75 -75 -75 -75 -75 -75 250 200 150 100 50 0 -50 -100 -150 -100 -50 0 50 100 150 200 250

Pay off of Long Straddle

400 300
Profit / (Loss)

200 100 0 -100 -200 Price of Nifty

22 00 22 50 23 00 23 50 24 00 24 50 25 00 25 50 26 00 26 50 27 00 27 50 28 00 28 50 29 00 29 50 30 00

STOCK CONCEPTS

Short Straddle
Sell same strike price call and put option. It is beneficial when market looks range bound. Trader will receive time value. Risk Return Profile :
Unlimited Risk when Market is Volatile, Limited Return when Market is Range Bound

STOCK CONCEPTS

Sell 2600 March Call option at Rs.75 and 2600 March Put option at Rs.75
Events Price Of Nifty Value of I Option Value of II Option Profit / (Loss)

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

2200 2250 2300 2350 2400 2450 2500 2550 2600 2650 2700 2750 2800 2850 2900 2950 3000

75 75 75 75 75 75 75 75 75 25 -25 -75 -125 -175 -225 -275 -325

-325 -275 -225 -175 -125 -75 -25 25 75 75 75 75 75 75 75 75 75

-250 -200 -150 -100 -50 0 50 100 150 100 50 0 -50 -100 -150 -200 -250

Pay off of Short Straddle 200 100

Profit / (Loss)

0 2200 -100 -200 -300 -400 Price of Nifty 2350 2500 2650 2800 2950

STOCK CONCEPTS

Long Strangle
Buy Different strike Risk Return price call and put Profile : option. Limited Risk when Market is range It is beneficial when Bound market looks very Unlimited Return volatile. when Market is Trader has to pay Volatile time value.
STOCK CONCEPTS

Purchase 2700 March Call option at Rs.50 and 2500 March Put option at Rs.50
Events Price Of Nifty Value of I Option Value of II Option Profit / (Loss)

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

2200 2250 2300 2350 2400 2450 2500 2550 2600 2650 2700 2750 2800 2850 2900 2950 3000

-50 -50 -50 -50 -50 -50 -50 -50 -50 -50 -50 0 50 100 150 200 250

250 200 150 100 50 0 -50 -50 -50 -50 -50 -50 -50 -50 -50 -50 -50

200 150 100 50 0

Pay off of Long Strangle

300 250 200 150 100 50 0 -50 -100 -150

-100 -100 -100 -100 -100 -50 0 50 100 150 200

Profit / (Loss)

-50

STOCK CONCEPTS

22 00 22 50 23 00 23 50 24 00 24 50 25 00 25 50 26 00 26 50 27 00 27 50 28 00 28 50 29 00 29 50 30 00

Price of Nifty

Short Strangle
Sell different strike price call and put option. It is beneficial when market looks range bound. Trader will receive time value. Risk Return Profile :
Unlimited Risk when Market is Volatile, Limited Return when Market is Range Bound

STOCK CONCEPTS

Sell 2700 March Call option at Rs.50 and 2500 March Put option at Rs.50
Events Price Of Nifty Value of I Option Value of II Option Profit / (Loss)

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

2200 2250 2300 2350 2400 2450 2500 2550 2600 2650 2700 2750 2800 2850 2900 2950 3000

50 50 50 50 50 50 50 50 50 50 50 0 -50 -100 -150 -200 -250

-250 -200 -150 -100 -50 0 50 50 50 50 50 50 50 50 50 50 50

-200 -150 -100 -50 0

Pay off of Long Strangle

150 100 50 0 -50 -100 -150 -200 -250 -300

100 100 100 100 100 50 0 -50 -100 -150 -200

Profit / (Loss)

50

STOCK CONCEPTS

22 00 22 50 23 00 23 50 24 00 24 50 25 00 25 50 26 00 26 50 27 00 27 50 28 00 28 50 29 00 29 50 30 00

Price of Nifty

Short Butterfly
Sell same strike price Risk Return call and put option & buy Profile : lower strike price put & higher strike price call (of Limited Risk when equal distance). Market is Volatile, It is beneficial when Limited Return market looks range when Market is bound. Range Bound Trader will receive time value.
STOCK CONCEPTS

SELL 2600 2600 2800 2400 Price Of Nifty Value of Call Sold Value of Put Sold Value of Call Bought CE PE CE PE Value of Put Bought 100 100

BUY

25 25

Events

Profit / (Loss)

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

2200 2250 2300 2350 2400 2450 2500 2550 2600 2650 2700 2750 2800 2850 2900 2950 3000

100 100 100 100 100 100 100 100 100 50 0 -50 -100 -150 -200 -250 -300

-300 -250 -200 -150 -100 -50 0 50 100 100 100 100 100 100 100 100 100

-25 -25 -25 -25 -25 -25 -25 -25 -25 -25 -25 -25 -25 25 75 125 175

175 125 75 25 -25 -25 -25 -25 -25 -25 -25 -25 -25 -25 -25 -25

-50 -50 -50 -50 -50 0 50 100 150 100 50 0 -50 -50 -50 -50
Profit / (Loss)

Pay off of Long Butterfly

200 100 0 -100 -200 -300 -400 Price of Nifty 2200 2250 2300 2350 2400 2450 2500 2550 2600 2650 2700 2750 2800 2850 2900 2950 3000

STOCK CONCEPTS -25 -50

Long Butterfly
Buy same strike price call and put option & sell lower strike price put & higher strike price call (of equal distance). It is beneficial when market looks volatile. Trader will pay time value.

Risk Return Profile :

Limited Risk when Market is range Bound Limited Return when Market is Volatile

STOCK CONCEPTS

SELL 2600 2600 2800 2400 Value of Call Bought Value of Put Bought Value of Call Sold CE PE CE PE Value of Put Sold 25 25

BUY 100 100

Events

Price Of Nifty

Profit / (Loss)

Pay off of Short Butterfly

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 2200 2250 2300 2350 2400 2450 2500 2550 2600 2650 2700 2750 2800 2850 2900 2950 3000 -100 -100 -100 -100 -100 -100 -100 -100 -100 -50 0 50 100 150 200 250 300 300 250 200 150 100 50 0 -50 -100 -100 -100 -100 -100 -100 -100 -100 -100 25 25 25 25 25 25 25 25 25 25 25 25 25 -25 -75 -125 -175 -175 -125 -75 -25 25 25 25 25 25 25 25 25 25 25 25 25 25 50 50 50 50 50 0 -50 -100 -150 -100 -50 0 50 50 50 50
Profit / (Loss)

400 300 200 100 0 -100 -200 Price of Nifty 2200 2250 2300 2350 2400 2450 2500 2550 2600 2650 2700 2750 2800 2850 2900 2950 3000

STOCK50 CONCEPTS

Calendar Spread
Sell one call or put option of current month & buy same strike price call or put of next month. It is beneficial when disparity in volatility in different months found. Trader will receive time value.

Risk Return Profile :

Limited Risk when Market is range Bound Limited Return when Market is Volatile

STOCK CONCEPTS

Sell 2600 March Call option at Rs.110 and Buy 2600 April Call option at Rs.130
Events Price Of Nifty Value of Call Sold Value of Call Bought Profit / (Loss) 1 2 3 2200 2250 2300 110 110 110 -125 -122 -117 -15 -12 -7

Pay off of Calender Spread

400 300
Profit / (Loss)

4
5 6 7

2350
2400 2450 2500

110
110 110 110

-110
-101 -88 -72

0
9 22 38

200 100 0 -200 -300 -400 Price of Nifty

22 00 22 50 23 00 23 50 24 00 24 50 25 00 25 50 26 00 26 50 27 00 27 50 28 00 28 50 29 00 29 50 30 00

8
9 10 11

2550
2600 2650 2700

110
110 60 10

-51
-27 1 33

59
83 61 43

-100

12
13 14 15

2750
2800 2850 2900

-40
-90 -140 -190

67
106 146 190

27
16 6 0

16
17

2950
3000

-240
-290

233
280

-7
-10

STOCK CONCEPTS

Factors affecting Pricing of Option

Spot - s Strike - x Time to Maturity - t Volatility - vol Rate of Interest - r
Dividend - div

STOCK CONCEPTS

Relationship with option Pricing

Call Spot Strike Time to Maturity Volatility Rate of Interest Positive Negative Negative Positive Positive
STOCK CONCEPTS

Put Negative Positive Negative Positive Negative

Option Greeks
Option Greeks represents Dimensions of risk involved in taking a position in an option. Option Greeks are : Delta Gamma Vega Theta Rho

STOCK CONCEPTS

 Delta
The ratio comparing the change in the price of the underlying asset to the corresponding change in the price of a derivative. Means delta shows the net change in the price of option due to 1 Rs. Change in the price of underlying.
For Eg. If price of GNFC changes from Rs.100 to Rs.101 and the price of its 100 strike call option changes from Rs.5 to Rs.5.50. It shows that the delta of 100 strike call option is 0.50
STOCK CONCEPTS

Directional effect of Delta

The relationship between underlying price and call option delta is positive as the price of underlying increases, the price of call option also increases and vice versa. That means delta of call option is positive & when you sell call option it becomes negative. On Second side relationship between underlying price and put option delta is negative as the price of underlying increases, the price of put option decreases and vice versa. That means delta of put option is negative & when you sell put option it becomes positive. The positive and negative sign of delta shows the favorable and unfavorable direction of the position of option. Means whether the position is bullish or bearish can be checked by checking the net delta of the position.

STOCK CONCEPTS

Call Option Delta Behavior

Underlying Price Increases Value of Call Option Increases

Increase Delta

Underlying Price Decreases

Value of Call Option Decreases

STOCK CONCEPTS

Decrease Delta

Put Option Delta Behavior

Underlying Price Increases Value of Put Option Decreases

Decrease Delta

Underlying Price Decreases

Value of Put Option Increases

STOCK CONCEPTS

Increase Delta

 Normally Delta of Out of the money option lies between 0 to 0.49 Delta of At the money option lies at 0.50 Delta of In the money option lies between 0.51 to 1
Can delta go above 1 ?????????????????

STOCK CONCEPTS

How to Calculate Portfolio Delta

First find out the delta of an option from the option calculator Allot the sign (+ or -) as per the bullish or bearish view. Eg. If you sell call than your Delta will be negative. Multiply the figure with the Quantity You will get the total delta of that option Find the delta of all the options of portfolio Delta of future or stock is 1. i.e. if you sell the future, delta will be -1. Add all the delta to find out the delta of portfolio.
STOCK CONCEPTS

 Gamma
Gamma measures the change in delta for a given change in the underlying. Eg. If a call option has a delta of 0.5 and a gamma of 0.05, this indicates that the new delta will be 0.55 if the underlying price moves up by one full point and 0.45 if underlying price moves down by one full point.

STOCK CONCEPTS

Need of Gamma
Gamma anticipates the speed of delta which is very helpful at the time of running the delta neutral strategies. Because there we need to know the effect of delta due to change in spot price from one level to another.

STOCK CONCEPTS

 Theta
Theta measures the effect of time decay on an option. As time passes, option will lose time value and the theta indicates the extent of this decay. Both call and put options are wasting assets and therefore have a negative theta. Note that the decay of options is nonlinear in that the rate of decay will accelerate as the option approaches expiry.
STOCK CONCEPTS

Eg. of theta
For Eg. If price of GNFC remains Rs.100 on Day 1 & Day 2 but the price of its 100 strike call option changes from Rs.5 to Rs.4.85. It shows that the theta of 100 strike call option is 0.15 for one day. (Annualised 54.75)

STOCK CONCEPTS

 Vega
Vega measures the effect that a change in implied volatility has on an options price. Both calls and puts tend to increase in value as the volatility increases, as this raises the probability that the option will move in the money. Both calls and puts will thus possess a positive vega.

STOCK CONCEPTS

Volatility
The volatility of an option is a measure of the spread of the price movements of the underlying instrument. The more volatile the underlying instrument, the greater the time value of the option will be. This will mean greater uncertainty for the option seller who, will charge a high premium to compensate. Option prices increase as volatility rises and decrease as volatility falls.
STOCK CONCEPTS

 Rho
Rho measures the impact on price of an option due to change in the rate of interest. It provides very less impact in short term maturity option while it is very important tool for long run maturity option.

STOCK CONCEPTS

Delta Neutral Strategies

Delta neutral strategy makes the portfolio in such a way so that the delta of complete portfolio should be Zero. That signifies that trader do not want to earn money through bull or bear market while he just want to earn either time value or volatility value.

STOCK CONCEPTS

Few eg of delta neutral strategies

Sell one call and one put option Sell one put option, buy one call option and sell one future Buy one put option, sell one call option and buy one future Buy one call and buy one put option Buy one ATM call and Sell two OTM call Buy one ATM Put and Sell two OTM Put Buy one ITM Call and sell one ATM and one OTM call Buy one ITM Put and sell one ATM and one OTM call Buy one future and sell two calls Sell one future and sell two puts
STOCK CONCEPTS

Relationship between Vega and Theta

Generally Vega and Theta are rivals of each other. If trader wants to earn theta, he must be having the risk of Vega and vice versa. For eg if you sell the option, you will get time value as the time passes, But if the volatility rises in the market, you will lose money.
STOCK CONCEPTS

Put Call Parity An Arbitrage Opportunity

1. 2. Buy Future, Buy Put and Sell Call; Sell Future, Sell Put and Buy Call Risk of Exercise Transaction Charge

STOCK CONCEPTS

Volatility Spread
Sell high volatility option and buy low volatility option, Neutral the delta, Keep theta Positive, Keep gamma Positive, Keep vega Positive.

STOCK CONCEPTS

Long Gamma Strategy

Buy options and try to reduce the costing by trading either in future or in stock. Buy at low and sell at high so that the profit accumulated should make option free.

STOCK CONCEPTS

Bhavcopy
INSTRUMEN T FUTIDX FUTIDX SYMBOL MINIFTY MINIFTY EXPIRY_DT 26-Mar-09 30-Apr-09 STRIKE_PR 0 0 OPTION_T YP XX XX OPEN 2634 2630 HIGH 2639 2631 LOW 2538.4 2527

FUTIDX
FUTIDX FUTIDX FUTIDX FUTIDX FUTIDX FUTIDX OPTSTK OPTSTK OPTSTK OPTSTK OPTSTK OPTSTK OPTSTK

MINIFTY
NFTYMCAP50 NFTYMCAP50 NFTYMCAP50 NIFTY NIFTY NIFTY TATASTEEL TATASTEEL TATASTEEL TATASTEEL TATASTEEL TATASTEEL TATASTEEL

28-May-09
26-Mar-09 30-Apr-09 28-May-09 26-Mar-09 30-Apr-09 28-May-09 26-Mar-09 26-Mar-09 26-Mar-09 26-Mar-09 26-Mar-09 26-Mar-09 26-Mar-09

0
0 0 0 0 0 0 150 155 160 165 170 175 180

XX
XX XX XX XX XX XX CA CA CA CA CA CA CA

2645
1101.3 0 0 2634.8 2618 2619 13.05 10.3 8.2 5.75 5 2.5 2.85

2645
1101.3 0 0 2639.45 2625 2625 14.95 10.9 9.15 6.45 5.4 2.5 2.85

2525
1101.2 0 0 2538.4 2527.3 2525.05 8.5 6.15 4.4 3.1 2.4 2.5 1.4

STOCK CONCEPTS

Bhavcopy II
CLOSE 2556.8 2545.15 2543.75 1101.2 1180.2 1110.85 2556.8 2545.5 2542.1 8.9 6.4 4.8 3.15 2.65 2.5 1.55 SETTLE_PR 2556.8 2545.15 2543.75 1018.9 1026.75 1032.4 2556.8 2545.5 2542.1 8.9 6.4 4.8 3.15 2.65 2.5 1.55 CONTRACTS 96215 7030 707 2 0 0 842741 20815 1347 197 30 520 12 303 1 140 VAL_INLAKH 49657.24 3612.7 363.1 6.6 0 0 1086216 26701.08 1728.48 481.01 75.12 1324.15 31.05 804.35 2.71 389.28 OPEN_INT 941780 130100 14360 600 0 0 32326450 1418400 131000 152800 169608 1326304 67232 774696 12224 764000 CHG_IN_OI 246300 28000 4180 600 0 0 1302250 233400 31700 74872 10696 155856 1528 59592 -1528 77928 TIMESTAMP 05-Mar-09 05-Mar-09 05-Mar-09 05-Mar-09 05-Mar-09 05-Mar-09 05-Mar-09 05-Mar-09 05-Mar-09 05-Mar-09 05-Mar-09 05-Mar-09 05-Mar-09 05-Mar-09 05-Mar-09 05-Mar-09

STOCK CONCEPTS

Blunders in Derivatives Market

The 1990s saw a number of episodes in which companies using derivatives lost large amounts of money

The 1993 Metallgesellschaft oil hedging debacle The 1994 bankruptcy of Orange county The 1995 collapse of Barings bank The 1998 LTCM collapse The recent collapse of Enron
STOCK CONCEPTS

Metallgesellschaft
The Event
MGRM decided in 1991 to enter the US heating oil and gasoline markets.

To do this, it offered retailers five and ten year fixed price contracts. These gave MGRM a short position of 160 million barrels of oil. MGRM hedged this position through purchase of NYMEX crude oil futures. MGRM used a stacked hedge, rolling over 1 and 2 month contracts. This exposed MGRM to cashflow risk (margin calls, since futures position large relative to cashflow) & basis risk (change in backwardation - contango at roll).
STOCK CONCEPTS

The problems
End 1993 oil price fell and NYMEX future moved into contango. Falling crude price forced large margin payments. Move to contango made the roll expensive. MG reacted in December 1993 by taking direct control of MGRM , and liquidating the hedge position. Liquidation cost Mg $1.83bn ,around one half of the total value of the firm.
STOCK CONCEPTS

Lessons
Highly speculative to hedge long-date position with shortdated instruments. MGRM was substantially over-hedged initial short exposure become a long exposure. Size of MGRM position induced contango. MGRM viewed synthetic storage as cheaper than physical storage. The contango was the price they needed to pay the market to do this storage. MGRM was a gamble that oil prices would rise from 199192 levels. The hedge was part of a speculative strategy to become a major player in the US oil refining industry.
STOCK CONCEPTS

Orange County
The Event
Citron dominates the orange county treasury in the 1980s and 90s. He was one of the nations best known municipal treasurers, primarily because his investment strategies produced a very high average return of 9.3 %. Citrons strategies consisted primarily of large, leveraged bets that short term interest rates would not increase. Citron borrowed about $13 billion from various securities firm through arrangements known as reverse repurchase agreements, using Orange countys $7.4 billion investment pool as collateral. This gave him about $20 billion to invest. Citron used structured notes to buy large amounts of inverse floaters, bonds whose value increases rapidly when interest rates decline and vice versa.
STOCK CONCEPTS

The problems
The federal reserve increased short-term rates on February 4,1994,and five times thereafter in the same year. Orange countys investment pool began hemorrhaging. Citron was able to hide these losses during 1994, because of the way in which his derivative investments were structured and as they technically fit within Orange countys investments guidelines. On December 1, 1994 Orange countys officials held a press conference announcing losses of $1.7 billion. Orange county was unable to repay the money it had borrowed and filed the largest municipal bankruptcy petition in history on December 6, 1994.
STOCK CONCEPTS

lessons
Naked directional bets will never succeed indefinitely citrons strategy gained only till interest rates remained low and once the rates started rising ,they resulted in large losses.

Limited disclosure As citrons investments were shortterm and issued by highly rates entities. It technically fit within the orange county investment guidelines. However, The fact that they were structured notes with leveraged directional bets was never highlighted.

STOCK CONCEPTS

Barings bank
The Event
Leeson accumulated a very large long position in Nikkei stock index futures ($7b exposure) and to Japanese government bonds (JGBs) , both in Osaka and Singapore. Leeson was able to hide these losses from senior management in London. Leeson hid trading losses in an error account, the famous 88888 account.

STOCK CONCEPTS

The problems
The Nikkei fell following the kobe 1995 earthquake.
Margin calls exhausted Barings reserves. Barings was sold for 1 to ING.
STOCK CONCEPTS