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A derivative is a financial instrument or other contract within the scope of this Standard with all three of the following characteristics:
its value changes in response to the change in 'underlying' it requires no initial investment or an initial net investment
Derivatives Markets
Exchange traded :
Traditionally exchanges have used the open-outcry system,
but increasingly they are switching to electronic trading Contracts are standard there is virtually no credit risk.
Over-the-counter (OTC) :
A computer- and telephone-linked network of dealers at
financial institutions, corporations, and fund managers Contracts can be non-standard and there is some small amount of credit risk
Types of Derivatives
Forward
Option
Futures
Swaps Forward Rate Agreements(FRA)
Forward Contracts
Contractual Commitment to buy or sell
a specified quantity and quality of underlying asset at a future date and
interest rates
Futures Contracts
contract is an agreement to buy or sell
a specified quantity and quality of an underlying product at a specified date in the future, for a price agreed
traded on an exchange
Types of Traders
Hedgers
Use derivatives to reduce risk that they face from potential
variables
Arbitrageurs
Take offsetting positions in two or more instruments to lock
in a profit
Options
An option is a contract that grants a right to the holder or
contract.
The holder or the purchaser pays a premium for the right.
Types of options
Call option- The right to buy a specified amount of currency at
a specified rate.
a specified rate.
ITM,ATM,OTM
Call Option Put Option 1.In-the-money Strike Price less than Strike Price greater than Spot Price of underlying Spot Price of underlying asset asset Strike Price equal to Spot Strike Price equal to Spot Price of underlying asset Price of underlying asset
2. At-the-money
3. Out-of-the-money
Strike Price greater than Strike Price less than Spot Price of underlying Spot Price of underlying asset asset
Margin required
Initial Margin :
An Initial margin is the deposit required to maintain either a short or long position in a futures contract.
Maintenance Margin :
Maintenance margin is the amount of initial margin that must be maintained for that position before a margin call is generated.
Convergance.
price.
Time value is the difference between premium and intrinsic
value
Volatility
Volatility is a measure of the rate and magnitude of the change
Greeks
Delta Gamma Vega
Theta
Delta
The movement of the option position relative to the movement
Gamma
Options Gamma is the rate of change of options delta with a
changes with a change in the price of the underlying stock, Options Gamma describes how much the options delta changes as the price of the underlying stock changes.
Vega
Options Vega measures the sensitivity of a stock option's price
Theta
Theta is that options Greek which tells you how much an
option's price will diminish over time, which is the rate of time decay of stock options. Time decay is a well known phenomena in options trading where the value of options reduces over time even though the underlying stock remains stagnant Positive Theta means that the option's value will increase as the time passes & vice-versa. Negative Theta means that the option's value will fall as the time passes & vice-versa. Theta is highest for ATM options, and is progressively lower as options are ITM and OTM.
Greeks Table
Long call Long put Short call Short put Delta Positive Negative Negative Positive
Gamma
Positive
Positive
Negative
Negative
Vega
Positive
Positive
Negative
Negative
Theta
Negative
Negative
Positive
positive
OPTION STRATEGY
INCOME STRATEGIES
COVERED CALL BULL PUT SPREAD BEAR CALL SPREAD
COVERED CALL
DIRECTION Bullish Assset legs Long stock Short call (OTM) Max risk Uncapped Max reward Capped Strategy type Income
Description: It is like collecting rent while you own a stock Outlook : neutral to bullish (steady rise). Greeks : 1. Delta : positive and expected to fall to zero 2. Gamma: negative (net seller) 3. Vega: negative (harmful for this position) 4. Theta: positive (time decay is helpful for the position)
Oulook: bullish or neutral to bullish Rationale: income for a net credit while reducing your maximum risk. Greeks : Delta:Positive
Outlook: bearish or neutral to bearish. Greeks: Delta: negative Gamma: negative Vega: positve Theta: negative
OPTION STRATEGY
VOLATILITY STRATEGIES
Straddle Strangle
STRADDLE
Direction Neutral Asset Legs Long Put (ATM) Long Call (ATM) Max Risk Capped Max Rewards Uncapped Strategy Type Capital Gains
Outlook: movement in either direction Greeks: Delta: highest in either direction Gamma: highest Vega: positive (helpful) Theta: negative (harmful)
STRANGLE
Direction Neutral Asset Legs Long Put (OTM) Long Call (OTM) Max Risk Capped Max Rewards Uncapped Strategy Type Capital Gains
Outlook: huge movement expected in either direction. Greeks: Delta: is highest Gamma: positive Vega: positive Theta: negative or harmful
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