Options

The Rising
Wave

Derivatives Segment Growth

Overall market volumes increased by
about 150%

300
250

Index Option Volumes grown by

more than 10 times in last five
years

Trillions

200

Stock and index future Volumes were

in a declining trend

150
100
50
0

Stock Options

2010-11

2009-10

Index Options

2008-09

2007-08

2006-07

Stock Futures

2005-06

2004-05

2003-04

2002-03

2001-02

Index Futures

Cash

Reasons for growth of option

segment
Lower cost. (Options: 13 Paisa, Futures: 1.25 Rupees)
Inbuilt stop loss.
Does not require large corpus.
Higher leverage with limited risk..
Potential to make exponential profit.
Protection against opening gap risk.
Can take advantage of volatility (Events).
Flexibility to control risk, using strategies.
Risk reward will be in your favor. (Delta example)

What is an Option
Option is an instrument giving holder the right to
buy or sell a specific quantity (lot) of a specific
assets (Underlying) at a specific price (Premium)
up to a specific date (Contract Expiry).

Options are further classified in two

types
Call Option
An agreement which
gives buyer the right to
buy but not the
obligation to buy a
stock.

Put Option
It is opposite of call
option I.e.., giving the
owner the right to sell
but not the obligation.

Terminologies of Options
Index options: These options have the index
underlying. Like index futures contracts, index
contracts are also cash settled.

as the
options

Stock options: Stock options are options on individual stocks.

Buyer of an option: The buyer of an option is the one who by
paying the option premium buys the right but not the
obligation to exercise his option on the seller/writer.
Writer/Seller of an option: The writer of a call/put option is
the one who receives the option premium and is thereby
obliged to sell/buy the asset if the buyer exercises on him.
Cont...

 Option price/premium: Option price is the price which the

option buyer pays to the option seller.
Expiration date: The date specified in the options contract is
known as the expiration date, the exercise date, the strike date
or the maturity.
Strike price: The price specified in the options contract is
known as the strike price.
American options: American options are options that can be
exercised at any time up to the expiration date.
European options: European options are options that can be
exercised only on the expiration date itself.

In The Money -- At The Money -- Out

Of Money

Why not able to reap option

benefits:
Lack of money management.
Dont trade option but invest/ Longer holding
period.
Wrong Strike price selection.

Why option investments loses

money

Every 5 days will cost option buyer around 25

points (0.5%)

Which Option to buy?

Wrong strike price selection.

Beginning of the Fresh contract : Out Of money option

Middle of the month: Move towards ATM Option

Towards the expiry: At the Money option.

Momentum

Delta, gamma, Vega.

Lesser Theta

ITM Option should never be used for trading as it require

huge premium and Liquidity issue.

If ITM option is left for expiry it will attract delivery STT

that is 0.125% (6-7 nifty points) and will trade at a
discount to that extent towards the expiry.

Strike Price Selection

5600

Strike

5500
5400
5300
21 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1
5200
Days to expire

Nifty Spot=
5300

Cash/Future/Option
Trading
Reliance has given upside breakout above 1000 levels now it
may
test 1050 levels. But if it fails to hold 1000 then may test 950
levels.
----------------------------------------------------------------------------Buy Cash : Buy 250 shares @ 1000/Investment : 2,50,000/If it moves to 1050 then profit = 12,500/- Return on Investment :
5%
If it goes to 950 then risk = 12,500/Risk on Investment :
-5%
----------------------------------------------------------------------------Buy Future : Buy 1 lot of 250 shares
Investment : 20% of
total value
=50,000
If it moves to 1050 then profit = 12,500
Return on Investment :
25%
If it goes to 950 then risk = 12,500
Risk on Investment :

Call Option
Buy Call Option:
Buy 1000 Call @ 25/Investment = 6,250/After 2 days :
If it moves to 1050 then option value: 57/Profit = (57-25)*250= 8,000
ROI = 128%
If it goes down to 950 then Option Value:7
Risk = (7-25)*250 = (4500)/ROI = -72%

Straddle
Straddle: Involves buying ATM Call and Put of the same strike
price.
Buy 1000 Call @ 25/Buy 1000 Put @ 25/Investment = 12500/After 2 days :
If it moves to 1050 then
Call: 57 ; Put: 8
Profit = (65-50)*250=3,750
ROI = 30%
If it goes down to 950 then
Call: 7 ; Put: 57
Profit = (64-50)*250=3,500
ROI = 28%

Strangle
Strangle: Involves buying OTM of call and OTM Put.
Buy 1050 Call @ 8/Buy 950 Put @ 7/Reliance= 1000
Investment = 3,750/After 2 days :
If it moves to 1050 then
Call: 26 ; Put: 1
Profit = (27-15)*250=3,250
ROI = 87%
If it goes down to 950 then
Call: 1 ; Put: 23
Profit = (24-15)*250=2,750
ROI = 73%

Strip
Strip: Involves buying one ATM/OTM Call and Buying two
ATM/OTM Put.
Buy 1000 Call @ 25/Buy 1000 Put @ 25/Buy 1000 Put @ 25/Investment = 18750/After 2 days :
If it moves to 950 then
Call: 7 ; Put: 57
Profit = (121-75)*250=11,500
ROI = 63%
If it goes to 1050 then
Call: 58 ; Put: 7
Profit = (72-75)*250=(750)
ROI = -4%

Strap

Strap: Involves buying two ATM/OTM Call and Buying one

ATM/OTM Put.
Buy 1000 Call @ 25/Buy 1000 Call @ 25/Buy 1000 Put @ 25/Investment = 18,750/After 2 days :
If it moves to 1050 then
Call: 57 ; Put: 7
Profit = (121-75)*250=11,500
ROI = 63%
If it goes down to 950 then
Call: 7 ; Put: 57
Profit = (71-75)*250=1,000
ROI = -5.5%

Where to get option calls from:

Trading Systems.
Pattern Finder.
Derivative Calls.
Derivative Portfolio.
Fortune finder (Intraday).

Myths

Complex.

Only writing makes money.

Option will expire worthless.

Option takes time to appreciate.

80% of the option buyers loses money.

Option trading is only for professionals.

Option trading will lose when volatility reduces.

Writing option is the key to growth of options

Wishing You All The Very Best

And Lots Of Success
In The Stock Markets!!