-


 23.06.2019


AAKASHAYA PATRA SEVEN STAR SMART EDUCATION SERIES PART – 13 :

INTRODUCTION TO OPTIONS

An option is a contract written by a seller that conveys to the buyer the right — but not the  obligation — to buy (in the case of a call option) or to sell (in the case of a put option) a  particular asset, at a particular price (Strike price / Exercise price) in future. In return for  granting the option, the seller collects a payment (the premium) from the buyer. Exchange-  traded options form an important class of options which have standardized contract features  and trade on public exchanges, facilitating trading among large number of investors. They  provide settlement guarantee by the Clearing Corporation thereby reducing counterparty  risk. Options can be used for hedging, taking a view on the future direction of the market,  for arbitrage or for implementing strategies which can help in generating income for  investors under various market conditions.

OPTION TERMINOLOGY
·         Index options: These options have the index as the underlying. In India, they have  a European style settlement. Eg. Nifty options, Mini Nifty options etc.
·         Stock options: Stock options are options on individual stocks. A stock option contract gives  the holder the right to buy or sell the underlying shares at the specified price. They have an  American style settlement.
·         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 / seller 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.
·         Call option: A call option gives the holder the right but not the obligation to buy an asset by  a certain date for a certain price.
·         Put option: A put option gives the holder the right but not the obligation to sell an asset by  a certain date for a certain price.
·         Option price/premium: Option price is the price which the option buyer pays to the  option seller. It is also referred to as the option premium.
·         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 or the  exercise price.
·         American options: American options are options that can be exercised at any time upto the  expiration date.
·         European options: European options are options that can be exercised only on the  expiration date itself.
·         n-the-money option: An in-the-money (ITM) option is an option that would lead to a  positive cashflow to the holder if it were exercised immediately. A call option on the index  is said to be in-the-money when the current index stands at a level higher than the strike  price (i.e. spot price > strike price). If the index is much higher than the strike price, the  call is said to be deep ITM. In the case of a put, the put is ITM if the index is below the  strike price.
·         At-the-money option: An at-the-money (ATM) option is an option that would lead to zero  cashflow if it were exercised immediately. An option on the index is at-the-money when the  current index equals the strike price (i.e. spot price = strike price).
·         Out-of-the-money option: An out-of-the-money (OTM) option is an option that would  lead to a negative cashflow if it were exercised immediately. A call option on the index is  out-of-the-money when the current index stands at a level which is less than the strike  price (i.e. spot price < strike price). If the index is much lower than the strike price, the call  is said to be deep OTM. In the case of a put, the put is OTM if the index is above the  strike price.
·         Intrinsic value of an option: The option premium can be broken down into two  components - intrinsic value and time value. The intrinsic value of a call is the amount  the option is ITM, if it is ITM. If the call is OTM, its intrinsic value is zero. Putting it
       another way, the intrinsic value of a call is Max[0, (St — K)] which means the intrinsic  value of a call is the greater of 0 or (St — K). Similarly, the intrinsic value of a put is        Max[0,  K — St],i.e. the greater of 0 or (K — St). K is the strike price and St is the spot price.
·         Time value of an option: The time value of an option is the difference between its  premium and its intrinsic value. Both calls and puts have time value. An option that is OTM  or ATM has only time value. Usually, the maximum time value exists when the option is  ATM. The longer the time to expiration, the greater is an option's time value, all else equal.  At expiration, an option should have no time value.

for more such type of education joint our online series and batches and be a pro trader contact on 7028 421 786.


Comments

Post a Comment

Popular posts from this blog

AAKASHAYA PATRA EXCLUSIVE STOCK FOR INVESTMENT: 13.06.2021

-
Image
                TOURISM FINANCE CORPORATION OF INDIA CMP 75.6 ENTRY 72 TO 75 STOPLOSS 60 TARGET 175 TIME: 12 MONTHS   Tourism Finance Corporation of India Ltd.(TFCI) is an Indian Financial Institution, setup in 1989 upon the recommendations of the National Committee of Tourism under the aegis of Planning Commission. Established  as a premier tourism financing institution,TFCI has acted as a catalyst in creation of infrastructure in hospitality segment in over 3 decades of its existence. TFCI has also enabled various businesses to channelize their investments into different segments and locations of the tourism industry. Set-up by a group of government organisations like. IFCI, LIC, OIC, SBI, BOI, Canara Bank, etc., TFCI was instrumental in creating many firsts (viz., Indian Railways' Palace on Wheels, Esselworld,spa/wellness resort Ananda in the Himalayas, etc.) in hospitality sector. TFCI has assisted a third of the total capac...
Read more

AAKASHAYA PATRA SEVEN STAR SMART EDUCATION SERIES PART – 57 : 13.09.2020

-
Image
  Financial Ratios   Management Efficiency Ratios   Last week we had seen details about Return on Equity (ROE), Return on Capital Employed (ROCE) and Return on Asset (ROA). This week we shall try to understand Liquidity Ratios. Management Efficiency Ratios help us to evaluate the ability of the management to use its assets and manage its liabilities effectively. Commonly used Management Efficiency Ratios include – 1. Fixed Asset Turnover Ratio 2. Working Capital Turnover Ratio 3. Total Asset Turnover Ratio 4. Inventory Turnover Ratio 5. Inventory Number of Days 6. Receivables Turnover Ratio 7. Days of Sales Outstanding Fixed Asset Turnover Ratio: The fixed-asset turnover ratio is the ratio of net sales to the fixed assets of the company. Fixed Asset Turnover Ratio = Net Sales / Average Net Fixed Assets This ratio is used to measure the operating performance of the company, i.e., how efficiently a company is producing sales with its machines a...
Read more

AAKASHAYA PATRA SEVEN STAR SMART EDUCATION SERIES PART – 61 : 10.10.2020

-
Image
                           Financial Ratios- Liquidity Ratio As the name indicates, these financial ratios help us to evaluate the ability of the management to use its assets and manage its liabilities effectively. Commonly used Management Efficiency Ratios include –   1. Fixed Asset Turnover Ratio 2. Working Capital Turnover Ratio 3. Total Asset Turnover Ratio 4. Inventory Turnover Ratio 5. Inventory Number of Days 6. Receivables Turnover Ratio 7. Days of Sales Outstanding   Fixed Asset Turnover Ratio: The fixed-asset turnover ratio is the ratio of net sales to the fixed assets of the company. Fixed Asset Turnover Ratio = Net Sales / Average Net Fixed Assets This ratio is used to measure the operating performance of the company, i.e., how efficiently a company is producing sales with its machines and equipment. In general, a higher fixed-asset turnover ratio indicates that a company ha...
Read more