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OPTIONS

 June 12th 2000 – Index futures were launched


 June 4th 2001 –Index options were launched
 July 2nd 2001 – Stock options were launched
 November 9th 2001 – Single stock futures were launched.
 Though the options market has been around since 2001, the real liquidity in
the Indian index options was seen only in 2006
What Are Options

 Option are Type of Derivative Security


 Why Option called Derivative Security bcz its Price is intrinsically linked to
the price of Something Else or in Other words whose value is Derived from
Some other Instrument
 So How we define Option
 Option are Contract that grant the right but not the obligation to Buy or sell
underlying asset a Set Price on or Before a Certain Date
 Every Option has a Fixed Expiry Date and Fixed Strike Price
 Fixed Price of Any Option is Called Strike Price which u all know about this
 For Example A call Option For SBI Future of 300 and Date 26-04-2018
 Here 300 is Strike Price And 26-04-2018 is Called Expiry Date
Type Of Option

 1 Call Option
 2 Put Option

 What are Call Option


 In Simple Words if Some one want to create a Bullish Position he Can
Buy a call option or Sell Put Option
 Similarly if Some one want to create bearish position he can either Sell call
option are can buy Put Option
Option Style

 Europen Style
 American Style
Europen Style vs American Style

 CA Stands For American Style And CE Stands For Europen Style


 Owner of American Style Option May exercise at any Time Before the
Option Expires While Owner of European style may exercise only at
expiration
 But Today All option at Indian Stock Exchange is European Style
 Why American Style Option Change to Europen Style(Some People
exercise their Option if there is Closing Diffference of Any Underlying
Instrument in this Case seller of option has no Power And he May loss
Money on that Trade)
Type of Option

 ITM
 ATM
 OTM
And for Further Classification
 Deep In the money
 In the Money (ITM)
 At the Money (ATM)
 Out of the Money (OTM)
 Deep Out of the Money
ITM

 ITM Stands For In the Money Option


 For a Call Option Strike Price of the Option is Below the Underlying Price
 For Example Nifty Fut Spot Is @ 10600 ALL Call below 10600 Are in the Money
Call Option And whtevere The difference Between Call Strike Price and
Spot Price That is intrinsic Value of that call option
 Intrinsic Value can be calculated at the last day of Expiry You can also
calculate but it have also some other Parts
 Rest Part is (Theata Vega Gamma Delta Rho)
 This Part I will Cover Later
ITM FOR PUT OPTION

 Similarly For Put Option Strike Price of the Option is Above the Underlying
Option
 For Example Nifty Future Spot Trading @ 10600 All Strike Price Above this
Price are In the Money Option
 In The Money Always have Intrinsic Value in it
 So in other words we can say that
 IV=Spot Price – Strike Price
ATM

 ATM Stands for AT The Money


 At The Money Option Are those Which Have Same Strike Price and Market
Price of That Instrument
 AT the Money Valid For Both the Option Wheather it is Call or Put
 For Example Spot Price of Nifty Fut is 10700
 10700 CE and 10700 Pe Is At The Money Option
OTM

 OTM Money Stands For Out Of the Money


 These Option Are reverese the ITM Option
 In Case of Call All option Above the Spot Price All option are Out of the
Money Option
 And in Case of Put Option All Option Below the Spot Price Are Out of the
Option
 For Example Nifty Fut Trading @ 10800 all Option Above 10800 Out Of the
Money Call Option And Option Below this Price is Out of the Money Put
Option
Some Basic Concept

 Strike Price
 Underlying Price
 Exercising of an option contract
 Option Expiry
 Option Premium
 Option Settlement
Option Buy or Sell

 Selecting the Right Strike Price is a Very Important Aspect of Option trading
 As we Always Hear that this Strike Price have Maximum Open interest it
means the One who is bullish think Market or Stock will Move up And Those
who are Bearish Think Market or Stock will Go Down From here
 So how Do We Find The Right Strike Price I will Cover it later By Sharing Some
Fact
 One Thing I want to Share with u all that Being an Option writer one Can
make money By Shorting and Buying Option By Proper Risk Management
Depends Upon The Risk Profile How U Manage it
Some Fact with Buying And Selling
Option
 If the option buyer has limited risk (to the extent of premium paid), then the
option seller has limited profit (again to the extent of the premium he receives)
 If the option buyer has unlimited profit potential then the option seller potentially
has unlimited risk
 The breakeven point is the point at which the option buyer starts to make
money, this is the exact same point at which the option writer starts to lose
money
 If option buyer is making Rs.X in profit, then it implies the option seller is making a
loss of Rs.X
 If the option buyer is losing Rs.X, then it implies the option seller is making Rs.X in
profits
 Lastly if the option buyer is of the opinion that the market price will increase
(above the strike price to be particular) then the option seller would be of the
opinion that the market will stay at or below the strike price…and vice versa.
 After All it is Zero Sum Game
 So We Have to Find Out the Way How Can we Earn the Money
 Some Fact
 Spot – Stike =Difference
 Call – Put = Difference
 Is always Same
 If There Is Difference Than there is opportunity For Arbitrage
Advantage of A option Buyer and
Seller
 If We see Payout Graph of Any Option Buyer he has to Pay Only Preimum
the maximum he can lose is just Premium but on the other Hand if Some
one want to short Option either it is call or Put he need good Amount of
Money to Deposit to Broker And how much money he Required You Can
Calculate By Span Calculator
 Availabe Online almost at every Brokrage House Website
 When Volatility High These Margin Will Increase
Synthetic Future

 A Synthetic Long Future Contract Can be Created by Combining Long Call


and Shorting Put Option
 Similarly A Synthetic Short Future Can Be Created By Combing Long Put
And Shorting Call Option
 IN simple Word if I Have to Say
 F=C-P
 Where F Stands For Future And C Stands For Call And P Stands For Put
Option
 How This Synthetic Future Benefit I Will Cover it Later
Break Even

 Before Buying Any Option One Should know where am Going To maket
Profit And Where am Going To loss And How Much and AT what Time
 If You know Some Basic of Option Atleast U have an idea under what
Condition where m Going to make Money or loss Money
 So for learning purpose Let take Some Example of BreakEven
Payout Graph For Option Buyer And seller
And Summarizing all
Intrinsic Value of A option

 Before Buying Or Selling One should know How much he is paying or how
much he get if Option Expire on his Desired Price
 Intrinsic Value Always +ve And it is Valid for Both Call option as well as Put
Option
 It can not be –ve
 And never go below 0
 IV=Spot Value –Option Strike
 IV=11000-10800 =200 Where 11000 is Spot Value and 10800 is Option Strike
 In this Case 200 is intrinsic value
Option Pricing Or Option Greeks

 Whatever we learnt So far is Basic Of Option and I Guess All of us know


about this
 Now How a Option Price Behave or In other words we can say that how
option price change either it is for call or for put
 The Main Formula Which is used in Option Pricing Is Black & Scholes
Formula this formula tell us why a Nifty Put is trading at 200 or 150
and not 130 or 120
 Delta
 Gamma
 Vega(Volatility)
 Theta
 Rho
Delta

 The Delta measures how an options value changes with respect to the
change in the underlying. In simpler terms, the Delta of an option By how
many points will the option premium change for every 1 point change in
the underlying
 For Example if Nifty Move 1 Point How Option Preimum Changes
 Let us take Example Suppose Nifty is trading @ 11100 And 11100 CE is
Trading @ 150 now Nifty changes to 11101 then 11100 CE Become 150.60
 What does It means it means delta of this option is (.60)
Lets learn how to calculate Delta

 Delta value varies between 0 to 1 depends on Strike Price for Call Option
 Delta value varies Between 0 to -1 Depends on Strike Price For Put Option
 Why Put Delta Is –ve will Cover it Later For now Just Remember Delta Value
for Call Option And Put Option
Delta Value For Call Option And Put
Option According to Option Type

Approx Delta value Approx Delta


Option Type
(CE) value (PE)
Between + 0.8 to + Between – 0.8 to –
Deep ITM
1 1

Between + 0.6 to + Between – 0.6 to –


Slightly ITM
1 1

Between + 0.45 to + Between – 0.45 to


ATM
0.55 – 0.55
Between + 0.45 to + Between – 0.45 to -
Slightly OTM
0.3 0.3
Between + 0.3 to + Between – 0.3 to –
Deep OTM
0 0
Why Maximum Delta is 1

 Take a Example Delta of Option is 1.5


 Nifty @11000
 Nifty Call 11000 @ 150
 Nifty Change to Be Expected 50
 Then Total change =50*1.5=75
 As Option are Derivative Product its value Depend on Underlying it can nt
Move Faster Than its Underlying
 Hence Delta of a Call And Put Option Can nt Be > 1
 Similary Delta of Call Option is can nt < 0 if it is less than 0 thn End result in
the form of –ve Movement which is Impossible
 Next Question who decide Delta of A option
 Black & Sholes Option Pricing Formula Which Input some Value And
Gives Output
Delta for Call Option

 How we benefit By Knowing Delta Value of Option


 Let us take An Example
 Nifty @10:30 is 11000 And Nifty 11000 CE @ 150 (ATM) And having Delta
Value is 0.55
 Some one think Market Will Rise At Second Half and think Market will rise by
50 Point thn How much Option Preimum Change
 Option Strike =11000
 Option Preimum =150
 Delta of Option is = 0.55
 Nifty Expected Rise =11050
 We Expecting Nifty Change By 50 Point thn Option Preimum According to
Delta is =50*0.55=27.5
 (if All factor Remain Same )
 Now Your Call will Rise=150+27.5=177.5
 In this way u know How much Profit U can Make
 Similarly if some one is bearish and Expecting Market to Drop in Second Half
Thn Same example 150-27.5=122.5 if all Other Factor Remain same
Delta For Put Option

 the Delta of a Put Option ranges from -1 to 0. The negative sign is just to
illustrate the fact that when the underlying gains in value, the value of
premium goes down
 Nifty @11200 Nifty Put of 11000 @ 65
 Nifty is expected To Move Down by 50 Point
 Delta =-0.35
 Then = 50*-0.35=-17.5
 Net value =65+17.5=82.5
 M adding the value coz I know value of put option increase whn underlying
goes down Similarly if Market goes up 65-17.5 =47.5
 Its Luk Like Very Simple But it is not As Simple As it Luk like
 Delta Always Change When Underlying Change In the Money Option can
be Out Of the Money And Out of The Money Option Can Be In the Money
or ATM
 Hence In other Words Delta is not A fixed Entity
Delta Changes W.r.t To Underlying
Delta Value Changes

Change
Moneyn Old New %
Strike Delta in
ess Premium Premium Change
Premium

Deep 30* 0.05 = 3+1.5 =


2400 0.05 Rs.3/- 50%
OTM 1.5 4.5

Slightly
2275 0.3 Rs.7/- 30*0.3 = 9 7 +9 = 16 129%
OTM

30*0.5 = 12+15 =
ATM 2210 0.5 Rs.12/- 125%
15 27
Slightly 30*0.7 = 22+21 =
2200 0.7 Rs.22/- 95.45%
ITM 21 43
75 + 30
Deep ITM 2150 1 Rs.75/- 30*1 = 30 40%
=105
Few Case Studies
Nifty Spot @ 8125 Trader has 3 different Call

Sl No Contract Classification Lots Delta Position Delta


+ 1 * 0.7 = +
1 8000 CE ITM 1 -Buy 0.7
0.7
+ 1 * 0.5 = +
2 8120 CE ATM 1 -Buy 0.5
0.5
+ 1 * 0.05 = +
3 8300 CE Deep OTM 1- Buy 0.05
0.05

= 0.7 + 0.5 +
Total Delta of positions
0.05 = + 1.25
 The combined positions have a positive delta i.e. +0.25. This means both the underlying
and the combined position move in the same direction
 With the addition of Deep ITM PE, the overall position delta has reduced, this means the
combined position is less sensitive to the directional movement of the market
 For every 1 point change in Nifty, the combined position changes by 0.25 points
 If Nifty moves by 50 points, the combined position is expected to move by 50 * 0.25 = 12.5
points
Combination of Call And Put And
Delta Calculation

Sl No Contract Classification Lots Delta Position Delta


+ 1 * 0.7 = +
1 8000 CE ITM 1- Buy 0.7
0.7
+ 2 * (-1.0) = -
2 8300 PE Deep ITM 2- Buy -1
2.0
+ 1 * 0.5 = +
3 8120 CE ATM 1- Buy 0.5
0.5
+ 1 * 0.05 = +
4 8300 CE Deep OTM 1- Buy 0.05
0.05

0.7 – 2 + 0.5 +
Total Delta of positions
0.05 = – 0.75
Net Impact

 The combined positions have a negative delta. This means the underlying
and the combined option position move in the opposite direction
 With an addition of 2 Deep ITM PE, the overall position has turned delta
negative, this means the combined position is less sensitive to the
directional movement of the market
 For every 1 point change in Nifty, the combined position changes by – 0.75
points
 If Nifty moves by 50 points, the position is expected to move by 50 * (- 0.75)
= -37.5 points
Gamma

 Change in one Variable Due to Change in Another Variable


 With this change in underlying, one thing is very clear – the delta itself changes. Meaning
delta is a variable, whose value changes based on the changes in the underlying and the
premium
 Gamma captures the rate of change of delta, it helps us get an answer for a question
such as “What is the expected value of delta for a given change in underlying
 Nutshell we can say that if Underlying changes by 1 thn how much its delta change that
change decided by Gamma
 Nifty Spot = 8326
 Strike = 8400
 Option type = CE
 Moneyness of Option = Slightly OTM
 Premium = Rs.26/-
 Delta = 0.3
 Gamma = 0.0025
 Change in Spot = 70 points
 New Spot price = 8326 + 70 = 8396
 New Premium =??
 New Delta =??
 New moneyness =??
 Change in Premium = Delta * change in spot i.e 0.3 * 70 = 21
 New premium = 21 + 26 = 47
 Rate of change of delta = 0.0025 units for every 1 point change in underlying
 Change in delta = Gamma * Change in underlying i.e 0.0025*70 = 0.175
 New Delta = Old Delta + Change in Delta i.e 0.3 + 0.175 = 0.475
 New Moneyness = ATM
 When Nifty moves from 8326 to 8396, the 8400 CE premium changed from
Rs.26 to Rs.47, and along with this the Delta changed from 0.3 to 0.475.
 Notice with the change of 70 points, the option transitions from slightly OTM
to ATM option. Which means the option’s delta has to change from 0.3 to
somewhere close to 0.5. This is exactly what’s happening here.
One level up again

 Old spot = 8396


 New spot value = 8396 + 70 = 8466
 Old Premium = 47
 Old Delta = 0.475
 Change in Premium = 0.475 * 70 = 33.25
 New Premium = 47 + 33.25 = 80.25
 New moneyness = ITM (hence delta should be higher than 0.5)
 Change in delta =0.0025 * 70 = 0.175
 New Delta = 0.475 + 0.175 = 0.65
 Let’s take this forward a little further, now assume Nifty falls by 50 points, let us see what
happens with the 8400 CE option –
 Old spot = 8466
 New spot value = 8466 – 50 = 8416
 Old Premium = 80.25
 Old Delta = 0.65
 Change in Premium = 0.65 *(50) = – 32.5
 New Premium = 80.25 – 32. 5 = 47.75
 New moneyness = slightly ITM (hence delta should be higher than 0.5)
 Change in delta = 0.0025 * (50) = – 0.125
 New Delta = 0.65 – 0.125 = 0.525
Gamma constant ????

 you may wonder why the Gamma value is kept constant in the above
examples. Well, in reality the Gamma also changes with the change in the
underlying. This change in Gamma due to changes in underlying is
captured by 3rd derivative of underlying called “Speed” or “Gamma of
Gamma” or “DgammaDspot”. For all practical purposes, it is not necessary
to get into the discussion of Speed.
 But as I Trade option I will Tell u From my experience as option Goes Near
Expiry Gamma Become High For Atm And Itm And Very Slow Form Out of
The Money
 Unlike the delta, the Gamma is always a positive number for both Call and Put Option.
Therefore when a trader is long options (both Calls and Puts) the trader is considered
‘Long Gamma’ and when he is short options (both calls and puts) he is considered ‘Short
Gamma’.
 For example consider this – The Gamma of an ATM Put option is 0.004, if the underlying
moves 10 points, what do you think the new delta is?
 Since we are talking about an ATM Put option, the Delta must be around – 0.5. Remember
Put options have a –ve Delta. Gamma as you notice is a positive number i.e +0.004. The
underlying moves by 10 points without specifying the direction, so let us figure out what
happens in both cases.
Case 1 –Underlying moves up by 10
point
 Delta = – 0.5
 Gamma = 0.004
 Change in underlying = 10 points
 Change in Delta = Gamma * Change in underlying = 0.004 * 10 = 0.04
 New Delta = We know the Put option loses delta when underlying
increases, hence – 0.5 + 0.04 = – 0.46
Case 2 Underlying goes down by 10
points
 Delta = – 0.5
 Gamma = 0.004
 Change in underlying = – 10 points
 Change in Delta = Gamma * Change in underlying = 0.004 * – 10 = – 0.04
 New Delta = We know the Put option gains delta when underlying goes
down, hence – 0.5 + (-0.04) = – 0.54
3rd Greek Theta

 What is Theata
 Option Premium=Time Value + intrinsic Value
 On expiry Day You Receive Only Intrinsic value If a Call Have else Option
become 0 And u All Know Abt This
 Lets Find the Time Value And Intrinsic Value
 For Example Nifty Spot Price is 11500 And 11400 Ce Is traded @ 215
 Then intrinsic is =11500-11400 =100
and 215-100=115 so You are Paying 115 Extra that is Theta
But One Important Part is buying Date of Option and expiry Date of Option
 Impact of Time on Option
 Some time we See Index is up But Option Price Decreased Quit A bit
 Reason Behind This is Drop in Volatility And Time
 I will Cover Volatility Later For The time being If Vol Drops Option Price Decrease
Option Price Vs Time To Expiry
 Some Time Option Preimum Are too High But Time For Expiry is Very Near For Example Only
2 days Or 5 Days that time People Are Willing To Pay high Premium to Volatilty these Type
of Situation you see often when there is an Event or Volatility at upper Range like in these
days
 When Market rise or Down 1% Daily
 Theta is a friendly Greek to the option seller. Remember the objective of the option seller is
to retain the premium. Given that options loses value on a daily basis, the option seller
can benefit by retaining the premium to the extent it loses value owing to time. For
example if an option writer has sold options at Rs.54, with theta of 0.75, all else equal, the
same option is likely to trade at – =0.75 * 3 = 2.25 = 54 – 2.25 = 51.75 Hence the seller can
choose to close the option position on T+ 3 day by buying it back at Rs.51.75/- and
profiting Rs.2.25 …and this is attributable to theta
4th Greek Vega or Volatility

 This Greek Is Enemy For Option Seller And A Very Gud frnd for Option Buyer
 For Better Understanding let us take example
Consider 2 batsmen and the number of runs
they have scored over 6 consecutive
matches
Match Billy Mike

1 20 45

2 23 13

3 21 18

4 24 12

5 19 26

6 23 19
 You are the captain of the team, and you need to choose either Billy or
Mike for the 7th match. The batsman should be dependable – in the sense
that the batsman you choose should be in a position to score at least 20
runs. Whom would you choose
 There are two ways One is Calculate The Sigma Or Second Calcluate the
Average
 Sigma = Total Score (Who score Highest Run Select the Batsman)
 Average =Billy Sigma =130 ,Mike Sigma =133
 If u calculate average thn Billy =130/6=21.67 and Mike =133/6=22.16
Statistics Billy Mike

Sigma 130 133

Mean 21.6 22.16

SD 1.79 11.18
 In this way You are Selecting Mike
 But here is twist
 To begin with, for each match played we will calculate the deviation from
the mean. For example, we know Billy’s mean is 21.67 and in his first match
Billy scored 20 runs. Therefore deviation from mean form the 1st match is 20
– 21.67 = – 1.67. In other words, he scored 1.67 runs lesser than his average
score. For the 2nd match it was 23 – 21.67 = +1.33, meaning he scored 1.33
runs more than his average score
The middle black line represents the average score of Billy, and the double
arrowed vertical line represents the the deviation from mean, for each of
the match played.
 Variance is simply the ‘sum of the squares of the deviation divided by the total number of
observations’. This may sound scary, but its not. We know the total number of observations
in this case happens to be equivalent to the total number of matches played, hence 6.
 So variance can be calculated as –
 Variance = [(-1.67) ^2 + (1.33) ^2 + (-0.67) ^2 + (+2.33) ^2 + (-2.67) ^2 + (1.33) ^2] / 6
= 19.33 / 6
= 3.22
 Further we will define another variable called ‘Standard Deviation’ (SD) which is calculated
as –
 std deviation = √ variance
 So standard deviation for Billy is –
= SQRT (3.22)
= 1.79
Player Lower Estimate Upper Estimate

21.6 – 1.79 = 21.6 + 1.79 =


Billy
19.81 23.39

22.16 – 11.18 = 22.16 + 11.18 =


Mike
10.98 33.34
So if u observe this example mike is risky as his range fall 10.98 tp 33 he can
maket 11 run and 33 that’s probability
On the other hand billy has probability for 19.89 to 23 so which looks gud
average wise is not more risky than other
 Why I choose this example and its bit complicated nt Easy to understand
buy here come the Another twist
 In recent example I want to pick batsman who is less risky and in that case I
will pick billy coz Selecting Mike over billy is more risky
 Now all of You can answer why I m asking this
 if Infosys and TCS have volatility of 25% and 45% respectively, then clearly
Infosys has less risky price movements when compared to TCS
Let’s do some Math Now

 Today’s Date 15th April 2018


 Nifty Spot is 10500
 Nifty Volatility is 14%
 Infy Spot is 1175
 Infy Vol=20%
 Can You Predict the likely Range For 1 Year If This Factor Remain Same
 If they Changes thn Range of Nifty And infy Also Change
 Nifty=10500-(14%*10500)=9030 lowest Range
 Nifty =10500+(14%*10500)=11970 Higest Range
 Infy =1175+(20%*1175)=1410 Higest Range
 Infy=1175-(20%*1175)=940 lowest Range

 So next question is Can we calculate 1 day Volatility Also Yes We Can


 Open Excel file And Print
Now the Main Part How to earn Money
in option
 How to Select Right Strike Price for Shorting or Buying Option
 Or Calculating The SL Of Trade
 Then how do we know
 As we calculated The Yearly Vol similarly we can calculate Monthly Option
SD And for 15 days or Any Desired Time Frame But I Recommend Have
Minimum 15 days Peroid or By Experience You will Know wht time frame
Suits You
 For Example Daily Sd =1.4 And last 15 day 5% then u can calculate
 Which strike price to short or Buy
Volatility Based Sl

 Why do most trader caught during Trade


 M not saying this is 100 % sure formula but wana share with u all
 Coz they Place Mental SL And if m not wrong they Place sl using chart
 M not saying chart is nt Gud but if u go by History someone say market
support is at 9820 market goes below that and thn reverse back what does
it mean
 when volatility increases, the stock/index price starts swinging heavily. To
put this in perspective, imagine a stock is trading at Rs.100, with increase in
volatility, the stock can start moving anywhere between 90 and 110. So
when the stock hits 90, all PUT option writers start sweating as the Put
options now stand a good chance of expiring in the money. Similarly, when
the stock hits 110, all CALL option writers would start panicking as all the
Call options now stand a good chance of expiring in the money.
5th The Rho Greek

 Rho is a standard Greek (a computed quantitative parameter) that measures the impact
of a change in interest rates on an option price. It indicates the amount by which the
option price will change for every 1% change in interest rates. Assume that a call option is
currently priced at $5 and has a rho value of 0.25. If the interest rates increase by 1%, then
the call option price will increase by $0.25 (to $5.25) or by the amount of its rho value.
Similarly, the put option price will decrease by the amount of its rho value.
 Since interest rate changes don’t happen that frequently, and usually are in increments of
0.25%, rho is not considered a primary Greek in that it does not have as a major impact on
option prices compared to other factors (or Greeks like delta, gamma, vega, or theta).
 So nutshell whn volatility increase Premiums for both call and put increase and it can be
anything depends on Event or volatility I have seen before expiry 250 rate also for nifty
ATM put Call combine
Call option premium vs volatility
Some fact while Buying And Shorting
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