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  • Value Creation Through Risk Management: Dr. Shantanu Chakraborty Asst. Professor Iiswbm

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    An option provides the holder the right but not the obligation to buy or sell an underlying asset at a predetermined price on or before an expiration date. There are two main types of options - calls, which give the right to buy, and puts, which give the right to sell. For calls, the buyer profits if the asset price rises above the strike price, while the seller profits if it remains below. For puts, the buyer profits if the price falls below the strike, while the seller profits if it remains above. Options can be in, at, or out of the money depending on the relationship between the current asset price and strike price.

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    An option provides the holder the right but not the obligation to buy or sell an underlying asset at a predetermined price on or before an expiration date. There are two main types of options - calls, which give the right to buy, and puts, which give the right to sell. For calls, the buyer profits if the asset price rises above the strike price, while the seller profits if it remains below. For puts, the buyer profits if the price falls below the strike, while the seller profits if it remains above. Options can be in, at, or out of the money depending on the relationship between the current asset price and strike price.

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    17 views13 pages

    Value Creation Through Risk Management: Dr. Shantanu Chakraborty Asst. Professor Iiswbm

    Uploaded by

    Abhijit Kumar Basu
    An option provides the holder the right but not the obligation to buy or sell an underlying asset at a predetermined price on or before an expiration date. There are two main types of options - calls, which give the right to buy, and puts, which give the right to sell. For calls, the buyer profits if the asset price rises above the strike price, while the seller profits if it remains below. For puts, the buyer profits if the price falls below the strike, while the seller profits if it remains above. Options can be in, at, or out of the money depending on the relationship between the current asset price and strike price.

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    of 13

    Value Creation through Risk Management

    Dr. Shantanu Chakraborty Asst. Professor IISWBM

    What is an option?
    An

    option provides the holder with the right to buy or sell a specified quantity of an underlying asset at a fixed price (called a strike price or an exercise price) on or before the expiration date of the option. Since it is a right and not an obligation, the holder can choose not to exercise the right and allow the option to expire. There are two types of options - call options (right to buy) and put options (right to sell).

    Call & Put


    Buyer of a call option long call Seller of a call option short call Buyer of a put option long put Seller of a put option Short Put

    Underlying

    asset could be

    Stocks, bonds, commodity, indices, foreign currency & real assets.

    Call Options
    A

    call option gives the buyer of the option the right to buy the underlying asset at a fixed price (strike price or , X or K) at any time on/ before the expiration date of the option. The buyer pays a price for this right Call premium

    Long Call on Tata steel


    Profit from buying one Tata steel call option: Call premium = Rs.5, strike price = Rs.100, option life = 2 months 30 Profit (Rs.) 20 10 70 0 -5 80 90 100 Terminal stock price (Rs.) 110 120 130

    Short Call on Tata steel


    Profit from writing/selling one Tata steel call option: Option Premium = Rs.5, strike price = Rs.100 Profit (Rs.) 5 0 -10 -20 -30 110 120 130 70 80 90 100 Terminal stock price (Rs.)

    ZERO SUM GAME???

    Put Options

    A put option gives the buyer of the option the right to sell the underlying asset at a fixed price on/at any time before the expiry date of the option.

    The

    buyer pays a price for this right put premium

    Long Put on Hindalco


    Profit from buying an Hindalco put option: Put premium = Rs.7, strike price = Rs.70 30 Profit (Rs.)

    20 10
    0 -7 Terminal stock price (Rs)

    40

    50

    60

    70

    80

    90 100

    Short Put on Hindalco


    Profit from writing an Hindalco put option: option price = Rs.7, strike price = Rs.70 Profit (Rs.) 7 0 -10 -20 -30 40 50 60 Terminal stock price (Rs.)

    70

    80

    90 100

    Position Long Call/Call Holder Long Put/Put Holder

    Profit/Loss Unlimited profit potential & limited loss to the tune of premium Limited profit to the tune of premium & unlimited loss

    Short Call/Call Writer Short Put/Put Writer

    Options Type

    An option is in-the-money (ITM) option when it is profitable for the option holder, if exercised. And option is out-of-money (OTM) when the option holder looses money if exercises the option. An option is at-the-money (ATM) when the underlying stock price is identical or relatively close to the option strike price.

    Thank You

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