Sensex Devta

The Greeks : Delta, Gamma , Theta, Vega and Rho

Delta : delta measures the sensitivity of the option value to changing stock price. Delta of any option gives an idea about the number of unit of a stock that should be held by any investor for creating a riskless hedge.

Gamma : the gamma of any option is rate of the change of the option s delta with respect to the price of the underlying stock.

Theta : Theta measure the option respect of change in expiration time . if stock price and other factors of the option pricings constant model are constant .

Rho : Rho can be measure of the sensitivity of option value to change in interest rates .

Vega : vega measures the sensitivity of the option premium with respect to the volatility of the asset .

Factors influencing the option price

Current stock price (spot price), Strike price, Time to expiration ,Volatility , Risk free rate and Dividend

Current stock price (spot price) : value of call option increase with increasing the stock price . while its value decreases whenever the stock price declines value of put option increase with decrease in stock price . while it value in decrease with increase in stock price.

Strike price : call option increase with decrease in strike price and decrease when increase in strike price vice versa with put

Time to expiration : call and put both are decrease phase with time

Volatility : call and put both value are increased with increasing in volatility

Risk free rate : value of call option increased with increasing in risk free rate. Value of put option decrease with increase in risk free rate

Option strategies :

(1)Bull and Bear spread : A bull spread is a combination of options created to profit from a rise In price of the underlying assets.

A bear spread spread is a combination of options created to profit from a fall In price of the underlying assets.

Long bull spread : buy lower, sell higher ………buy 4900 put sell 5300put ,buy call 4900,sell 5300 call

Risk exposure limited, Limited profit potential ,Trend are clear in future ,call and put both are use

(2)Box spread: A box spread is a combination of bull and bear spread with call and put respectively with same strike price

Long call at lower strike price , short call at higher strike price

Long put at higher strike price , short put at power strike price

If you are a risk adverse investor there you can adopt this strategy since this always gives a pay off the difference between the higher and lower strike price

Two call and two put are use , same strike price

Condor spread : A condor spread strategy involving four option of the same type but with a small difference

Two option are bought with lower and higher strike price sell two option with intermediate strike price

Limited loss and limited profit , call and put both are use , trend are not clear

Calender spread : it is created by selling a call option with a certain strike price and buying another call option with long maturity but the same strike price .

Butterfly spread : A butterfly spread can be executed by using four identical option with the same expiration date and on the same underlying stock but different strike price

Buy lower and higher strike price , sell two intermediate strike price

Direction are not clear , use both call and put and long and short both strategy

Straddle : straddle involves buying call and put with the same strike price

Limited risk ,limited loss , profit upside unlimited , downside limited, direction not clear.

Strangle : combination of call and put with same expiration date and different strike price

Buying call higher strike price , buying put lower strike price

increasing in stock price as likely as it decrease.

Strips : a strips consists of long position in one call and two put the same strike price and expiration date

Volatile stock , buyer belive that stock price will be big move but price is more likely fall than rise.

Straps : buying two call and sell one put same strike price and expiration date

Stock is more likely rise than fall , volatile stock

Generation of strike for stock options

Generation of strike for index options

Option market instruments :

(1) Index based option

(2) stock based option

Contract specification for index option : on Nse index options market are one –month, two month and three month expiry contracts with minimum nine different strikes available for trading. Hence , if there are three serial month contracts available and the scheme of strikes 6-1-6 , then there are minium 3*13*2 (call and put option) i.e. 78 option contracts available on an index . option contracts are specified as follows : DATE- EXPIRYMONTH-YEAR-CALL/PUT-AMERICAN/EUROPEAN-STRIKE.

Contract specification of S&P CNX Nifty options

Contract specification of stock options

New contract will be introduced on the next trading day following the expiry of near month

Options

Option market :

Option are traded either on an organized exchange or on over the counter (OTC) market .

Option Terminology:

Index options : have the index as the underlying. They can be European or American . they also cash settled.

Stock options : they are options on individual stock and give the holder the right to buy or sell shares at the specified price. They can be European or American.

Buyer of an options : The buyer of an option is the one who by paying the option premium buys the but not the obligation to exercise his option on the seller/ writer.

Writer of an option : the writer of a call/ put option is the one who receives the premium and is thereby obliged to sell / buy the assets if the buyer exercise on him

There are two basic types of option , call option and put option.

Call option :A call option gives the buyer of an option the right to purchases from the seller the underlying asset

Put option :A put option gives the buyer of option the right to sell the underlying asset

Option price / premium : it is the price which the option buyer pays to the option seller . it is also called the option premium .

Expiration date : the date specified in the option contract is known as the expiration date , the exercise date , the strike date or the maturity.

Exercise price or strike price : Entering into the contract , the parties agree upon a price at which the underlying asset may be bought or sold . the price is referred to as the exercise price or the strike price .

American style: An option contract which can be exercised any time before the expiration date

European style: An potion contract which can be exercise on the date of expiration date

At –the- money: An option is At- the- money exercise price is equal to the spot price.

In- the- money : A call option is In–the-money when the strike price is below the current spot price of the underlying asset and a put option is In- the- money when the strike price is above the current price of the underlying asset .

Out– of– the-money : A call option is out –of- the-money when the strike price is above the current spot price of the underlying asset and a put option is Out –of –the money when the strike price is below the spot price of underlying asset .

Intrinsic value : call (0,S-X) , Put (0,X-S)

S : spot price , X: Strike price

Time value : The difference between the option premium and the intrinsic value .

Derivatives Analysis &Valuation

Forwards, Future, Option and Swap

Derivatives instrument : Commodity ,Currency, Interest, Equity

Forward: An agreement between two party , a buyer and a seller, that calls for the delivery of an assets at future date with a price agreed todays . the instrument can not be trade in any recognished stock exchange.

Future:two party involved in a future contract . the seller of the contract , who agrees to deliver the asset at the specified time in future and the buyer of the contract , who agrees to pay a fixed price and takes delivery of the asset. The futures contract is used by a buyer and seller in order t hedge other positions of the underling asses.

Option :An option is a contact in which the seller (also called the writer) , gives the buyer the right but not obligation to purchase from a designation asset at a specific price which is agreed upon at the time of entering into the contract

Swap:an agreement or transaction in which two or more parties exchange their cash flows at a predetermined series of payment . exchange of interest rate payment for specific maturity on an agreed upon notional principal. One party received fixed and received floating rate or vice versa.

Option market instruments :

(1) Index based option

(2) stock based option

Contract specification for index option : on Nse index options market are one –month, two month and three month expiry contracts with minimum nine different strikes available for trading. Hence , if there are three serial month contracts available and the scheme of strikes 6-1-6 , then there are minium 3*13*2 (call and put option) i.e. 78 option contracts available on an index . option contracts are specified as follows : DATE- EXPIRYMONTH-YEAR-CALL/PUT-AMERICAN/EUROPEAN-STRIKE.

Contract specification of S&P CNX Nifty options