04 - 05 - Option Strategies & Payoff's

7/23/2019 04 - 05 - Option Strategies & Payoff's

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OPTIONS

INTRODUCTION TO OPTIONS

An option is a contract written by a seller that conveys to the buyer the right

obligation to buy (in the case of a call option) or to sell (in the case of a put

particular asset, at a particular price (Strike price / Exercise price) in future.

granting the option, the seller collects a pay!ent (the pre!iu!) fro! the buyer


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OPTION TERMINOLOGY Index options: "hese options have the in#ex as the un#erlying.

Stock options: Stock options are options on in#ivi#ual stocks. A stock option

gives the hol#er the right to buy or sell the un#erlying shares at the specifie#

Buyer of an option: "he person who obtains the right to buy or sell but has n

to perfor! is calle# the owner / hol#er of the option. $ne who buys an option

pre!iu! to obtain the right.

Writer / seller of an option: $ne who confers the right an# un#ertake the obl

the hol#er is calle# seller / writer of an option.


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Call option:A right toBUYthe un#erlying asset at pre#eter!ine# price with

interval of ti!e is calle# as %A&& $ption.

Put option:A right toSELLthe un#erlying asset at pre#eter!ine# price with

specifie# interval of ti!e is calle# as '" $ption.

Option price/preiu: $ption price is the price which the option buyer pay

option seller. t is also referre# to as the option pre!iu!.

Expiration date: "he #ate specifie# in the options contract is known as the ex#ate, the exercise #ate, the strike #ate or the !aturity.

Strike price: "he pre#eter!ine# price at the ti!e of buying/writing of an opt

it can be exercise# is calle# the stroke price. t is the price at which the hol#e

option buys/sells the asset.


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!erican options:A!erican options are options that can be exercise# at any

the expiration #ate.

European options:European options are options that can be exercise# only

expiration #ate itself.

In"t#e"oney option:An inthe!oney ("*) option is an option that woul#

positive cashflow to the hol#er if it were exercise# i!!e#iately. A call option

is sai# to be inthe!oney when the current in#ex stan#s at a level higher tha

price $i%e% arket price & strike price'. n the case of a put, the put is "* if t

below the strike price.


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!t"t#e"oney option:An atthe!oney (A"*) option is an option that woul# lea

cashflow if it were exercise# i!!e#iately. An option on the in#ex is atthe!oney

current in#ex euals the strike price $i%e% arket price ( strike price'.

Out"of"t#e"oney option- An outofthe!oney ($"*) option is an option that wa negative cashflow if it were exercise# i!!e#iately. A call option on the in#ex i

!oney when the current in#ex stan#s at a level which is less than the strike price

price ) strike price'. n the case of a put, the put is $"* if the in#ex is above the

Intrinsic *alue of an option- "he intrinsic value of a call is the a!ount the op

if it is "*. f the call is $"*, its intrinsic value is +ero.

+ie *alue of an option: "he ti!e value of an option is the #ifference between it

an# its intrinsic value.


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Moneyness of the Call Option

Three call options A ! " C #ith e$ercise price of Rs %&& Rs %&' " Rs %%& arRs * Rs + " Rs %, respecti-ely #hen the .n(erlyin) stoc/ is tra(in) at Rs %&'

Moneyness of each of the options2

Option A3 S 4 5 6 %&' 4 %&& 6 Positi-e 7In8the89oney :y Rs ';

Option !3 S 4 5 6 %&' 4 %&' 6


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CALL " PUT OPTIONS

!UY CALL MP 6 %&&&

SP 6 %%&&

If % 9onth later

MP 6 %*&& =>%&&?

MP 6 %%&& =&?

MP 6 @&& =not e$ercise?

!UY PUT

MP 6 %&&&

SP 6 @&&

If % 9onth later

MP 6 && =>*&&?

MP 6 @&& =&?

MP 6 %&&& =not e$ercise?

Buyer has the right, Loss of Premium &

No obligation


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SELL CALL

MP 6 %&&&

SP 6 %%&&

Pre9i.9 6 '&

If % 9onth later

MP 6 %*&& =8%&&?

MP 6 %%&& =&?

MP 6 @&& =:.yer #ill not e$ercise? >

Pre9i.9 A9o.nt

SELL PUT

MP 6 %&&&

SP 6 @&&

Pre9i.9 6 '&

If % 9onth later

MP 6 && =8*&&?

MP 6 @&& =&?

MP 6 %%&& =!.yer #ill not e$ercise? > Pre9i.9 A9o.n

,o -i.#ts Preiu 0ill 1e recei*ed O1li.ation if exercised


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OPTIONS PAYOBBSPayoff profile of :.yer of asset3 Lon) asset

An in-estor :.ys the .n(erlyin) asset A!C Lt(0 shares for instance for Rs0 **

it at a f.t.re (ate at an .n/no#n price0 Once it is p.rchase( the in-estor is sai(

the asset0 !elo# sho#s the payoff for a lon) position on A!C Lt(0

The in-estor :o.)ht A!C Lt(0 at Rs0 ***&0

If the share price )oes .p he profits0

If the share price falls he loses0


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Payoff profile for seller of asset3 Short asset

An in-estor shorts the .n(erlyin) asset A!C Lt(0 shares for instance for Rs0 *

:.ys it :ac/ at a f.t.re (ate at an .n/no#n price0 Once it is sol( the in-estor i

short the asset0 !elo# sho#s the payoff for a short position on A!C Lt(00

The in-estor sol( A!C Lt(0 at Rs0 ***&0

If the share price falls he profits0

If the share price rises he loses0


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Payoff profile for :.yer of call options3 Lon) call

A call option gives the buyer the right to buy the un#erlying asset at the stri

specifie# in the option.

The profitloss that the :.yer 9a/es on the option (epen(s on the 9ar/et price

.n(erlyin)0 If .pon e$piration the 9ar/et price e$cee(s the stri/e price he 9a

i)her the 9ar/et price 9ore is the profit he 9a/es0 If the 9ar/et price of the

less than the stri/e price he lets his option e$pire .n8e$ercise(0 is loss in this

pre9i.9 he pai( for :.yin) the option0 !elo# )i-es the payoff for the :.yer o

9onth call option 7often referre( to as lon) call; #ith a stri/e of **'& :o.)ht a

of +F0F&0


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Payoff for :.yer of call option

The fi).re sho#s the profitslosses for the :.yer of a three89onth Nifty **'& call optio

seen as the spot Nifty rises the call option is in8the89oney0 If .pon e$piration Nifty c

the stri/e of **'& the :.yer #o.l( e$ercise his option an( profit to the e$tent of the (

:et#een the Nifty8close an( the stri/e price0 The profits possi:le on this option are pot

.nli9ite(0 o#e-er if Nifty falls :elo# the stri/e of **'& he lets the option e$pire0 i

li9ite( to the e$tent of the pre9i.9 he pai( for :.yin) the option0


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Payoff profile for #riter 7seller; of call options3 Short call

A call option gives the buyer the right to buy the un#erlying asset at the strike

specifie# in the option.

Bor sellin) the option the #riter of the option char)es a pre9i.90 The profitloss

:.yer 9a/es on the option (epen(s on the 9ar/et price of the .n(erlyin)0 1

:.yers profit is the sellers loss0 If .pon e$piration the 9ar/et price e$cee(s the st

:.yer #ill e$ercise the option on the #riter0 ence as the 9ar/et price increases th

the option starts 9a/in) losses0 i)her the 9ar/et price 9ore is the loss he 9a/es

e$piration the 9ar/et price of the .n(erlyin) is less than the stri/e price the :.yer

option e$pire .n8e$ercise( an( the #riter )ets to /eep the pre9i.90 !elo# )i-es th

the #riter of a three 9onth call option 7often referre( to as short call; #ith a stri/e

at a pre9i.9 of +F0F&0


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Payoff for #riter of call option

The fi).re sho#s the profitslosses for the seller of a three89onth Nifty **'& call optio

Nifty rises the call option is in8the89oney an( the #riter starts 9a/in) losses0 If .pon

Nifty closes a:o-e the stri/e of **'& the :.yer #o.l( e$ercise his option on the #rite

s.ffer a loss to the e$tent of the (ifference :et#een the Nifty8close an( the stri/e price

can :e inc.rre( :y the #riter of the option is potentially .nli9ite( #hereas the 9a$i9

li9ite( to the e$tent of the .p8front option pre9i.9 of Rs0+F0F& char)e( :y hi90


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Payoff profile for :.yer of p.t options3 Lon) p.t

A put option gives the buyer the right to sell the un#erlying asset at the strike p

in the option.

The profitloss that the :.yer 9a/es on the option (epen(s on the 9ar/et price

.n(erlyin)0 If .pon e$piration the 9ar/et price is :elo# the stri/e price he 9a

Lo#er the 9ar/et price 9ore is the profit he 9a/es0 If the 9ar/et price of the .

hi)her than the stri/e price he lets his option e$pire .n8e$ercise(0 is loss in th

pre9i.9 he pai( for :.yin) the option0 !elo# )i-es the payoff for the :.yer o

9onth p.t option 7often referre( to as lon) p.t; #ith a stri/e of **'& :o.)ht at

of F%0&0


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Payoff for :.yer of p.t option

The fi).re sho#s the profitslosses for the :.yer of a three89onth Nifty **'& p.t optio

seen as the spot Nifty falls the p.t option is in8the89oney0 If .pon e$piration Nifty cl

the stri/e of **'& the :.yer #o.l( e$ercise his option an( profit to the e$tent of the (i

:et#een the stri/e price an( Nifty8close0 The profits possi:le on this option can :e as h

stri/e price0 o#e-er if Nifty rises a:o-e the stri/e of **'& he lets the option e$pire0

li9ite( to the e$tent of the pre9i.9 he pai( for :.yin) the option0


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Payoff profile for #riter 7seller; of p.t options3 Short p.t

A put option gives the buyer the right to sell the un#erlying asset at the strike pr

in the option.

Bor sellin) the option the #riter of the option char)es a pre9i.90 The profitloss

:.yer 9a/es on the option (epen(s on the 9ar/et price of the .n(erlyin)0 1hate

:.yers profit is the sellers loss0 If .pon e$piration the 9ar/et price happens to :

stri/e price the :.yer #ill e$ercise the option on the #riter0 If .pon e$piration th

of the .n(erlyin) is 9ore than the stri/e price the :.yer lets his option .n8e$erci

#riter )ets to /eep the pre9i.90 !elo# )i-es the payoff for the #riter of a three

option 7often referre( to as short p.t; #ith a stri/e of **'& sol( at a pre9i.9 of F


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Payoff for #riter of p.t option

The fi).re sho#s the profitslosses for the seller of a three89onth Nifty **'& p.t option

Nifty falls the p.t option is in8the89oney an( the #riter starts 9a/in) losses0 If .pon e

Nifty closes :elo# the stri/e of **'& the :.yer #o.l( e$ercise his option on the #rite

s.ffer a loss to the e$tent of the (ifference :et#een the stri/e price an( Nifty8 close0 Th

:e inc.rre( :y the #riter of the option is a 9a$i9.9 e$tent of the stri/e price 7Since th

can happen is that the asset price can fall to Hero; #hereas the 9a$i9.9 profit is li9ite

e$tent of the .p8front option pre9i.9 of Rs0F%0& char)e(

:y hi90


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STRATEGY % 3 LONG CALL

When to Use: In-estor is -ery bullish on the stoc/ in(e$0

Risk: Li9ite( to the Pre9i.90

Reward: Unli9ite(


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Mr0 5Y< is :.llish on Nifty on *,th .ne #hen the Nifty is at ,%@%0%&0 e :.

option #ith a stri/e price of Rs0 ,F&& at a pre9i.9 of Rs0 JF0J' e$pirin) on

If the Nifty )oes a:o-e ,FJF0J' Mr0 5Y< #ill 9a/e a net profit 7after

the pre9i.9; on e$ercisin) the option0 In case the Nifty stays at or falls :elo#

can fore)o the option 7it #ill e$pire #orthless; #ith a 9a$i9.9 loss of the pre

Current Nifty

Index

4191.10

Call Option Strike Price (Rs) 4600

Mr. XYZ Pays Premium (Rs) 6.!


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Payoff Sche(.le

On expiry Nifty

closes at

Net Payoff from

Call

Option (Rs.)

4100.00 !".!#

4!00.00 !".!#

4#00.00 !".!#

4"!".!# 04$00.00 "!."#

4900.00 %"!."#

#100.00 4"!."#

#!00.00 ""!."#


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STRATEGY * 3 SORT CALL

When to use: In-estor is -ery a))ressi-e an( he is very bearish a:o.t the

in(e$0

Risk: Unli9ite(

Reward: Li9ite( to the a9o.nt of pre9i.9


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Mr0 5Y< is :earish a:o.t Nifty an( e$pects it to fall0 e sells a Call option #it

price of Rs0 *F&& at a pre9i.9 of Rs0 %', #hen the c.rrent Nifty is at *F@,0 If

stays at *F&& or :elo# the Call option #ill not :e e$ercise( :y the :.yer of the

Mr0 5Y< can retain the entire pre9i.9 of Rs0 %',0

Strate)y 3 Sell Call Option

C.rrent Nifty in(e$ *F@,

Call Option Stri/e Price 7Rs0; *F&&

Mr0 5Y< recei-es Pre9i.9 7Rs0; %',


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Payoff Sche(.le

On expiry

Nifty closes at

Net Payoff from the Call

Options Rs!"

#$%% &'$

#'%% &'$

#(%% &'$

#)%% '$

#)'$ %

#*%% +$(

#,%% +&$(

-%%% +#$(


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STRATEGY J 3 SYNTETIC LONG CALL3 !UY STOCK !U

When to use: 1hen o#nership is (esire( of stoc/ yet in-estor is conce

near8ter9 (o#nsi(e ris/0 The o.tloo/ is conservatively bullish!

Risk: Losses li9ite( to Stoc/ price > P.t Pre9i.9 4 P.t Stri/e price

Reward: Profit potential is .nli9ite(0

M 5Y< i : lli h : t A!C Lt( t / : A!C Lt( t t / t


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Mr0 5Y< is :.llish a:o.t A!C Lt( stoc/0 e :.ys A!C Lt(0 at c.rrent 9ar/et

,&&& on ,th .ly0 To protect a)ainst fall in the price of A!C Lt(0 7his ris/; he :

Lt(0 P.t option #ith a stri/e price Rs0 J@&& 7OTM; at a pre9i.9 of Rs0 %,J0+&

J %st .ly0

.trate/y : 0uy .tock 1 0uy Put Option

0uy .tock 2r! 345

pays"

C.rrent Mar/et Price of A!C Lt(0

7Rs0;

$%%

Stri/e Price 7Rs0; -,%

0uy Put 2r! 345

pays"

Premium Rs!"

&$-!


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Payoff Sche(.le

&'C td.

closes at

(Rs.) on

expiry

Payoff from

te

*toc+ (Rs.)

Net Payoff from

te

Put Option

(Rs.)

Net

Payo,

(Rs.)

!400.00 "600.00 !6.#0 %4!.-

!"00.00 "400.00 $!6.#0 %4!.-

!-00.00 "#00.00 "4.%0 %4!.-

4000.00 0 "$4.%0 14!.-414!.-0 $4.%0 "$4.%0 0

4%00.00 #00.00 "$4.%0 #".%0

4400.00 400.00 "$4.%0 %#".%

4"00.00 600.00 "$4.%0 4#".%

4-00.00 -00.00 14!.-0 "#".%


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STRATEGY , 3 LONG PUT

When to use: In-estor is :earish a:o.t the stoc/ in(e$0

Risk: Li9ite( to the a9o.nt of Pre9i.9 pai(0

Reward: Unli9ite(


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Mr0 5Y< is :earish on Nifty on *,th .ne #hen the Nifty is at *F@,0 e :.

option #ith a stri/e price Rs0 *F&& at a pre9i.9 of Rs0 '* e$pirin) on J%st .

Nifty )oes :elo# *',+ Mr0 5Y< #ill 9a/e a profit on e$ercisin) the option0

Nifty rises a:o-e *F&& he can fore)o the option 7it #ill e$pire #orthless; #ith

loss of the pre9i.90

*tratey / 'uy Put Option

Current &i'ty ine %"94

Put Option Strike Price (Rs.) %"00

r. 23 Pays Premium (Rs.) #%


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Payoff Sche(.le

On expiry Niftycloses at

Net Payoff from

Put Option (Rs.)

%!00 %4-%400 14-

%#00 4-

%#4- 0

%"00 #%

%$00 #%

%-00 #%%900 #%


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STRATEGY ' 3 SORT PUT

When to Use: In-estor is -ery 0ullish on the stoc/ in(e$0 The 9ain i(ea is

short ter9 inco9e0

Risk: P.t Stri/e Price 4 P.t Pre9i.90

Reward: Li9ite( to the a9o.nt of Pre9i.9 recei-e(0


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Mr0 5Y< is :.llish on Nifty #hen it is at ,%@%0%&0 e sells a P.t option #ith a

of Rs0 ,%&& at a pre9i.9 of Rs0 %&0'& e$pirin) on J%st .ly0 If the Nifty in

a:o-e ,%&& he #ill )ain the a9o.nt of pre9i.9 as the P.t :.yer #ont e$erc

option0 In case the Nifty falls :elo# ,%&& P.t :.yer #ill e$ercise the option5Y< #ill start losin) 9oney0 If the Nifty falls :elo# J@*@0'& #hich

:rea/e-en point Mr0 5Y< #ill lose the pre9i.9 an( 9ore (epen(in) on the

fall in Nifty0*tratey / *ell Put Option

Current &i'ty ine 4191.1

0

Put Option Strike Price (Rs.) 4100

r. 23

recei5es

Premium (Rs.) 1$0.#


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Payoff Sche(.le

On expiry Nifty

Closes at

Net Payo, from te

Put Option (Rs.)

!400.00 #%9.#0

!#00.00 4%9.#0

!$00.00 %%9.#0

!900.00 %9.#0

!9%9.#0 0

4100.00 1$0.#0

4!00.00 1$0.#0

4#00.00 1$0.#0


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STRATEGY F 3 COERED CAL

When to Use: This is often e9ploye( #hen an in-estor has a short+term

moderately bullish -ie# on the stoc/ he hol(s0

Risk: If the Stoc/ Price falls to Hero the in-estor loses the entire -al.e of

:.t retains the pre9i.9 since the Call #ill not :e e$ercise( a)ainst hi90

Reward: Li9ite( to 7Call Stri/e Price 4 Stoc/ Price pai(; > Pre9i.9 rec


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Mr0 A :o.)ht 5Y< Lt(0 for Rs J+'& an( si9.ltaneo.sly sells a Call option at an

of Rs ,&&&0 1hich 9eans Mr0 A (oes not thin/ that the price of 5Y< Lt(0 #ill r

Rs0 ,&&&0 o#e-er incase it rises a:o-e Rs0 ,&&& Mr0 A (oes not 9in( )ettin)

that price an( e$itin) the stoc/ at Rs0 ,&&& 7TARGET SELL PRICE 6 J0@& restoc/ p.rchase price;0 Mr0 A recei-es a pre9i.9 of Rs +& for sellin) the Ca

o.tflo# to Mr0 A is 7Rs0 J+'& 4 Rs0 +&; 6 Rs0 J&0 e re(.ces the cost of :.y

:y this strate)y0

If the stoc/ price stays at or :elo# Rs0 ,&&& the Call option #ill not )et e$erciscan retain the Rs0 +& pre9i.9 #hich is an e$tra inco9e0

If the stoc/ price )oes a:o-e Rs ,&&& the Call option #ill )et e$ercise(

:.yer0

.trate/y : 0uy .tock 1 .ell Call Option


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2r! 6 buys the stock 345

7td!

Mar/et Price 7Rs0; -*'%

Call Options Stri/e Price 7Rs0; $%%%

2r! 6 receives Premium Rs!" *%

345 7td! price closes at

Rs!"

Net Payoff

Rs!"

-(%% +&)%

-)%% +)%

-)$% +-%

-))% %

-*%% -%

-,%% &-%

$%%% #-%

$&%% #-%

$#%% #-%

STRATEGY 3 LONG COM!O 3 SELL A PUT


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STRATEGY 3 LONG COM!O 3 SELL A PUT

CALL

When to Use: In-estor is 0ullish on the stoc/0

Risk: Unli9ite(

Reward: Unli9ite(

A stoc/ A!C Lt(0 is tra(in) at Rs0 ,'&0 Mr0 5Y< is :.llish on the stoc/0

not #ant to in-est Rs0 ,'&0 e (oes a Lon) Co9:o0 e sells a P.t option #ith

Rs0 ,&& at a pre9i.9 of Rs0 %0&& an( :.ys a Call Option #ith a stri/e price of R

pre9i.9 of Rs0 *0 The net cost of the strate)y 7net (e:it; is Rs0 %0

*tratey / *ell a Put 6 'uy a CallC d C k i 0


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&'C td. Current Market Price

(Rs.)

4#0

*ells Put Strike Price (Rs.) 400r. 23

recei5es

Premium (Rs.) 1.00

'uys Call Strike Price (Rs.) #00r. 23

pays

Premium (Rs.) %.00

Net 7e8it (Rs.) 1.00

Payoff Sche(.le


39/66

Payoff Sche(.le

60C 7td! closes at

Rs!"

Net Payoff from

the Put .old

Rs!"

Net Payoff from the

Call purchased

Rs!"

Net Pa

Rs

)%% % %@+ &,,('% % %,+ &$,

(%% % @+ ,,

''% % ,+ $,

'%& % 8% %

'%% % 8* +&

$'% % 8* +&

$%% % 8* +&

-'% 8,@ 8* +'&

-%% 8@@ 8* +&%&

#'% +&$, +# +&'&


40/66

STRATEGY + 3 PROTECTIE CALL SYNTETIC LONG PUT

When to Use: If the in-estor is of the -ie# that the 9ar/ets #ill )o (o#n b

#ants to protect a)ainst any .ne$pecte( rise in the price of the stoc/0

Risk: Li9ite(0

Reward: Ma$i9.9 is Stoc/ Price 4 Call Pre9i.9


41/66

*tratey / *ort *toc+ 6 'uy CallOption

*ells *toc+

(r. &

recei5es)

Current Market

Price (Rs.)

44#$

'uys Call Strike Price (Rs.) 4#00r. & pays Premium (Rs.) 100

S.ppose A!C Lt(0 is tra(in) at Rs0 ,,' in .ne0 An in-estor Mr0 A :.y

,'&& call for Rs0 %&& #hile shortin) the stoc/ at Rs0 ,,'0

Payoff Sche(.le


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Payoff Sche(.le60C 7td! closes at

Rs!"

Payoff from the

stock Rs!"

Net Payoff from

the Call Option

Rs!"

Net Payoff

Rs!"

$&%% J' 8%&& #')

$&'% J& 8%&& #%)

$#%% *' 8%&& &')

$-%% %' 8%&& ')

$-'% %& 8%&& )

$-') %&& 8%&& %

$$%% ' 8%&& +$-

$$') & 8%&& +&%%

$(%% 8%,J & +&$-

$)%% 8*,J %&& +&$-

$*%% 8J,J *&& +&$-

$,%% 8,,J J&& +&$-

+ +


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STRATEGY @ 3 COERED PUT

When to Use: If the in-estor is of the -ie# that the 9ar/ets are moderately

Risk: Unli9ite( if the price of the stoc/ rises s.:stantially

Reward: Ma$i9.9

S.ppose A!C Lt( is tra(in) at Rs ,'&& in .ne An in-estor Mr A shorts R


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S.ppose A!C Lt(0 is tra(in) at Rs ,'&& in .ne0 An in-estor Mr0 A shorts R

sellin) a .ly P.t for Rs0 *, #hile shortin) an A!C Lt(0 stoc/0

.trate/y : .hort .tock 1 .hort Put Option

.ells .tock 2r!

6 receives"

C.rrent Mar/et

Price 7Rs0;

$'%%

.ells Put Stri/e Price 7Rs0; $-%%

2r! 6 receives Premium Rs!" #$

P ff S h ( l


45/66

Payoff Sche(.le

&'C td.

closes at

(Rs.)

Payoff

from te

stoc+ (Rs.)

Net Payo,

from te

Put Option

(Rs.)

Net Payo,

(Rs.)

4000 !00 "#*6 %%4

4100 400 "$*6 %%4

4%00 00 "*6 %%4

4!00 #00 #4 %%4

4400 $00 #4 1%4

44#0 !0 #4 $4

4#00 0 #4 %4

4#%4 "#4 #4 0

4##0 "!0 #4 %"

4"00 "$00 #4 $"

4"!# "$! #4 111

4"#0 1"0 %4 1!"


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STRATEGY %& 3 LONG STRADDLE

When to Use: The in-estor thin/s that the .n(erlyin) stoc/ in(e$ #ill e$pe

si/nificant volatility in the near ter90

Risk: Li9ite( to the initial pre9i.9 pai(0

Reward: Unli9ite(

S.ppose Nifty is at ,,'& on *th April0 An in-estor Mr0 A enters a lon) s


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pp y p )

:.yin) a May Rs ,'&& Nifty P.t for Rs0 +' an( a May Rs0 ,'&& Nifty Call for

net (e:it ta/en to enter the tra(e is Rs *& #hich is also his 9a$i9.9 possi:le

*tratey / 'uy Put 6 'uy CallNifty index Current +alue 44#0Call and Put Strike Price

(Rs.)

4#00

r. & pays otal

Premium(Call 6 Put)

(Rs.)

%0$

Payoff Sche(.le


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On expiryNifty closes at

Net Payoff from Putpurcased (Rs.)

Net Payoff from Callpurcased (Rs.)

Net Pa(Rs.

!-00 6$! "$## 49!

!900 !$! "$## !9!4000 4$! "$## %9!

4100 $! "$## 19!4%00 #$! "$## 9!4%!4 $%$ "$## #94%9! $## "$## 04!00 $$! "$## $4400 $! "$## 10$4#00 "%! "$## %0$4"00 "%! "## 10$4$00 "%! *% $4$0$ "%! %! 04$"" "%! $44 #94-00 "%! $*% 9!4900 "%! #*% 19!#000 "%! *% %9!#100 "%! 4*% !9!#%00 "%! !*% 49!#!00 -# "$- #9!


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STRATEGY %% 3 SORT STRADDL

When to Use: The in-estor thin/s that the .n(erlyin) stoc/ in(e$ #ill e$pe

little volatility in the near ter90

Risk: Unli9ite(

Reward: Li9ite( to the pre9i.9 recei-e(

S.ppose Nifty is at ,,'& on *th April0 An in-estor Mr0 A enters into a short s


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sellin) a May Rs ,'&& Nifty P.t for Rs0 +' an( a May Rs0 ,'&& Nifty Call for R

net cre(it recei-e( is Rs0 *& #hich is also his 9a$i9.9 possi:le profit0

.trate/y : .ell Put 1 .ell Call

Nifty index C.rrent al.e $$'%

Call and Put Stri/e Price 7Rs0; $'%%

2r! 6 receives 8otal PremiumCall 1 Put" Rs!"

#%)

Payoff Sche(.le


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On expiry Nifty closes at Net Payoff from Put

.old Rs!"

Net Payoff from Call

.old Rs!"

Net Payoff

Rs!"

-*%% 8F%' %** +$,-

-,%% 8'%' %** +-,-

$%%% 8,%' %** +#,-

$&%% 8J%' %** +&,-

$#%% 8*%' %** +,-

$#-$ 8%+% %** +',

$#,- 8%** %** %

$-%% 8%%' %** )

$$%% 8%' %** &%)

$'%% +' %** #%)

$(%% +' ** &%)

$)%% +' 8+ )

$)%) +' 8+' %

$)(( +' 8%,, +',

$*%% +' 8%+ +,-

$,%% +' 8*+ +&,-

'%%% +' 8J+ +#,-

STRATEGY %* LONG STRANGLE


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STRATEGY %* 3 LONG STRANGLE

When to Use: The in-estor thin/s that the .n(erlyin) stoc/ in(e$ #ill e$

very hi/h levels of volatility in the near ter90

Risk: Li9ite( to the initial pre9i.9 pai(

Reward: Unli9ite(

S.ppose Nifty is at ,'&& in May0 An in-estor Mr0 A e$ec.tes a Lon) Stran)le


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Rs0 ,J&& Nifty P.t for a pre9i.9 of Rs0 *J an( a Rs ,&& Nifty Call for Rs ,J

(e:it ta/en to enter the tra(e is Rs0 FF #hich is also his 9a$i 9.9 possi:le los

*tratey / 'uy O Put 6 'uy

O CallNifty index Current +alue 4#0

0'uy Call

Option

Strike Price (Rs.) 4$0

0r. & pays Premium (Rs.) 4!'uy Put

Option

Strike Price (Rs.) 4!0

0r. & pays Premium (Rs.) %!

Payoff Sche(.le

On expiry Net Payoff from Put Net Payoff from Call Net Payoff


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Nifty closes at purchased Rs!" purchased Rs!" Rs!"

-*%% , 8,J $-$

-,%% J 8,J --$

$%%% * 8,J #-$

$&%% % 8,J &-$

$#%% 8,J -$

$#-$ ,J 8,J %

$-%% 8*J 8,J +((

$$%% 8*J 8,J +((

$'%% 8*J 8,J +((

$(%% 8*J 8,J +((

$)%% 8*J 8,J +((

$)(( 8*J *J %

$*%% 8*J ' -$

$,%% 8*J %' &-$

'%%% 8*J *' #-$

'&%% 8*J J' --$

'#%% 8*J ,' $-$

'-%% +#- '') '-$

STRATEGY %J SORT STRANGL


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STRATEGY %J0 SORT STRANGL

When to Use: This options tra(in) strate)y is ta/en #hen the options in-esto

the .n(erlyin) stoc/ #ill e$perience little volatility in the near ter90

Risk: Unli9ite(

Reward: Li9ite( to the pre9i.9 recei-e(

S.ppose Nifty is at ,'&& in May0 An in-estor Mr0 A e$ec.tes a Short Stra


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sellin) a Rs0 ,J&& Nifty P.t for a pre9i.9 of Rs0 *J an( a Rs0 ,&& Nifty Call

The net cre(it is Rs0 FF #hich is also his 9a$i9.9 possi:le )ain0

.trate/y : .ell O82 Put 1 .ell O82 Call

Nifty index C.rrent al.e $'%%

.ell Call Option Stri/e Price 7Rs0; $)%%

2r! 6 receives Pre9i.9 7Rs0; $-

.ell Put Option Stri/e Price 7Rs0; $-%%

2r! 6 receives Premium Rs!" #-

Payoff Sche(.le


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On expiry Nifty

closes at

Net Payoff from

Put sold Rs!"


sold Rs!"

Net Payoff

Rs!"

-*%% 8, ,J +$-$

-,%% 8J ,J +--$

$%%% 8* ,J +#-$$&%% 8% ,J +&-$

$#%% 8 ,J +-$

$#-$ 8,J ,J %

$-%% *J ,J ((

$$%% *J ,J ((

$'%% *J ,J ((

$(%% *J ,J ((

$)%% *J ,J ((

$)(( *J 8*J %

$*%% *J 8' +-$

$,%% *J 8%' +&-$

'%%% *J 8*' +#-$

'&%% *J 8J' +--$

'#%% *J 8,' +$-$

+ +

STRATEGY %, COLLAR


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STRATEGY %,0 COLLAR

When to Use: The collar is a )oo( strate)y to .se if the in-estor is #ritin

calls to earn pre9i.9s :.t #ishes to protect hi9self fro9 an .ne$pecte(in the price of the .n(erlyin) sec.rity0

Risk: Li9ite(

Reward: Li9ite(

S.ppose an in-estor Mr0 A :.ys or is hol(in) A!C Lt(0 c.rrently tra(in) at Rs


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(eci(es to esta:lish a collar :y #ritin) a Call of stri/e price Rs0 '&&& for Rs0

si9.ltaneo.sly p.rchasin) a Rs0 ,&& stri/e price P.t for Rs0 *0 Since he pays

the stoc/ A!C Lt(0 another Rs0 * for the P.t :.t recei-es Rs0 J@ for sellin) th

option his total in-est9ent is Rs0 ,,F0

.trate/y : 0uy .tock 1 0uy Put 1 .ell Call

60C 7td! C.rrent Mar/et Price

7Rs0;

$)'*

.ell Call Option Stri/e Price 7Rs0; '%%%

2r! 6 Receives Pre9i.9 7Rs0; -,

0uy Put Option Stri/e Price 7Rs0; $)%%

2r! 6 Pays Pre9i.9 7Rs0; #)

Net Premium

ReceivedRs!"

Payoff .chedule

60C 7td! closes at Payoff fro9 Call Payoff fro9 P.t Payoff fro9 stoc/ Net p


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Rs!" Sol( 7Rs0; P.rchase( 7Rs0; A!C Lt(0 Rs

$$%% J@ *J 8J'+ +$

$$'% J@ **J 8J&+ +$

$'%% J@ %J 8*'+ +$

$(%% J@ J 8%'+ +$

$)%% J@ 8* 8'+ +$

$)'% J@ 8* 8+ $

$*%% J@ 8* ,* '$

$*'% J@ 8* @* &%

$*'* J@ 8* %&& &&

$,%% J@ 8* %,* &'

$,$* J@ 8* %@& #%

'%%% J@ 8* *,* #'

'%'% 8%% 8* *@* #'

'&%% 8F% 8* J,* #'

'&'% 8%%% 8* J@* #'

'#%% 8%F% 8* ,,* #'

'#$* 8*&@ 8* ,@& #'

'#'% 8*%% 8* ,@* #'

'-%% +#(& +#) '$# #'

STRATEGY %'0 !ULL CALL SPREAD STRATEGY


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CALL OPTION SELL CALL OPTION

When to Use: In-estor is moderately bullish!

Risk: Li9ite( to any initial pre9i.9 pai( in esta:lishin) the position0 Ma$i9

occ.rs #here the .n(erlyin) falls to the le-el of the lo#er stri/e or :elo#0

Reward: Li9ite( to the (ifference :et#een the t#o stri/es 9in.s net pre9

Ma$i9.9 profit occ.rs #here the .n(erlyin) rises to the le-el of the hi)her

a:o-e0

Mr0 5Y< :.ys a Nifty Call #ith a Stri/e price Rs0 ,%&& at a pre9i.9 of Rs0 %

ll Nift C ll ti ith t i/ i R ,,&& t i f R J' ,&


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sells a Nifty Call option #ith a stri/e price Rs0 ,,&& at a pre9i.9 of Rs0 J'0,&

(e:it here is Rs0 %J'0&' #hich is also his 9a$i9.9 loss0

*tratey / 'uy a Call :it a lo:er stri+e(I) 6 *ell a Call :it a ier stri+e

(O)Nifty index Current +alue 4191.10'uy I Call

Option

Strike Price (Rs.) 4100

r. 23

Pays

Premium (Rs.) 1$0.4#

*ell O

Call

Option

Strike Price (Rs.) 4400

r. 23Recei5es

Premium (Rs.) !#.40

Net Premium

Paid

1!#.0#

Payoff Sche(.le

On expiry NiftyCloses at


' (R )

Net Payoff from

C ll * ld (R )

Net

(


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Closes at 'uy (Rs.) Call *old (Rs.) (

!#00.00 "$*0.4! !.40

!"00.00 "$*0.4! !.40

!$00.00 "$*0.4! !.40

!-00.00 "$*0.4! !.40

!900.00 "$*0.4! !.40

4000.00 "$*0.4! !.40

4100.00 "$*0.4! !.40

4%00.00 "*0.4! !.40

4%!#.0# "!.40 !.40

4!00.00 #,.!! !.40 "

4400.00 $#,.!! !.40

4#00.00 ##,.!! "64.60

4"00.00 #,.!! "$64.60

4$00.00 4#,.!! "#64.60

4-00.00 !#,.!! "64.60

4900.00 6#,.!! "464.60

#000.00 *#,.!! "!64.60

#100.00 %#,. !! "664.60

#%00.00 9%9.## $"4."0

STRATEGY %F0 !ULL PUT SPREAD STRAT


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SELL PUT OPTION !UY PUT OPTION

When to Use: 1hen the in-estor is moderately bullish!

Risk: Li9ite(0 Ma$i9.9 loss occ.rs #here the .n(erlyin) falls to the le-e

stri/e or :elo#

Reward: Li9ite( to the net pre9i.9 cre(it0 Ma$i9.9 profit occ.rs #here

rises to the le-el of the hi)her stri/e or a:o-e0

Mr0 5Y< sells a Nifty P.t option #ith a stri/e pric e of Rs0 ,&&& at a pre9

*% ,' an( :.ys a f.rther OTM Nifty P.t option #ith a stri/e price Rs J+&&


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*%0,' an( :.ys a f.rther OTM Nifty P.t option #ith a stri/e price Rs0 J+&&

pre9i.9 of Rs0 J0&& #hen the c.rrent Nifty is at ,%@%0%& #ith :oth op

e$pirin) on J%st .ly0

.trate/y : .ell a Put 1 0uy a Put

Nifty 9ndex C.rrent al.e $&,&!&%

.ell Put Option Stri/e Price 7Rs0; $%%%

2r! 345

Receives

Pre9i.9 7Rs0; #&!$'

0uy Put Option Stri/e Price 7Rs0; -*%%

2r! 345 Pays Pre9i.9 7Rs0; -!%%

Net Premium

Received Rs!"

&*!$'

Payoff Sche(.le

On expiry Nifty Net Payoff from Put Net Payoff from


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Closes at 'uy (Rs.) Put *old (Rs.)

!#00.00 #,*.00 "4*%.!!

!"00.00 $,*.00 "*%.!!

!$00.00 ,*.00 "#*%.!!

!-00.00 ".00 "$*%.!!

!900.00 ".00 "*%.!!

!9-1.## ".00 .00

4000.00 ".00 #$.4!

4100.00 ".00 #$.4!

4%00.00 ".00 #$.4!

4!00.00 ".00 #$.4!4400.00 ".00 #$.4!

4#00.00 ".00 #$.4!

4"00.00 ".00 #$.4!

4$00.00 ".00 #$.4!

4-00.00 !.00 %1.4#

04 - 05 - Option Strategies & Payoff's

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Transcript of 04 - 05 - Option Strategies & Payoff's