TRADING IDEAS

OPTION TRADING COURSE

BASIC MODULE
Contents
• Derivatives and its Types
• Need for Derivatives
• Options Terminology
• Option Chain
• Option Pricing
• Concept of Intrinsic Value and Time Value
• Factors Affecting Option Pricing
• Option Greeks
DERIVATIVES
DERIVATIVES
• Derives Value from “something else”
• Contracts (Important to understand that this is different from shares
which gives ownership rights) – These are independent contracts
between parties which might be completely unrelated to the
underlying’s company
• E.g. Forwards, Futures, Options, CDS, etc.
• No right to the company or underlying unlike stocks – ‘except when
exercised’
Futures and Options
• Popular
• Leverage
• High Risk -> Possibly High Reward
 RELIANCE
INDUSTRIES LTD.

CMP 2,620.65 Fut May 2022 2,639.75

Qty 250.00 OPT Strike Price 2,700.00

Comparison Target Price 2,800.00 OPT Premium 53.60

Futures
Stocks 26MAY2022 Options

Investment 6,55,162.50 1,45,186.25 13,400.00

Profit 44,837.50 40,062.50 11,600.00

Profit %age 6.84% 27.59% 86.57%
Need and Purpose of Futures and Options
• Risk Management / Hedging → When one holds stock but the market
is expected to go down
• Give Leverage to Holdings → When one holds stock, market is
expected to go up but can’t invest more in stocks.
• Speculative Income → Has nothing to do with stocks, doesn’t own
any, doesn’t intend to own but has a view and wants to profit from
that.
OPTIONS TERMINOLOGY
Terminology
• Spot Price / Underlying Price
• Basis (Futures Terminology)
• Types of Options – CE and PE (as opposed to CA and PA)
• Lot Size
• Strike Price
• Expiry
• Settlement
• Physical Settlement vs Cash Settlement
• Moneyness
• ITM – In-the-money
• ATM – At-the-money
• OTM – Out-of-the-money
• Option Premium
• Pay off Diagrams
OPTION CHAIN
•Lists all type of options available for trading
for an underlying

• Different Strike Prices

• Different Expiries

• Includes Pricing, Bid, Ask along with other valuable information

• Example
OPEN INTEREST
• Number of contracts open at a particular time

• Not necessarily the number of buyers or sellers but just number of contracts

• Analyzed from the perspective of options seller

OPEN INTEREST
&
PRICE ACTION
Open Interest Price Status Insights Action

Long Build Up Bullish/Strong Entry

Buyers

Short Buildup Bearish/Strong Entry

Sellers

Long Profit Booking Exit

Unwinding by Buyers

Short Covering Profit Booking Exit

by Sellers
OPTIONS PRICING
Black Scholes Formula
Option Pricing Contd.
• Intrinsic Value → How much money is built in a particular option?
• Time Value → How much is time premium?
• Option Premium = Intrinsic Value + Time Premium
• Intrinsic Value = 0 for OTM and ATM Options
• Intrinsic Value = Positive value of (Strike Price – Spot Price) (For ITM)
• Profit at Expiry = Intrinsic Value - Premium
Factors Affecting Option Price/Premium
• Strike Price
• Price of the underlying
• Time till expiry
• Volatility
• Interest Rate
• Dividend
OPTION GREEKS
Option Greeks
• Delta → Underlying
• Theta → Time till expiry / Time decay
• Vega → Volatility
• Gamma → Rate of change of Delta / “Momentum” / “Acceleration”
• Rho → Interest Rate
Delta
• Ranges between 0 and 1
• Positive for Call Options
• Negative for Put Options
• ATM → 0.5
• ITM > 0.5
• OTM < 0.5
• Determines how premium changes with change in underlying
• Probability of the option expiring in the money
Theta
• Best to view it in Rupee terms
• Indicates how much the premium will fall as time lapses
• ‘Negative’ for options buyer – either call or put
• ‘Positive’ for options seller – either call or put
• Hack!
Vega
• Implied Volatility
• Sensitivity of option’s premium to changes in volatility of the underlying
• Amount of change of an option’s premium for 1% change in IV of the
underlying
• Check VIX to get an idea
• High Vega favourable for options sellers*
• Low Vega favourable for options buyers*

*Conditions Apply
Gamma
• Indicates how Delta changes with change in price of the underlying
• Speed/Velocity vs. Acceleration
• Gamma decreases as options moves deeper ITM or OTM. Highest for
ATM.
• “Stability of the probability of an option expiring ITM”
 THANK YOU!
Questions and (Possible) Answers

Feedback