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Options Payoff

Options Payoff. Presented By Prantika Halder MBA-BT-II yr. Options Definition. The right , but not the obligation , to enter into a transaction [buy or sell] at a pre-agreed price, quantity, time [by a specified date in the future], and terms.

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Options Payoff

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  1. Options Payoff Presented By Prantika Halder MBA-BT-II yr.

  2. Options Definition • The right, but not the obligation, to enter into a transaction [buy or sell] at a pre-agreed price, quantity, time [by a specified date in the future], and terms. • The option buyer typically pays the seller an upfront free (the premium) for the option rights.

  3. Options Markets • Over-The-Counter (OTC) • Physicals Market • Exchange Traded • Standardized Terms • Style • Expiry Dates • Strike Levels

  4. Basic Options Structures • Calls – Options acquired by a buyer (holder) and granted by a seller (writer) to buy at a fixed price • Puts – Options acquired by a buyer and granted by a seller to sell at a fixed price

  5. Basic Options Structures • All option products & strategies are some combination of buying or selling of calls or puts

  6. Basic Options Provisions • Buy or Sell (Write) • Long or Short • Call or Put • Underlying Asset • Product, Security / Instrument • Strike (Exercise) Price • Premium • Exercise Date

  7. Basic Options Provisions - Strike • Strike Price – Fixed price to be paid if option exercised, as specified in the options agreement • Set in intervals on exchange traded options • At any preferred level OTC

  8. Basic Options Provisions - Premium • Premium – Price of the option that buyer pays and seller receives at the time of option transaction. • Consideration paid for rights • Non-Refundable

  9. Option Exercise Provisions or “Style” • American – Style • European - Style

  10. American-style Exercise Provision • Buyer (Holder) may exercise at any time prior to expiry • Value factor related to dividends on equity options

  11. European-style Exercise Provision • Buyer (Holder) may exercise only on expiry date • Valuation difference

  12. Payoff profile of buyer of asset:Long Asset • When an investor buys the underlying asset sells it back at a future date at an unknown price; once it is purchased the investor called long asset.

  13. Payoff profile for seller of asset:Short Asset • When an investor shorts the underlying asset and buys it back at a future date at an unknown price; once it is sold the investor called short asset.

  14. Payoff profile for buyer of call options:Long Call • A trader who believes that a stock's price will increase might buy the right to purchase the stock (a call option) rather than just buy the stock.

  15. Payoff profile for seller of call options:Short Call A trader who believes that a stock price will decrease, can sell the stock short or instead sell, or "write," a call.

  16. Payoff profile for buyer for put options:Long put A trader who believes that a stock's price will decrease can buy the right to sell the stock at a fixed price (a put option).

  17. Payoff profile for seller for put options:short put A trader who believes that a stock price will increase can buy the stock or instead sell a put. The trader selling a put has an obligation to buy the stock from the put buyer at the put buyer's option.

  18. When Do Traders Typically Use Options In Their Portfolios • When Pricing Is Viewed As Attractive • When Seeking To Enhance Portfolio Income • To Play The Market With Limited Risk (No More Than Premium Paid.

  19. Options Trading Strategies • Secondary Trading In Options • Rights Sold And Re-Sold • Typically Not Just “Buy And Hold” • Frequently Traders Will Exit Or Roll Positions Before Nearing Expiry

  20. Options Pricing Sample

  21. Options Pricing • Theoretically The Net Present Value Of All Potential Outcomes For The Option For Determining pricing option Black Scholes Model is applicable.

  22. Likely Factors Influencing Pricing Of Options • Price Volatility Of Underlying Asset • Duration Of The Option – Time To Expiration • Strike Price Of The Option • Value Of The Underlying Commodity [Or Financial Instrument] • Risk Free Interest Rate

  23. Returns On Basic Options

  24. Option Value • At-The-Money • In-The-Money • Out-Of-The-Money • Option Price Can Be Viewed As Comprised Of Two Components • Intrinsic Value • Extrinsic Value

  25. Option Value - Intrinsic • Intrinsic Value Of An Option Is Simply The Amount, If Any, By Which The Option Is In-The-Money • Profit That Could Be Realized If Option Were Exercised Immediately • Easy Valuation

  26. Option Value - Extrinsic • Extrinsic Value Reflects The Potential Future Value Of The Option, Influenced Primarily By The Time Remaining To Expiry And The Price Volatility Of The Underlying Asset • The Hard Part To Value

  27. THANK YOU

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