Wednesday, 10 April 2013

Guide to Option Trading Strategies


Options Basic Glossary


Call Option:- 

An option Contract that gives the holder the right to buy the underlying at a specified price for a certain, fixed period of time. 
An example should help clarify this. Nifty is currently trading at 5825, an investor buys a 3 month call option on Nifty with a strike price of 5800 , this mean investor has bought the right to buy Nifty at 5800 in three months time. 
After three months, if nifty has risen above 5800, investor will exercise the option, and make a profit of equal to difference between 5800 and market price of nifty. 
Investors net profit will be deducted by the initial premium paid for an option

Put Option:-

An option Contract that gives the holder the right to Sell the underlying at a specified price for a certain, fixed period of time.
An example should help clarify this. Nifty is currently trading at 5825, an investor buys a 3 month put option on Nifty with a strike price of 5800 , this mean investor has bought the right to sell Nifty at 5800 in three months time. 
After three months, if nifty has fallen below 5800, investor will exercise the option, and make a profit of equal to difference between 5800 and market price of nifty. 
Investors net profit will be deducted by the initial premium paid for an option

Premium:- 

The price a call or put buyer must pay to a put or call seller (writer) for an option contract. Market Supply and demand forces determine the premium

Strike Price:- 

The stated price per quantity for which the underlying may be purchased (in the case of a call) or sold (in the case of a put) by the option holder upon exercise of the option contract

Break-Even Point (BEP):- 

The price at which an option strategy results in neither a profit or loss

Volatility:- 

A measure of the fluctuation in the market price of the underlying, Mathematically, volatility is the annualized standard deviation of returns

At the money (ATM):- 

Any option is at-the money if the strike price is equal to the market price of underlying

In-the-money (ITM):- 

A call option is out-of-the-money if the strike price is greater than the market price of the underlying. A Put option is out-of-the-money if the strike is less than the market price of underlying

Time Decay or erosion:- 

A term used to describe how the time value of an option can "decay" or reduce with the passage of time 

Long Position:- 

A Position wherein an investor is a net holder in a particular options series

Synthetic Position:- 

A Strategy involving two or more instruments that has the same risk/reward profile as a strategy involving only on instrument

For More Information about other strategies kindly click on below links
Guide To Options Basics
Long Call
Long Put
Short Call 
Short Put
Long Straddle
Short Straddle
Synthetic Long Call