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FINANCIAL DERIVATIVES SAMPLE QUESTIONS Q1. a Strangle Is an Investment Strategy That Combines A. a Call and a Put for the Same
FINANCIAL DERIVATIVES SAMPLE QUESTIONS Q1. A strangle is an investment strategy that combines a. A call and a put for the same expiry date but at different strike prices b. Two puts and one call with the same expiry date c. Two calls and one put with the same expiry dates d. A call and a put at the same strike price and expiry date Answer: a. Q2. A trader buys 2 June expiry call options each at a strike price of Rs. 200 and Rs. 220 and sells two call options with a strike price of Rs. 210, this strategy is a a. Bull Spread b. Bear call spread c. Butterfly spread d. Calendar spread Answer c. Q3. The option price will ceteris paribus be negatively related to the volatility of the cash price of the underlying. a. The statement is true b. The statement is false c. The statement is partially true d. The statement is partially false Answer: b. Q 4. A put option with a strike price of Rs. 1176 is selling at a premium of Rs. 36. What will be the price at which it will break even for the buyer of the option a. Rs. 1870 b. Rs. 1194 c. Rs. 1140 d. Rs. 1940 Answer b. Q5 A put option should always be exercised _______ if it is deep in the money a. early b. never c. at the beginning of the trading period d. at the end of the trading period Answer a. Q6. Bermudan options can only be exercised at maturity a. -
Buying Options on Futures Contracts. a Guide to Uses
NATIONAL FUTURES ASSOCIATION Buying Options on Futures Contracts A Guide to Uses and Risks Table of Contents 4 Introduction 6 Part One: The Vocabulary of Options Trading 10 Part Two: The Arithmetic of Option Premiums 10 Intrinsic Value 10 Time Value 12 Part Three: The Mechanics of Buying and Writing Options 12 Commission Charges 13 Leverage 13 The First Step: Calculate the Break-Even Price 15 Factors Affecting the Choice of an Option 18 After You Buy an Option: What Then? 21 Who Writes Options and Why 22 Risk Caution 23 Part Four: A Pre-Investment Checklist 25 NFA Information and Resources Buying Options on Futures Contracts: A Guide to Uses and Risks National Futures Association is a Congressionally authorized self- regulatory organization of the United States futures industry. Its mission is to provide innovative regulatory pro- grams and services that ensure futures industry integrity, protect market par- ticipants and help NFA Members meet their regulatory responsibilities. This booklet has been prepared as a part of NFA’s continuing public educa- tion efforts to provide information about the futures industry to potential investors. Disclaimer: This brochure only discusses the most common type of commodity options traded in the U.S.—options on futures contracts traded on a regulated exchange and exercisable at any time before they expire. If you are considering trading options on the underlying commodity itself or options that can only be exercised at or near their expiration date, ask your broker for more information. 3 Introduction Although futures contracts have been traded on U.S. exchanges since 1865, options on futures contracts were not introduced until 1982. -
307439 Ferdig Master Thesis
Master's Thesis Using Derivatives And Structured Products To Enhance Investment Performance In A Low-Yielding Environment - COPENHAGEN BUSINESS SCHOOL - MSc Finance And Investments Maria Gjelsvik Berg P˚al-AndreasIversen Supervisor: Søren Plesner Date Of Submission: 28.04.2017 Characters (Ink. Space): 189.349 Pages: 114 ABSTRACT This paper provides an investigation of retail investors' possibility to enhance their investment performance in a low-yielding environment by using derivatives. The current low-yielding financial market makes safe investments in traditional vehicles, such as money market funds and safe bonds, close to zero- or even negative-yielding. Some retail investors are therefore in need of alternative investment vehicles that can enhance their performance. By conducting Monte Carlo simulations and difference in mean testing, we test for enhancement in performance for investors using option strategies, relative to investors investing in the S&P 500 index. This paper contributes to previous papers by emphasizing the downside risk and asymmetry in return distributions to a larger extent. We find several option strategies to outperform the benchmark, implying that performance enhancement is achievable by trading derivatives. The result is however strongly dependent on the investors' ability to choose the right option strategy, both in terms of correctly anticipated market movements and the net premium received or paid to enter the strategy. 1 Contents Chapter 1 - Introduction4 Problem Statement................................6 Methodology...................................7 Limitations....................................7 Literature Review.................................8 Structure..................................... 12 Chapter 2 - Theory 14 Low-Yielding Environment............................ 14 How Are People Affected By A Low-Yield Environment?........ 16 Low-Yield Environment's Impact On The Stock Market........ -
11 Option Payoffs and Option Strategies
11 Option Payoffs and Option Strategies Answers to Questions and Problems 1. Consider a call option with an exercise price of $80 and a cost of $5. Graph the profits and losses at expira- tion for various stock prices. 73 74 CHAPTER 11 OPTION PAYOFFS AND OPTION STRATEGIES 2. Consider a put option with an exercise price of $80 and a cost of $4. Graph the profits and losses at expiration for various stock prices. ANSWERS TO QUESTIONS AND PROBLEMS 75 3. For the call and put in questions 1 and 2, graph the profits and losses at expiration for a straddle comprising these two options. If the stock price is $80 at expiration, what will be the profit or loss? At what stock price (or prices) will the straddle have a zero profit? With a stock price at $80 at expiration, neither the call nor the put can be exercised. Both expire worthless, giving a total loss of $9. The straddle breaks even (has a zero profit) if the stock price is either $71 or $89. 4. A call option has an exercise price of $70 and is at expiration. The option costs $4, and the underlying stock trades for $75. Assuming a perfect market, how would you respond if the call is an American option? State exactly how you might transact. How does your answer differ if the option is European? With these prices, an arbitrage opportunity exists because the call price does not equal the maximum of zero or the stock price minus the exercise price. To exploit this mispricing, a trader should buy the call and exercise it for a total out-of-pocket cost of $74. -
Straddles and Strangles to Help Manage Stock Events
Webinar Presentation Using Straddles and Strangles to Help Manage Stock Events Presented by Trading Strategy Desk 1 Fidelity Brokerage Services LLC ("FBS"), Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917 690099.3.0 Disclosures Options’ trading entails significant risk and is not appropriate for all investors. Certain complex options strategies carry additional risk. Before trading options, please read Characteristics and Risks of Standardized Options, and call 800-544- 5115 to be approved for options trading. Supporting documentation for any claims, if applicable, will be furnished upon request. Examples in this presentation do not include transaction costs (commissions, margin interest, fees) or tax implications, but they should be considered prior to entering into any transactions. The information in this presentation, including examples using actual securities and price data, is strictly for illustrative and educational purposes only and is not to be construed as an endorsement, or recommendation. 2 Disclosures (cont.) Greeks are mathematical calculations used to determine the effect of various factors on options. Active Trader Pro PlatformsSM is available to customers trading 36 times or more in a rolling 12-month period; customers who trade 120 times or more have access to Recognia anticipated events and Elliott Wave analysis. Technical analysis focuses on market action — specifically, volume and price. Technical analysis is only one approach to analyzing stocks. When considering which stocks to buy or sell, you should use the approach that you're most comfortable with. As with all your investments, you must make your own determination as to whether an investment in any particular security or securities is right for you based on your investment objectives, risk tolerance, and financial situation. -
November 4, 2016 Ms. Susan M. Cosper Technical Director Financial Accounting Standards Board 401 Merritt 7 P.O. Box 5116 Norwalk
November 4, 2016 Ms. Susan M. Cosper Technical Director Financial Accounting Standards Board 401 Merritt 7 P.O. Box 5116 Norwalk, CT 06856-5116 By email: [email protected] Re: File Reference Number 2016-310, Exposure Draft, Derivatives and Hedging (Topic 815) – Targeted Improvements to Accounting for Hedging Activities Dear Ms. Cosper, The International Swaps and Derivatives Association’s (ISDA)1 Accounting Policy Committee appreciates the opportunity to comment on the Financial Accounting Standards Board’s (“FASB”) Exposure Draft, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (the “Exposure Draft”). Collectively, the Committee members have substantial professional expertise and practical experience addressing accounting policy issues related to financial instruments and specifically derivative financial instruments. This letter provides our organization’s overall views on the Exposure Draft and our responses to the questions for respondents included within the Exposure Draft. Overview ISDA supports the FASB’s efforts to simplify the accounting for hedging activities and address practice issues that have arisen under current generally accepted accounting principles (“GAAP”). We believe the Exposure Draft achieves the FASB’s objectives of improving the financial reporting of cash flow and fair value hedge relationships to better portray the economic results of an entity’s risk management activities in its financial statements and simplifying the application of hedge accounting guidance in current GAAP. 1 Since 1985, the International Swaps and Derivatives Association has worked to make the global derivatives markets safer and more efficient. ISDA’s pioneering work in developing the ISDA Master Agreement and a wide range of related documentation materials, and in ensuring the enforceability of their netting and collateral provisions, has helped to significantly reduce credit and legal risk. -
Payoffs from Neutral Option Strategies: a Study of USD-INR Market
Journal of Economics, Management and Trade 21(12): 1-11, 2018; Article no.JEMT.44988 ISSN: 2456-9216 (Past name: British Journal of Economics, Management & Trade, Past ISSN: 2278-098X) Payoffs from Neutral Option Strategies: A Study of USD-INR Market Avneet Kaur1*, Sandeep Kapur1 and Mohit Gupta1 1School of Business Studies, Punjab Agricultural University, India. Authors’ contributions This work was carried out in collaboration between all authors. Authors AK and SK designed the study. Authors AK and MG performed the statistical analysis. Author AK wrote the protocol and wrote the first draft of the manuscript. Authors AK, SK and MG managed the analyses of the study. Author AK managed the literature searches. All authors read and approved the final manuscript. Article Information DOI: 10.9734/JEMT/2018/44988 Editor(s): (1) Dr. Afsin Sahin, Professor, Department of Banking School of Banking and Insurance, Ankara Haci Bayram Veli University, Turkey. Reviewers: (1) Imoisi Anthony Ilegbinosa, Edo University, Iyamho, Nigeria. (2) R. Shenbagavalli, India. Complete Peer review History: http://www.sciencedomain.org/review-history/27321 Received 05 September 2018 Original Research Article Accepted 07 November 2018 Published 20 November 2018 ABSTRACT Aims: The present study has tried to assess the profitability of payoffs from adopting neutral option strategies on USD-INR. Study Design: The study was carried out using daily closing values of the US Dollar-Indian Rupee current future rate available on National Stock Exchange of India (NSE) for the period starting from 29th October 2010 (the start of currency options market in NSE) to 30th June 2016. Methodology: The present study has tried to fill the gap of assessing the profitability of payoffs from adopting neutral options strategies on USD-INR. -
Options in Asset Allocation Problems: an Empirical Model Applied to the Italian FTSE MIB Index
Dipartimento di Impresa e Management Cattedra Asset Pricing Options in asset allocation problems: an empirical model applied to the Italian FTSE MIB Index Prof. Paolo Porchia Prof. Marco Pirra RELATORE CORRELATORE Matr. 705881 CANDIDATO Anno Accademico 2019/2020 1 2 Contents Introduction...................................................................................................................................................... 4 1). What are options? History, definitions, and strategies. .......................................................................... 6 1.1). Options: brief history and general definition. ....................................................................................... 6 1.2). Plain Vanilla and Exotic options: main determinants, greeks, payoffs. .............................................. 11 1.3) The most common options strategies. .................................................................................................. 21 2). The role of options in investors’ portfolios. ........................................................................................... 30 2.1). The role of options in buy and hold portfolios to solve the classic asset allocation problem. ............ 30 2.2). Benefit from including derivatives in optimal dynamic strategies. ..................................................... 37 2.3). Optimal Portfolio’s choices whit jumps in volatility. ......................................................................... 43 2.4). A myopic portfolio to exploit the mispricing. -
Introduction to Options Mark Welch and James Mintert*
E-499 RM2-2.0 01-09 Risk Management Introduction To Options Mark Welch and James Mintert* Options give the agricultural industry a flexi- a put option can convert an option position into ble pricing tool that helps with price risk manage- a short futures position, established at the strike ment. Options offer a type of insurance against price, by exercising the put option. Similarly, the adverse price moves, require no margin deposits buyer of a call option can convert an option posi- for buyers, and allow buyers to participate in tion into a long futures position, established at favorable price moves. Commodity options are the strike price, by exercising the call option. The adaptable to a wide range of pricing situations. option buyer also can sell the option to someone For example, agricultural producers can use com- else or do nothing and let the option expire. The modity options to establish an approximate price choice of action is left entirely to the option buyer. floor, or ceiling, for their production or inputs. The option buyer obtains this right by paying the With today’s large price fluctuations, the financial premium to the option seller. payoff in controlling price risk and protecting What about the option seller? The option seller profits can be substantial. receives the premium from the option buyer. If the option buyer exercises the option, the option What is an Option? seller is obligated to take the opposite futures An option is simply the right, but not the position at the same strike price. Because of the obligation, to buy or sell a futures contract at seller’s obligation to take a futures position if the some predetermined price within a specified option is exercised, an option seller must post a time period. -
China After the Subprime Crisis
China After the Subprime Crisis 9780230_281967_01_prexviii.indd i 9/1/2010 3:41:25 PM Also by Chi Lo: ASIA AND THE SUBPRIME CRISIS: Lifting the Veil on the Financial Tsunami UNDERSTANDING CHINA’S GROWTH: Forces that Drive China’s Economic Future PHANTOM OF THE CHINA ECONOMIC THREAT: Shadow of the Next Asian Crisis THE MISUNDERSTOOD CHINA: Uncovering the Truth behind the Bamboo Curtain WHEN ASIA MEETS CHINA IN THE NEW MILLENNIUM: China’s Role in Shaping Asia’s Post-Crisis Economic Transformation 9780230_281967_01_prexviii.indd ii 9/1/2010 3:41:25 PM China After the Subprime Crisis Opportunities in the New Economic Landscape Chi Lo Chief Economist and Strategist for a Major Investment Management Company based in Hong Kong, China 9780230_281967_01_prexviii.indd iii 9/1/2010 3:41:25 PM © Chi Lo 2010 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6-10 Kirby Street, London EC1N 8TS. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted his right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2010 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS. -
Derivative Instruments and Hedging Activities
www.pwc.com 2015 Derivative instruments and hedging activities www.pwc.com Derivative instruments and hedging activities 2013 Second edition, July 2015 Copyright © 2013-2015 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved. PwC refers to the United States member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This publication has been prepared for general information on matters of interest only, and does not constitute professional advice on facts and circumstances specific to any person or entity. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication. The information contained in this material was not intended or written to be used, and cannot be used, for purposes of avoiding penalties or sanctions imposed by any government or other regulatory body. PricewaterhouseCoopers LLP, its members, employees and agents shall not be responsible for any loss sustained by any person or entity who relies on this publication. The content of this publication is based on information available as of March 31, 2013. Accordingly, certain aspects of this publication may be superseded as new guidance or interpretations emerge. Financial statement preparers and other users of this publication are therefore cautioned to stay abreast of and carefully evaluate subsequent authoritative and interpretative guidance that is issued. This publication has been updated to reflect new and updated authoritative and interpretative guidance since the 2012 edition. -
EQUITY DERIVATIVES Faqs
NATIONAL INSTITUTE OF SECURITIES MARKETS SCHOOL FOR SECURITIES EDUCATION EQUITY DERIVATIVES Frequently Asked Questions (FAQs) Authors: NISM PGDM 2019-21 Batch Students: Abhilash Rathod Akash Sherry Akhilesh Krishnan Devansh Sharma Jyotsna Gupta Malaya Mohapatra Prahlad Arora Rajesh Gouda Rujuta Tamhankar Shreya Iyer Shubham Gurtu Vansh Agarwal Faculty Guide: Ritesh Nandwani, Program Director, PGDM, NISM Table of Contents Sr. Question Topic Page No No. Numbers 1 Introduction to Derivatives 1-16 2 2 Understanding Futures & Forwards 17-42 9 3 Understanding Options 43-66 20 4 Option Properties 66-90 29 5 Options Pricing & Valuation 91-95 39 6 Derivatives Applications 96-125 44 7 Options Trading Strategies 126-271 53 8 Risks involved in Derivatives trading 272-282 86 Trading, Margin requirements & 9 283-329 90 Position Limits in India 10 Clearing & Settlement in India 330-345 105 Annexures : Key Statistics & Trends - 113 1 | P a g e I. INTRODUCTION TO DERIVATIVES 1. What are Derivatives? Ans. A Derivative is a financial instrument whose value is derived from the value of an underlying asset. The underlying asset can be equity shares or index, precious metals, commodities, currencies, interest rates etc. A derivative instrument does not have any independent value. Its value is always dependent on the underlying assets. Derivatives can be used either to minimize risk (hedging) or assume risk with the expectation of some positive pay-off or reward (speculation). 2. What are some common types of Derivatives? Ans. The following are some common types of derivatives: a) Forwards b) Futures c) Options d) Swaps 3. What is Forward? A forward is a contractual agreement between two parties to buy/sell an underlying asset at a future date for a particular price that is pre‐decided on the date of contract.