Know about Who is eligible, Where to invest, Is there any lock-in, Next Step, & How to invest in Rajiv Gandhi Equity Saving Scheme (RGESS), 2012..........15.02.2013

Calculation Methodology of International Price Based Commodities traded on MCX/NCDEX...........15.02.2013

Calculation Methodology of International Price Based Commodities traded on MCX/NCDEX :-

OPTION BASIC :- PROFIT & LOSS IN CASE OF TAKING LONG POSITION IN CALL OPTION........14.02.2013

OPTION BASIC :- PROFIT & LOSS IN CASE OF TAKING LONG POSITION IN CALL OPTION :-

A CALL OPTION GIVES THE RIGHT TO THE BUYER TO BUY THE UNDERLYING ASSETS (STOCK, INDEX ETC.) AT A STRIKE PRICE SPECIFIED IN THE OPTION.

TAKING LONG POSITION IN THE CALL OPTION MEANS YOU ARE BULLISH ON THE PARTICULAR LEVEL OF THE STOCK OR INDEX. 

FOR EXAMPLE: - IF YOU BUY OR LONG NIFTY 5900 CALL MAY EXPIRY 2011 @ RS. 35/- AND NIFTY SPOT IS AT 5785 CURRENT LEVEL ON 28 APRIL 2011, IT MEANS YOU ARE BULLISH IN NIFTY AT 5900 MEANS TO SAY NIFTY SPOT CAN GO UP TO 5900 AND CAN ALSO CROSS THIS LEVEL FROM THE CURRENT LEVEL THAT IS 5785.

SO BUYING A CALL OR TAKING LONG POSITION IN CALL MEANS YOU ARE VERY BULLISH AND EXPECT THE UNDERLYING STOCK / INDEX TO RISE IN THE FUTURE AT PARTICULAR STRIKE PRICE THAT YOU HAVE DECIDED. IN THE CASE OF ABOVE EXAMPLE YOU ARE BULLISH ON NIFTY AT 5900 MEANS TO SAY NIFTY SPOT WILL RISE IN THE FUTURE UP TO 5900 AND CAN CROSS ALSO THIS LEVEL FROM ITS CURRENT LEVEL WHICH IS 5785 ON 28 APRIL 2011 AND TIME IS ALSO DECIDED FOR THAT WHICH IS MAY EXPIRY.

PROFIT IN CASE OF TAKING LONG POSITION IN CALL OPTION :- PROFIT IS UNLIMITED IN CASE OF BUYING THE CALL OPTION. AS IT IS EARLIER EXPLAINED THAT WHEN THE OPTION IS IN -THE- MONEY THEN THERE WILL BE PROFIT, MEANS TO SAY "IN CASE OF LONG CALL THE PROFIT WILL BE SPOT PRICE > STRIKE PRICE ON EXPIRY"

IN CASE OF ABOVE EXAMPLE LONG POSITION HAS TAKEN IN NIFTY 5900 CALL AND THE CURRENT LEVEL OF NIFTY SPOT IS 5785, MEANS YOU WILL BE IN PROFIT IF NIFTY SPOT WILL BE GREATER THAN FROM YOUR STRIKE PRICE THAT YOU HAVE SELECTED TO BUY THE CALL OPTION.

SO PROFIT = DIFFERENCE BETWEEN THE SPOT PRICE AND STRIKE PRICE - PREMIUM PAID FOR BUYING THE CALL OPTION

LOSS IN CASE OF TAKING LONG POSITION IN CALL OPTION :- LOSS IS LIMITED TO PREMIUM PAID FOR BUYING THE CALL OPTION IN LONG CALL OPTION. MEANS IF NIFTY SPOT CLOSES BELOW FROM YOUR STRIKE PRICE THAT YOU HAVE CHOSEN TO BUY THE OPTION THEN YOU WILL LOSE YOUR WHOLE PREMIUM THAT YOU HAVE PAID FOR BUYING THE OPTION.

IN CASE OF ABOVE EXAMPLE LONG POSITION HAS TAKEN IN  NIFTY 5900 CALL  MAY EXPIRY @ RS. 35/- . IF NIFTY SPOT CLOSES BELOW 5900 OR AT 5900 ALSO THEN YOU WILL LOSE WHOLE PREMIUM OF THE OPTION THAT IS RS. 35/-.

THE FOLLOWING TABLE WILL CLEAR THE PROFIT & LOSS IN CASE OF TAKING LONG POSITION IN CALL OPTION ON THE BASIS OF ABOVE EXAMPLE :- 

FROM THE ABOVE TABLE IT IS CLEAR THAT IF NIFTY SPOT CLOSES AT 5900 TO 5500 ON EXPIRY MEANS AT STRIKE PRICE OR BELOW THE STRIKE PRICE OF LONG CALL THEN LOSS IS SAME AT EACH LEVEL WHICH IS RS. -35/- PREMIUM THAT HAS PAID FOR BUYING THE CALL OPTION AND IF NIFTY SPOT CLOSES ABOVE THE STRIKE PRICE WHICH IS 5900 ON EXPIRY THEN PROFIT INCREASES AS THE NIFTY SPOT INCREASES.

SO PROFIT & LOSS IN CASE OF TAKING LONG POSITION IN CALL OPTION :-

PROFIT :- UNLIMITED

LOSS :- LIMITED TO AMOUNT OF PREMIUM PAID FOR BUYING THE CALL OPTION

NOTE :- ALL THE DIGITS ARE ASSUMED AND NOT BASED ON ACTUAL FIGURE.

OPTION BASIC :- UNDERSTANDING THE CONCEPT OF TIME VALUE OF MONEY IN OPTION TRADING...........14.03.2013

OPTION BASIC :- UNDERSTANDING THE CONCEPT OF TIME VALUE OF MONEY IN OPTION TRADING

Money has Time Value. The idea behind Time Value of Money is that a rupee now is worth more than rupee in the future. The relationship between Value of a Rupee today and Value of a Rupee in future is known as ‘Time Value of Money".

In Option Trading Time Value of Money is simply difference on Option Value or Option Premium and Intrinsic Value of the Option. Time Value also known as extrinsic value or instrumental value.

Means, 

Time Value of an Option = Option Premium - Intrinsic Value of an Option

Option Premium :- Option Premium is the premium which the Option Buyer pays to the Option Seller. It is also referred to as the Option Price.

Intrinsic Value of an Option :-

Cleared in the post on 14th Feb 2013  under"Understanding the Concept of Intrinsic Value in Option Trading" . See the post for details.

But For Revision remember this :- 

Intrinsic value of a call option = Spot Price - Strike Price (In case of Buying the Option)
Intrinsic value of a put option = strike price - Spot Price (In Case of Buying the Option) 


"since the longer the option has to go until expiry, the more opportunity there is for the Spot Price to move to a level such that the Option becomes In-the-Money. Generally, the longer the time to expiry, the Higher the Option’s time value. As expiry approaches, the value of an option tends to zero, and the rate of time decay accelerates."


"Means to say that At the beginning or starting of the expiry the Option has maximum Time Value of Money means, whatever the rupee is invested to buy an option now can worth more than rupee in the future. As soon as when the expiry date comes to near the option then then Time Value of Money decreases so the value of an option tends to zero at the end of the expiry."


"Both Calls and Puts have Time Value. An Option that is Out of -the- Money and At -the- Money has only Time Value. Usually the maximum Time Value exists when then Option is At -the- Money. The longer the time to expiration, the greater is an Option's Time Value, all also equal. At expiration doesn't have Time Value." 

Note :- Concept of In -the- Money, Out of -the- Money and At -the- Money have cleared on 14th Feb 2013 post under "UNDERSTANDING THE CONCEPT OF "IN -THE- MONEY OPTION", "OUT OF -THE- MONEY OPTION" & AT -THE- MONEY OPTION" IN OPTION TRADING". See the Post for Details.

But For Memory remember this :-

FOR CALL OPTION IS SAID TO BE IN -THE- MONEY OPTION WHEN SPOT PRICE > STRIKE PRICE MEANS,
POSITIVE CASH FLOW TO THE OPTION HOLDER IN CALL OPTION = SPOT PRICE - STRIKE PRICE

FOR PUT OPTION IS SAID TO BE IN -THE- MONEY OPTION WHEN STRIKE PRICE > SPOT PRICE MEANS,
POSITIVE CASH FLOW TO THE OPTION HOLDER IN PUT OPTION = STRIKE PRICE - SPOT PRICE  

See this graph :-

See the above graph. After the analyzing the above graph it is clear that in the starting of month to expiry Option has maximum Time Value of money but, when the month to expiry is coming the Time Value is decreasing or sloping down. And on the expiry it has become zero value.

So It has cleared that there is no Time Value of Money on the expiry date, so the value or premium of an option becomes zero.

OPTION BASIC :- UNDERSTANDING THE CONCEPT OF INTRINSIC VALUE IN OPTION TRADING...........14.02.2013

OPTION BASIC :- UNDERSTANDING THE CONCEPT OF INTRINSIC VALUE IN OPTION TRADING :-

The intrinsic value of an option is the amount an option holder can realize by exercising the option immediately. Intrinsic value is always positive or zero. An out-of-the-money option has zero intrinsic value.   

Intrinsic value of a call option = Spot Price - Strike Price 

Intrinsic value of a put option = strike price - Spot Price 

Note:- 

Spot Price :- The Price at which underlying assets (shares, stocks, index etc.) trades in the Spot Market or Cash Market. 

Strike Price: - The Price specified in the Option Contract is known as Strike Price or the Exercise Price. 

Example: - 

Intrinsic Value of Call Option :-  

If you Buy NIFTY 6000 Call April Expiry @ RS. 63 on 04 April 2011 and if NIFTY Spot closes at 6150 on April Expiry date, Then in this case...........

Strike Price = 6000 
Option Contract = April Expiry 
Spot Price on the date of April Expiry = 6150 
Option Premium =  Rs.63

Intrinsic Value of Call Option = Spot Price - Strike Price means, 6150 - 6000 = +150 

So the Intrinsic Value of the Call Option in this case is +150 means this call option is In the Money Call Option. In  "In the Money Call Option" Spot Price > Strike Price and there will be positive cash flow to the option holder which is Rs. 150 per lot. 

Intrinsic Value of Put Option :- 

If you Buy NIFTY 5700 Put April Expiry @ Rs. 60 and if NIFTY Spot closes at 5600 on April Expiry Date, then in this case.... 

Strike Price = 5700 
Option Contract = April Expiry 
Spot Price on the date of April Expiry = 5600 
Option Premium =  Rs.60 
Intrinsic Value of Put Option = Strike Price - Spot Price means, 5700 - 5600 = +100 

So the Intrinsic Value of the Put Option in this case is +100 means, this put option is In the Money Put Option. In  "In the Money Put Option" Strike Price > Spot Price and there will be positive cash flow to the option holder which is Rs. 100 per lot.

OPTION BASIC :- UNDERSTANDING THE CONCEPT OF "IN -THE- MONEY OPTION", "OUT OF -THE- MONEY OPTION" & AT -THE- MONEY OPTION" IN OPTION TRADING..........14.02.2013

OPTION BASIC :- UNDERSTANDING THE CONCEPT OF "IN -THE- MONEY OPTION", "OUT OF -THE- MONEY OPTION" & AT -THE- MONEY OPTION" IN OPTION TRADING :-



IN -THE- MONEY OPTION :- IT IS THE OPTION IN WHICH THERE IS POSITIVE CASH FLOW TO THE OPTION HOLDER MEANS THERE WOULD BE PROFIT IN EXERCISING OR SQUARING OFF THE OPTION.


FOR CALL OPTION IS SAID TO BE IN -THE- MONEY OPTION WHEN SPOT PRICE > STRIKE PRICE MEANS,


POSITIVE CASH FLOW TO THE OPTION HOLDER IN CALL OPTION = SPOT PRICE - STRIKE PRICE


FOR PUT OPTION IS SAID TO BE IN -THE- MONEY OPTION WHEN STRIKE PRICE > SPOT PRICE MEANS,


POSITIVE CASH FLOW TO THE OPTION HOLDER IN PUT OPTION = STRIKE PRICE - SPOT PRICE

EXAMPLE :- 


IN CASE OF CALL OPTION : SUPPOSE YOU BUY NIFTY 6000 CALL APRIL EXPIRY @ RS. 43 AND ON THE EXPIRY NIFTY SPOT IS CLOSED AT 6175. IN THIS CASE :-

SPOT PRICE = 6175 ON THE EXPIRY 
STRIKE PRICE = 6000

SO "FOR CALL OPTION IS SAID TO BE IN -THE- MONEY OPTION WHEN SPOT PRICE > STRIKE PRICE" AND IN THIS CASE THIS OPTION WILL BE IN -THE- MONEY CALL OPTION BECAUSE HERE SPOT PRICE IS GRATER THAN STRIKE PRICE, SO 



POSITIVE CASH FLOW TO THE OPTION HOLDER IN CALL OPTION = SPOT PRICE - STRIKE PRICE MEANS, 6175 - 6000 = +175(PROFIT) 


IN CASE OF PUT OPTION :- SUPPOSE YOU BUY NIFTY 5800 PUT APRIL EXPIRY @ RS.35 AND ON THE EXPIRY NIFTY SPOT IS CLOSED AT 5715, IN THIS CASE:-


SPOT PRICE = 5715 ON THE EXPIRY
STRIKE PRICE = 5800


SO "FOR PUT OPTION IS SAID TO BE IN -THE- MONEY OPTION WHEN STRIKE PRICE > SPOT PRICE" AND IN THIS CASE THIS OPTION WILL BE IN -THE- MONEY PUT OPTION BECAUSE HERE STRIKE PRICE IS GRATER THAN SPOT PRICE, SO 

POSITIVE CASH FLOW TO THE OPTION HOLDER IN PUT OPTION = STRIKE PRICE - SPOT PRICE MEANS, 5800 - 5715 = +85(PROFIT) 


OUT OF -THE- MONEY OPTION :- IT IS THE OPTION IN WHICH THERE IS NEGATIVE CASH FLOW TO THE OPTION HOLDER MEANS THERE WOULD BE LOSS IN EXERCISING OR SQUARING OFF THE OPTION.


FOR CALL OPTION IS SAID TO BE OUT OF -THE- MONEY OPTION WHEN SPOT PRICE < STRIKE PRICE MEANS,

NEGATIVE CASH FLOW TO THE OPTION HOLDER IN CALL OPTION = SPOT PRICE - STRIKE PRICE 


FOR PUT OPTION IS SAID TO BE OUT OF -THE- MONEY OPTION WHEN STRIKE PRICE < SPOT PRICE MEANS,


NEGATIVE CASH FLOW TO THE OPTION HOLDER IN PUT OPTION = STRIKE PRICE - SPOT PRICE

EXAMPLE :- 


IN CASE OF CALL OPTION : SUPPOSE YOU BUY NIFTY 6000 CALL APRIL EXPIRY @ RS. 43 AND ON THE EXPIRY NIFTY SPOT IS CLOSED AT 5910. IN THIS CASE :- 

SPOT PRICE = 5910 ON THE EXPIRY 
STRIKE PRICE = 6000

SO "FOR CALL OPTION IS SAID TO BE OUT OF -THE- MONEY OPTION WHEN SPOT PRICE < STRIKE PRICE"AND IN THIS CASE THIS OPTION WILL BE OUT OF -THE- MONEY CALL OPTION BECAUSE HERE SPOT PRICE IS LESS THAN STRIKE PRICE, SO 


NEGATIVE CASH FLOW TO THE OPTION HOLDER IN CALL OPTION = SPOT PRICE - STRIKE PRICE MEANS, 5910 - 6000 = -90(LOSS), BUT REAL LOSS IS -43 BECAUSE "IN CASE OF BUYING THE OPTION LOSS IS LIMITED TO THE PREMIUM PAID" AND HERE THE PREMIUM IS PAID RS. 43/-. SO LOSS WILL BE ONLY RS. 43/- ONLY.


IN CASE OF PUT OPTION :- SUPPOSE YOU BUY NIFTY 5800 PUT APRIL EXPIRY @ RS.35 AND ON THE EXPIRY NIFTY SPOT IS CLOSED AT 5850 IN THIS CASE:- 


SPOT PRICE = 5850 ON THE EXPIRY 
STRIKE PRICE = 5800


SO "FOR PUT OPTION IS SAID TO BE OUT OF -THE- MONEY OPTION WHEN STRIKE PRICE < SPOT PRICE"AND IN THIS CASE THIS OPTION WILL BE OUT OF -THE- MONEY PUT OPTION BECAUSE HERE STRIKE PRICE IS LESS THAN SPOT PRICE, SO  

NEGATIVE CASH FLOW TO THE OPTION HOLDER IN PUT OPTION = STRIKE PRICE - SPOT PRICE MEANS, 5800 - 5850 = -50(LOSS) BUT REAL LOSS IS -35 BECAUSE "IN CASE OF BUYING THE OPTION LOSS IS LIMITED TO THE PREMIUM PAID" AND HERE THE PREMIUM IS PAID RS. 35/-. SO LOSS WILL BE ONLY RS. 35/- ONLY. 


AT -THE- MONEY OPTION :- IT IS THE OPTION IN WHICH THERE IS NO CASH FLOW TO THE OPTION HOLDER MEANS ZERO CASH FLOW WILL BE THERE MEANS NO PROFIT AND LOSS WILL BE THERE, YOU WILL LOSE ONLY YOUR BUYING COST.


FOR CALL OPTION / PUT OPTION ARE SAID TO BE AT -THE- MONEY OPTION WHEN SPOT PRICE = STRIKE PRICE.


EXAMPLE :- 


IN CASE OF CALL OPTION : SUPPOSE YOU BUY NIFTY 6000 CALL APRIL EXPIRY @ RS. 43 AND ON THE EXPIRY NIFTY SPOT IS CLOSED AT 6000. IN THIS CASE :-

SPOT PRICE = 6000 ON THE EXPIRY 
STRIKE PRICE = 6000

SO "FOR CALL OPTION IS SAID TO AT -THE- MONEY OPTION WHEN SPOT PRICE = STRIKE PRICE" AND IN THIS CASE THIS OPTION WILL BE AT -THE- MONEY CALL OPTION BECAUSE HERE SPOT PRICE IS EQUAL TO THE STRIKE PRICE, SO 


ZERO CASH FLOW TO THE OPTION HOLDER IN CALL OPTION = SPOT PRICE - STRIKE PRICE MEANS, 6000 - 6000 = 0(ZERO), BUT YOU WILL LOSE YOUR WHOLE BUYING COST WHICH IS RS. 43/-. ONLY.


IN CASE OF PUT OPTION :- SUPPOSE YOU BUY NIFTY 5800 PUT APRIL EXPIRY @ RS.35 AND ON THE EXPIRY NIFTY SPOT IS CLOSED AT 5800, IN THIS CASE:-


SPOT PRICE = 5800 ON THE EXPIRY 
STRIKE PRICE = 5800


SO "FOR PUT OPTION IS SAID TO BE AT -THE- MONEY OPTION WHEN STRIKE PRICE = SPOT PRICE" AND IN THIS CASE THIS OPTION WILL BE AT -THE- MONEY PUT OPTION BECAUSE HERE STRIKE PRICE IS EQUAL TO THE SPOT PRICE, SO  


ZERO CASH FLOW TO THE OPTION HOLDER IN PUT OPTION = STRIKE PRICE - SPOT PRICE MEANS, 5800 - 5800 = 0(ZERO), BUT YOU WILL LOSE YOUR WHOLE BUYING COST WHICH IS RS. 35/- ONLY.