Derivatives Notes #2 | Options & Futures | Options :

I started writing a series of blog posts about Options a while ago. You can find the introductory article here.

In the below article, I would give a brief intro to the options :

Options: An Introduction to Leveraged Instruments : Options are financial derivatives that allow investors to speculate on the price of an underlying asset or hedge against potential losses. They provide the buyer the right, but not the obligation, to buy (in the case of a call option) or sell (in the case of a put option) an underlying asset at a specified price, known as the strike price, before or at the option’s expiration date.

Types of Options:

American Options: These options can be exercised at any time before the expiry date. They offer greater flexibility to the holder and are commonly used in the stock market.

European Options (PE/CE): These options can only be exercised at the time of expiry. A notable example is the Indian options market, where the expiration occurs on the last Thursday of the month. European options are prevalent in certain commodity and forex markets.

Key Concepts:

Strike Price: The price at which both the buyer and seller enters the contract(bet/deal).

Option Break-Even Point: Break even is when the price of underlying asset enters into no profit-no loss zone.

Option Value: Price at which the option is traded. It has two things — Intrinsic value and time value. To buy or sell options we need to pay a premium to the option writer/seller.

Premium: This is the price paid by the buyer to the seller (a.k.a writer of the option). It represents the income received by the seller, and the risk taken by the buyer.

Option Expiry: The pre-determined date at which the option contract concludes. For Indian stock markets, this is typically the last Thursday of the month. For indices the expiry date varies weekly, monthly etc.,

Market Dynamics: In the case of stock markets, due to volatility the price of underlying asset or index may change constantly. So, the options trading is not always a one-way game.

Pay off chart: Here’s the chart showing the payoff of a European Call Option. The x-axis represents the stock price at expiry, and the y-axis represents the payoff. The payoff increases linearly with the stock price above the strike price, minus the premium paid for the option. The grey dashed line (between 40 & 60 on x — axis)represents the strike price. ​​

In the context of the DeFi ecosystem, options play a pivotal role. Platforms like @lyrafinance @Panoptic_xyz @opyn_ etc., provides a transparent and accessible way for individuals to trade options on various cryptocurrencies. These platforms use smart contracts to automate the options process, reducing the need for intermediaries and offering a more inclusive financial market.

Relevant Resources:

For further insights and real-time data on equity derivatives, you may visit the links below (Indian context):

Links to the database of indices:
https://nseindia.com/market-data/equity-derivatives-watch… https://opstra.definedge.com

Conclusion: Options are a versatile financial instrument used for hedging risk or speculating on the price movements of an underlying asset. Understanding the fundamental concepts such as strike price, option value, and expiry is crucial. In my further posts, I would delve deep into types of options(like call, put, moneyness in an option and various trading strategies).

#Derivatives #OptionsTrading #FinancialLiteracy #Investing #StockMarket