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We [at Soros Fund Management] use options and more exotic derivatives sparingly. We
try to catch new trends early and in later stages we try to catch trend reversals. Therefore,
we tend to stabilize rather than destabilize the market. We are not doing this as a public
service. It is our style of making money. - George Soros
• Definition - Operations
3. Trading process
4. Money Management
5. Advantages
A derivative can be defined as a financial instrument whose value depends on (or derives from) the
value of other basic underlying variables(assets).
Linear Derivatives:
Linear products are instruments that see their value directly related to the market price of the
underlying variable.
— In case of a move in the underlying asset, the value of the derivative will move with a nearly
identical quantity.
— Often called “Delta-One” products because there is a 1:1 relationship between the values of the
underlying and derivative in case of market move.
•They are bilateral contracts and hence exposed to counter party risk
•Each contract is custom designed, and hence is unique in terms of contract size, expiration date and
the asset type and quality
•The contract price is generally not available in public domain
•The contract has to be settled by delivery of the asset on expiration date
•In case the party wishes to reverse the contract, it has to compulsorily go to the same counter party,
which being in a monopoly situation can command the price it wants
A future contract is a standardization agreement between the seller (short position) of the contract
and the buyer (long position), traded on a futures exchange, to buy or sell a certain underlying
instrument at a certain date in future, at a pre-set price. The future date is called the delivery date or
final settlement date. The pre-set price is called the futures price.
Settlement - The last step of a security transaction where the buyer pays cash and gets the ownership
Margin - Collateral kept by a trader with a broker to cover the risk of losses on a transaction.
Mark to Market - The process of determining the present market value of a security position.
• The payoff of such products varies with the value of the underlying, but also with other
elements (interest rates, volatility, dividends, etc.)
• Non-linear products are often referred to as “options” but this is a global name for a wide
range of different payoffs
•Various underlying assets: stocks, indices, funds, fx rate, interest rates, bonds, etc.
•Option may be defined as a contract, between two parties whereby one party obtains the right, but
not the obligation, to buy or sell a particular asset, at a specified price, on or before a specified date.
•The person who acquires the right is known as the option buyer or option holder.
•The other person (who confers the right) is known as option seller or option writer.
•The seller of the option for giving such option to the buyer charges an amount which is known as the
option premium.
•Call Option : A call option gives the holder a right to buy shares. The option holder will make money if
the spot price is higher than the strike price.
• Buyer is bullish / Seller is bearish or not bullish
•Put Option : The put option gives the right to sell. The option holder will make money if the spot price
is lower than the strike price.
• Buyer is bearish / Seller is bullish or not bearish
The maximum profit that an option writer can make in this case is the premium amount.
Moneyness is a measure of the degree to which a derivative is likely to have positive monetary value at
its expiration, in the risk-neutral measure. There are three positions in options: In-the-money; At-the-
money; and Out-of-the-money.
Call Option Spot > Strike Spot = Strike Spot < Strike
Put Option Spot < Strike Spot = Strike Spot > Strike
Various factors affect the price of options on index / stocks. We shall look at the impact of changes in
each of these factors on option prices one at a time, assuming that all other factors remain the same.
Intrinsic value is the difference between Strike Price and CMP. Intrinsic value is always found in ITM
options. OTM options have zero Intrinsic Value.
Time value premium decreases at an accelerated rate as the option approaches maturity.
Options Greeks
Future Spot
Date 27/12/'19 Contacts Jan 2020
12200 12120
Strike Price PE 11900 12000 12100 12200 12300
Premium 70 95 130 170 215
Intrinsic Value 0 0 0 80 180
Time Value 70 95 130 90 35
Strategy : Buy Call Option Amount On expiry Nifty Net Payoff from Call
closes at Option (Rs.)
Strategy : Buy Put Option Amount On expiry Nifty Net Payoff from Put
closes at Option (Rs.)
When to use : When ownership is desired of stock yet investor is concerned about near-term
downside risk. The outlook is conservatively bullish.
Risk : Losses limited to Stock price + Put Premium – Put Strike price
Break-even point : Put Strike Price + Put Premium + Stock Price – Put Strike Price
Client Buy Nifty Nifty Fut 12300 11900 220 -400 -180
12000 120 -300 -180
12100 20 -200 -180
Put Option Strike Price 12200
12200 -80 -100 -180
12300 -80 0 -80
Client Pay Premium 80 12400 -80 100 20
12500 -80 200 120
BEP = 12200+80+12300-12200 12380 12600 -80 300 220
12700 -80 400 320
When to Use : The investor thinks that the underlying stock / index will experience significant volatility
in the near term.
Reward : Unlimited
Break-even point :
Upper Break-even Point = Strike Price of Long Call + Net Premium Paid
Lower Break-even Point = Strike Price of Long Put - Net Premium Paid
Strategy : Buy Call + Put Option Amount Net Payoff Net Payoff
On expiry Net Payoff
from Put from Call
Nifty closes at (Rs.)
Option (Rs.) Option (Rs.)
Nifty Spot CMP 12300
11900 300 -100 200
Call & Put Strike Price 12300 12000 200 -100 100
12100 100 -100 0
Client Pay C= 100 + P= 100 200 12200 -100 -100 -200
12300 -100 -100 -200
12400 -100 -100 -200
BEP = 12300 + 200 (U) 12500
12500 -100 100 0
12600 -100 200 100
BEP = 12300 - 200 (L) 12100
12700 -100 300 200
When to use : The investor thinks that the underlying stock / index will experience very high levels of
volatility in the near term.
Reward : Unlimited
Break-even point :
Upper Break-even Point = Strike Price of Long Call + Net Premium Paid
Lower Break-even Point = Strike Price of Long Put - Net Premium Paid
•Risk profile
• High Risk - Derivatives
• Low Risk - Equity
Volumes :
Derivatives volume is the number of contracts traded during a given period of time. Hence volume
reflects the number of contracts that changed hands from a seller to a buyer, regardless of whether it
is new contract being created of just an existing contracts.
Rising UP UP Bullish
Falling UP UP Bearish
Requirements :-
Small capital
•How ? = 15 mini option premium candle's RSI closed above 60 and prices also above its
20 EMA (Previous Candle)
• Buy = Above previous candle's high
• SL = (-1) Previous candle's low or 20 EMA which ever is higher
• Trail SL = After candle closes, move SL to current LOW of candle
SL 112
SL 112
SL 112
SL 56
RSI > 60
SL 56
SL 28
SL 28
32100
Trade 4 48 58 10 20.83 4 400
PE
Money management in investments \ trading deals with the question of what part
of the money put into risk in order to maximize the profit and even survival in
worst case scenario.
TSL
Buy
SL
Time
20% 2 to 1 20 80 -40
40% 2 to 1 40 60 +20
60% 2 to 1 60 40 +80