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An Option is a contract that gives the right, but not the obligation, to buy or sell the underlying asset on or before a stated date, at a stated price. The party taking a long position, i. Options, which give you a right to buy the underlying asset, are called Call Options. On the other hand, the Options that give you a right to sell the underlying asset are called Put Options. These Options have Index as the underlying asset. For example, options on Nifty, Sensex, Bank Nifty etc.

These Options have individual stocks as the underlying asset. The buyer of an Option has a right but not the obligation in the contract. The writer of an Option receives the Option premium and is thereby obliged to sell the asset if the buyer of Option exercises his right. This is the day on which a derivative contract ceases to exist. It is the last trading date of the contract.

The expiration day of Nifty contracts is Aug 31, in the following example. It is the price at which the underlying asset trades in the spot market. Underlying stock value of Nifty option was as on Aug 28, Strike price is the price per share for which the underlying security may be purchased or sold by the Option holder. As discussed in futures section, Open Interest is the total number of Option contracts outstanding for an underlying asset.

For an Option, intrinsic value refers to the amount by which an Option is in the money, i. Therefore, only in-the-money Options have intrinsic value whereas at-the-money and out-of-the-money Options have zero intrinsic value. The intrinsic value of an Option can never be negative. Thus, for call Option, which is in-the-money, intrinsic value is the excess of spot price S over the exercise price X. Intrinsic value of a Call Option can be calculated as S-X, with a possible minimum value of zero because no one would like to exercise his right under no advantage condition.

Similarly, for Put Option which is in-the-money, intrinsic value is the excess of exercise price X over the spot price S.

Thus, intrinsic value of Put Option can be calculated as X-S, with minimum possible value of zero. It is the difference between premium and intrinsic value, if any, of an Option.

Delta measures the change in Option price for a unit change in the price of underlying. So if my delta is 0. Gamma measures the change in Delta with respect to per unit change in underlying. If Gamma value is 0. So Gamma shows what will be the next change in Delta with respect of change in underlying.

Vega measures the change in Options price per unit change in volatility. A Vega value of 6. Thus, Vega shows effect of volatility on Option price. Theta measures the change in Option price per day change in time to expiry. If Theta is Rho measures the change in Option price per unit change in interest rate. A Rho value of 2 shows that for every unit increase in interest rate, Option price will change by 2.

Rho is inversely related to puts and directly related to calls. For example, last traded price of different ITM Calls and Puts, when underlying Nifty is trading at , are as follows:. At-The-Money Options have no intrinsic value, but it may still have time value. Call Option is said to be OTM, when spot price is lower than strike price.

For example, last traded price of different OTM Calls and Puts, when underlying Nifty is trading at , are as follows:. In case of American option, buyers can exercise their Option any time before the maturity of contract.

On Aug 28, , Nifty was trading at Assume that you buy a Call Option with strike price of at a premium of Rs. On Aug 28, , Nifty is at Assume that you buy a Put Option with strike price of at a premium of Rs.

An opening transaction is one that adds or creates a new trading position. It can be either a purchase or a sale. With respect to an Option transaction, we will consider both:. Opening purchase — This is done with the purchasing intention of creating or increasing a long position in a given series of Options.

Opening sale — This is done with the selling intention of creating or increasing a Short position in a given series of Options. A Closing transaction is one that reduces or eliminates an existing position by an appropriate offsetting purchase or sale. With respect to an Option transaction:. Closing purchase — This is done with the purchasing intention of reducing or eliminating a short position in a given series of Options. Closing sale — This is done with the selling intention of reducing or eliminating a long position in a given series of Options.

You cannot close out a long call position by purchasing a Put or any other similar transaction. A closing transaction for an Option involves the sale of an Option contract with the same terms. You, as an Option buyer, pay a relatively small premium for market exposure in relation to the contract value. This is known as Leverage. You can see large percentage gains from comparatively small, favorable percentage moves in the underlying equity.

Leverage also has downside implications. A Long Option position has limited risk premium paid and unlimited profit potential. A Short Option position has unlimited downside risk, but limited upside potential to the extent of premium received. Long Call Ladder Strategy. Call Back —Spread Strategy. Put Back- spread Strategy. Long Put Ladder Strategy. Long Call Butterfly Strategy. Short Iron Butterfly Strategy. Long Call Condor Strategy. Long Call Calendar Spread Strategy. Short Put Ladder Strategy.

Short Call Ladder Strategy. Long Iron Butterfly Strategy. Short Call Condor Strategy. Short Call Butterfly Strategy. Back to Chapter List Previous Chapter. Options An Option is a contract that gives the right, but not the obligation, to buy or sell the underlying asset on or before a stated date, at a stated price.

Types of Options There are two types of Options: Stock Option These Options have individual stocks as the underlying asset. Buyer of an Option The buyer of an Option has a right but not the obligation in the contract. Writer of an Option The writer of an Option receives the Option premium and is thereby obliged to sell the asset if the buyer of Option exercises his right.

Lot Size Lot size is the number of units of underlying asset in a contract. Expiration Day This is the day on which a derivative contract ceases to exist. Spot Price It is the price at which the underlying asset trades in the spot market. Strike Price or Exercise Price Strike price is the price per share for which the underlying security may be purchased or sold by the Option holder.

Option Premium Intrinsic Value Option premium, consists of two components - intrinsic value and time value. Time Value It is the difference between premium and intrinsic value, if any, of an Option. Option Greeks Delta Delta measures the change in Option price for a unit change in the price of underlying. Important points for Delta: Call Delta ranges from 0 to 1 and Put Delta ranges from 0 to -1 Total of absolute value of call Delta and put Delta always comes to 1 Gamma Gamma measures the change in Delta with respect to per unit change in underlying.

Important points for Gamma: Gamma of Option is always positive. Gamma of Call and Put Option is same. Vega Vega measures the change in Options price per unit change in volatility.

Theta Theta measures the change in Option price per day change in time to expiry. Rho Rho measures the change in Option price per unit change in interest rate. For example, last traded price of different ITM Calls and Puts, when underlying Nifty is trading at , are as follows: For example, last traded price of different OTM Calls and Puts, when underlying Nifty is trading at , are as follows: