Option trading advanced module

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Options trading advanced module study material. Helpful to clear following NCFM Modules. ? Security Market Basic Module. ? Equity Derivatives: A Beginner's. Module. ? Capital Market (Dealer) Module. ? Derivatives Market (Dealer) Module. ? Option Trading Strategies Module. Everybody who want to make career in Derivatives � Options Market. ? Study Material.
Advance Option Chain.
Options trading advanced module study material. OPTIONS TRADING (ADVANCED) MODULE. PRACTICE QUESTIONS. 1. Which of the following is a contract where both parties are committed? ? Forward. ? Future. ? Both the above. ? Option. 2. Swaps can be based on. ? Interest. ? Principal and Interest. ? Equity. ? Any of the above. 3. An option to buy an underlying is.
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Name of Module Fees Rs. Test Duration in minutes No. A Beginners' Module 60 50 5 3 Currency Derivatives: This workbook builds on those modules to discuss advanced topics in derivatives. This book has been developed for NSE by Mr. All content included in this book, such as text, graphics, logos, images, data compilation etc.
This book or any part thereof should not be copied, reproduced, duplicated, sold, resold or exploited for any commercial purposes. Furthermore, the book in its entirety or any part cannot be stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise. The underlying may be a financial asset such as currency, stock and market index, an interest bearing security or a physical commodity.
Depending on how the pay offs are structured, it could be a forward, future, option or swap. However, forwards are not traded in the market. However, futures are tradable in the market. The pay offs in a futures contract are symmetric.
The option holder pays the option writer an option premium for entering into the contract. Unlike futures, the pay offs in an option contract are asymmetric. The downside for the option holder is limited to the premium paid; the option seller has an unlimited downside. American options are exercisable any time until expiry of the contract; European options are exercisable only on expiry of the contract. The payments may cover only interest, or extend to the principal in different currencies or even relate to other asset classes like equity.
The same exposure can be taken, either through the underlying cash market debt, equity etc. A benefit of derivative is the leveraging. For the same outgo, it is possible to have a much higher exposure to the underlying asset in the derivative market, than in the underlying cash market.
This makes it attractive for speculaters and hedgers, besides normal investors. This is calculated by examining the historical returns from the equity share and a diversified equity index over a long period of time say, daily returns over 3 years. As an illustration, the calculation is shown in Table 1. A higher value of R-square indicates that the relationship is indeed strong. The R-square value of 0. The calculations in Tables 1.
Beta and R-square are calculated based on data over a long period of time, say 2 � 3 years. At least 30 observations are required for a normal distribution. Normal discrete compounding with the same parameters would have been calculated as Rs. More frequent compounding increases the terminal value Rs. A call option has intrinsic value if its exercise price K is lower than the prevailing market price S0. The intrinsic value would be equivalent to S0 � K , but not negative.
If the exercise price of a call is higher, it will be allowed to lapse i. Therefore, the intrinsic value of a call is given as Max 0, S0 � K. A put option has intrinsic value if its exercise price K is higher than the prevailing market price S0. The intrinsic value of a put would be equivalent to K � S0 , but not negative. If the exercise price of a put is lower, it will be allowed to lapse i. Therefore, the intrinsic value of a put is given as Max 0, K � S0.
Time value of an option is the excess that market participants are prepared to pay for an option, over its intrinsic value. Suppose the premium quoted in the market for a call option with exercise price Rs.
The stock is quoting at Rs. Intrinsic value of the option is Max 0, 17 � 15 i. Time value is Rs. The various factors that affect the value of an option i.
If it is out of the money i. Therefore, higher the interest rate, more valuable the call option. Higher the interest rate, greater the opportunity cost of money. Therefore, higher the interest rate, less valuable the put option. This will reduce the intrinsic value of a call option and increase the intrinsic value of a put option.
Binomial and Black Scholes are two approaches to option valuation. Black Scholes has its inaccuracies, but is less cumbersome to apply than Binomial. Given a distribution, various other interpretations become possible. A normal distribution is defined by its mean and standard deviation. It is depicted in the form of a bell-shaped curve, as shown in Figure 1.
In the above case, it is For example, reading from the first row of the table: This means that Because of this asymmetric nature of share prices, normal distribution is not a suitable assumption to capture the behaviour of share prices. However, the returns from the shares over short periods of time can be said to be normally distributed. If a share has gone up from Rs.
Since, log of a stock price in future is assumed to be normally distributed, stock prices are said to be log normally distributed. Several models, including Black-Scholes, assume that during short periods of time, percentage change in stock prices which is the return in a non-dividend paying stock is normally distributed.
A variable with log normal distribution can take values between zero and infinity. A log normal distribution is skewed to one side not symmetric like a normal distribution.
It is an important input that affects the valuation of options. There are various facets to volatility. Thus, estimate for annual volatility is 0. It can be argued that the more recent data is more important than the earlier data.
Broadly, the model can be defined as follows: The weights are given such that the weight for the ith observation is more than that for the i-1th observation; i-1th observation has more weightage than i-2th observation, and so on. The total of all the weightages should be equal to 1 i. With this, volatility can be easily calculated as per the following formula: The equation is written as follows: GARCH 1,1 is commonly used.
Implied Volatility The volatility estimation discussed so far considered historical volatility based on price movement of a market variable, such as price of a stock. Volatility of the stock in turn affects the value of the stock option through a model like Black Scholes.
The Black Scholes model gives the theoretical value of the option, given historical volatility and other parameters that the model is based on. The actual option premia in the market are likely to be different from the theoretical estimation of any market participant, because of differences in the parameters used by various market participants. Given the market price of an option, and the parameters other than volatility, it is possible to do the Black Scholes calculation backwards, to arrive at the volatility implicit in the price.
This is the implied volatility. Implied volatility of a contract is the same for the whole market. However, historical volatility used by different market participants varies, depending on the periodicity of data, period covered by the data and the model used for the estimation of volatility. Given the difference in historic volatility, the option value calculated using the same Black Scholes model varies between market participants.
Accordingly, the following descripters are prevalent in the FO segment:

Ncfm option trading advanced module.
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Ncfm options trading advanced module pdf.
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A protective put position is created by buying (or owning) stock and buying put options on a share-for-share basis.