From assessment year (AY) 2006-07 (financial year 2005-06), transactions in derivatives are not
considered as speculative transaction, as per Section 43 (5) of Income Tax (IT) Act, 1961. Therefore,
income from F&O may be shown as non-speculative business
Intro to Options trading
1
Option definition
Types of Options
A call is an option to buy (but not the obligation)
A put is an option to sell (but not the obligation)
A European option can be exercised only at the end of its life
An American option can
Trading Strategies
using Options
1
Plan
Learn different trading strategies using options
Understand the profit/loss from these strategies
How &when these strategies can be used
https:/www.nseindia.com/products/content/derivatives/equities/indi
vidual_
Hedging Using Futures
KSB
Long & Short Hedges
Hedge: Perfect hedge
A long futures hedge is appropriate when you know
you will purchase an asset in the future and want to
lock in the price
A short futures hedge is appropriate when you
know you will sell
Introduction to
Binomial Trees Model
A gambling game
Fair coin toss thrice. Head in any trial implies gain of Re.1.Tail implies
no gain. Entry fee is Re.1
Should I paly the game?
Main Questions
What is a binomial (Trees) Model of stock price movement?
Properties of Stock
Options
1
Notation
c : European call option
price
p : European put option
price
S0 :
Stock price today
K : Strike price
T : Life of option
: Volatility of stock price
C :American Call option price
P : American Put option price
Normal and Lognormal
Distribution
The normal distribution
Normal distribution (or density):
( x; , )
1
e
2
1 x 2
2
2
The normal distribution
Normal density is symmetric:
( x; , ) ( x; , )
If a random variable x is normally distributed with
2
x
~
N
Implied Volatility,
Volatility smiles and
surface
Some Questions after B&S
How close are the market prices of options to those predicted by
Black-Scholes?
Do traders really use Black-Scholes when determining a price for an
option?
Are the probability d
Contract Specifications
Parameter
Index
Futures
Index
Options
Futures on
Individual
Securities
Options on
Individual
Securities
Mini Index
Futures
Mini Index
Options
Long Term
Index
Options
Underlying
10 indices
10 indices
208
securities
208
securities
S&
Binomial Option Pricing
Plan
Recap
Calculation of option price using binomial option pricing formula
Delta
Recap
Q1. What is a binomial (Trees) Model of stock price movement?
Q2. How this binomial model can help us in determining/calculating
the pric