Basic of Options

Option, an instrument used for hedging by taking a view on the future direction of market which help in generating income for investors under various market conditions. Option can be simply defined as a contract which gives the buyer the right but not the obligation to buy (call option) or to sell (put option) a particular asset at a particular price in future. For every option, buyer has to pay an amount to the seller know as Option premium or option price.

Here, I would try to explain the basic options payoffs. It is a known fact that option results in non-linear payoff i.e. losses for buyer of an option is limited whereas profits are potentially unlimited.

Long Asset (Without option)

Long refers to buying the asset at the underlying price when investor perceives the market to be bullish. For example, buyer buys a share of XYZ Ltd at Rs 2500 and decides to sell it at a future date at an unknown price. The investor is said to be ‘long’ the asset. As expected if market turns out to be bullish such that share prices goes up, buyer makes profits and if share price falls, he loses.

Short Asset (Without Option)

Short refers to selling of asset at the underlying price and buys it back at a future date at an unknown price. Once the share is sold, the investor is said to be ‘short’ the asset. For example, buyer sells a share of XYZ Ltd at Rs 2500 as he perceives the market to be bearish. If share price falls, he profits and vice versa.

Buyer of Call Options (Long Call)

A call option gives the buyer the right to buy the underlying asset at the strike price specified in the option. Now here the profit/ loss of the buyer depend on the spot price of the share. In this case, buyer along with the share (Long Asset) buys an option at the premium price which he pays to the seller of the option. Every option has an expiration date and strike price (K) which is specified in the option contract.
If upon expiration, spot price > strike price (In the Money), buyer makes a profit. If spot price < strike price (Out of the Money), buyer lets the option expire un-exercised. His loss is them limited to the premium he paid for buying the option.
For example, if buyer buys a 3 month (expiration date) Nifty 2500 call option at a premium of 100. If upon expiration spot price is 3000 then buyer makes a profit of 400 (3000-2500+100). However if spot price is 2100, buyer lets the option expire and his losses are limited only to Rs 100 (the premium).

It is important to remember that profit for buyer of call option is unlimited and losses are limited.

Seller of Call Options (Short Call)

Seller or Writer is the one who charges the premium to the buyer of call option. Whatever is the buyer’s profit is the seller’s loss. If upon expiration, spot price exceeds strike price, buyer will exercise the option on writer thus writer start making losses. However when buyer let the option expire un-exercised (strike price>spot price) writer gets to keep the premium which is his profit.

It is important to remember that profit for seller of call option is limited and losses are unlimited.

Buyer of Put Options (Long Put)

A put option gives the buyer the right to sell the underlying asset at the strike price specified in the option. Profit/loss of buyer again depends on the spot price of the underlying. Upon expiration if spot price is below strike price (In the Money), buyer makes a profit. If spot price > strike price (Out of the money), buyer makes a loss. His loss is again the premium he paid to the seller of put option.

It is important to remember that profit for buyer of put option is unlimited and losses are limited.

Seller of Put Options (Short Put)

Seller or Writer is the one who charges the premium to the buyer of put option. Whatever is the buyer’s profit is the seller’s loss. If upon expiration, strike price exceeds spot price, buyer will exercise the option on writer thus writer start making losses. However when buyer let the option expire un-exercised (spot price>strike price) writer gets to keep the premium which is his profit.

It is important to remember that profit for seller of put option is limited and losses are unlimited.

The above explained six payoffs are the basic ones which are molded and redervied to form various option strategies used by investors to maximize their profits and minimize risks. I will try to explain it more clearly through graphs in my next blog.

Source: National Stock exchange of India Ltd.

Book Review--The Monk who sold his Ferrari..

It was March 2007, when I first started reading the book ‘The monk who sold his Ferrari by Robin Sharma’. However I could not complete it due to my pre engagements and lack of interest after reading few pages. During my summers, I again got the prospect of reading it…

Robin Sharma has always been a fabulous storyteller and this notion of mine has been reassured after reading this enlightening book. At first look, the title of the novel is misleading but as you keep on reading…You will realize how Ferrari has been associated with the millionaire lawyer turned enlightened monk. A beautifully woven story with few incidents and objects is core of the novel..

Garden being symbolized as human mind to emphasize on cultivating our mind• The quality of your life is determined by the quality of your thoughts
• There are no mistakes - only lessons. See setbacks as opportunities for personal expansion and spiritual growth

Light house in the garden specifies the purpose of life constantly.• The purpose of life is a life of purpose
• Discovering and then realizing your lifework brings lasting fulfillment
• Set clearly defined personal, professional and spiritual goals, and then have the courage to act on them.
A 90 kg weight sumo wrestler is being resembled to an important concept ‘Kaizen’ of continuous improvement.• Enlightenment comes through the consistent cultivation of your mind, body and soul.

And the list is on…it talks about self discipline, time as the most precious commodity and our ultimate purpose in life is to selflessly serve others. The one thing which separates it from other self help books is the techniques which have been given to achieve the transformation that can enhance the life of every individual…A must read for all!!
Few Lines from the novel…
on an average day
the average person runs about sixty thousand thoughts through
his mind. What really amazed me though, was that ninety-five
percent of those thoughts were the same as the ones you thought
the day before!"
This is the tyranny of impoverished thinking. Those
people who think the same thoughts every day, most of them
negative, have fallen into bad mental habits. Rather than focusing on all the good in their lives and thinking of ways to make things even better, they are captives of their pasts.


Now am looking forward to read ‘I who bought his ferrari’ by some other author..

Gender Inequality In India..

India has always been a victim of gender inequality, if we go by statistics, The World Economic Forum Gender Gap Index 2007 ranked India at the 114th position. In 2008, situation remained same with 113rd rank. Rank is calculated based on economic, political, educational and health parities among 134 countries. Surprisingly, in 2009ranking, Iceland stood 1st surpassing all other Nations whereas India struggled to stick to 114th.

We Indians often talk about Naina Lal Kidwai of HSBC India and ICICI’s Chanda Kocher, Indira Nooyi. However study shows that not more than 4% women occupy senior level positions and only 1% organization have women CEO.

Today, I read that Multinational Corporations (MNC) is inclined to hire women for the top jobs. They want to infuse gender diversity. However, it is also mandatory to be competitive in global market. Multinational Corporations (MNCs) must diversify their workforce in the international arena. This diversification, to be meaningful, must extend across both gender and cultural boundaries. With the increasing inclination of fairer sex towards MNC’s, it is the best time to leverage on that.

Corporations find it lucrative and advantageous as women attrition rate has always been low as compared to male counterparts. Women prefer to be stable and attach value to the work they do. Apart from that, MNC considers them to be good communicator and negotiator.

However, the problem persists because of lack of higher education opportunities’ for women in the male dominated country, India. Another blockage is the mindset of women towards career. They are always at the crossroads of family and career.

Step taken by MNC’s may prove to be a boon towards bridging the gap of gender inequality and hopefully place India in top 50 in the coming years in Gender Gap Index.
Keep your fingers crossed!