Tutorials

Volatility & pricing of options

by R. Venkata Subramani

Volatility forms a very key factor in the pricing of an option. As we discuss later in this chapter this component known as ‘vega’ is a factor that is used in the mathematical computation of arriving at the theoretical value of an option price. Increased volatility means higher option prices and vice versa.

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Historical Volatility & Implied Volatility in Options

by R. Venkata Subramani

Volatility is a measure of how fast the underlying futures prices are moving. It is a measure of the speed and magnitude at which the underlying stock’s prices change. This is expressed in a percentage. The two basic types of volatility are historical volatility and implied volatility. Historical volatility is a measure of how much [...]

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Factors affecting pricing of an Option

by R. Venkata Subramani

The current price of the underlying is obviously a very important factor that determines the price of an Option. Also the strike price of the contract is another key factor that affects the price of an Option. The time to expiry is again another important factor that affects the price of an Option. The intrinsic [...]

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Selling short in the derivatives market

by R. Venkata Subramani

Futures and options traders use the terms long and short similar to the regular equity markets. A long position means that the investor has bought the derivative instrument – futures or options. A short position means that the investor has sold the instrument. So selling short in futures is when the investor sells a contract, [...]

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Status of an Option

by R. Venkata Subramani

The status of an option changes on a daily basis depending upon the market rate of the underlying. To find out the status of the option, the market rate of the underlying is compared with the strike price of the option contract. Accordingly, an Option will fall into any one of the status viz., ITM, [...]

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Components of an Equity Options Contract

by R. Venkata Subramani

Underlying asset The value of derivative instrument is derived from the characteristics and value of a related stock and this is known as the underlying asset. The underlying can be any stock, commodity, bullion or Index. The underlying asset is the specific asset based on which the derivative contract is bought or sold. For e.g., [...]

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Call and Put Options

by R. Venkata Subramani

Call Option A call option is the right, but not an obligation to buy something at a fixed price – the strike price at anytime within the specified time period. In this definition, the “something” is the underlying which the investor has the right to buy or sell. The underlying is usually either an exchange [...]

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Types of options

by R. Venkata Subramani

A European option is an option that can be exercised only on the expiry date of the option, i.e. at a single pre-defined point in time. An American option is an option that can be exercised at any time before the expiry date. Other options where early exercise occurs differently are given below. However note [...]

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