Options Theory for Professional Trading

1. Call Option Basics
1.1– Breaking the Ice As with any of the previous modules in Varsity, we will again make the same old assumption that you are new to options and therefore know nothing about options. For this reason ..

2. Basic Option Jargons
2.1– Decoding the basic jargons In the previous chapter, we understood the basic call option structure. The idea of the previous chapter was to capture a few essential ‘Call Option’ concepts suc ..

3. Buying a Call Option
3.1 – Buying call option In the previous chapters we looked at the basic structure of a call option and understood the broad context under which it makes sense to buy a call option. In this chapter, ..

4. Selling/Writing a Call Option
4.1 – Two sides of the same coin Do you remember the 1975 Bollywood super hit flick ‘Deewaar’, which attained a cult status for the incredibly famous ‘Mere paas maa hai’ dialogue ☺? The mo ..

5. The Put Option Buying
5.1 – Getting the orientation right I hope by now you are through with the practicalities of a Call option from both the buyers and sellers perspective. If you are indeed familiar with the call opti ..

6. The Put Option selling
6.1 – Building the case Previously we understood that, an option seller and the buyer are like two sides of the same coin. They have a diametrically opposite view on markets. Going by this, if the P ..

7. Summarizing Call & Put Options
7.1 – Remember these graphs Over the last few chapters, we have looked at two basic option type’s, i.e. the ‘Call Option’ and the ‘Put Option’. Further, we looked at four different variant ..

8. Moneyness of an Option Contract
8.1 – Intrinsic Value The moneyness of an option contract is a classification method wherein each option (strike) gets classified as either – In the money (ITM), At the money (ATM), or Out of ..

9. The Option Greeks (Delta) Part 1
9.1 – Overview Yesterday I watched the latest bollywood flick ‘Piku’. Quite nice I must say. After watching the movie I was casually pondering over what really made me like Piku – was ..

10. Delta (Part 2)
10.1 – Model Thinking The previous chapter gave you a sneak peek into the first option Greek – the Delta. Besides discussing the delta, there was another hidden agenda in the previous chapter – ..

11. Delta (Part 3)
11.1 – Add up the Deltas Here is an interesting characteristic of the Delta – The Deltas can be added up! Let me explain – we will go back to the Futures contract for a moment. We know for every ..

12. Gamma (Part 1)
12.1 – The other side of the mountain How many of you remember your high school calculus? Does the word differentiation and integration ring a bell? The word ‘Derivatives’ meant something else t ..

13. Gamma (Part 2)
13.1 – The Curvature We now know for a fact that the Delta of an option is a variable, as it constantly changes its value relative to the change in the underlying. Let me repost the graph of the del ..

14. Theta
14.1 – Time is money Remember the adage “Time is money”, it seems like this adage about time is highly relevant when it comes to options trading. Forget all the Greek talk for now, we shall go b ..

15. Volatility Basics
15.1 – Background Having understood Delta, Gamma, and Theta, we are now at all set to explore one of the most interesting Option Greeks – The Vega. Vega, as most of you might have guessed is the r ..

16. Volatility Calculation (Historical)
16.1 – Calculating Volatility on Excel In the previous chapter, we introduced the concept of standard deviation and how it can be used to evaluate ‘Risk or Volatility’ of a stock. Before we move ..

17. Volatility & Normal Distribution
17.1 – Background In the earlier chapter we had this discussion about the range within which Nifty is likely to trade given that we know its annualized volatility. We arrived at an upper and lower e ..

18. Volatility Applications
18.1 – Striking it right The last couple of chapters have given a basic understanding on volatility, standard deviation, normal distribution etc. We will now use this information for few practical t ..

19. Vega
19.1 – Volatility Types The last few chapters have laid a foundation of sorts to help us understand Volatility better. We now know what it means, how to calculate the same, and use the volatility in ..

20. Greek Interactions
20.1 – Volatility Smile We had briefly looked at inter Greek interactions in the previous chapter and how they manifest themselves on the options premium. This is an area we need to explore in more ..

21. Greek Calculator
21.1 – Background So far in this module we have discussed all the important Option Greeks and their applications. It is now time to understand how to calculate these Greeks using the Black & Sch ..

22. Reintroducing Call & Put Options
22.1 – Why now? I suppose this chapter’s title may confuse you. After rigorously going through the options concept over the last 21 chapters, why are we now going back to “Call & Put Options ..

23. Case studies – wrapping it all up!
23.1 – Case studies We are now at the very end of this module and I hope the module has given you a fair idea on understanding options. I’ve mentioned this earlier in the module, at this point I f ..

24. Quick note on Physical Settlement
24.1 – Overview Until recent times, trading in equity futures and options was cash settled in India. What this means is that upon expiry of the contract, buyers or sellers had to settle their po ..

25. Options M2M and P&L calculation
25.1 – Back to Futures After many years, I’m updating this module with a new chapter, and it still feels as if I wrote this module on options just yesterday. Thousands of queries have poured i ..