Payoff structure of derivatives

PAYOFF STRUCTURE OF DERIVATIVES S. HASAN RAZA HAFIZ ABDUL RAUF MUHAMMAD ZAID SABIH SHEIKH MUHAMMAD MAAZ KHURSHEED

CONTENTS INTRODUCTION FUTURE PAYOFFS OPTION PAYOFFS PROTECTIVE PUT COVERED CALL BEARISH STRATEGIES

WHAT ARE DERIVATIVES ?

TYPES OF DERIVATIVES FORWARD FUTURE OPTION SWAPS

FUTURE PAYOFF Futures – Buyer Payoff Payoff for Futures Buyer Futures – Seller Payoff Payoff for Futures Seller

Mr. X buys a Nifty futures at 1250

Nifty Payoff1,000 -2501,100 -1501,200 -501,300 501,400 150

Futures – Buyer Payoff

-250

-150

-50

50

150

250

1,000 1,100 1,200 1,300 1,400 1,500

Payoff for Futures Buyer

Mr. X sells Nifty futures at 1250

Nifty Payoff1.000 2501,100 1501,200 501,300 -501,400 -150

Futures – Seller Payoff

-250

-150

-50

50

150

250

1,000 1,100 1,200 1,300 1,400 1,500

Payoff for Futures Buyer

OPTIONS PAYOFF

CALL OPTIONPUT OPTION

Buying of a Call OptionView: Bullish• Buy a one month Nifty Call

• With the Strike of 1250

• Premium of Rs 100

Nifty Spot

1000 1100 1200 1250 1350 1400 1500

Below strike

Below strike

Below strike

At strike Break even

Above strike

Above strike

Value of 1250 call

0 0 0 0 100 150 250

Premium paid

-100 -100 -100 -100 -100 -100 -100

Net Profit / (Loss)

-100 -100 -100 -100 0 50 150

Payoffs

Payoff chart

-150

-100

-50

0

50

100

150

200

1,000 1,100 1,200 1,250 1,350 1,450 1,550

View: Bearish• Sell / Write a one month Nifty Call

• With the Strike of 1250

• Premium of Rs 100

Selling of a Call Option

Nifty Spot

1000 1100 1200 1250 1350 1450 1550

Below strike

Below strike

Below strike

At strike Break even

Above strike

Above strike

Value of 1250 call

0 0 0 0 -100 -200 -300

Premium recd

100 100 100 100 100 100 100

Net Profit / (Loss)

100 100 100 100 0 -100 -200

Payoffs

Payoff Chart

-250

-200

-150

-100

-50

0

50

100

150

200

1,000 1,100 1,200 1,250 1,350 1,450 1,550

Buying of a Put Option

View: Bearish• Buy a one month Nifty Put

• With the Strike of 1250

• Premium of Rs 100

PayoffsNifty Spot

1000 1100 1150 1250 1350 1450 1550

Below strike

Below strike

Break even

At strike Above strike

Above strike

Above strike

Value of 1250 put

250 150 100 0 0 0 0

Premium paid

-100 -100 -100 -100 -100 -100 -100

Net Profit / (Loss)

150 50 0 -100 -100 -100 -100

Payoff Chart

-150

-100

-50

0

50

100

150

200

950 1050 1150 1250 1350 1450 1550

PROTECTIVE PUT

COVERED CALL

BEAR STRATEGY

Bearish strategies in options trading are employed when the options trader expects the underlying stock price to move downwards.

WHY USE BEARISH STRATEGIES?•Limiting lose• Negative effects of time decay.• Generate profit.

DISADVANTAGES: • Limited profit potential • Number of different strategies• Takes extra time and effort to decide best one for

any situation.

Bear Put Spread

Bear Call Spread