All about Options & Market outlook

Sahaj Agrawal

VP - Derivatives Research

Agenda

• Options Basics - Know how things work!

• Components of options pricing

• Walking through Put – Call Ratio

• The “Moneyness” of Options

• Outlook – Our take on the market

Options

• Options trading constitutes to about 90% of trading volumes inthe derivative space

• Nifty options are the most traded instrument in the Derivative segment on the exchange

• Index options are Options traders favorite. Of recent launches by the exchanges, Weekly options have been most successful

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Options definition

An option is :

• A financial contract that gives an investor the right to either Buy orSell an underlying

• But No obligation (unlike futures, under an adverse scenario)

• At a pre-determined price (known as the strike price)

• And on a specified date (known as the expiration date)

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Pricing Options

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Option Premium

Spot

Strike

Time Volatility

Risk Free Rate

Dividend

Premium 𝑐𝑎𝑛 𝑏𝑒 𝑒𝑥𝑝𝑙𝑎𝑖𝑛𝑒𝑑 𝑏𝑦 𝐵𝑙𝑎𝑐𝑘 𝑆𝑐ℎ𝑜𝑙𝑒𝑠 Model

Pricing Options – Breaking up the price

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Intrinsic Value

Time Value

Option Premium

Pricing Options – Breaking up the price

• Nifty @ 10650

• Nifty Feb 11000 call @ 17• Intrinsic value – 0 and Time value – 17

• Nifty Feb 10500 call @ 239• Intrinsic value – 150 and Time value – 89

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Understanding Simple Pay-Offs

Opt Type CEExpiry Dt 28-Feb-19Strike 10700Trade Dt 18-Feb-19Trade Pr 110.00Spot 10650Qty 1BEP 10810.00

390

290

190

90

-10

-110-110-110-110-110-110

-200

-100

0

100

200

300

400

500

1010

0

1020

0

1030

0

10

40

0

10

50

0

1060

0

1070

0

1080

0

1090

0

1100

0

11

10

0

11

20

0

1130

0

Pay

-Off

Spot

LONG CALL Payoff

Opt Type PEExpiry Dt 28-Feb-19Strike 10700Trade Dt 18-Feb-19Trade Pr 130.00Spot 10650Qty 1BEP 10570

-130-130-130-130-130-130

-30

70

170

270

370

-200

-100

0

100

200

300

400

1010

0

1020

0

1030

0

10

40

0

10

50

0

1060

0

1070

0

1080

0

1090

0

1100

0

11

10

0

11

20

0

1130

0

Pay

-Off

Spot

LONG PUT Payoff

Buy Sell

CallBullish - Limited

risk unlimited

reward

Bearish -

unlimited risk

Limited reward

PutBearish - Limited

risk Unlimited

reward

Bullish - unlimited

risk limited

reward

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Positions one can take

• “Sell call” is not same as “Buy Put”• Selling options is skewed towards Risk – Reward is limited to option

premium collected• Selling options involves unlimited risk

When trading options

• View on the underlying

• Implied volatility

• Time to expiry

• Strike selection

• Risk management (Average / Exit levels)

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Put-Call ratio

• Ratio of Put / Call

• Variants – All series OI/ Current series OI / Volume

• Eg: PCR Nifty Current month Open interest

PCR = PUT Current month OI / Call Current month OI

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• Interpreting the sentiment of participants

• High ratio Indicates put writers are comfortable holding positions and maintain a positive bias

• Low ratio indicates call writers are comfortable holding positions and maintain a negative bias

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Put-Call ratio

Put-Call ratio – Trading

• Intraday/short term trading can be done using PCR

• An increase in PCR indicates fresh put writing – Positive stance• An decrease in PCR indicates fresh call writing – Negative stance

• Option writers can use PCR along with the broader view in markets to decide on the aggression of option writing

*PCR is one of the inputs which can be used for decision making

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14

Put-Call ratio – Historical data

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ITM, ATM & OTM OptionsNifty Spot @ 10870

Moneyness of options

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Moneyness of options

Moneyness of options

• Moneyness has a direct impact on the change in options price wrtchange in underlying – DELTA

• ATM options have DELTA of 0.50• A unit change in underlying will change the options price by 0.50

• ITM options have DELTA of near 1• A unit change in underlying will change the options price by 1

• OTM options have DELTA of near 0.25• A unit change in underlying will change the options price by 0.25

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Using OptionsSome examples

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Pricing Options – Volatility impact

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TIMESTAMP SYMBOL OPTION_TYP STRIKE_PR EXPIRY_DT CLOSE BANKNIFTY

31-Jan-19 BANKNIFTY CE 27500 2/28/2019 374.4 27295

01-Feb-19 BANKNIFTY CE 27500 2/28/2019 265.75 27085

04-Feb-19 BANKNIFTY CE 27500 2/28/2019 291.1 27186

05-Feb-19 BANKNIFTY CE 27500 2/28/2019 310.45 27271

• Pre Budget – High uncertainty – High premium

• Post Budget – Event impact discounted – Volatility collapse – Premium reduced

Put-Call ratio – Index Intraday Trading – 15/02/2019

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• PCR suggested negative setup for the day

• After initial reaction the index failed to witness selling pressure

• An intraday trader, can take a risk of buying Call options for an intraday trade

Put-Call ratio – Index Intraday Trading – 18/02/2019

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• PCR suggested positive setup for the day

• After initial reaction the index continues to witness pressure

• An intraday trader, can take a risk of buying Put options for an intraday trade

Call writing strategy – SBIN

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• Positive on the stock for investment and holding in portfolio

• Short term view is of consolidation

• Call writing can be initiated against holding to reduce long term cost

• Call Writing: Sell SBIN JAN 300CE @ 7.0

Market Outlook

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Going ahead

• Nifty took support at trend defining level of 9950 and staged a strong bounce back to 11000 levels

• Through 2018 we have witnessed consolidation with significant selling in Midcap and Small cap stocks

• Indian Markets managed to outperform Asian peers like Shanghai and HangSeng

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• We believe we are in a structural positive market and currently arein “corrective” phase with resistance seen at 11100. While supportseen at 10580/10430/10300

• Expect the index to remain under pressure and test 10430 levelsbefore resuming up move

• Trend defining level for the index is seen at 9950, above this weremain structurally positive for 11800/13000

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Going ahead

Thank youHappy Trading !!

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