stock option vs. index option

1Complex Options. Simple Solutions.

Stock OptionsVs.

Index Options

2

OptionCall OptionPut OptionStock OptionIndex Option

Key Terminologies

3

Option:Standardized ContractGives Buyer the Right but not the obligation to Buy or SellFor Equity – Underlying Instrument is StockFor Index – Underlying Instrument is Basket of Different StocksNo Value after Expiration of Specific ContractAll Stock and Index Options have European Style ExerciseTool for Earning Good Profit with Limited RiskInvestor can define Minimum LossActively used by Arbitrageurs, Hedgers and Speculators

4

Call Option:Give Buyer the rightNot the obligation to buy underlyingBuying Call Option – Bullish ViewSelling Call Option – Bearish View

5

Put Option:Give Seller the rightNot the obligation to Sell underlyingBuying Put Option – Bearish ViewSelling Put Option – Bullish View

6

Stock Option:Standardized ContractGives Buyer the Right but not the obligation to Buy or SellFor Equity – Underlying Instrument is a StockOption can not be exercise before ExpiryLow VolumeHigh VolatilityHigh Risk

7

Index Option:Standardized ContractGives Buyer the Right but not the obligation to Buy or SellFor Index – Underlying Instrument is a Basket of Different StocksOption can not be exercise before ExpiryHigh VolumeLow VolatilityLow Risk

8

Arbitrageurs:Trade in Two or more different MarketsEither its Same Security or Similar Security or Currency or CommodityProfits by Simultaneously Buying and SellingTake advantage of Pricing difference created by Market Condition

9

Hedgers:Trade in Two or more different Segment to Reduce RiskEither they are Producer or Users of the Commodity or Financial Product Hedge through either with Same Security or Similar Security or Currency or Commodity or IndexHedge by offsetting position either in Future or OptionReduce Risk as well as Reduce Profit Potentials.

10

Speculator:Trade in any Market where Profit Potential availableHigh Risk – Reward in Short TermProvide Necessary Liquidity to the Market to FunctionUse Charting Tool or Pivots or other decision making tools

11

Almost Same for both Stock and Index Option Factors are:

Price movement of Underlying Stock or Index Strike Price Volatility in Underlying Time Remaining till Expiry Interest Rate Dividend

Pricing Factors

12

Underlying InstrumentRiskVolatility

How Stock Option Differ from Index Option

13

1. Underlying InstrumentsFor Stock Options:

Share of an Individual Company

For Index Options: Basket of Shares of Different Companies

14

2. Risk:For Stock Options:

Highly Volatile, High Risk

For Index Options: Greater Stability, Low Risk

15

3. Volatility:For Stock Options:

Highly Volatile, because of dependent on only individual stock

For Index Options: Less Volatile, because of dependent on basket of different stock

16

Thank You

-: Contact :-803, City Center, Nr. Sosyo Circle, Udhana Magdalla Road, Surat – 395 004

1002, Luxuria Business Hub, Gaurav Path Road, Surat – 395 007 www.finideas.com || info@finideas.com

Complex Options. Simple Solutions.

www.facebook.com/finideas

www.twitter.com/finideas

www.youtube.com/finideas

http://finideasmspl.blogspot.in/

http://in.linkedin.com/in/finideas