Page 67 - DMGT513_DERIVATIVES_AND_RISK_MANAGEMENT

Derivatives & Risk Management

Notes 4. Option Series: All options of a given type (calls or puts) with the same strike price and
expiration date are classified as an "option series."
For example, all XYZ June 110 calls would be an individual series, while all XYZ June 110
puts would be another series.
5. Contract Size of Equity Options: The contract size of an option refers to the amount of the
underlying asset covered by the options contract. For each unadjusted equity call or put
option, 100 shares of stock (usually, but this may differ from stocks to stocks) will change
hands when one contract is exercised by its owner. These 100 shares of underlying stock
are also referred to as the contract's "unit of trade."
6. Contract Size of Index Options: The contract size of a cash-settled index option is
determined by its multiplier. The multiplier determines the aggregate value of each point
of the difference between the exercise price of the option and the exercise settlement value
of the underlying interest.
For example, a multiplier of 100 means that for each point by which a cash-settled option
is in the money upon exercise, there is a $100 increase in the cash settlement amount.
7. Option price: Option price is the price which the option buyer pays to the option seller. It
is also referred to as the option premium.

8. Expiration date: The date specified in the options contract is known as the expiration date,
the exercise date, the strike date or the maturity.
9. Strike Price(K): Also known as the "exercise price," this is the stated price at which the
buyer of a call has the right to purchase a specific futures contract or at which the buyer of
a put has the right to sell a specific futures contract. The exchanges decide the strike price
at which call and put options are traded. Generally, to simplify matters, the exchanges
specify the strike price interval for different levels of underlying prices, meaning the
difference between one strike price and the next strike price over and below it.

Example: The strike price interval for Bharat Heavy Electricals is ` 10. This means that
there would be strike prices available with an interval of ` 10. Typically, the investor can see
options on Bharat Heavy Electricals with strike prices of ` 150, ` 160, ` 170, ` 180, ` 190 etc.
Following Table 6.1 shows the strike price intervals specified by exchanges.
Table 6.1: Strike Price Intervals for Options

Price level of Underlying Strike Price Interval (in Rs.)
Less than or equal to 50 2.5
Above 50 to 250 5.0
Above 250 to 500 10.0
Above 500 to 1000 20.0
Above 1000 to 2500 30.0
Above 2500 50.0

As the price of underlying moves up or down, the exchanges introduce more strike prices
in keeping with the strike price interval rules. At any point in time, there are at least five
strike prices (one near the stock price, two above the stock price and two below the stock
price) available for trading in one-, two- and three-month contracts.

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