Equity & Equity Derivative

The stock market is a place that facilitates the trading of securities, including corporate and government securities. These are long-term, public fund raising instruments. There are many ways to raise funds:

Under it, funds will be raised from the public by the sharing of the ownership.

Follow on Public Offer (FPO) where an already listed company issues additional shares to the public in order to raise more money.

Rights issue allows you to raise additional funds from your shareholders by selling securities.

The Securities and Exchange Board of India, (SEBI), has created two routes for top 200 listed companies to raise public money and reduce promoter shareholding in order to meet the minimum public-shareholding norms. These are the two routes:

 

Offered for Sale (OFS), and Institutional Placement Programmes allow all companies to reduce their promoter stake by selling shares on stock exchanges during regular hours in order to meet minimum public holding norms.

Promoters can sell shares on the bourses using the OFS or IPP routes with quicker regulatory clearances. This allows them to raise capital faster than any other method. There is no need for paperwork.

The authorized capital is the maximum amount of capital that a company can raise through shares. This is the maximum capital a company can raise via shares.

If a company raises money from more than 50 people it is no longer a private placement. It is considered a public issue. This listing requirement, along with other SEBI norms, must be met.

Section 67 of companies act defines an offering of shares and debentures for 50 or more people as an invitation or offer to the public. This would require that the norms set out by SEBI regulations be observed. These include the issuing of prospectus and compliance with procedures and other disclosure norms.

Secondary Market enables stock holders to adjust their holdings in response to changes in their assessment of risk and return which ultimately gives the rise of stock transactions/trading while Developments of aforesaid nature take place in Primary Market.

Transactions in cash:

A transaction involves buying and selling the same securities on the same settlement cycle. The traders receive or pay any difference in transactions at the close of the settlement cycle.

There are two types: intra-day and delivery based settlements.

There are no deliverable/receivable positions in an Intra-Day transaction,. All positions that are open are closed on the same day. After two working days, fund pay-in/payout is only possible.

In a Delivery based transaction, all open deliverable/receivable positions are settled after two working days of trade.

Futures transactions:

Futures contracts allow you to purchase or sell an underlying amount at a specified price and on or prior to a specified date. Both the parties to a futures contract must exercise it unless they are delivered on or before settlement.

Futures Trading Features:

• For taking positions, an initial margin amount of contract price is required. This is determined by exchange using SPAN plus exposure margin.
• Daily adjustments will be made to mark-to-profit/loss.
• If positions are not squared by the last trading day of a contract, an exchange will take them off.

Optional Transactions:

Option is a contract between two people to purchase or sell an amount of underlying assets at a pre-specified price. It can be before or after a date. There are two types: the Call option and the Put option.

Call Optionis a way to purchase the underlying at a certain price on or before a particular date.

Put Option allows you to sell the underlying at a specified price, on or before a particular date.

Option premium is paid by buyer of option. Buyer buys right, but not obligation, to exercise option on seller/writer.

The option premium is paid to the writer of the Call/Put call option. If the buyer exercises his option, they must sell/buy the underlying.

Options trading:

• Option buying requires premium and option selling requires margin.
• Option premium is the price that an option buyer pays to option sellers to acquire the right.
• The strike price is the pre-specified price, and the expiration date is when strike price becomes applicable.
• Sub-underlying assets are the asset that is sold or bought.

Style Options:

American Options can be exercised at any time before or on the expiration date. The American Option is priced using the Binomial Option Pricing Methodology.

European Options can only be exercised after the expiry of the contract. European Options are priced using the Black and Sholes method.

All index options are European trade options in India. They can't be exercised between, but can be sold at any time. Stock options can be exercised or sold anytime.

Option Value:

The intrinsic value of an option is the difference in the spot price and the strike price for the underlying, i.e.
Intrinsic value of call option = Spot price - Strike price
Intrinsic Value = Strike Price – Spot Price.
Time valueof an option refers to the difference between its premium price and its intrinsic value, i.e. Premium - (Spot Price - Strike Price)
OTM and Call ATM have no time value. ATM is the most common option.

In the Money Option: An option that could lead to positive cash flow for the holder if exercised immediately is called an ITM option. When Spot price is higher than Strike price, a call option is considered to be ITM (i.e. Call options are said to be in ITM when the Spot price > Strike price (i.e., it is higher), whereas put options are said to be in ITM when the Strike price Spot price (i.e. Lower/below

At money option: An ATM allows you to withdraw cash immediately and generate zero cash flow. Spot price = Strike Price

Out of the Money: An OTM (Out-of-the-money) is an option that could cause a negative cash flow and if not exercised immediately. If Call option = Spot price Strike price, then put option = Spot price > Strike.

The factors that determine the price of an option:

Spot price of the Underlying Asset, Strike price, Annualized Volatility and Time to Expiration.

Option Greeks:

Option Greek is the change in price of an option when a price determinant changes. Below are some important options Greek:

Delta This is the rate at which an option price changes, i.e. Premium based on the price of the underlying assets.

The delta of the long call option and short call is always positive. It ranges from 0 to 1 while long put and short calls are always negative. They range between 0 to -1.

Vega This measures the change in option value relative to volatility price of the underlying assets. It is positive for long options, and negative for shorter options.

Theta It measures how the value of an option changes with time. The option will lose its value with the passage of time, even if all other aspects remain the same.

Rho It measures the sensitivity of an option value relative to the risk-free rate.

Gama This is the rate at which the option's delta compares to the price for the underlying asset.

Options Strategies:

1. Bullish Strategy: Long call

2. Bullish Strategy: Short put

3. Bearish View : Long Put

4. Bearish view : Short call

5. Bullish Strategy: Bull Call Spread

6. Bearish Strategy: Bear Put Spread

7. Bullish Strategy: Synthetic call/Protective put

8. Bearish Strategy: Synthetic Long Term Put/Protective call

9. Bullish Strategy: Covered call with futures

10. Bearish Strategy: Covered put

11. Collar: Bullish Strategy

12. Bullish View: Long Combo

13. Long Strangle: Neutral Strategy

14. Short Strangle: Neutral Strategy

15. Long Stradle: Neutral Strategy

16. Short Stradle: Neutral Strategy

17. Neutral strategy : Long call butterfly

18. Neutral strategy : Short Butterfly