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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
