Derivatives, Futures & Options — 10 Terms Defined

Calendar Spread Derivatives, Futures & Options ₹ Writing an option in a nearer expiry and buying the same strike in a further expiry, or the equivalent in futures. Net Debit = Far Expiry Premium - Near Expiry Premium, at the same strike

Call Option Derivatives, Futures & Options ₹ An option giving its buyer the right to buy the underlying at the strike price on or before expiry. Payoff at expiry for the buyer = max(Spot - Strike, 0) - Premium Paid

Cash and Carry Arbitrage Derivatives, Futures & Options % Buying the underlying in the cash market while selling its futures, locking in the basis as a return. Locked-in Return = (Futures Price - Spot Price - Transaction Costs) / Spot Price, annualised over the days to expiry

Cash Settlement Derivatives, Futures & Options ₹ Settlement of a derivative by paying the cash difference between the contract price and the final settlement price. Settlement Amount = (Final Settlement Price - Contract Price) x Lot Size, sign adjusted for the position

Cash-Secured Put Derivatives, Futures & Options ₹ Writing a put while setting aside enough cash to buy the underlying if assigned. Cash to Reserve = Strike x Lot Size; Effective Purchase Price if Assigned = Strike - Premium Received

Collar Derivatives, Futures & Options ₹ Holding shares while buying a protective put and writing a call, funding the protection with the premium received. Net Cost = Put Premium - Call Premium; Outcome is bounded between (Put Strike - Net Cost) and (Call Strike - Net Cost)

Contango Derivatives, Futures & Options qualitative A condition in which futures prices are above the spot price, and later expiries are priced above nearer ones. Test: Futures Price > Spot Price, with successively distant contracts priced progressively higher

Contract Value Derivatives, Futures & Options ₹ The notional value of the underlying that one derivative contract controls. Contract Value = Lot Size x Current Price of the Underlying

Cost of Carry Derivatives, Futures & Options % The net cost of holding the underlying until a derivative's expiry, comprising financing cost less any income received. Futures Fair Value = Spot x (1 + Risk-Free Rate x Days to Expiry / 365) - Dividends Expected before Expiry

Covered Call Derivatives, Futures & Options ₹ Writing a call option against shares already owned, so the delivery obligation is covered by the holding. Maximum Gain = (Strike - Purchase Price + Premium) x Lot Size; Break-even = Purchase Price - Premium