Derivatives, Futures & Options — 65 Terms Defined

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

Put-Call Parity Derivatives, Futures & Options ₹ The relationship fixing the price of a European call and put with the same strike and expiry relative to the underlying. Call Price - Put Price = Spot Price - Present Value of Strike

Rho Derivatives, Futures & Options ₹ The change in an option's price for a one-percentage-point change in the risk-free interest rate. Rho = Change in Option Price / Change in Risk-Free Rate (per 1 percentage point)

Rollover Derivatives, Futures & Options index points Closing a derivative position in the expiring contract and opening the equivalent position in the next expiry. Rollover Cost = Price of the Far Contract - Price of the Near Contract, per unit

Short Call Derivatives, Futures & Options ₹ A position created by writing a call option, receiving the premium and taking on an obligation to deliver if exercised. Profit at expiry = Premium Received x Lot Size - max(Spot - Strike, 0) x Lot Size; loss is unbounded above the strike

Short Put Derivatives, Futures & Options ₹ A position created by writing a put option, receiving the premium and taking on an obligation to buy if exercised. Profit at expiry = Premium Received x Lot Size - max(Strike - Spot, 0) x Lot Size; maximum loss when the underlying reaches zero

SPAN Margin Derivatives, Futures & Options ₹ The portion of initial margin computed by simulating a portfolio's worst-case loss across a grid of price and volatility scenarios. SPAN Margin = the largest loss the portfolio would suffer across the scenario array tested by the clearing corporation

Stock Futures Derivatives, Futures & Options ₹ A futures contract whose underlying is a single listed company's shares. Contract Value = Share Price x Lot Size; settlement in India is by physical delivery of the shares

Straddle Derivatives, Futures & Options ₹ Buying or writing both a call and a put at the same strike and expiry. Long Straddle Cost = Call Premium + Put Premium; Break-evens = Strike +/- Total Premium

Strangle Derivatives, Futures & Options ₹ Buying or writing a call and a put at different out-of-the-money strikes with the same expiry. Long Strangle Cost = Call Premium + Put Premium; Break-evens = Call Strike + Total Premium, and Put Strike - Total Premium

Strike Price Derivatives, Futures & Options ₹ The fixed price at which an option's holder may buy or sell the underlying if the option is exercised. Test: the strike is set by the exchange in standard intervals and does not change over the contract's life

Synthetic Position Derivatives, Futures & Options qualitative A combination of options and the underlying that reproduces the payoff of a different single instrument. Synthetic Long = Long Call + Short Put at the same strike and expiry; Synthetic Short = Short Call + Long Put

Theta Derivatives, Futures & Options ₹ The rate at which an option loses value as time passes, holding everything else constant. Theta = Change in Option Price / Change in Time, conventionally expressed per calendar day and negative for a holder

Time Value Derivatives, Futures & Options ₹ The portion of an option's premium above its intrinsic value, paid for the possibility of a favourable move before expiry. Time Value = Option Premium - Intrinsic Value

Underlying Asset Derivatives, Futures & Options qualitative The security, index, commodity or rate whose price determines a derivative's value. Test: the derivative's settlement value is computed by reference to this asset's price at a defined time

Vega Derivatives, Futures & Options ₹ The change in an option's price for a one-percentage-point change in implied volatility. Vega = Change in Option Price / Change in Implied Volatility (per 1 percentage point)

Weekly Expiry Derivatives, Futures & Options qualitative A derivative contract that expires each week rather than monthly, concentrating an option's whole life into a few days. Test: the contract's expiry falls on a designated weekday of the current week rather than at month end