Derivatives, Futures & Options — 65 Terms Defined

American Option Derivatives, Futures & Options qualitative An option that may be exercised at any time up to and including its expiry date. Test: the holder may exercise on any trading day up to expiry, and the writer may be assigned at any time

Arbitrage Derivatives, Futures & Options ₹ Simultaneously buying and selling equivalent assets in different markets to lock in a price difference without directional risk. Test: the combined position has offsetting exposures, so the profit is fixed at inception regardless of the underlying's movement

At the Money Derivatives, Futures & Options qualitative An option whose strike is at or nearest to the current price of the underlying. Test: Strike is equal to, or the listed strike closest to, the current Spot price

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

Basis Derivatives, Futures & Options index points The difference between a futures price and the spot price of its underlying. Basis = Futures Price - Spot Price

Bear Put Spread Derivatives, Futures & Options ₹ Buying a put at one strike and writing a put at a lower strike with the same expiry, capping both cost and gain. Net Debit = Higher Strike Premium - Lower Strike Premium; Maximum Gain = (Strike Difference - Net Debit) x Lot Size

Black-Scholes Model Derivatives, Futures & Options ₹ A mathematical model that prices European options from the spot price, strike, time to expiry, interest rate and volatility. Inputs: Spot, Strike, Time to Expiry, Risk-Free Rate, Volatility; output: the theoretical option price

Bull Call Spread Derivatives, Futures & Options ₹ Buying a call at one strike and writing a call at a higher strike with the same expiry, capping both cost and gain. Net Debit = Lower Strike Premium - Higher Strike Premium; Maximum Gain = (Strike Difference - Net Debit) x Lot Size

Butterfly Spread Derivatives, Futures & Options ₹ A three-strike position buying one option at each outer strike and writing two at the middle strike. Net Debit = Lower Premium + Upper Premium - 2 x Middle Premium; Maximum Gain = (Strike Interval - Net Debit) x Lot Size

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

Delta Derivatives, Futures & Options ratio (x, times) The rate at which an option's price changes for a one-unit change in the underlying. Delta = Change in Option Price / Change in Underlying Price; ranges 0 to 1 for calls and 0 to -1 for puts

Derivative Derivatives, Futures & Options qualitative A contract whose value is determined by the price of another asset, called the underlying. Test: the contract's payoff is defined by reference to the price of a separate asset, rate or index

European Option Derivatives, Futures & Options qualitative An option that may be exercised only on its expiry date, not before. Test: exercise is permitted only at expiry; the holder may still close the position by selling it in the market at any time

Expiry Date Derivatives, Futures & Options days The date on which a derivative contract ceases to exist and is settled. Test: the contract's rights and obligations terminate at the close of the stated expiry day, with settlement at the closing reference price

Exposure Margin Derivatives, Futures & Options ₹ An additional margin charged on top of SPAN margin as a buffer against risks the scenario model does not capture. Exposure Margin = a prescribed percentage of contract value, or a multiple of the underlying's volatility, whichever the exchange specifies