Hedging Through Call option

Ram an investor is bothered about the increase in the share price of a company.
So He wants to buy 100 shares 2 months from now.

He can hedge himself by buying a call option to purchase.

No. of Shares Strike Price/Share Premium/Share

100 1000 10
100000 1000
Now he has the right but not the obligation to purchase.

Situation - 1 At the end of 2 months

If Spot Price increases Rs. 1500/share

He will go for option so he will pay =1000x100 100000

Now he will sell the shares =1500x100 150000
Profit 50000
Less: Premium 1000
Net Profit 49000

Situation - 2 At the end of 2 months

If Spot Price decreases Rs. 900/share

He will not go for option so he will pay =900x100 90000

Add: Premium 1000
Total Purchase Price 91000

Hedging Through Put option

Ram an investor is bothered about the decrease in the share price of a company.
So He wants to sell 100 shares 2 months from now.

He can hedge himself by buying a put option to purchase.

No. of Shares Strike Price/Share Premium/Share

100 1000 10
100000 1000
Now he has the right but not the obligation to sell.

Situation - 1 At the end of 2 months

If Spot Price increases Rs. 1500/share

He will not go for option so he will get =1500x100 150000

Less: Premium 1000
Net Profit 149000

Situation - 2 At the end of 2 months

If Spot Price decreases Rs. 900/share

He will go for option so he will get =1000x100 100000

Less Premium =10x100 1000
 99000
Market Price of 100 shares =900x100 90000
Net Profit 9000

Here his breakeven is 1000 -10 = 990

Since he sells at Rs. 1000, he makes a profit of Rs.90 (990-900) per share
Hedging Through Call option

Ram an investor is bothered about the increase in the share price of a company.
So He wants to buy 1000 shares 4 months from now.

He can hedge himself by buying a call option to purchase.

No. of Shares
Strike Price/Share
Premium/Share

1000 1000 10
1000000 10000
Now he has the right but not the obligation to purchase.

Situation - At
1 the end of 4 months
If Spot Price increasesRs. 1500/share

He will go for option so=1000x1000

he will pay 1000000
Now he will sell the shares
=1500x1000 1500000
Profit 500000
Less: Premium 10000
Net Profit 490000

Situation - At
2 the end of 4 months
If Spot Price decreasesRs. 900/share

He will not go for option

=900x1000
so he will pay900000
Add: Premium 10000
Total Purchase Price 910000

Hedging Through Put option

Ram an investor is bothered about the decrease in the share price of a company
So He wants to sell 1000 shares 4 months from now.

He can hedge himself by buying a put option to purchase.

No. of Shares
Strike Price/Share
Premium/Share

1000 2000 10
2000000 10000
Now he has the right but not the obligation to sell.

Situation - At
1 the end of 4 months
If Spot Price increasesRs. 2500/share

He will not go for option

=2500x1000
so he will get
2500000
Less: Premium 10000
Net Profit 2490000

Situation - At
2 the end of 4 months
If Spot Price decreasesRs. 1800/share

He will go for option so=2000x1000

he will get 2000000
Less Premium 10000
 1990000
Market Price of 1000 shares
=1800x1000 1800000
Net Profit 190000

Here his breakeven is 2000 -100 = 1990

Since he sells at Rs. 2000, he makes a profit of Rs.190 (1990-1800) per share
e in the share price of a company.

se in the share price of a company.

f Rs.190 (1990-1800) per share