OPTIONS ON GOLD FUTURES THE SMARTER WAY TO HEDGE YOUR RISK

Transcription

1 OPTIONS ON GOLD FUTURES THE SMARTER WAY TO HEDGE YOUR RISK

2 INTRODUCTION Options on Futures are relatively easy to understand once you master the basic concept. OPTION The option buyer pays a premium to the option seller in every transaction. The following is a list of the rights and obligations associated with trading put and call options on futures. CALL BUYERS CALL SELLERS An option on a futures contract is the right, but not the obligation, to buy or sell a particular futures contract at a specific price on or before a certain expiration date. There are two types of options: call options and put options. Each offers an opportunity to take advantage of futures price moves without actually having a futures position. CALL OPTION Pay premium Have the right to exercise, resulting into in a long futures position Time decay works against them No margin requirements Collect premium Have an obligation if assigned, to assume a short futures position Time decay works in their favor Have margin requirements A call option gives the holder (buyer) the right to buy (go long) a futures contract at a specified price on or before an expiration date. For example, an INDIA INX December Gold $1300 call option gives the holder (buyer) the right to buy or go long a Gold futures contract at a price of $1300. Even if Gold futures rise substantially above $1300 the call holder will still have the right to buy Gold futures at $1300. If Gold futures moves below $1300, the call option buyer is not obligated to buy at $1300. PUT OPTION A put option is an option contract which gives the buyer of the option the right, but not the obligation, to sell a specified amount of an underlying futures at a specified price, on or before the expiration date of the contract. This is the opposite of a call option, which gives the holder the right to buy underlying futures. OPTION BUYER An option buyer can choose to exercise their right and take a position in the underlying futures. A call buyer can exercise the right to buy the underlying futures and a put buyer can exercise the right to sell the underlying futures contract. In most cases though, option buyers do not exercise their options, but instead offset (take the opposite position) them in the market before expiration. OPTION SELLER An option seller (i.e., someone who sells an option that they did not previously own) is also called an option writer or grantor. An option seller is contractually obligated to take the opposite futures position if the option buyer exercises their right to the futures position specified in the option. The option buyer pays the option seller the premium to buy the option. In return for the premium, the option seller assumes the risk of taking a possibly adverse futures position. PUTS AND CALLS Puts and calls are separate option contracts; they are not the opposite side of the same transaction. For every put buyer there is a put seller, and for every call buyer there is a call seller. PUT BUYERS pay premium have right to exercise, resulting into in a short futures position time decay works against them no margin requirements EXERCISE PRICE PUT SELLERS collect premium have obligation if assigned, to assume a long futures position time decay works in their favor have margin requirements Also known as the strike price the exercise price is the price at which the option buyer may buy or sell the underlying futures contracts. Exercising the option results in a futures position at the designated strike price. For example, by exercising an India INX December Gold $1290 call, the buyer of the option would then be long a December Gold futures contract at $1290. If the holder of a Gold December $1320 put were to exercise their option, the result would be a short futures position, at $1320, in December Gold Futures. Strike prices are set by the Exchange and have different intervals depending on the underlying contract. Strike prices are set above and below the existing futures price and additional strikes are added, if the futures move up or down. UNDERLYING FUTURES CONTRACT The underlying is the corresponding futures contract that is purchased or sold upon the exercise of the option. For example, an option on a December Gold futures contract is the right to buy or sell one such contract. An option on INDIA INX December Gold futures gives the right to buy or sell one INDIA INX December Gold futures contract. PREMIUM The premium is the price that the buyer of an option pays and the seller of an option receives, for the rights conveyed by 1

3 an option. The market price of an option is however determined by supply and demand. Various factors affect options premiums, including strike price level in relation to the futures price level; time remaining to expiration market volatility and interest rates all of which will be discussed further. EXERCISE Exercise refers to the process whereby the option buyer asserts their right and goes long the underlying futures (when exercising a call) or short the underlying futures (when exercising a put). ASSIGNMENT Assignment refers to the obligation of option sellers, to take the opposite and possibly adverse futures position to the option buyers as and when the contract gets assigned and for this risk receive the premium. Remember: Buyers exercise and sellers get assigned. EXPIRATION DATE/LAST TRADING DAY This is the last day on which an option can be exercised into the underlying futures contract. After this point the option will cease to exist; the buyer cannot exercise and the seller has no obligation. Note that Gold options expire prior to the final settlement or expiration of the underlying futures contract. For example, a December INDIA INX Gold $1350 call option will expire on November 27, However, the underlying futures will expire on November 28, The last trading day is the last day on which an option can be offset. OFFSET The buyer is under no obligation to exercise an option on a futures contract. Traders (Buyer & Sellers) can take an offsetting option position if they wish to take profits before expiration or limit their losses. Options buyers can offset their options by instructing their broker to sell their option before expiration. An option seller can offset a position by buying back or covering a short position. PRICING FUNDAMENTALS An option gives the options buyer the right, though not the obligation, to take a long or short position in a specific futures contract at a fixed price on the expiration date. For this right granted by the option contract the buyer pays a sum of money or premium to the option seller. The option seller (or writer) keeps the premium, whether the option is exercised or not. The seller must fulfill the obligation of the contract if and when the option is exercised by the buyer. How are options premiums (or prices) determined? While supply and demand ultimately determine the price of options, several factors have a significant impact on option premiums. 1. THE VOLATILITY OF THE UNDERLYING FUTURES MARKETS Volatility is a function of price movement. When prices are rising or falling substantially, volatility is said to be high. When a futures contract shows little price movement, volatility is said to be low. High volatility generally causes option premiums to increase sometimes very dramatically. Lower volatility environments generally cause options premiums to decline. When markets become volatile, option buyers are willing to pay larger premiums for greater protection against adverse price risk because there is greater chance of price change in the underlying instrument. On the other hand, a greater chance for price change means more risk for the option seller. Sellers therefore demand a larger premium in exchange for this risk. It is much the same as insurance and insurance underwriters. If risk is perceived to be large, the insurance company will require a larger premium. If the risk is not large the insurance purchaser will usually not have to pay a large premium. With options, anytime there is a greater chance of the underlying futures advancing or declining through one or more exercise prices, risk is perceived to be greater and premiums will increase. THE IMPACT OF VOLATILITY ON OPTION PREMIUMS INDIA INX Gold December $1250 call option price Low Volatility Medium Volatility High Volatility $7.4 $11.9 $14.2 The table above shows that as volatility increases, (all other factors being equal) options premiums increase. Options traders should be sure to consider volatility before using these markets. 2. THE EXERCISE PRICE COMPARED TO THE UNDERLYING FUTURES PRICE The relationship between the option s strike price and the underlying futures price is another key influence on option premiums. If India INX Gold futures are trading at $1300 per ounce, common sense tells us that a $1280 call option will be worth more than $1300 call option (the right to buy $20 / ounce lower will be more costly). Similarly, a $1320 call option would be relatively cheap because the underlying Gold futures is a full $20 away from the exercise price. 3. TIME REMAINING FOR EXPIRATION An option s value erodes as its expiration nears. An option with 60 days until expiration will have greater theoretical 2

4 value than an option with 30 days until expiration. When there is more time for the underlying futures to move; sellers will demand and buyers will be willing to pay a larger premium. THE EFFECT OF TIME ON OPTION PREMIUMS Gold December $1300 Call option price 60 days until 30 days until Expiration BREAKEVEN POINTS Expiration $5.40 $2.70 As mentioned previously, options are versatile instruments that allow the possibility of profit while also limiting risk to a predetermined amount. The maximum amount options buyers can lose is the premium that they originally paid, plus brokerage commissions. But before initiating an options position, the trader should first calculate the breakeven point. To calculate an options breakeven point the trader uses the strike price and the premium. Knowing breakeven points will help traders choose more effective strategies. Example: A trader purchases an India INX December Gold $1250 call option and pays a premium of $2. Where does the underlying futures have to advance for the option to break even at expiration? BREAKEVEN POINT FOR CALLS Strike Price + Premium Paid = Breakeven Point $ $2 = $1252 Thus, for this position to break even, the underlying December futures contract has to advance to $1252 Example: If a trader purchases a December Gold $1300 put option for $3, how far must the December India INX Gold futures decline for the option to break even at expiration? BREAKEVEN POINT FOR PUTS Strike Price - Premium Paid = Breakeven Point $1300 $3 = $1297 TIME VALUE AND INTRINSIC VALUE The underlying futures price level compared with the exercise price and the passage of time both have an impact on options premiums. Two terms that describe these effects are referred to as time value and intrinsic value. An option s premium can be made up of one or both of these components. Calculating these two values requires only the strike price, the underlying futures price and the option premium. INTRINSIC VALUE AND TIME VALUE FOR CALLS In the case of a call, the intrinsic value is the amount by which the underlying futures price exceeds the strike price: Futures Price - Strike Price = Intrinsic Value (Must be positive or 0) Example: India INX December Gold futures are trading at $1325 per ounce and the December $1320 Call option is trading at $5.30. What is the time value and intrinsic value components of the premium? Futures Price - Strike Price = Intrinsic Value $1325 $1320 = $5 Time value represents the amount option traders are willing to pay over intrinsic value, given the amount of time left to expiration for the futures value. To increase in the case of calls and decline in case of put. Options Premium - Intrinsic Value = Time Value $5.30 $5 = $0.30 Time Value + Intrinsic Value = Premium $ $5 = $5.30 INTRINSIC VALUE AND TIME VALUE FOR PUTS: In the case of a put, intrinsic value is the amount by which the underlying futures price is below the strike price: Strike Price - Futures Price = Intrinsic Value (must be positive or 0) Put Option Premium - Intrinsic Value = Time Value Put Time Value + Put Intrinsic Value = Put Option Value Example: What are the time value and intrinsic value of an India INX December Gold $1350 put if the underlying futures are trading at $1345 and the option premium is $6? Strike Price - Futures Price = Intrinsic Value $1350 $1345 = $5 There are $5 of intrinsic value. Options - Intrinsic Value = Time Value Premium $6 $5 = $1 There is $1 of time value. 3

5 IMPORTANT CONCEPTS IN-THE-MONEY A call option is said to be in-the-money when the futures price exceeds the strike price. A put is in-the-money when the futures price is below the strike price. For example, December Gold $1300 call option will be in-the-money if December Gold futures are above $1300; meaning that the holder has the right to buy these futures a $1300 regardless of how much the price has risen. Any option that has intrinsic value is in-the-money. AT-THE-MONEY An option is at-the-money when the futures price equals the option s strike price. An India INX Gold December call option with a strike price of $1300 is at-the-money if the December Gold futures contract is trading at very close to $1300. OUT-OF-THE-MONEY When the futures price is below the strike price (for calls) or above the strike price (for puts) the option is said to be out-of-the-money. An out of the money option doesn t have intrinsic value, it only has time value. If India INX Gold future are trading at $1320 per ounce then a $1340 call would be out-of-the-money. DELTA Delta measures the rate of change of an option premium with respect to a price change in the underlying futures contract. Delta is a measure of price sensitivity at any given moment. Not all options move point-for-point with their underlying futures contracts. If a futures contract moves.50 points and the option only moves.25 points, its delta is 50%; i.e., the option is only 50% as sensitive to the movement of underlying futures contract. The delta will change as an option moves from out-of-the-money to at-the-money to in-the-money, approaching 100%. Deltas range from 0% to 100% (0-1).The delta of the underlying futures contract is 100% (options pricing software is normally used to calculate delta). MARGIN An option buyer must only pay the amount of the premium, in full, at the time of the trade. However, because selling an option involves more risk, an option seller or writer will be required to pay a margin which is calculated by SPAN, a standard margining software. If an options position is devolved into a futures position on expiry, margin is required, similar to any other futures position. DEVOLVEMENT PROCESS FOR OPTIONS INTO FUTURES: Option on Futures contracts shall have the corresponding commodity futures contract as their underlying. Option series having strike price closest to the Daily Settlement Price (DSP) of Futures contracts shall be termed as At the Money (ATM) options series. All In the Money and At the Money Call and Put Buy options and their assigned Sell Options, as on the expiry day, shall devolve into underlying Futures position as follows:- a) Long Call position shall devolve into long position in the underlying Futures contract b) Long Put position shall devolve into short position in the underlying Futures contract c) Short Call position shall devolve into short position in the underlying Futures contract d) Short Put position shall devolve into long position in the underlying Futures contract All such devolved options, positions shall be open as futures positions at the strike price of the exercised Options. TIME VALUE DECAY As discussed in the previous section, the value of an option beyond intrinsic value is called time value or extrinsic value. It is the sum of money option traders are willing to pay given the likelihood of the option increasing in value. Time value erodes as each day passes, accelerating as expiration nears. This characteristic of options is referred to as time- decay and is the reason why options are sometimes considered wasting assets. If time passes and the underlying futures contract does not move far enough by expiration, the option s time value will decay and the option buyer may incur a loss. 4

6 BASIC OPTION STRATEGIES Bullish Bearish Volatile Stable Long Call Long Put Long Straddle Short Straddle Buy a call and buy a put at same strike Sell a call and Sell a put at same strike Short Put Short Call Long Futures Short Futures Bull Spread Bear Spread Buy a call and sell a call at a higher strike/ or/buy a put and sell a put a higher strike Buy a put and sell a put at a lower strike/ or/buy a call and sell a put a lower strike 5

7 STRATEGY FOR BULL MARKET: BULL CALL SPREAD In a bull call spread strategy, an investor will simultaneously buy call options at a specific strike price and sell the same number of calls at a higher strike price. Both call options will have the same expiration month and underlying asset. This type of vertical spread strategy is often used when an investor is bullish and expects a moderate rise in the price of the underlying asset. STRATEGY FOR BEAR MARKET: BEAR PUT SPREAD The bear put spread strategy is another form of vertical spreadlike the bull call spread. In this strategy, the investor will simultaneously purchase put options at a specific strike price and sell the same number of puts at a lower strike price. Both options would be for the same underlying asset and have the same expiration date. This method is used when the trader is bearish and expects the underlying asset s price to decline. It offers both limited gains and limited losses. STRATEGIES FOR VOLATILE MARKET: STRADDLE AND STRANGLE LONG STRADDLE: A long straddle options strategy is when an investor purchases both a call and put option with the same strike price, underlying asset and expiration date simultaneously. An investor will often use this strategy when he or she believes the price of the underlying asset will move significantly, but is unsure of which direction the move will take. This strategy allows the investor to maintain unlimited gains, while the loss is limited to the cost of both options contracts. LONG STRANGLE: In a long strangle options strategy, the investor purchases a call and put option with the same maturity and underlying asset; but with different strike prices. The put strike price will typically be below the strike price of the call option, and both options will be out of the money. An investor who uses this strategy believes the underlying asset s price will experience a large movement, but is unsure of which direction the move will take. Losses are limited to the costs of both options; strangles will typically be less expensive than straddles because the options are purchased out of the money. STRATEGIES FOR NEUTRAL MARKET: BUTTERFLY SPREAD The butterfly spread involves buying one call option at a particular strike price while simultaneously selling two call options at a higher strike price, and buying one other call option at an even higher strike price. When using put options, the process is to buy one put option at a particular strike price while simultaneously selling two put options at a lower strike price, and buying one put option at an even lower strike price. The net effect of this action is to create a profit range, a range of prices within which, the trade will experience a profit over time. A butterfly spread is most typically used as a neutral strategy. A WORD ABOUT SELLING OPTIONS ON FUTURES This booklet has emphasized the advantages of a limited risk investment involved in purchasing options on futures. As discussed earlier, if someone buys an option on a futures contract, there must be a seller on the other side of the trade. While selling options on futures can also be a profitable strategy, it must be stressed that it entails substantially more risk than buying options on futures. An individual who sells options on futures has the potential to lose large sums of money. The strategy should therefore only be initiated by individuals who fully understand options on futures as well as the considerable risk associated with option selling, and who can meet the financial requirements. REVIEW QUESTIONS (Select all answers that are correct for each question) 1. Which of the following best describes options on futures? A. The right to buy or sell a futures contract B. The right to take delivery of a cash commodity C. The right to assign a futures contract 2. A put option is: A. The other side of a call option position B. The right to buy a futures contract C. The right to sell a futures contract 3. A call option is: A. The other side of a put option transaction B. The same as a short futures position C. The right to go long a futures contract 4. Options on futures are: A. Usually offset before expiration B. Wasting assets C. Traded on regulated commodity exchanges such as INDIA INX D. All of the above 5. The premium of an option is: A. Set by the exchange staff B. Unaffected by futures prices C. Determined by buyers and sellers reflecting supply and demand 6. The exercise price is: A. The number of days remaining in the life of an option B. The number of contracts you can exercise C. The price at which the option holder will go long (calls) or short (puts) the underlying futures on expiry 6

8 7. The different strike prices are set by: A. Option sellers B. Option buyers C. The exchange 8. Intrinsic value for call options is calculated by: A. Futures price minus the exercise price B. Exercise price minus the futures price C. Futures price minus the call premium 9. The breakeven point for a call option purchase is: A. Strike price plus days to expiration B. Futures price plus the call option premium C. Strike price plus the call option premium 10. Options can be used by: A. Speculators desiring to profit from a market move with limited risk B. Hedgers wishing to protect themselves against adverse price moves C. Both a and b 11. Sellers of options: A. Should be aware of the risks involved with selling options B. Can lose large sums of their trading capital C. Must meet margin requirements D. All of the above 12. To take advantage of a rising market one could: A. Sell call options on futures B. Buy call options on futures C. Sell futures contracts 13. INDIA INX offer options on: A. Single Stock B. Global currency Derivatives C. Index Derivative D. Gold Futures E. All of the above ANSWER TO REVIEW QUESTIONS: 1.A, 2.C, 3.C,4.D, 5.C, 6.C, 7.C, 8.A, 9.C, 10.C, 11.D, 12 B, 13.E 7

9 OPTIONS FAQs WHAT ARE OPTIONS? It is a derivatives product like a futures contract, but different; in that risk is limited for a buyer, while profit is unlimited. For the seller, return is restricted to the premium, the buyer pay to buy an option.the seller has an obligation to buy from the put buyer or to sell to the call buyer. WHAT IS A CALL OPTION? A call option is an agreement that gives the buyer a right, but not an obligation, to buy the underlying future at a specified price within a specific time period. WHAT IS A PUT OPTION? A put option is an option contract giving the owner an right, but not an obligation, to sell a specified amount of an underlying future at a specified price within a specified time. This is the opposite of a call option, which gives the holder the right to buy underlying Future. WHAT DO THE OPTIONS TERMS AMERICAN- STYLE AND EUROPEAN-STYLE MEAN? American-Style option can be exercised any time before expiration. An European-style option can be exercised only on expiration of the contract. India INX Gold Future options are European-style options WHAT ARE OPTION GREEKS? Greeks, including Delta, Gamma, Theta, Vega and Rho, measure the different factors that affect the price of an option contract. They are calculated using a theoretical options pricing. Since there are a variety of market factors that can affect the price of an option in some ways, assuming all other factors remain unchanged, we can use these pricing models to calculate the Greeks and determine the impact of each factor when its value changes WHAT IS DELTA? It is also termed as the hedge ratio. It measures how much an option s price is expected to change per $1 change in the price of the underlying Gold Future. For example, a Delta of 0.40 means that the option s price will theoretically move $0.40 for every $1 move in the price of the underlying Gold Future. WHAT IS GAMMA? It is known as the rate of change of Delta. Gamma measures the rate of change in an option s Delta per $1 change in the price of the underlying Gold Future. Since a Delta is only good for a given moment in time, Gamma tells you how much the option s Delta should change as the price of the underlying Gold Future increases or decreases in value. WHAT IS THETA? It is basically time decay. Theta measures the change in the price of an option for a one-day decrease in its time to expiration. Simply put, Theta tells you how much the price of an option should decrease as the option nears expiration. WHAT IS VEGA? It is measured as sensitivity towards volatility. It measures the rate of change in an option s price per 1% change in the implied volatility of the underlying Gold Future. While Vega is not a real Greek letter, it is intended to tell you how much an option s price should move when the volatility of the underlying Gold Future increases or decreases. WHAT IS RHO? It is termed as sensitivity to interest rates. It measures the expected change in an option s price per 1% change in the interest rates. It tells you how much the price of an option should rise or fall if the risk-free (U.S. Treasury-bill)* interest rate increases or decreases. WHAT ARE THE ADVANTAGES OF TRADING IN OPTIONS OVER FUTURES? 1. No Margin call for buyer 2. Option buyer maximum risk is equal to the amount that is paid as a premium to buy an option 3. Enables the user to hedge by locking in at a price, and also offers the flexibility to take advantage of any positive price advances 4. Can be used as a trading and a hedging strategy 5. A combination of Futures and Options would offer hedging strategies to market participants to protect themselves from unfavourable price moves and thus enable them to effectively hedge their risk exposure. 6. Low cost of participation 7. Flexibility of exiting by offsetting position 8. Attractive for both retail and institutional investors 9. Lower transaction costs 10. Diverse participant groups 11. Options represent a form of price insurance, the cost of which is the option premium determined during its trading 12. Free from counter party risk as it s exchange traded 8

10 What is the Devolvement process for options into futures? Option on Futures contracts shall have the corresponding commodity futures contract as their underlying. Option series having strike price closest to the Daily Settlement Price (DSP) of Futures contracts shall be termed as At the Money (ATM) options series. All In the Money and At the Money, Call and Put Buy options, and their assigned Sell Options, as on the expiry day; shall devolve into underlying Futures position as follows:- a) Long Call position shall devolve into long position in the underlying Futures contract. b) Long Put position shall devolve into short position in the underlying Futures contract. c) Short Call position shall devolve into short position in the underlying Futures contract. d) Short Put position shall devolve into long position in the underlying Futures contract. All such devolved options positions shall be open as futures positions at the strike price of the exercised Options. WHY SHOULD A TRADER TRADE IN OPTIONS? Options are better hedging-and-trading tools than futures. Losses are limited for the buyer and costs are lower. In a futures contract, a trader will be required to pay an initial margin and also mark-to-market margin based on volatility in market price. In options, the outgo is limited to the premium the trader pays on the contract. So, if you want to lock-in to the price of a commodity you have or want to bet on, options offer a cheaper and safer choice. You can hedge your price risk effectively with options. For example; you, as a Gold trader buy a put option to sell 1 Lot of Gold at $1350 per troy ounce, five months from now. If, the price goes to $1150 (contract becomes in-the-money) on contract expiry, the profit of $200 (per troy ounce) will be yours. HOW MANY TYPES OF MARKET SCENARIO A TRADER HAS TO DEAL WITH? There are typically 4 types of market scenario a trader faces: 1. Bull Market 2. Bear Market 3. Volatile Market 4. Neutral Market Options have the solutions for all the above market scenario WHICH OPTION STRATEGY SHOULD I USE IF I AM BULLISH ON THE GOLD FUTURE PRICE? Strategy for Bull Market: Bull Call Spread In a bull call spread strategy, an investor will simultaneously buy call options at a specific strike price and sell the same number of calls at a higher strike price. Both call options will have the same expiration month and underlying asset. This type of vertical spread strategy is often used when an investor is bullish and expects a moderate rise in the price of the underlying asset. WHICH OPTION STRATEGY I SHOULD USE IF I AM BEARISH ON THE GOLD FUTURE PRICE? Strategy for Bear Market: Bear Put Spread The bear put spread strategy is another form of vertical spreadlike the bull call spread. In this strategy, the investor will simultaneously purchase put options at a specific strike price and sell the same number of puts at a lower strike price. Both options would be for the same underlying asset and have the same expiration date. This method is used when the trader is bearish and expects the underlying asset s price to decline. It offers both limited gains and limited losses. Which Option strategy should I use if I am expecting huge volatility on the Gold Future price? Strategies for Volatile Market: Straddle and Strangle LONG STRADDLE: A long straddle options strategy is when an investor purchases both a call and put option with the same strike price, underlying asset, and expiration date simultaneously. An investor will often use this strategy when he or she believes the price of the underlying asset will move significantly, but is unsure of which direction the move will take. This strategy allows the investor to maintain unlimited gains, while the loss is limited to the cost of both options contracts. LONG STRANGLE: In a long strangle options strategy, the investor purchases a call and put option with the same maturity and underlying asset, but with different strike prices. The put strike price will typically be below the strike price of the call option, and both options will be out of the money. An investor who uses this strategy believes the underlying asset s price will experience a large movement, but is unsure of which direction the move will take. Losses are limited to the costs of both options; strangles will typically be less expensive than straddles because the options are purchased out of the money. 9

11 Which Option strategy should I use if I am not expecting any major movement on the Gold Future price? Strategies for Neutral Market: Butterfly Spread The butterfly spread involves buying one call option at a particular strike price while simultaneously, selling two call options at a higher strike price, and buying one other call option at an even higher strike price. When using put options, the process is to buy one put option at a particular strike price while simultaneously, selling two put options at a lower strike price, and buying one put option at an even lower strike price. The net effect of this action is to create a profit range, a range of prices within which the trade will experience a profit over time. A butterfly spread is most typically used as a neutral strategy. CONTACT: For further queries on India International Exchange (IFSC) Ltd & India International Clearing Corporation (IFSC) Ltd you can contact us at bdm@indiainx.com For more details visit us at Address: 101, First Level, Hiranandani Signature Tower, GIFT SEZ, GIFT CITY DISCLAIMER: India International Exchange (IFSC) Limited By accepting this document, you agree and accept with the representations made herein: The material and the information included in this document have been compiled for general information sharing purpose ONLY and neither create any legally binding obligation on the part of India International Exchange (IFSC) Limited (hereinafter referred to as the INDIA INX ) and/or its affiliates nor reflects any endorsements by INDIA INX. Whilst making all reasonable efforts to provide correct and appropriate information and data, INDIA INX cannot and does not warrant or guarantee that the information and data provided in this document are accurate in every respect. All the information and data made available on this document is provided AS IS and WITH ALL FAULTS, hence without warranty of any kind, other than when expressly provided in this document. INDIA INX does not warranty guarantee or make any representations concerning the use, results of use or inability to use the information available on this document in terms of the timeliness, truthfulness, sequence, completeness, accuracy, reliability, correctness, and performance or otherwise. The user of the information assumes the entire risk as to the suitability, use, results of use, accuracy, completeness, correctness of the information and shall waive any claim of detrimental reliance upon the information. The material and the information provided in this document are neither intended to nor constitute an investment advice. While making a decision you should consider both your legal and regulatory position in the relevant jurisdiction and the risks associated with the transaction. By making the information and data available on this document INDIA INX is not acting as your legal, financial, tax or accounting advisor or in any other, fiduciary capacity with respect to any transaction, of whatsoever nature. Without limitation, this document does not solicit or constitute an offer, an invitation to offer or a recommendation to enter into any transaction. Through this document, INDIA INX is neither soliciting business, generally or specifically, nor is it directing any work flow or recommendations to the futures commission merchants, the commodity pool operator, the commodity trading advisor and introducing broker. INDIA INX SPECIFICALLY DISCLAIMS ALL LIABILITY FOR ANY DIRECT, INDIRECT, CONSEQUENTIAL OR ANY OTHER LOSSESS OR DAMAGES INCLUDING LOSS OF PROFITS INCURRED BY YOU OR ANY THIRD PARTY THAT MAY ARISE FROM ANY RELIANCE ON THIS DOCUMENT FOR THE RELIABILITY, ACCURACY, AND COMPLETELENESS. All rights reserved. All content (texts, trademarks, illustrations, images, graphic representations, files, designs, arrangements and the literary work) on this document of INDIA INX is protected by the prevailing intellectual property laws, therefore the rights accruing from the same wholly vest with INDIA INX. However, users are permitted to use the information by making copies, storing (internally) or reproducing the data provided in this document for their OWN PERSONAL USE and not commercial purposes. All other use, other than abovementioned shall be considered to be in violation of the terms and conditions and would constitute an offence under the laws of India and the International treaties governing the same. Any dispute arising out of or in connection with the use of the information provided by this document is subject to the exclusive jurisdiction of the courts of Gujarat, India and shall be governed by Indian Law. 10